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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
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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)
AMENDMENT NO. 1
The registrant is filing this amendment to its Form 10-K for the fiscal
year ended December 31, 1998 to reflect a restatement of its previously filed
consolidated financial statements for the fiscal year ended December 31, 1998.
The restatement was made to recognize non-cash compensation expense related to
the February 1998 extension of the expiration date of all previously issued and
unexpired stock options granted under the Company's stock option plans. This
Form 10K/A amends Items 1, 6, 7, 7A and 8 to reflect this restatement and also
amends Items 10, 11, 12 and 13 to include information which was previously to
have been incorporated by reference to the registrant's proxy statement.
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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.
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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 47.0%. Net income for the fiscal
year ended December 31, 1998 was $8.7 million, as compared to $5.3 million for
the fiscal year ended December 31, 1997, an increase of 64.1%. 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,
------------------------------------
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. The restatement reflected in this amendment to the
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Form 10-K 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 has been recorded
at the parent company level as reflected in Note 19 to the Consolidated
Financial Statements.
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
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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.
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.
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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.
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
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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 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" and Note 11 -- Stockholders' Equity as contained in the
"Notes to Consolidated Financial Statements."
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
8
<PAGE> 10
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 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
9
<PAGE> 11
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.
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.
10
<PAGE> 12
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 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/A 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;
11
<PAGE> 13
- 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.
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.
12
<PAGE> 14
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."
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.
13
<PAGE> 15
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.
14
<PAGE> 16
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.
15
<PAGE> 17
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/A. 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/A.
(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.
16
<PAGE> 18
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........................ 26,890 17,378 12,959 8,931 6,245
---------- -------- -------- -------- --------
Income before income taxes................. 13,164 7,812 5,474 3,585 1,844
Income tax expense......................... 4,510 2,537 1,901 1,261 574
---------- -------- -------- -------- --------
Net Income................................. $ 8,654 $ 5,275 $ 3,573 $ 2,324 $ 1,270
========== ======== ======== ======== ========
PER SHARE DATA(1)
Earnings per share -- Basic................ $ 86.15 $ 71.62 $ 60.91 $ 50.56 $ 36.32
Earnings per share -- Diluted.............. 85.41 71.08 60.35 50.04 35.73
Cash dividends............................. -- -- -- -- --
Book value per share at end of year........ 1,344.77 1,110.18 863.99 730.87 547.33
SELECTED ACTUAL YEAR-END BALANCES
Total assets............................... $1,186,523 $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....................... 144,096 100,732 58,232 42,677 23,743
SELECTED AVERAGE BALANCES
Total assets............................... $ 986,183 $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....................... 126,082 69,185 44,523 26,963 15,643
</TABLE>
17
<PAGE> 19
<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................... 0.88 0.78 0.81 0.82 0.69
Return on average equity................... 6.86 7.62 8.02 8.62 8.12
Leverage capital ratio..................... 12.57 12.36 10.90 11.90 9.60
Efficiency ratio(2)........................ 59.28 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............. 14.61 15.50 13.71 N/A N/A
Average equity to average assets........... 12.78 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)................................. 100,451 73,658 58,660 45,968 34,952
Weighted average shares outstanding
Diluted(1)............................... 101,315 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.
18
<PAGE> 20
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/A. All dollar amounts are rounded.
INTRODUCTION AND OVERVIEW
The Company had net income of $8.7 million in 1998, as compared to $5.3
million in 1997 and $3.6 million in 1996, which represented an increase of 64.1%
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 47.0% 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............................................. 46.97 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...................................... 54.74 34.10 45.10
Net income............................................... 64.06 47.64 53.74
Diluted earnings per share............................... 20.16 17.78 20.60
</TABLE>
RESULTS OF OPERATIONS
NET INCOME. The Company had net income of $8.7 million in 1998, $5.3
million in 1997 and $3.6 million in 1996, an increase of 64.1% 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
19
<PAGE> 21
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 $85.41 in
1998, $71.08 in 1997 and $60.35 in 1996, representing an increase of 20.2% 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.
20
<PAGE> 22
<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.......................... 17,053 11,768 4,635
-------- -------- --------
Total Noninterest Earning
Assets.......................... 35,839 27,552 19,233
TOTAL ASSETS...................... $986,183 $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.............. 126,082 69,185 44,523
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY............ $986,183 $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.
21
<PAGE> 23
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
22
<PAGE> 24
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.
23
<PAGE> 25
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................... $17,114 $10,193 $ 7,529 $6,921 67.90% $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.... $26,890 $17,378 $12,959 $9,512 54.74% $4,419 34.10%
======= ======= ======= ====== ====== ====== ======
Efficiency ratio(1).......... 59.28% 58.59% 63.05%
Noninterest expense to
average assets............. 2.73% 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
24
<PAGE> 26
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 $9.5 million, or
54.7%, to $26.9 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 63.6% in
1998, 58.7% in 1997, and 58.1% in 1996.
