SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File Number: 33-90342
CENTRAL ILLINOIS FINANCIAL CO., INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 37-1358484
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
100 WEST UNIVERSITY, CHAMPAIGN, ILLINOIS 61824-4028
(Address of principal executive offices) (Zip Code)
(217) 351-6500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EXCHANGE CLASS ON WHICH REGISTERED
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
(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 Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _X_
The index to exhibits is located on page 66 of 67 total sequentially numbered
pages.
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As of March 17, 1997, the Registrant had issued and outstanding 4,898,497
shares of the Registrant's Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the Registrant as of March 17, 1997,
was $37,389,696.*
* Based on the last reported price ($16.00) of an actual transaction in
Registrant's Common Stock on March 6, 1997, and reports of beneficial
ownership filed by directors and executive officers of Registrant and by
beneficial owners of more than 5% of the outstanding shares of Common Stock
of Registrant; however, such determination of shares owned by affiliates
does not constitute an admission of affiliate status or beneficial interest
in shares of Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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CENTRAL ILLINOIS FINANCIAL CO., INC.
Form 10-K Annual Report
Table of Contents
Part I
Item 1. Description of Business 1
A. Business Development
B. Business of CIFCI and Subsidiaries
C. Competition
D. Monetary Policy and Economic Conditions
E. Regulation and Supervision
F. Employees
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of
Security Holders 8
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 9
Item 6. Selected Consolidated Financial Data 10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
Item 8. Financial Statements and Supplementary Data 27
Item 9 Changes in and Disagreements on Accounting
and Financial Disclosure 55
Part III
Item 10. Directors and Executive Officers of the
Registrant 55
Item 11. Executive Compensation 60
Item 12. Security Ownership of Certain Beneficial Owners
and Management 62
Item 13. Certain Relationships and Related Transactions 63
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 63
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
A. BUSINESS DEVELOPMENT
Central Illinois Financial Co., Inc. ("CIFCI"), a
Delaware corporation, is a bank holding company registered under
the Bank Holding Company Act of 1956, as amended (the "BHCA").
CIFCI was incorporated on December 9, 1994, and on June 30, 1995,
acquired all of the outstanding stock of BankIllinois and The
Champaign National Bank following the merger of Central Illinois
Financial Corporation and BankIllinois Financial Co. (the
"Merger"). On October 20, 1995, BankIllinois and The Champaign
National Bank were merged to form BankIllinois ("BankIllinois" or
the "Bank"), an Illinois chartered bank. CIFCI also has one non-
bank subsidiary, BankIllinois Trust Company ("BankIllinois Trust
Company"), an Illinois trust company.
B. BUSINESS OF CIFCI AND SUBSIDIARIES
GENERAL
CIFCI conducts the business of banking through
BankIllinois, its wholly owned subsidiary, and the business of
trust through BankIllinois Trust Company, also its wholly owned
subsidiary. As of December 31, 1996, CIFCI had consolidated
total assets of $515.4 million, stockholders' equity of $52.1
million and trust assets under administration of approximately
$286 million. Substantially all of the income of CIFCI is
currently derived from dividends received from BankIllinois. The
amount of these dividends is directly related to the earnings of
BankIllinois and is subject to various regulatory restrictions.
See "Regulation and Supervision."
BankIllinois conducts a general banking business
embracing most of the services, both consumer and commercial,
which banks may lawfully provide, including the following
principal services: the acceptance of deposits to demand,
savings and time accounts and the servicing of such accounts;
commercial, consumer and real estate lending, including
installment loans and personal lines of credit; safe deposit
operations; and additional services tailored to the needs of
individual customers, such as the sale of traveler's checks and
cashier's checks and other specialized services. BankIllinois
also offers personalized financial planning services through the
PrimeVest Investment Center at BankIllinois, which services
include a broad spectrum of investment products, including
stocks, bonds, mutual funds and tax advantaged investments. In
addition, BankIllinois Trust Company is a full service trust
company which offers a wide range of services such as acting as
trustee, consultant, guardian, executor and agents.
Commercial lending at BankIllinois covers such
categories as agriculture, manufacturing, capital, inventory,
construction, real estate development and commercial mortgages.
Commercial lending, particularly loans to small and medium sized
businesses, accounts for a major portion of BankIllinois' loan
portfolio. BankIllinois' retail banking division offers a Visa
credit card and makes direct loans to consumers for various
purposes, including home equity and direct automobile loans. The
consumer mortgage loan department, which is part of the retail
banking division, specializes in real estate loans to
individuals. BankIllinois also purchases installment obligations
from retailers, primarily without recourse.
BankIllinois' principal sources of income are interest
and fees on loans and investments and service fees. Its
principal expenses are interest paid on deposits and general
operating expenses.
BankIllinois and BankIllinois Trust Company's primary
service area is Champaign County, Illinois.
LENDING ACTIVITIES
GENERAL. BankIllinois' primary source of revenue is
interest revenue from its lending activities. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS Results of Operations Net Interest Income."
LOAN PORTFOLIO COMPOSITION. BankIllinois' loan
portfolio totaled approximately $285.9 million at December 31,
1996, representing 56% of BankIllinois' total assets at that
date. At that date, BankIllinois' loan portfolio included
approximately $110.1 million of loans for commercial, financial
and agricultural purposes, $127.7 million for real estate
purposes and $48.1 million
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for installment and consumer purposes.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS Results of Operations Financial
Condition Loans."
For a discussion of risks with respect to BankIllinois'
loan portfolio, BankIllinois' strategies for addressing and
managing such risks, BankIllinois' non-performing loans and
BankIllinois' allowance for losses on loans, see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS Results of Operations Allowance for Loan Losses and
Loan Quality" and " Financial Condition Loans."
INTEREST RATES AND FEES. Interest rates and fees
charged on BankIllinois' loans are affected primarily by the
market demand for loans and the supply of money available for
lending purposes. These factors are affected by, among other
things, general economic conditions and the policies of the
Federal government, including the Board of Governors of the
Federal Reserve System (the "FRB"), legislative tax policies and
governmental budgetary matters. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results
of Operations Net Interest Income."
INVESTMENT SECURITIES
The carrying value of CIFCI's securities at December
31, 1996 was approximately $153.5 million, representing 30% of
CIFCI's total assets. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial
Condition Investment Securities."
INTEREST RATE SENSITIVITY
For a discussion of BankIllinois' approach to managing
its mix of interest rate sensitive assets and liabilities, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Financial Condition Interest Rate
Sensitivity."
C. COMPETITION
CIFCI faces strong competition both in originating
loans and in attracting deposits. Competition in originating
real estate loans comes primarily from other commercial banks,
savings institutions and mortgage bankers making loans secured by
real estate located in CIFCI's market area. Commercial banks and
finance companies, including finance company affiliates of
automobile manufacturers, provide vigorous competition in
consumer lending. CIFCI competes for real estate and other loans
principally on the basis of the interest rates and loan fees it
charges, the types of loans it originates and the quality of
services it provides to borrowers.