Salary and employee benefits expense was $17.1 million in 1998, as compared
to $10.2 million in 1997, an increase of 67.9%. 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. In addition, the Company
recognized $1.5 million in non-cash compensation expense during 1998 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. 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. The Company's efficiency ratio
was 59.3% in 1998, 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. Total noninterest expense as a percentage
of average total assets was 2.7% in 1998, 2.6% in 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 $379.2 million, or 47.0%, 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 facility. Asset growth occurred primarily in loans and
securities which increased $301.4 and $55.3 million,
25
<PAGE> 27
respectively, funded with increases in deposits of $328.2 million and in equity
of $43.4 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 $43.4 million, or 43.0%, was mostly due to a private
placement of common stock in 1998 that raised $32.6 million and to 1998 net
income of $8.7 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
26
<PAGE> 28
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.
27
<PAGE> 29
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 1995
---------------- ---------------- ---------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial................... $273,331 29.8% $197,462 32.1% $148,433 36.4% $107,895
Agricultural................. 8,283 0.9 9,558 1.6 7,499 1.8 5,772
Real estate
1-4 Family................. 52,348 5.7 59,217 9.6 41,826 10.3 32,252
Commercial................. 428,252 46.7 263,450 42.9 161,363 39.6 78,198
Construction............... 117,703 12.8 52,791 8.6 27,953 6.9 16,264
Consumer..................... 17,652 1.9 17,097 2.8 12,821 3.1 10,972
Credit card loans............ 1,454 0.2 1,592 0.3 1,187 0.3 702
Other........................ 17,929 2.0 13,593 2.1 6,287 1.6 7,779
-------- ----- -------- ----- -------- ----- --------
Gross Loans.................. 916,952 100.0% 614,760 100.0% 407,369 100.0% 259,834
===== ===== =====
Deferred loan fees(1)........ (1,241) (430) (18) --
Allowance for loan loss...... (10,657) (6,692) (4,058) (2,458)
-------- -------- -------- --------
Net loans.................... $905,054 $607,638 $403,293 $257,376
======== ======== ======== ========
<CAPTION>
AT DECEMBER 31,
---------------------------
1995 1994
----- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Commercial................... 41.5% $ 57,036 36.4%
Agricultural................. 2.2 4,397 2.8
Real estate
1-4 Family................. 12.4 23,916 15.3
Commercial................. 30.1 56,066 35.8
Construction............... 6.3 10,496 6.7
Consumer..................... 4.2 2,783 1.8
Credit card loans............ 0.3 179 0.1
Other........................ 3.0 1,748 1.1
----- -------- -----
Gross Loans.................. 100.0% 156,621 100.0%
===== =====
Deferred loan fees(1)........ --
Allowance for loan loss...... (1,539)
--------
Net loans.................... $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.
28
<PAGE> 30
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
29
<PAGE> 31
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.
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
30
<PAGE> 32
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.
31
<PAGE> 33
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.
32
<PAGE> 34
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.
33
<PAGE> 35
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.
34
<PAGE> 36
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
35
<PAGE> 37
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
36
<PAGE> 38
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.
37
<PAGE> 39
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
38
<PAGE> 40
$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/A.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
AMOUNT AMOUNT AMOUNT
---------- -------- --------
RISK WEIGHTED ASSETS........................................ $1,028,322 $669,975 $439,096
========== ======== ========
AVERAGE ASSETS(1)........................................... $1,110,753 $786,470 $515,332
========== ======== ========
CAPITAL COMPONENTS
Stockholders' equity...................................... $ 144,096 $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.............................................. $ 139,597 $ 97,171 $ 56,148
Allowable allowance for loan loss......................... 10,657 6,692 4,058
---------- -------- --------
TOTAL RISK BASED CAPITAL.................................... $ 150,254 $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 $8.7 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
39
<PAGE> 41
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.
40
<PAGE> 42
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.
41
<PAGE> 43
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................... 466,501 134,873 211,276 126,246 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.
42
<PAGE> 44
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 Interest 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.
43
<PAGE> 45
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.
These 1998 consolidated financial statements have been restated as
described in Note 1.
/s/ KPMG LLP
Chicago, Illinois
March 26, 1999
44
<PAGE> 46
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
45
<PAGE> 47
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....................................... 4,253 2,293
Goodwill and Core Deposit Intangibles, net.................. 3,727 3,336
Foreclosed Properties....................................... -- 281
Other Assets................................................ 1,862 1,279
---------- --------
Total Assets......................................... $1,186,523 $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............................................. 120,381 86,241
Retained Earnings........................................... 22,833 14,179
Accumulated Other Comprehensive Income...................... 775 221
---------- --------
Total Stockholders' Equity........................... 144,096 100,732
---------- --------
Total Liabilities and Stockholders' Equity........... $1,186,523 $807,323
========== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
46
<PAGE> 48
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.............................. 17,114 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............................ 26,890 17,378 12,959
------- ------- -------
Income Before Income Taxes.................................. 13,164 7,812 5,474
Income Tax Expense.......................................... 4,510 2,537 1,901
------- ------- -------
Net Income........................................... $ 8,654 $ 5,275 $ 3,573
======= ======= =======
EARNINGS PER SHARE:
Basic....................................................... $ 86.15 $ 71.62 $ 60.91
Diluted..................................................... 85.41 71.08 60.35
Weighted Average Shares -- Basic............................ 100,451 73,658 58,660
Weighted Average Shares -- Diluted.......................... 101,315 74,222 59,201
</TABLE>
See accompanying Notes to Consolidated Financial Statements
47
<PAGE> 49
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
Gains 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....................... 8,654 8,654
Other Comprehensive Income:
Unrealized Securities Holding
Gains Arising During the
Year........................ 1,239 1,239
Reclassification Adjustment
for Gains Included in Net
Income...................... (344) (344)
Income Tax Effect............. (341) (341)
------- ----- --------
8,654 554 9,208
------- ----- --------
Capital Issuance................... 16,320 16 32,583 32,599
Non-Cash Compensation.............. 1,459 1,459
Exercise of Stock Options.......... 98 98 98
------- ---- -------- ------- ----- --------
BALANCE, DECEMBER 31, 1998......... 107,153 $107 $120,381 $22,833 $ 775 $144,096
======= ==== ======== ======= ===== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
48
<PAGE> 50
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.................................................. $ 8,654 $ 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
Non-Cash Compensation..................................... 1,459 -- --
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..................................... (1,653) (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
49
<PAGE> 51
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.