CIFCI faces substantial competition in attracting
deposits from other commercial banks, savings institutions, money
market and mutual funds, credit unions and other investment
vehicles. The ability of CIFCI to attract and retain deposits
depends on its ability to provide investment opportunities that
satisfy the requirements of investors as to rate of return,
liquidity, risk and other factors. CIFCI attracts a significant
amount of deposits through its branch offices, primarily from the
communities in which those branch offices are located; therefore,
competition for those deposits is principally from other
commercial banks and savings institutions located in the same
communities. CIFCI competes for these deposits by offering a
variety of deposit accounts at competitive rates, convenient
business hours and convenient branch locations with interbranch
deposit and withdrawal privileges at each.
D. MONETARY POLICY AND ECONOMIC CONDITIONS
The earnings of commercial banks and bank holding
companies are affected not only by general economic conditions,
but also by the policies of various governmental regulatory
agencies. In particular, the FRB regulates money and credit
conditions and interest rates in order to influence general
economic conditions and interest rates, primarily through open
market operations in U. S. government securities, varying the
discount rate on member banks and nonmember bank borrowings and
setting reserve requirements against bank deposits. Such FRB
policies and acts have a significant influence on overall growth
and distribution of bank loans, investments and deposits and
related interest rates. CIFCI cannot accurately predict the
effect, if any, such policies and acts may have in the future on
its business or earnings.
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E. REGULATION AND SUPERVISION
GENERAL
Financial institutions and their holding companies are
extensively regulated under federal and state law. As a result,
the growth and earnings performance of CIFCI can be affected not
only by management decisions and general economic conditions, but
also by the requirements of applicable state and federal statutes
and regulations and the policies of various governmental
regulatory authorities including, but not limited to, the
Illinois Commissioner of Banks and Real Estate (the
"Commissioner"), the FRB, the Federal Deposit Insurance
Corporation (the "FDIC"), the Internal Revenue Service and state
taxing authorities and the Securities and Exchange Commission
(the "SEC"). The effect of such statutes, regulations and
policies can be significant, and cannot be predicted with a high
degree of certainty.
Federal and state laws and regulations generally
applicable to financial institutions, such as CIFCI and its
subsidiaries, regulate, among other things, the scope of
business, investments, reserves against deposits, capital levels
relative to operations, the nature and amount of collateral for
loans, the establishment of branches, mergers, consolidations and
dividends. The system of supervision and regulation applicable to
the CIFCI and its subsidiaries establishes a comprehensive
framework for their respective operations and is intended
primarily for the protection of the FDIC's deposit insurance
funds and the depositors, rather than the shareholders, of
financial institutions.
The following references to material statutes and
regulations affecting CIFCI and its subsidiaries are brief
summaries thereof and do not purport to be complete, and are
qualified in their entirety by reference to such statutes and
regulations. Any change in applicable law or regulations may
have a material effect on the business of CIFCI and its
subsidiaries.
RECENT REGULATORY DEVELOPMENTS
On September 30, 1996, President Clinton signed into
law the Economic Growth and Regulatory Paperwork Reduction Act
of 1996" (the Regulatory Reduction Act ). Subtitle G of the
Regulatory Reduction Act consists of the Deposit Insurance Funds
Act of 1996" (the DIFA ). The DIFA provides for a one-time
special assessment on each depository institution holding
deposits subject to assessment by the FDIC for the Savings
Association Insurance Fund (the SAIF ) in an amount which, in
the aggregate, will increase the designated reserve ratio of the
SAIF (i.e., the ratio of the insurance reserves of the SAIF to
total SAIF-insured deposits) to 1.25% on October 1, 1996.
Subject to certain exceptions, the special assessment was payable
in full on November 27, 1996. The Bank holds no SAIF-assessable
deposits and, therefore, was not subject to the special
assessment.
Prior to the enactment of the DIFA, a substantial
amount of the SAIF assessment revenue was used to pay the
interest due on bonds issued by the Financing Corporation
("FICO"), the entity created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance
Corporation (the "FSLIC"), the SAIF s predecessor insurance fund.
Pursuant to the DIFA, the interest due on outstanding FICO bonds
will be covered by assessments against both SAIF and Bank
Insurance Fund ("BIF") member institutions beginning January 1,
1997. Between January 1, 1997 and December 31, 1999, FICO
assessments against BIF-member institutions cannot exceed 20% of
the FICO assessments charged SAIF-member institutions. From
January 1, 2000 until the FICO bonds mature in 2019, FICO
assessments will be shared by all FDIC-insured institutions on a
pro rata basis. It has been estimated that the FICO assessments
for the period January 1, 1997 through December 31, 1999 will be
approximately 0.013% of deposits for BIF members versus
approximately 0.064% of deposits for SAIF members, and will be
less than 0.025% of deposits thereafter.
The DIFA also provides for a merger of the BIF and the
SAIF on January 1, 1999, provided there are no state or federally
chartered, FDIC-insured savings associations existing on that
date. To facilitate the merger of the BIF and the SAIF, the DIFA
directs the Treasury Department to conduct a study on the
development of a common charter and to submit a report, along
with appropriate legislative recommendations, to the Congress by
March 31, 1997.
In addition to the DIFA, the Regulatory Reduction Act
includes a number of statutory changes designed to eliminate
duplicative, redundant or unnecessary regulatory requirements.
Among other things, the Regulatory Reduction Act establishes
streamlined notice procedures for the commencement of new
nonbanking activities by bank holding companies, establishes time
frames within which the FDIC must act on applications by state
banks to engage in activities which, although permitted for state
banks under applicable state law, are not permissible activities
for national banks, and excludes ATM closures and certain branch
office relocations
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from the requirements applicable to branch
closings. The Regulatory Reduction Act also clarifies the
liability of a financial institution, when acting as a lender or
in a fiduciary capacity, under the federal environmental laws.
Although the full impact of the Regulatory Reduction Act on the
operations of CIFCI and the Bank cannot be determined at this
time, management believes that the legislation may reduce
compliance costs to some extent and allow CIFCI and the Bank
somewhat greater operating flexibility.
THE COMPANY
GENERAL. CIFCI, as the sole stockholder of the Bank, is a
bank holding company. As a bank holding company, CIFCI is
registered with, and is subject to regulation by, the FRB under
the BHCA. In accordance with FRB policy, CIFCI is expected to
act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances where CIFCI might
not do so absent such policy. Under the BHCA, CIFCI is subject
to periodic examination by the FRB and is required to file with
the FRB periodic reports of its operations and such additional
information as the FRB may require. CIFCI is also subject to the
requirements of the Illinois Bank Holding Company Act, as
amended.
INVESTMENTS AND ACTIVITIES. Under the BHCA, a bank holding
company must obtain FRB approval before: (i) acquiring, directly
or indirectly, ownership or control of any voting shares of
another bank or bank holding company if, after such acquisition,
it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares);
(ii) acquiring all or substantially all of the assets of another
bank; or (iii) merging or consolidating with another bank holding
company. Subject to certain conditions (including certain
deposit concentration limits established by the BHCA), the FRB
may allow a bank holding company to acquire banks located in any
state of the United States without regard to whether the
acquisition is prohibited by the law of the state in which the
target bank is located. In approving interstate acquisitions,
however, the FRB is required to give effect to applicable state
law limitations on the aggregate amount of deposits that may be
held by the acquiring bank holding company and its insured
depository institution affiliates in the state in which the
target bank is located or which require that the target bank have
been in existence for a minimum period of time (not to exceed
five years) before being acquired by an out-of-state bank holding
company.
The BHCA also prohibits, with certain exceptions, CIFCI
from acquiring direct or indirect ownership or control of more
than 5% 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. The principal exception to this
prohibition allows bank holding companies to engage in, and to
own shares of companies engaged in, certain businesses found by
the FRB to be so closely related to banking ... as to be a
proper incident thereto. Under current regulations of the FRB,
CIFCI and its non-bank subsidiaries are permitted to engage in,
among other activities, such banking-related businesses as the
operation of a thrift, sales and consumer finance, equipment
leasing, the operation of a computer service bureau, including
software development, and mortgage banking and brokerage. The
BHCA generally does not place territorial restrictions on the
activities of non-bank subsidiaries of bank holding companies.
Federal legislation also prohibits acquisition of
control of a bank or bank holding company, such as CIFCI,
without prior notice to certain federal bank regulators.
Control is defined in certain cases as acquisition of 10% of
the outstanding shares of a bank or bank holding company.
CAPITAL REQUIREMENTS. Bank holding companies are required
to maintain minimum levels of capital in accordance with FRB
capital adequacy guidelines. If capital falls below minimum
guideline levels, a bank holding company, among other things, may
be denied approval to acquire or establish additional banks or
non-bank businesses.
The FRB's capital guidelines establish the following
minimum regulatory capital requirements for bank holding
companies: a risk-based requirement expressed as a percentage of
total risk-weighted assets, and a leverage requirement expressed
as a percentage of total assets. The risk-based requirement
consists of a minimum ratio of total capital to total risk-
weighted assets of 8%, of which at least one-half must be Tier 1
capital. The leverage requirement consists of a minimum ratio of
Tier 1 capital to total assets of 3% for the most highly rated
companies, with minimum requirements of 4% to 5% for all others.
For purposes of these capital standards, Tier 1 capital consists
primarily of permanent stockholders' equity less intangible
assets (other than certain mortgage servicing rights and
purchased credit card relationships) and total capital means Tier
1 capital plus certain other debt and equity instruments which do
not qualify as Tier 1 capital and a portion of the company's
allowance for loan and lease losses.
The risk-based and leverage standards described above
are minimum requirements, and higher capital levels will be
required if warranted by the particular circumstances or risk
profiles of individual banking organizations. Further, any
banking organization
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experiencing or anticipating significant
growth would be expected to maintain capital ratios, including
tangible capital positions (i.e., Tier 1 capital less all
intangible assets), well above the minimum levels.
As of December 31, 1996, CIFCI had regulatory capital
in excess of the FRB's minimum requirements, with a risk-based
capital ratio of 17.7% and a leverage ratio of 10.7%.
DIVIDENDS. The FRB has issued a policy statement with
regard to the payment of cash dividends by bank holding
companies. In the policy statement, the FRB expressed its view
that a bank holding company should not pay cash dividends
exceeding its net income or which can only be funded in ways that
weaken the bank holding company's financial health, such as by
borrowing. Additionally, the FRB possesses enforcement powers
over bank holding companies and their non-bank subsidiaries to
prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations.
Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies. In addition to
the restrictions on dividends that may be imposed by the FRB, the
Delaware General Corporation Law would allow CIFCI to pay
dividends only out of its surplus, or if CIFCI has no such
surplus, out of its net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year.
FEDERAL SECURITIES REGULATION. CIFCI's common stock is
registered with the SEC under the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Consequently, CIFCI is subject to the
information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Exchange Act.
THE BANK
GENERAL. The Bank is an Illinois-chartered bank, the
deposit accounts of which are insured by the BIF of the FDIC. As
a BIF-insured, Illinois-chartered bank, the Bank is subject to
the examination, supervision, reporting and enforcement
requirements of the Commissioner, as the chartering authority for
Illinois banks, and the FDIC, as administrator of the BIF.
DEPOSIT INSURANCE. As an FDIC-insured institution, the Bank
is required to pay deposit insurance premium assessments to the
FDIC. The FDIC has adopted a risk-based assessment system under
which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their
respective levels of capital and supervisory evaluations.
Institutions classified as well-capitalized (as defined by the
FDIC) and considered healthy pay the lowest premium while
institutions that are less than adequately capitalized (as
defined by the FDIC) and considered of substantial supervisory
concern pay the highest premium. Risk classification of all
insured institutions is made by the FDIC for each semi-annual
assessment period.
During the year ended December 31, 1996, BIF
assessments ranged from 0% of deposits to 0.27% of deposits. The
FDIC has announced that for the semi-annual assessment period
beginning January 1, 1997, BIF assessment rates will continue to
range from 0% of deposits to 0.27% of deposits.
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The FDIC may terminate the deposit insurance of any
insured depository institution if the FDIC determines, after a
hearing, that the institution has engaged or is engaging in
unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or
written agreement with, the FDIC. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a
permanent termination of insurance if the institution has no
tangible capital. Management of CIFCI is not aware of any
activity or condition that could result in termination of the
deposit insurance of the Bank.
FICO ASSESSMENTS. Since 1987, a portion of the deposit
insurance assessments paid by SAIF members has been used to cover
interest payments due on the outstanding obligations of the FICO,
the entity created to finance the recapitalization of the FSLIC,
the SAIF's predecessor insurance fund. Pursuant to federal
legislation enacted September 30, 1996, commencing January 1,
1997, both SAIF members and BIF members will be subject to
assessments to cover the interest payment on outstanding FICO
obligations. Such FICO assessments will be in addition to
amounts assessed by the FDIC for deposit insurance. Until
January 1, 2000, the FICO assessments made against BIF members
may not exceed 20% of the amount of the FICO assessments made
against SAIF members. It is estimated that SAIF members will pay
FICO assessments equal to 0.064% of deposits while BIF members
will pay FICO assessments equal to 0.013% of deposits. Between
January 1, 2000 and the maturity of the outstanding FICO
obligations in 2019, BIF members and SAIF members will share the
cost of the interest on the FICO bonds on a pro rata basis. It
is estimated that FICO assessments during this period will be
less than 0.025% of deposits.
COMMISSIONER ASSESSMENTS. Illinois banks are required to
pay supervisory fees to the Commissioner to fund the operations
of the Commissioner. The amount of such supervisory fees is
based upon each institution's total assets, including
consolidated subsidiaries, as reported to the Commissioner.