RESTATEMENT AND RECLASSIFICATIONS
The Company restated its financial statements as of and for the year ended
December 31, 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 increased by $1,459 and net income decreased by $881 from the
amounts previously reported. Basic and diluted earnings per share were reduced
by $8.82 and $8.37, respectively, from the amounts previously reported.
Reclassifications have been made to certain 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
50
<PAGE> 52
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
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 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.
51
<PAGE> 53
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
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.
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.
52
<PAGE> 54
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Under APB No. 25, stock based compensation expense includes the excess, if
any, of the market price of the stock at grant date or other measurement date,
over the exercise price. This expense is recognized over the vesting period of
the options. Certain stock options have an exercise price less than the market
price at the measurement date; accordingly, compensation expense associated with
those options is included in salaries and employee benefits expense with a
corresponding increase in capital surplus.
The Company follows the practice of recording amounts received upon the
exercise of options by crediting common stock and capital surplus. Income tax
benefits from the exercise of stock options result in a decrease in current
income taxes payable and, to the extent not previously recognized as a reduction
in income tax expense, an increase in capital surplus.
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
53
<PAGE> 55
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
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).
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 operations.
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........................................... $ 8,654 $5,275 $3,573
======= ====== ======
Weighted average shares outstanding:
Basic.............................................. 100,451 73,658 58,660
======= ====== ======
Diluted............................................ 101,315 74,222 59,201
======= ====== ======
Earnings per share -- Basic.......................... $ 86.15 $71.62 $60.91
Effect of dilutive stock options outstanding......... (0.74) (.54) (.56)
------- ------ ------
Earning per share -- Diluted......................... $ 85.41 $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.
54
<PAGE> 56
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.
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>
55
<PAGE> 57
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 -- SECURITIES -- CONTINUED
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 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.
56
<PAGE> 58
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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, 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.
57
<PAGE> 59
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6 -- LOANS AND ALLOWANCE FOR LOAN LOSS -- CONTINUED
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>
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
58
<PAGE> 60
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- PREMISES AND EQUIPMENT, NET -- CONTINUED
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.
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
59
<PAGE> 61
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 9 -- SHORT-TERM BORROWINGS -- CONTINUED
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.
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
60
<PAGE> 62
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 11 -- STOCKHOLDERS' EQUITY -- CONTINUED
discretionary actions by regulators that could have a direct material effect on
the consolidated financial statements.
At December 31, 1998, the most recent notification from the banks' primary
regulators 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............................. $150,254 14.61% $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............................. $139,597 13.58% $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............................. $139,597 12.57% $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>
61
<PAGE> 63
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 11 -- STOCKHOLDERS' EQUITY -- CONTINUED
<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>
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
62
<PAGE> 64
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 13 -- COMMITMENTS AND CONTINGENCIES -- CONTINUED
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. At December 31,
1998 options to purchase 969 shares were available for future grant. 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. Of the options available for future
grant, 606 of the options were available under plans which 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. The other 363 options were available
under plans which stipulate that the price may not be less than 100% of fair
market value on the option grant date.
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. In February 1998 the Company amended all of its
previously adopted stock option plans to extend the exercise
63
<PAGE> 65
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 14 -- STOCK OPTION PLANS -- CONTINUED
period of all then outstanding options from 5 to 10 years. All options granted
under plans adopted since January 1, 1998 have been granted with 10-year
expiration periods. The amendment of prior year plans resulted in a new
measurement date for outstanding options granted under these plans. Compensation
expense related to these plans, and recognized in 1998, was $1,459, of which
$1,222 related to service for prior years. There was no compensation expense
related to these plans recognized in 1997 or 1996. Had compensation expense for
these plans been determined based on the fair value at the grant dates for
awards under those plans consistent with the method of SFAS No. 123, the
Company's net income and earnings per share would have been the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net income............................... As Reported $8,654 $5,275 $3,573
Pro Forma 9,250 5,240 3,538
Basic Earnings
Per Share............................... As Reported 86.15 71.62 60.91
Pro Forma 92.09 71.14 60.31
Diluted Earnings
Per Share............................... As Reported 85.41 71.08 60.35
Pro Forma 91.30 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. 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.