During the year ended December 31, 1996, the Bank paid
supervisory fees to the Commissioner totaling $42,425.
CAPITAL REQUIREMENTS. The FDIC has established the
following minimum capital standards for state-chartered insured
non-member banks, such as the Bank: a leverage requirement
consisting of a minimum ratio of Tier 1 capital to total assets
of 3% for the most highly-rated banks with minimum requirements
of 4% to 5% for all others, and a risk-based capital requirement
consisting of a minimum ratio of total capital to total risk-
weighted assets of 8%, at least one-half of which must be Tier 1
capital. For purposes of these capital standards, Tier 1 capital
and total capital consist of substantially the same components as
Tier 1 capital and total capital under the FRB's capital
guidelines for bank holding companies (see "--The Company--
Capital Requirements").
The capital requirements described above are minimum
requirements. Higher capital levels will be required if
warranted by the particular circumstances or risk profiles of
individual institutions. For example, the regulations of the
FDIC provide that additional capital may be required to take
adequate account of interest rate risk or the risks posed by
concentrations of credit, nontraditional activities or securities
trading activities.
During the year ended December 31, 1996, the Bank was
not required by the FDIC to increase its capital to an amount in
excess of the minimum regulatory requirements. As of December
31, 1996, the Bank exceeded its minimum regulatory capital
requirements with a leverage ratio of 10.2% and a risk-based
capital ratio of 17.0%.
Federal law provides the federal banking regulators
with broad power to take prompt corrective action to resolve the
problems of undercapitalized institutions. The extent of the
regulators' powers depends on whether the institution in question
is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." Depending upon the capital
category to which an institution is assigned, the regulators'
corrective powers include: requiring the submission of a capital
restoration plan; placing limits on asset growth and restrictions
on activities; requiring the institution to issue additional
capital stock (including additional voting stock) or to be
acquired; restricting transactions with affiliates; restricting
the interest rate the institution may pay on deposits; ordering a
new election of directors of the institution; requiring that
senior executive officers or directors be dismissed; prohibiting
the institution from accepting deposits from correspondent banks;
requiring the institution to divest certain subsidiaries;
prohibiting the payment of principal or interest on subordinated
debt; and ultimately, appointing a receiver for the institution.
DIVIDENDS. Under the Illinois Banking Act, Illinois-
chartered banks may not pay, without prior regulatory approval,
dividends in excess of their net profits.
The payment of dividends by any financial institution
or its holding company is affected by the requirement to maintain
adequate capital pursuant to applicable capital adequacy
guidelines and regulations, and a financial institution generally
is prohibited from paying any dividends if, following payment
thereof, the institution would be undercapitalized. As described
above, the Bank exceeded its minimum capital requirements under
applicable guidelines as of December 31, 1996. As of December
31, 1996, approximately $1.2 million was available to be paid as
dividends to CIFCI by the Bank. Notwithstanding the availability
of funds for dividends, however, the FDIC may prohibit the
payment of any dividends by the Bank if the FDIC determines such
payment would constitute an unsafe or unsound practice.
INSIDER TRANSACTIONS. The Bank is subject to certain
restrictions imposed by the Federal Reserve Act on extensions of
credit to CIFCI and its subsidiaries, on investments in the stock
or other securities of CIFCI and its subsidiaries and the
acceptance of the stock or other securities of CIFCI or its
subsidiaries as collateral for loans. Certain limitations and
reporting requirements are also placed on extensions of credit by
the Bank to its directors and officers, to directors and officers
of CIFCI and its subsidiaries, to principal stockholders of
CIFCI, and to "related interests" of such directors, officers and
principal stockholders. In addition, such legislation and
regulations may affect the terms upon which any person becoming a
director or officer of CIFCI or one of its subsidiaries or a
principal stockholder of CIFCI may obtain credit from banks with
which the Bank maintains a correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS. The FDIC has adopted
guidelines which establish operational and managerial standards
to promote the safety and soundness of state non-member banks.
The guidelines set forth standards for internal controls,
information
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systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits, asset quality and earnings. In
general, the guidelines prescribe the goals to be achieved in
each area, and each institution is responsible for establishing
its own procedures to achieve those goals. If an institution
fails to comply with any of the standards set forth in the
guidelines, the FDIC may require the institution to submit a plan
for achieving and maintaining compliance. The preamble to the
guidelines states that the FDIC expects to require a compliance
plan from an institution whose failure to meet one or more of the
guidelines is of such severity that it could threaten the safety
and soundness of the institution. Failure to submit an
acceptable plan, or failure to comply with a plan that has been
accepted by the FDIC, would constitute grounds for further
enforcement action.
BRANCHING AUTHORITY. Illinois banks, such as the Bank, have
the authority under Illinois law to establish branches anywhere
in the State of Illinois, subject to receipt of all required
regulatory approvals.
Effective June 1, 1997 (or earlier if expressly
authorized by applicable state law), the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal
Act") allows banks to establish interstate branch networks
through acquisitions of other banks, subject to certain
conditions, including certain limitations on the aggregate amount
of deposits that may be held by the surviving bank and all of its
insured depository institution affiliates. The establishment of
de novo interstate branches or the acquisition of individual
branches of a bank in another state (rather than the acquisition
of an out-of-state bank in its entirety) is allowed by the
Riegle-Neal Act only if specifically authorized by state law.
The legislation allows individual states to "opt-out" of certain
provisions of the Riegle-Neal Act by enacting appropriate
legislation prior to June 1, 1997. Illinois has enacted
legislation permitting interstate mergers beginning on June 1,
1997.
STATE BANK ACTIVITIES. Under federal law and FDIC
regulations, FDIC insured state banks are prohibited, subject to
certain exceptions, from making or retaining equity investments
of a type, or in an amount, that are not permissible for a
national bank. Federal law and FDIC regulations also prohibit
FDIC insured state banks and their subsidiaries, subject to
certain exceptions, from engaging as principal in any activity
that is not permitted for a national bank or its subsidiary,
respectively, unless the bank meets, and continues to meet, its
minimum regulatory capital requirements and the FDIC determines
the activity would not pose a significant risk to the deposit
insurance fund of which the bank is a member. Impermissible
investments and activities must be divested or discontinued
within certain time frames set by the FDIC. These restrictions
have not had, and are not currently expected to have, a material
impact on the operations of the Bank.
FEDERAL RESERVE SYSTEM. FRB regulations, as presently in
effect, require depository institutions to maintain non-interest
earning reserves against their transaction accounts (primarily
NOW and regular checking accounts), as follows: for transaction
accounts aggregating $49.3 million or less, the reserve
requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $49.3 million, the
reserve requirement is $1.479 million plus 10% of the aggregate
amount of total transaction accounts in excess of $49.3 million.
The first $4.4 million of otherwise reservable balances are
exempted from the reserve requirements. These reserve
requirements are subject to annual adjustment by the FRB. The
Bank is in compliance with the foregoing requirements.