64
<PAGE> 66
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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............................................ (2,287) (1,129) (579)
------- ------- ------
$ 4,510 $ 2,537 $1,901
======= ======= ======
</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............................... $4,607 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..................................... 304 2.3 245 3.1 176 3.2
Tax exempt interest............................ (497) (3.7) (406) (5.2) (173) (3.2)
Other, net..................................... 96 .7 42 .6 37 .7
------ ---- ------ ---- ------ ----
$4,510 34.3% $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
Non-cash compensation..................................... 538 --
Deferred loan fees and other.............................. 583 212
------ ------
Deferred tax assets before valuation allowance.............. 5,486 3,082
Valuation allowance....................................... (130) (186)
------ ------
Net deferred tax assets..................................... 5,356 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...................................... $4,253 $2,293
====== ======
</TABLE>
65
<PAGE> 67
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 16 -- INCOME TAXES -- CONTINUED
The net change in the net deferred tax asset is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax benefits included in provision................. $2,287 $1,129
Deferred tax included in other comprehensive income......... (341) (170)
Reclassifications from current.............................. 14 163
------ ------
$1,960 $1,122
====== ======
</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.
66
<PAGE> 68
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
67
<PAGE> 69
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.
68
<PAGE> 70
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 $8,925 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.............................................. 877 514
-------- --------
Total Assets......................................... $145,080 $101,508
======== ========
Liabilities:
Other Liabilities......................................... $ 984 $ 776
-------- --------
Stockholders' Equity:
Common Stock.............................................. 107 91
Capital Surplus........................................... 120,381 86,241
Retained Earnings......................................... 22,833 14,179
Accumulated Other Comprehensive Income.................... 775 221
-------- --------
Total Stockholders' Equity........................... 144,096 100,732
-------- --------
Total Liabilities and Stockholders' Equity........... $145,080 $101,508
======== ========
</TABLE>
69
<PAGE> 71
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............................ 5,313 1,766 1,223
Interest Expense.......................................... 83 190 13
Occupancy Expenses, net................................... 254 128 92
Other Expense............................................. 666 460 359
------- ------ ------
Total Expense........................................ 6,316 2,544 1,687
------- ------ ------
Loss Before Income Taxes and Equity in Undistributed
Earnings of Subsidiaries.................................. (2,796) (739) (619)
Income Tax Benefit.......................................... 948 270 259
------- ------ ------
Loss Before Equity in Undistributed Earnings of
Subsidiaries.............................................. (1,848) (469) (360)
Equity in Undistributed Earnings of Subsidiaries............ 10,502 5,744 3,933
------- ------ ------
Net Income........................................... $ 8,654 $5,275 $3,573
======= ====== ======
</TABLE>
70
<PAGE> 72
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................................................ $ 8,654 $ 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
Non-Cash Compensation.................................. 1,459 -- --
Security Gains......................................... -- -- (67)
Changes in Assets and Liabilities:
(Increase) Decrease in Other Assets.................... (403) (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>
71
<PAGE> 73
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 RESTATED(1)
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.................................. (7,468) (6,703) (6,030) (6,689)
-------- -------- -------- -------
Income Before Income Taxes........................... 4,375 3,806 3,184 1,799
Income Tax Expense................................... (1,562) (1,304) (1,125) (519)
-------- -------- -------- -------
Net Income........................................... $ 2,813 $ 2,502 $ 2,059 $ 1,280
======== ======== ======== =======
Earnings Per Share:
Basic.............................................. $ 26.26 $ 23.36 $ 21.31 $ 14.11
Diluted............................................ 25.98 23.12 21.14 14.05
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>
- -------------------------
(1) The Company restated its previously reported 1998 net income 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, net
income for the four quarters of 1998 from March through December was
reduced $800, $43, $29, and $9, respectively. Basic earnings per share was
reduced $8.77, $.45, $.27, and $.44, and diluted earnings per share was
reduced $8.57, $.34, $.17, and $.41, respectively.
72
<PAGE> 74
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
INFORMATION REGARDING NOMINEES AND DIRECTORS
<TABLE>
<CAPTION>
SERVING POSITION WITH THE COMPANY OR OTHER
NAME AND AGE SINCE PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS
------------ ------- --------------------------------------------
<S> <C> <C>
NOMINEES FOR ELECTION AT THE
1999 ANNUAL MEETING TO SERVE UNTIL 2002
Jose Araujo (53)..................... 1988 President of Joaraucar Consulting, Inc., an
industrial gases service company, since October 1997;
President of Gascarb, a carbon dioxide manufacturing
company, from February 1969 to September 1997.
Jerry D. Maahs (67).................. 1987 President of Alto Shaam, Inc. and Enthermics, Inc.,
manufacturers of food service equipment, since 1968;
also Chairman of AS International, an international
sales company since 1975.
Howard E. Zimmerman (70)............. 1987 Chairman of the Board of Zimmerman Real Estate Group,
a real estate appraisal and consulting company, since
1986.
DIRECTORS CONTINUING TO SERVE UNTIL 2000
John T. Bean (38).................... 1998 President, Director and Chief Executive Officer of
CIB Bank (Illinois), a subsidiary bank of the
Company, since January 1997; Executive Vice President
of Central Illinois Bank MC, a subsidiary bank of the
Company, from October 1994 to January 1997; Senior
Vice President of Central Illinois Bank, a subsidiary
bank of the Company, from October 1993 to October
1994.
Steven C. Hillard (36)............... 1992 President of CMI Johnson-Ross Corporation, a
manufacturer of construction equipment, since July
1997; President and C.E.O. of Hilmun Holdings, Inc.,
a diversified holding company with interests in
manufacturing, real estate development, and financial
investments, since September 1991; President of
Central Illinois Bank-MC from October 1992 to October
1994.
</TABLE>
73
<PAGE> 75
<TABLE>
<CAPTION>
SERVING POSITION WITH THE COMPANY OR OTHER
NAME AND AGE SINCE PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS
------------ ------- --------------------------------------------
<S> <C> <C>
J. Michael Straka (61)............... 1987 President and Chief Executive Officer of the Company
since 1987; President, Chief Executive Officer and a
director of First Ozaukee Capital Corp., a subsidiary
of the Company; since 1997, and President, Chairman
and a director of Hillside Investors Ltd., a
subsidiary of the Company, since 1994; director or
chairman and director of each of the Company's bank
and non-bank subsidiaries, including Central Illinois
Bank, since 1987, CIB Bank (Illinois), since 1994,
Marine Bank and Savings, since 1997, CIB Bank
(Indiana), since 1998, C.I.B. Data Processing
Services, Inc., since 1990, Mortgage Services, Inc.,
since 1995, and Marine Trust and Investment Company,
since 1998.
DIRECTORS CONTINUING TO SERVE UNTIL 2001
Norman E. Baker (52)................. 1988 President and CEO of Estoy Pronto, Inc., a consulting
and investment company, since July 1994; Partner in A
and B Partnership, a real estate investment company,
and President and CEO of Associated Storage and
Transfer, a warehousing and trucking company, from
July 1969 to July 1996.
W. Scott Blake (38).................. 1987 President of Blake Capital Corp., a real estate
development, investment and property management
company, since July 1998; President of Blake-Weise
Real Estate Group, a real estate development,
investment and property management company from
October 1988 to June 1998.
Dean M. Katsaros (43)................ 1995 Owner of Katsaros & Associates, a tax and accounting
business, since September, 1981; Chairman of KSB
Benefit Consultants, Inc., a provider of third-party
administrative services for defined contribution
plans, since May 1994; and General Partner, KB
Consultants, a computer equipment sales and computer
consulting services company, since May, 1990.
Donald M. Trilling (68).............. 1987 Secretary/Treasurer of Illini 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.
</TABLE>
- -------------------------
(1) Mr. J. Michael Straka, President, Chief Executive Officer and a director of
the Company, is the father of Donald J. Straka, a Senior Vice President,
Secretary and General Counsel of the Company, and Patrick J. Straka, a Senior
Vice President and Chief Investment Officer of the Company.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors, officers and beneficial owners of more than 10 percent of the
outstanding shares of the Company's common stock are required to file with the
SEC reports on Forms 3, 4 and 5 reflecting certain changes in their beneficial
ownership of the Company's Common Stock. Pursuant to regulations adopted by the
SEC, the Company is required to disclose each such person who failed to file any
such report on a timely basis during the Company's most recent fiscal year.
Based solely on a review of the Forms 3, 4 and 5 furnished to the Company and
any amendments thereto, the Company believes that all of its officers, directors
and greater than 10 percent beneficial owners complied with all filing
requirements applicable to them with respect to transactions during the 1998
fiscal year.
74
<PAGE> 76
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/A.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTORS' FEES AND COMPENSATION
During the 1998 fiscal year, (1) each director except Mr. J. Michael Straka
and Mr. John T. Bean received an annual retainer fee in the amount of $8,000,
and (2) each director, except Mr. Bean, was paid a fee of $600 for each Board of
Directors meeting attended.
On February 25, 1998, under the 1998 non-employee director stock option
plan, each director of the Company who was not an employee of the Company or any
of its subsidiaries also received an option to purchase 100 shares of common
stock. The exercise price per share for each option granted was $1,960.56, an
amount equal to 1.75 times the book value per share of the common stock as of
the last day of the calendar month preceding the date of grant. The options
become exercisable in five equal annual installments, beginning February 25,
1999, and expire on February 25, 2008.
DIRECTORS' DEFERRED COMPENSATION PLAN
Effective December 1994, the Company adopted a plan allowing directors to
elect to defer receipt of all or a portion of their directors' fees. Under this
plan, any director may enter into a written deferred compensation agreement
under which that director's fees are retained by the Company in a segregated
account. These fees remain an asset of the Company, subject to the claims of the
Company's creditors, until paid to the director under the agreement. The
deferred directors' fees accrue interest, and a director has a right to cancel
future deferrals at any time. The fees may be withdrawn and are payable in equal
monthly installments over a period of five years at the time of retirement or
upon the death of the director either before or after retirement. If the
director resigns from the board, the deferred fees are paid in full in a single
lump sum payment.
EXECUTIVE COMPENSATION
The following table sets forth the cash and noncash compensation for each
of the last two fiscal years awarded to or earned by the Chief Executive Officer
of the Company and the General Counsel, Senior Vice President and Secretary of
the Company. None of the Company's other executive officers received in excess
of $100,000 in total salary and bonus for such services in the last two fiscal
years, and therefore no other executive officers are listed.