THE TRUST COMPANY
BankIllinois Trust Company (the "Trust Company") is an
Illinois corporation which conducts a full service trust business
in the State of Illinois pursuant to a certificate of authority
issued to it by the Commissioner under the Illinois Corporate
Fiduciaries Act (the "Fiduciaries Act"). The Fiduciaries Act
requires the Trust Company, among other things, to maintain a
minimum level of capital, as determined by the Commissioner, and
to obtain the approval of the Commissioner before opening branch
offices or acquiring another trust company. The Trust Company is
subject to periodic examination by the Commissioner and the
Commissioner has the authority to take action against it to
enforce compliance with the laws applicable to its operations.
The Trust Company is also subject to supervision and regulation
by the FRB under the BHCA.
F. EMPLOYEES
CIFCI had a total of 243 employees at December 31,
1996, consisting of 171 full-time employees and 46 part-time at
BankIllinois and 23 full-time employees and 3 part-time at
BankIllinois Trust Company. CIFCI places a high priority on
staff development which involves extensive training, including
customer service training. New employees are selected on the
basis of both technical skills and customer service capabilities.
None of CIFCI's employees are covered by a collective bargaining
agreement with
<PAGE> 7
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CIFCI or its subsidiaries. CIFCI offers a variety
of employee benefits, and management considers its employee
relations to be excellent.
ITEM 2. PROPERTIES
BankIllinois owns the land and building at CIFCI's
principal executive offices at 100 West University, Champaign,
Illinois, which is also BankIllinois' main banking office. In
addition, BankIllinois owns three separate branch facilities, one
a few blocks away, one approximately two miles away from the main
banking office of BankIllinois and the other approximately five
miles away. BankIllinois also leases space in three supermarket
stores and operates a branch facility at each store. One
supermarket branch is situated in Urbana, approximately three
miles from BankIllinois' main office. The second is located in
Mahomet, approximately ten miles from BankIllinois' home office.
The third supermarket branch is located in Champaign
approximately two miles from the main office of BankIllinois, but
is scheduled to close in May, 1997 as a result of reduced
customer traffic following a decline in the number of businesses
in the area. In addition, BankIllinois leases seven drive-in
lanes adjacent to its main office, and also leases two other
branch facilities, one located approximately two miles southwest
of the main office and the other two miles southeast of the main
office. BankIllinois also leases approximately 13,000 square
feet in a building located down the street from the main banking
office for operations and other support services.
BankIllinois also owns two other buildings and three
parking lots which are located within a mile of its main office.
One of the buildings is partially used by BankIllinois for
mortgage personnel, and is currently on the market for sale. The
other building is used for storage. Two of the parking lots are
partially leased and are also used by BankIllinois employees.
The third parking lot is for employee use only.
CIFCI believes that its facilities are adequate to
serve its present needs. The main office for CIFCI, BankIllinois
and BankIllinois Trust Company is owned in fee and is
unencumbered.
ITEM 3. LEGAL PROCEEDINGS
In the course of business, CIFCI, BankIllinois and
BankIllinois Trust Company become involved in various lawsuits
and claims that are incidental to their respective businesses.
As of the date of filing this report, there were no causes of
action which would have a material adverse effect on the business
or financial condition of CIFCI, BankIllinois or BankIllinois
Trust Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no items submitted to a vote of security
holders in the fourth quarter of 1996.
<PAGE> 8
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
CIFCI's Common Stock was held by approximately 400
shareholders of record as of March 17, 1997, and is traded in the
over-the-counter market.
The following table shows, for the periods indicated,
the range of prices per share of CIFCI's Common Stock in the
over-the-counter market, as reported to CIFCI by the brokers
known to CIFCI to regularly follow the market for the Common
Stock. Certain other private transactions may have occurred
during the periods indicated of which CIFCI has no knowledge.
The following prices represent inter-dealer prices without retail
markups, markdowns or commissions, and have not been adjusted to
reflect a 5% stock dividend paid by the Company on May 15, 1996.
1995 QUARTER ENDING: PRICE/SHARE
March 31, 1995 N/A
June 30, 1995 $12.00 - $12.00
September 30, 1995 $12.00 - $13.00
December 31, 1995 $13.00 - $13.75
1996 QUARTER ENDING: PRICE/SHARE
March 31, 1996 $13.00 - $13.25
June 30, 1996 $13.25 - $14.00
September 30, 1996 $13.25 - $13.75
December 31, 1996 $14.00 - $16.25
Cash dividends were declared by CIFCI during the last
two quarters of the 1995 fiscal year. CIFCI paid a 5% stock
dividend in the second quarter of 1996 and paid no dividends
during the remaining quarters of the 1996 fiscal year. Management
expects that if dividends are declared by the Board of Directors
during 1997, such dividends will also be payable in the form of
stock. The following table sets forth the cash dividends per
share paid on Company's Common Stock for the past two years.
Declared dividends were paid early in the following quarter.
1995 QUARTER ENDING: DIVIDEND/SHARE
First Quarter N/A
Second Quarter N/A
Third Quarter $0.075
Fourth Quarter $0.075
1996 First Quarter $ --
Second Quarter $ --
Third Quarter $ --
Fourth Quarter $ --
The ability of CIFCI to pay dividends in the future
will be primarily dependent upon its receipt of dividends from
the Bank. In determining cash dividends, the Board of Directors
considers the earnings, capital requirements, debt and dividend
servicing requirements, financial ratio guidelines it has
established, the financial condition of CIFCI and other relevant
factors. The Bank's ability to pay dividends to CIFCI and
CIFCI's ability to pay dividends to its stockholders are also
subject to certain regulatory restrictions.
<PAGE> 9
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated
financial information for CIFCI for each of the five years ended
December 31, 1996. The selected consolidated financial data
should be read in conjunction with the Consolidated Financial
Statements of CIFCI, including the related notes, presented
elsewhere herein.
<TABLE>
YEAR ENDED DECEMBER 31,
1996 1995 1994 1993 1992
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest income $35,088 $35,903 $33,086 $33,273 $36,464
Interest expense 17,825 17,689 14,487 15,688 19,425
Net interest income 17,263 18,214 18,599 17,585 17,039
Provision for loan losses 375 3,097 565 3,015 3,674
Net interest income after provision
for loan losses 16,888 15,117 18,034 14,570 13,365
Noninterest income 4,321 3,979 4,258 5,041 5,207
Noninterest expense 14,525 19,082 17,480 15,882 15,460
Income tax expense 2,183 248 1,466 1,062 835
Discontinued operations gain on disposal
of subsidiary 0 570 4,634 3,244 419
Cumulative effect of change in
accounting principles 0 0 0 (220) (170)
Net income $4,501 $336 $7,980 $5,691 $2,526
Earnings per share:
Income from continuing operations $0.90 ($0.04) $0.67 $0.54 $0.47
Discontinued operations gain on disposal
of subsidiary 0.00 0.11 0.93 0.65 0.08
Cumulative effect of change in accounting
principles 0.00 0.00 0.00 (0.04) (0.04)
Net income $0.90 $0.07 $1.60 $1.15 $0.51
Return on average total assets 0.92% 0.07% 1.64% 1.18% 0.53%
Return on average stockholders' equity 9.00% 0.68% 18.19% 14.66% 7.01%
Total assets $515,440 $520,586 $495,313 $497,562 $495,588
Investment in debt and equity securities 153,492 97,304 106,034 120,650 125,921
Loans held for investment, net 280,281 311,519 326,204 304,749 294,774
Deposits 404,130 419,157 394,677 405,990 432,187
Borrowings 52,941 45,273 47,504 43,987 22,330
Total stockholders' equity 52,096 48,408 46,766 42,130 36,204
Total stockholders' equity to total assets 10.11% 9.30% 9.44% 8.47% 7.31%
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis is designed to provide the
reader with a comprehensive review of the consolidated results of operations
for 1996 for CIFCI, including BankIllinois and BankIllinois Trust Company,
and an analysis of CIFCI's financial condition at December 31, 1996 compared
to December 31, 1995 and at December 31, 1995 compared to December 31, 1994.
This discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes which begin at page 28 of
this report.
SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. CIFCI intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based
<PAGE> 10
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on certain
assumptions and describe future plans, strategies and expectations of CIFCI,
are generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. CIFCI's ability
to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on
the operations and future prospects of CIFCI and the subsidiaries include,
but are not limited to, changes in: interest rates, general economic
conditions, legislative/regulatory changes, monetary and fiscal policies of
the U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board, the quality or composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in CIFCI's market area and accounting principles, policies
and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed
on such statements. Further information concerning CIFCI and its business,
including additional factors that could materially affect CIFCI's financial
results, is included in CIFCI's filings with the Securities and Exchange
Commission.
OVERVIEW
The years ended December 31, 1996 and December 31, 1995 were years of
transition for CIFCI involving fundamental reorganization of the consolidated
organization.
On December 13, 1994, BankIllinois Financial Co. and Central Illinois
Financial Corporation entered into an agreement and plan of merger which
provided for a merger of the two companies into CIFCI. The merger, which was
accounted for as a pooling of interests, was completed on June 30, 1995.
Accordingly, prior period consolidated financial statements have been
restated as though the prior entities had been consolidated for all periods
presented. On October 20, 1995 the two subsidiary banks, BankIllinois and
Champaign National Bank, were merged into a single resulting bank known as
BankIllinois. Additionally, on October 20, 1995 CIFCI transferred the trust
operations of each of its subsidiary banks to its newly-formed trust company
subsidiary known as BankIllinois Trust Company. Costs incurred during 1995
associated with the merger were approximately $1,036,000. The resulting
effect of these costs on earnings per share was a decrease of approximately
$0.21 for the year ended December 31, 1995.
In addition to the direct costs associated with the merger, CIFCI also
incurred non-recurring restructuring costs during 1995 of approximately
$1,786,000. Included in these restructuring costs were expenses related to
reduction in work force, computer related expenses, adjustments to carrying
value of premises and equipment deemed to be unnecessary for the ongoing
operation of the merged entity and the consolidation of safe deposit boxes.
Management of CIFCI continues to spend significant time and effort
maintaining and improving asset quality. Changes in the loan policy with an
increased focus on credit analysis prior to loan approval and an emphasis on
early detection of problem assets instituted in 1994 and 1995 contributed to
net loans charged off of $2,478,000 and the provision for loan losses of
$3,097,000 in 1995. The emphasis on loan quality resulted in net charge-offs
being reduced to $670,000 in 1996, $1,808,000 less than in 1995. The
emphasis on loan quality also resulted in a decrease in the provision for
loan losses in 1996 by $2,722,000 from 1995 resulting in a $375,000 provision
in 1996. The allowance for loan losses was $5,587,000, or 1.95% of loans, at
December 31, 1996 compared to $5,882,000, or 1.85% of loans, at December 31,
1995.
RESULTS OF OPERATIONS
CIFCI earned $4,501,000 from continuing operations in 1996 compared to
a loss of $234,000 in 1995 and income from continuing operations of
$3,346,000 in 1994. Included in continuing operations were merger expenses
of $1,036,000 in 1995. In addition, non-recurring restructuring costs of
$1,786,000 and $733,000 were included in continuing operations in 1995 and
1994, respectively. Continuing operations does not include the gain on sale
of a subsidiary, net of tax of $570,000 and $4,634,000 in 1995 and 1994,
respectively.
CIFCI had net income (loss) of 0.92%, (0.05%) and 0.69% from
operations on average assets in 1996, 1995 and 1994, respectively. Other
financial ratios follow:
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<TABLE>
FINANCIAL RATIOS
1996 1995 1994
<S> <C> <C> <C>
Rate of return on continuing operations
before discontinued operations:
Average total assets 0.92% (0.05%) 0.69%
Average total stockholders' equity 9.00% (0.47%) 7.63%
Total rate of return on
Average total assets 0.92% 0.07% 1.64%
Average total stockholders' equity 9.00% 0.68% 18.19%
Average stockholders' equity to average
assets ratio 10.18% 10.00% 9.00%
</TABLE>
The rate of return on continuing operations in 1996 improved
relative to 1995 and 1994. The 1995 results were affected by the merger
and non-recurring restructuring expenses incurred. Income (loss) per share
from continuing operations was $0.90, ($0.04) and $0.67 in 1996, 1995 and
1994, respectively. Total net income per share included net income per
share of $0.00, $0.11 and $0.93 in 1996, 1995 and 1994, respectively, from
discontinued operations gain on sale of subsidiary. Total net income per
share was $0.90, $0.07, and $1.60 in 1996, 1995 and 1994, respectively.
NET INTEREST INCOME
Net interest income, the most significant component of CIFCI's
earnings, is the difference between interest received or accrued on CIFCI's
earning assets primarily loans and investments and interest paid or accrued
on deposits and short-term borrowings. In order to compare the interest
generated from different types of earning assets, the interest income on
certain tax-exempt investment securities and loans is increased for
analysis purposes to reflect the income tax savings provided by these tax-
exempt assets. The adjustment to interest income for tax-exempt investment
securities and loans was calculated based on the federal income tax
statutory rate of 34%. The adjustment to net interest income for the tax
effect of tax-exempt assets is shown in the following schedule. Net tax
equivalent (TE) interest income of $17,471,000 in 1996 reflects a decrease
from the $18,480,000 recorded in 1995 and the $18,905,000 recorded in 1994.
<TABLE>
NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
(in thousands)
1996 1995 1994
<S> <C> <C> <C>
Total interest income $35,088 $35,903 $33,086
Total interest expense 17,825 17,689 14,487
Net interest income $17,263 $18,214 $18,599
Tax equivalent adjustment:
Tax-exempt investments 196 252 291
Tax-exempt loans 12 14 15
Total adjustment 208 266 306
Net interest income (TE) $17,471 $18,480 $18,905
</TABLE>
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The following schedule "Consolidated Average Balance Sheet and
Interest Rates" provides details of average balances, interest income or
interest expense, and the average rates for CIFCI's major asset and liability
categories.