SUMMARY COMPENSATION TABLE*
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1) LONG-TERM COMPENSATION
------------------------------ ---------------------------------
AWARDS PAYOUTS
----------------------- -------
SECURITIES
OTHER RESTRICTED UNDERLYING
ANNUAL STOCK STOCK LTIP
NAME PRINCIPAL POSITION YEAR SALARY BONUS COMP AWARDS OPTIONS(#) PAYOUTS
---- ------------------ ---- ------ ----- ------ ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J. Michael Straka.... President and Chief 1998 $207,338 $ 0 $53,550(2) $0 159 $0
Executive Officer 1997 $150,000 $8,060 $34,700(2) $0 0 $0
Donald J. Straka..... Senior Vice President, 1998 $107,934 $ 0 $ 0 $0 103 $0
General Counsel 1997 $ 43,771(4) $ 0 $ 0 $0 46 $0
and Secretary
<CAPTION>
ALL
OTHER
NAME COMP.
---- -----
<S> <C>
J. Michael Straka.... $6,775(3)
$1,706(3)
Donald J. Straka..... $1,320(5)
$ 0
</TABLE>
- -------------------------
* Because the Company did not become a reporting company until June, 1998,
this table includes information for 1997 and 1998 only.
(1) Includes amounts earned in the fiscal year, whether or not deferred.
75
<PAGE> 77
(2) Consists of payments for attendance at meetings of the Board of Directors of
the Company and regular and committee meetings of the board of directors of
its subsidiaries in 1997 and 1998.
(3) Includes imputed compensation from group term life insurance, the cash value
of life insurance and additional term life insurance policies and auto
allowance.
(4) Partial year only. Mr. Donald J. Straka was hired on July 15, 1997 at an
annual salary of $95,500.
(5) Includes imputed compensation from group term life insurance and moving
expenses.
OPTIONS
The following tables summarize option grants to and exercises by the
executive officers named in the Summary Compensation Table above during the 1998
fiscal year and the value of the options held by such persons at the end of the
1998 fiscal year. No stock appreciation rights have been granted to date by the
Company.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
INDIVIDUAL GRANTS IN 1998 10-YEAR OPTION TERM
-------------------------------------------------------- ------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE EXPIRATION
NAME OPTIONS GRANTED EMPLOYEES(1) PRICE(2) DATE(3) 0% 5% 10%
---- --------------- ------------ -------- ---------- -- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
J. Michael Straka....... 159(4) 7.32% $1,960.56 2/25/08 $0 $196,045 $496,816
Donald J Straka......... 103(4) 4.74% $1,960.56 2/25/08 $0 $126,998 $321,837
</TABLE>
- -------------------------
(1) Based on 2,173 options granted to all employees.
(2) Equal to 1.75 times the book price per share of the common stock as of the
last day of the calendar month preceding February 25, 1998, the date of
grant.
(3) These options become exercisable in 20% annual installments, beginning
February 25, 1999.
(4) In February 1998, the Board of Directors extended, from five to ten years,
the exercise period of all options then outstanding under the Company's
stock option plans. As a result of that action, the expiration date of 130
options granted to Mr. J. Michael Straka on June 30, 1993 at an exercise
price of $742.98 was extended to June 30, 2003, the expiration date of 90
options granted to Mr. J. Michael Straka on January 1, 1995 at an exercise
price of $1,274.91 was extended to January 1, 2005, the expiration date of
228 options granted to Mr. J. Michael Straka on April 25, 1996 at an
exercise price of $1,630.51 was extended to April 25, 2006, and the
expiration date of 46 options granted to Mr. Donald J. Straka on September
24, 1997 at an exercise price of $2,059.64 was extended to September 24,
2007. None of the options for which the terms were extended in 1998 are
included in the table.
76
<PAGE> 78
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
TOTAL NUMBER OF
SECURITIES UNDERLYING TOTAL VALUE OF UNEXERCISED,
NUMBER UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
OF SHARES HELD AT FISCAL YEAR END HELD AT FISCAL YEAR END(1)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Michael Straka............. 0 $0 275 332 $333,362 $200,307
Donald J. Straka.............. 0 $0 9 140 $ 2,643 $ 51,325
</TABLE>
- -------------------------
(1) There is no public market for the Company's common stock. Current market
value is based on $1,344.77, the book value of the common stock at December
31, 1998, times 1.75, the multiple of book value at which the Company sold
16,320 shares of its common stock in its most recent private placement
offering beginning in May 1998.
LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
In January 1998, the Board of Directors approved, upon the recommendation
of the Personnel/ Compensation Committee, a long-term cash incentive plan for
Mr. J. Michael Straka, which superseded the long-term incentive plan for Mr.
Straka that was adopted in 1996. The plan provides for the payment of a cash
bonus of $250,000 to Mr. Straka on the fifth business day of the year 2000 if
two of three specified performance goals are met in fiscal years 1998 and 1999.
The goals relate to the Company's asset size, net income and value per share.