<TABLE>
CONSOLIDATED AVERAGE BALANCE SHEET AND INTEREST RATES
(dollars in thousands)
1996 1995 1994
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Taxable investment
securities <F1> $112,359 $6,797 6.05% $90,675 $4,992 5.51% $104,483 $5,560 5.32%
Tax-exempt investment
securities <F1> 8,471 576 6.80% 10,919 741 6.79% 12,221 855 7.00%
Federal funds sold 34,723 1,874 5.40% 16,977 951 5.60% 6,677 282 4.22%
Loans <F2> <F3> 294,384 26,049 8.85% 334,915 29,485 8.80% 317,880 26,695 8.40%
Total interest earning
assets and interest
income $449,937 $35,296 7.84% $453,486 $36,169 7.98% $441,261 $33,392 7.57%
Cash and due from banks $20,539 $21,202 $22,305
Premises and equipment 10,802 11,213 10,353
Other assets 10,197 10,733 13,690
Total assets $491,475 $496,634 $487,609
Liabilities and Stockholders' Equity
Interest bearing demand
deposits $118,296 $3,745 3.17% $106,410 $2,927 2.75% $123,588 $3,038 2.46%
Savings 20,358 379 1.86% 23,850 585 2.45% 24,562 564 2.30%
Time deposits 193,486 11,096 5.73% 210,699 11,698 5.55% 195,680 9,019 4.61%
Short-term borrowings 39,598 2,006 5.07% 34,903 1,882 5.39% 29,940 1,216 4.06%
FHLB advances 9,000 599 6.66% 9,000 597 6.63% 10,142 650 6.41%
Total interest bearing
liabilities and interest
expense $380,738 $17,825 4.68% $384,862 $17,689 4.60% $383,912 $14,487 3.77%
Noninterest bearing
demand deposits $54,229 $55,731 $53,516
Other liabilities 6,489 6,370 6,310
Total liabilities $441,456 $446,963 $443,738
Stockholders' equity 50,019 49,671 43,871
Total liabilities and
stockholders'
equity $491,475 $496,634 $487,609
Interest spread (average
rate earned minus
average rate paid) 3.16% 3.38% 3.80%
Net interest income (TE) $17,471 $18,480 $18,905
Net yield on interest
earning assets (TE) 3.88% 4.08% 4.28%
Notes:
<FN>
<F1> Investments in debt securities are included at carrying value.
<F2> Loans are net of unearned discount and allowance for loan losses.
Nonaccrual loans are included in the total.
<F3> Loan fees of approximately $473,000, $499,000 and $466,000 in 1996,
1995 and 1994, respectively, are included in total loan income.
</FN>
</TABLE>
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The following table presents, on a fully taxable equivalent basis,
an analysis of changes in net interest income resulting from changes in
average volumes of earning assets and interest bearing liabilities and
average rates earned and paid. The change in interest due to the combined
rate/volume variance has been allocated to rate and volume changes in
proportion to the absolute dollar amounts of change in each.
<TABLE>
ANALYSIS OF VOLUME AND RATE CHANGES
(in thousands)
1996 1995
Increase Increase
(Decrease) (Decrease)
from from
Previous Due to Due to Previous Due to Due to
Year Volume Rate Year Volume Rate
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Taxable investment securities $1,805 $1,280 $525 ($568) ($760) $192
Tax-exempt investment (165) (166) 1 (114) (89) (25)
securities
Federal funds sold 923 958 (35) 669 552 117
Loans (3,436) (3,601) 165 2,790 1,477 1,313
Total interest income ($873) ($1,529) $656 $2,777 $1,180 $1,597
Interest Expense
Interest bearing demand deposits $818 $346 $472 ($111) ($448) $337
Savings (206) (78) (128) 21 (16) 37
Time deposits (602) (974) 372 2,679 732 1,947
Short-term borrowings 124 241 (117) 666 224 442
Federal Home Loan Bank advances 2 0 2 (53) (75) 22
Total interest expense $136 ($465) $601 $3,202 $417 $2,785
Net Interest Income (TE) ($1,009) ($1,064) $55 ($425) $763 ($1,188)
</TABLE>
Total average earning assets decreased slightly from $453,486,000 in
1995 to $449,937,000 in 1996, generating lower levels of interest income in
1996, while interest expense increased slightly. Average loans decreased
$40,531,000, resulting in a decrease of $3,436,000 in interest income, of
which $3,601,000 was directly attributable to a decrease in the volume of
loans offset by a $165,000 increase due to rate changes. CIFCI continues to
emphasize credit quality and pricing. Interest income earned on non-taxable
securities decreased $165,000 in 1996 due to a change in volume. The
decreases were somewhat offset by increases in investments in taxable
securities and federal funds sold. Average investments in taxable securities
increased $21,684,000 and generated an additional $1,805,000 in interest
income, of which $1,280,000 was attributable to the volume increase. Average
federal funds sold increased $17,746,000 and contributed an additional
$923,000 in interest income, $958,000 of which was attributable to the
increase in volume offset by a $35,000 decrease due to rate changes. Total
interest income increased $2,777,000 in 1995 from 1994. This was caused by
increases in loan interest income of $2,790,000 and federal funds sold income
of $669,000 offset by decreases in taxable investment securities of $568,000
and non-taxable investment securities of $114,000. Of the $2,790,000
increase in loan interest income, $1,477,000 was attributable to an increase
in volume and $1,313,000 was attributable to an increase in rate.
CIFCI establishes interest rates on loans and deposits based on
market rates such as the 91-day Treasury Bill rate and the prime rate and
interest rates offered by other financial institutions in the local
community. The level of risk and the value of collateral also are evaluated
when determining loan rates. The average rate earned on loans increased
slightly from 8.80% in 1995 to 8.85% in 1996. The yield on federal funds
sold decreased 20 basis points from the year ended December 31, 1995, while
the yield on taxable investment securities increased 54 basis points.
The actual balances of loans at December 31, 1996 were lower than
at December 31, 1995. Installment and consumer loans, commercial, financial
and agricultural, and real estate loans decreased $20,324,000, $11,121,000
and $169,000, respectively. These decreases were mostly due to increased
emphasis placed on credit quality and pricing as well as a very competitive
market place.
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Interest expense increased $136,000 in 1996. This was partly
caused by the increase of $818,000 of interest on interest bearing demand
deposits. Of this increase, $346,000 was attributable to an increase in
volume and $472,000 was attributable to rate, as the average rate paid
increased from 2.75% in 1995 to 3.17% in 1996. A primary cause for this
increase was the introduction of new product called the Prime Investment
account in 1996. This account pays a higher rate of interest than a regular
money market account on balances of $25,000 and over and provides greater
access to funds than a certificate of deposit. At December 31, 1996, the
Prime Investment product accounted for $42,775,000, or 33.6%, of all interest
bearing demand deposits.