The Company met two of the three specified performance criteria in 1998. The
plan further provides that in the event the Company is sold prior to January 1,
2000 Mr. Straka shall be paid a portion of the $250,000 bonus amount prorated
based upon the point in time during this two-year period at which the sale
occurs.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, Mr. John T. Bean was the President, Chief Executive Officer
and a director of CIB-Chicago, a subsidiary bank of the Company. During that
time, Mr. Bean also served on the Compensation/ Personnel Committee of the Board
of Directors, which was responsible, among other things, for fixing the
compensation of Mr. J. Michael Straka. During 1998, Mr. J. Michael Straka was
the President and Chief Executive Officer of the Company and a director of
CIB-Chicago, served on its compensation committee and was responsible for fixing
Mr. Bean's compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth, as of March 31, 1999, the number of shares
of common stock beneficially owned by (i) each director of the Company
(including nominees), (ii) each of the executive officers named in the Summary
Compensation Table included under Item 11, and (iii) all directors and executive
officers of the
77
<PAGE> 79
Company as a group. Except as otherwise indicated, each person listed has sole
voting and investment power over shares beneficially owned.
<TABLE>
<CAPTION>
COMMON SHARES PERCENT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS(1)
------------------------ ------------------ -----------
<S> <C> <C>
Jose Araujo................................................. 583(2) *
Norman E. Baker............................................. 2,441(3) 2.28%
John T. Bean................................................ 241(4) *
W. Scott Blake.............................................. 921(5) *
Steven C. Hillard........................................... 1,009(6) *
Dean M. Katsaros............................................ 1,664(7) 1.55%
Jerry D. Maahs.............................................. 1,931(8) 1.80%
Donald J. Straka............................................ 69(9) *
J. Michael Straka........................................... 1,834(10) 1.71%
Donald M. Trilling.......................................... 1,474(11) 1.38%
Howard E. Zimmerman......................................... 1,033(12) *
All directors and executive officers as a group (15
persons).................................................. 14,048(13) 12.95%
</TABLE>
- -------------------------
* Less than one percent.
(1) Based on 107,153 shares outstanding as of March 31, 1999.
(2) Includes 33 shares that Mr. Araujo has the right to acquire within 60 days
upon the exercise of stock options.
(3) Includes 33 shares Mr. Baker has the right to acquire within 60 days upon
the exercise of stock options.
(4) Includes 50 shares jointly owned by Mr. Bean and his wife, 13 shares owned
by Mr. Bean's wife, and 91 shares that Mr. Bean has the right to acquire
within 60 days upon the exercise of stock options.
(5) Includes 33 shares that Mr. Blake has the right to acquire within 60 days
upon the exercise of stock options.
(6) Includes 159 shares Mr. Hillard has the right to acquire within 60 days
upon the exercise of stock options.
(7) Includes 375 shares jointly owned by Mr. Katsaros and his wife, and 36
shares that Mr. Katsaros has the right to acquire within 60 days upon the
exercise of stock options.
(8) Includes 1,900 shares jointly owned by Mr. Maahs and his wife, and 31
shares that Mr. Maahs has the right to acquire within 60 days upon the
exercise of stock options.
(9) Includes 30 shares Mr. Straka has the right to acquire within 60 days upon
exercise of stock options and 32 shares owned by a partnership with respect
to which Mr. Straka shares voting and investment power.
(10) Includes 864 shares jointly owned by Mr. Straka and his wife, 20 shares
owned by Mr. Straka's wife, 57 shares owned by partnerships with respect to
which Mr. Straka shares voting and investment power, and 371 shares that
Mr. Straka has the right to acquire within 60 days upon the exercise of
stock options.
(11) Includes 531 shares held in a trust for the benefit of Mr. Trilling's wife,
and 38 shares that Mr. Trilling has the right to acquire within 60 days
upon the exercise of stock options.
(12) Includes 75 shares held in a trust for the benefit of Mr. Zimmerman's wife
and 33 shares Mr. Zimmerman has the right to acquire within 60 days upon
the exercise of stock options.
(13) Includes, in addition to those shares footnoted above, 456 shares which the
executive officers as a group have the right to acquire within 60 days upon
the exercise of stock options.
78
<PAGE> 80
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following persons are known to the Company to be the beneficial owners
of more than 5% of the outstanding common stock of the Company as of the dates
indicated.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK PERCENT OF CLASS OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) COMMON STOCK(1)
------------------------------------ --------------------- -------------------
<S> <C> <C>
Strategic Capital Management Inc./Strategic Capital
Trust................................................... 6,414(2) 5.99%
John and Mary Lydia Hadley................................ 6,928(3) 6.47%
</TABLE>
- -------------------------
(1) Based upon a total of 107,153 shares of Common Stock issued and outstanding
on March 31, 1999.
(2) Based on written information provided by SCM to the Company as of April 7,
1999. Mr. David Sinow, a former director of the Company, is an officer,
director, and shareholder of Strategic Capital Trust Company ("SCTC"). Mr.
Sinow is also an officer and director of Strategic Capital Management, Inc.
("SCM"), a wholly owned subsidiary of SCTC. SCTC owns 750 shares of the
Company's common stock. The Company understands that Mr. Sinow, SCTC, and
SCM have direct or indirect shared voting and investment authority over
5,664 shares of the Company's common stock purchased by investors for whom
SCM provides investment management services.
(3) Based solely on information in the Company's stock transfer records as of
the date of filing of this Form 10K/A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has business relationships with entities in which directors of
the Company or members of their immediate family have ownership interests. These
business relationships are summarized below. The Company believes each
transaction described was on commercially reasonable terms.
Mr. Katsaros is a director of the Company and the owner of Katsaros and
Associates, a tax and accounting business. The Company and its subsidiaries paid
$3,860 to Katsaros and Associates for tax and accounting services in 1998. Mr.
Katsaros is also a general partner of KB Consultants, a partnership that sells
computer equipment and services. The Company purchased $271,618 in computer
hardware and services from KB Consultants in 1998. Mr. Katsaros is also an owner
and officer of KSB Benefit Consultants, Inc., a corporation providing benefit
plan consulting and administration services. In 1998, the Company paid KSB
Benefit Consultants, Inc. $18,737 for administering the Company's ESOP and
401(k) Plans. In 1998, one of the Company's subsidiary banks also paid $20,147
in rental payments to KSB Benefit Consultants for space that the subsidiary bank
subleased from KSB Benefit Consultants from January to July, 1998. In July 1998,
the subsidiary bank assumed primary responsibility for the lease, and KSB
Benefit Consultants paid the subsidiary bank $24,709 in rental payments for
space that it subleased from the subsidiary bank for the remainder of 1998.
Mr. J. Michael Straka is a director of the Company. Mr. Straka's wife,
Karen Straka, operates a sole proprietorship known as Plank & Peg that sells
antiques. During 1998, the Company and its subsidiaries paid Plank & Peg $97,239
in connection with the purchase of antiques to furnish their office facilities.
79
<PAGE> 81
MANAGEMENT INDEBTEDNESS
Directors and executive officers of the Company, including members of their
immediate families and companies with which they are affiliated, were customers
of, and had banking transactions with, the Company's subsidiary banks in the
ordinary course of business during 1998. These transactions included loans,
fiduciary relationships, and deposits. All loans to the Company's directors and
executive officers, any member of their immediate family, or any corporation or
organization of which any of them is an executive officer or partner or is,
directly or indirectly, the beneficial owner of 5% or more of any class of
equity securities were (1) made in the ordinary course of business, (2) made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons, and
(3) did not involve more than the normal risk of collectibility or present other
unfavorable features.
80
<PAGE> 82
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/A. 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.
81
<PAGE> 83
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 Amendment
No. 1 to Form 10-K on Form 10-K/A to be signed on its behalf by the undersigned,
thereunto duly authorized.
CENTRAL ILLINOIS BANCORP, INC.
Date: April 29, 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 Amendment No. 1 to Form 10-K on Form 10-K/A 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 April 29, 1999
- ----------------------------------------------------- Officer (Principal Executive
J. Michael Straka Officer) and Director
/s/ STEVEN T. KLITZING Chief Financial Officer April 29, 1999
- ----------------------------------------------------- (Principal Financial Officer)
Steven T. Klitzing
/s/ JOSE ARAUJO Director April 29, 1999
- -----------------------------------------------------
Jose Araujo
/s/ NORMAN BAKER Director April 29, 1999
- -----------------------------------------------------
Norman Baker
/s/ JOHN T. BEAN Director April 29, 1999
- -----------------------------------------------------
John T. Bean
/s/ W. SCOTT BLAKE Director April 29, 1999
- -----------------------------------------------------
W. Scott Blake
/s/ STEVEN C. HILLARD Director April 29, 1999
- -----------------------------------------------------
Steven C. Hillard
/s/ DEAN KATSAROS Director April 29, 1999
- -----------------------------------------------------
Dean Katsaros
/s/ JERRY D. MAAHS Director April 29, 1999
- -----------------------------------------------------
Jerry D. Maahs
/s/ DONALD M. TRILLING Chairman of the Board of April 29, 1999
- ----------------------------------------------------- Directors and Director
Donald M. Trilling
/s/ HOWARD E. ZIMMERMAN Director April 29, 1999
- -----------------------------------------------------
Howard E. Zimmerman
</TABLE>
82
<PAGE> 84
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>
- -------------------------
** Previously filed.
83
<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/A of Central Illinois Bancorp, Inc.
/s/ KPMG LLP
Chicago, Illinois
April 29, 1999
<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/A of Central Illinois Bancorp, Inc.
/s/ STRIEGEL KNOBLOCH & COMPANY LLC
Bloomington, Illinois
April 30, 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> 1,186,523
<DEPOSITS> 1,011,033
<SHORT-TERM> 3,255
<LIABILITIES-OTHER> 8,139
<LONG-TERM> 20,000
0
0
<COMMON> 107
<OTHER-SE> 143,989
<TOTAL-LIABILITIES-AND-EQUITY> 1,186,523
<INTEREST-LOAN> 69,075
<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> 26,890
<INCOME-PRETAX> 13,164
<INCOME-PRE-EXTRAORDINARY> 13,164
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<CHANGES> 0
<NET-INCOME> 8,654
<EPS-PRIMARY> 86.15
<EPS-DILUTED> 85.41
<YIELD-ACTUAL> 4.19
<LOANS-NON> 4,008
<LOANS-PAST> 5,584
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<ALLOWANCE-OPEN> 6,692
<CHARGE-OFFS> 928
<RECOVERIES> 160
<ALLOWANCE-CLOSE> 10,657
<ALLOWANCE-DOMESTIC> 10,657
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