The increase in interest expense during 1995 was a direct result of
offering interest rates at the end of 1994 and part of 1995 that were higher
than those offered in prior years as part of special CD promotions at
different branch locations. While the average balance of time deposits grew
from $195,680,000 in 1994 to $210,699,000 in 1995, this was offset by
decreases in interest bearing demand deposits, from $123,588,000 in 1994 to
$106,410,000 in 1995, some of which were transferred to time deposits during
the certificate of deposit specials.
Interest expense on savings deposits decreased $206,000 in 1996
compared to 1995. Of this decrease, $78,000 was attributable to a decrease
in volume and $128,000 was attributable to a decrease in rate. The average
interest rate paid decreased from 2.45% in 1995 to 1.86% in 1996.
Interest expense on time deposits decreased $602,000 in 1996
compared to 1995, reflecting the decrease in average time deposits
outstanding of $17,213,000 and offset somewhat by the increase in average
yield paid from 5.55% in 1995 to 5.73% in 1996. Both the decrease in
outstanding balance and the increase in rate paid were reflective of the
local interest rate environment. The increase of $2,679,000 in interest
expense on time deposits in 1995 compared to 1994 was due to a $732,000
increase in volume and a $1,947,000 increase in interest rates.
Interest expense on short-term borrowings increased $124,000 in
1996 over 1995. The increase was a result of average short-term borrowings
increasing $4,695,000 in 1996 to $39,598,000 from $34,903,000 in 1995, offset
by the interest rate decrease from 5.39% in 1995 to 5.07% in 1996. Included
in the average balance increase was an increase of $4,836,000 in daily
repurchase agreements. Average federal funds purchased increased $1,844,000
in 1996 compared to 1995, offset by a decrease of $1,984,000 in term
repurchase agreements.
Interest expense on short-term borrowings increased $666,000 in
1995 over 1994. The increase was a result of average short-term borrowings
increasing $4,963,000 in 1995 to $34,903,000 from $29,940,000 in 1994 as well
as the average interest rate increasing from 4.06% in 1994 to 5.39% in 1995.
Included in the average balance increase was an increase of $12,681,000 in
daily repurchase agreements. This increase was the result of a large
interest bearing money market account being transferred at the end of 1994 to
a daily repurchase agreement. This repurchase agreement had a balance of
approximately $10,000,000 at December 31, 1994 which increased during 1995 to
a balance of approximately $15,000,000 at December 31, 1995. There was a
decrease of $4,012,000 in average term repurchase agreements due to the
maturity of competitively priced large agreements. Average federal funds
purchased decreased $3,440,000 in 1995 compared to 1994, due to less reliance
on short-term borrowings and an influx of cash during 1995.
PROVISION FOR LOAN LOSSES
The quality of CIFCI's loan portfolio is of prime importance to
CIFCI management and the Board of Directors, as loans are the largest
component of CIFCI's assets. BKI maintains an independent credit
administration function which performs reviews of all large loans and all
loans which present indications of additional credit risk. Approval of the
senior loan committee, which meets weekly, is required prior to funding of
all secured credit relationships over $500,000 and all unsecured
relationships over $100,000. This committee also reviews nonaccrual loans
and other problem loans. The Board of Directors meets monthly to review
problem loans, BKI's lending policies and practices, and the results of
credit administration analyses.
Continued emphasis on loan quality resulted in net charge-offs
decreasing to $670,000 in 1996, $1,808,000 less than 1995. A corresponding
decrease in the provision for loan losses in 1996 of $2,722,000 from 1995
also occurred. The resulting 1996 provision was $375,000. (See the section
on Allowance for Loan Losses and Loan Quality elsewhere in this report for
further discussion relating to the adequacy of the allowance for loan
losses.) CIFCI charged off $1,538,000 in loans during 1996 compared to
$2,674,000 in 1995. Recoveries of previously charged off loans were $868,000
in 1996 compared to $196,000 in 1995, with the greatest recoveries coming in
the areas of commercial, financial and agricultural loans, having recoveries
of $647,000 in 1996. The increased emphasis placed on credit analysis and
early detection of problem loans following the merger in 1995 resulted in the
provision for loan losses increasing significantly from $565,000 in 1994 to
$3,097,000 in 1995, paralleling the increase in net charge-offs from a net
recovery of $12,000 in 1994 to a net charge-off of $2,478,000 in 1995.
<PAGE> 15
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
NONINTEREST INCOME
Noninterest income increased $342,000, or 8.6% from 1995 to 1996.
This was attributed to increases in trust fees of $331,000, or 20.7%, and
gains on sales of mortgage loans of $67,000, or 33.7%, offset by a decrease
in other noninterest income of $31,000. The increase in trust fees was due
to the transition to a higher quality based fee schedule. The increase in
gains on mortgage loans was due to the volume of loans sold increasing to
$17,726,000 in 1996 from $13,572,000 in 1995. CIFCI strives to minimize
interest rate risk on mortgage loans held for sale by selling loans as soon
after commitment as possible.
Noninterest income decreased $279,000, or 6.6%, from 1994 to 1995.
This was attributed to an increase in gains on sales of mortgage loans of
$137,000, or 221.0%, offset by decreases in gains on sales of securities and
other noninterest income of $172,000 and $283,000, respectively. The
increase in gains on mortgage loans was mostly due to the interest rate
environment. Gains on sales of securities have decreased due to management
holding securities until maturity. Other noninterest income was lower due to
a decrease of $84,000 in income from other real estate and a gain from sales
of premises and equipment of $52,000 recorded in 1994.
NONINTEREST EXPENSE
Total noninterest expense in 1996 decreased $4,557,000, or 23.9%,
to $14,525,000 from the 1995 balance of $19,082,000, which was an increase of
$1,602,000, or 9.2%, over 1994 noninterest expense of $17,480,000. The
decrease in 1996 can be attributed to improved efficiencies resulting from
the merger and the absence of merger and restructuring expenses incurred in
1995, which was a major factor in the increase in noninterest expense over
1994.
During 1996, salaries and employee benefits decreased $1,688,000
from 1995. This was primarily associated with improved efficiencies
resulting in fewer employees after the merger, the absence of severance
expense which had been incurred in 1995, and a reduction in profit sharing
contribution from 7% to 5%. During 1995, salaries and employee benefits
actually decreased $54,000 despite $981,000 of severance expenses related to
the departure of certain employees during the merger and restructuring of
CIFCI and its subsidiaries in 1995.
Occupancy expense increased $30,000 in 1996 and $140,000 in 1995.
The 1996 increase included a full year of expense on BKI's facility in
southwest Champaign which opened mid-year 1995. The 1995 expense increased
partly due to an expense of $50,000 to move the safe deposit boxes from the
old Champaign National Bank building to the BankIllinois main building.
There were also increases in rental expense and depreciation on buildings.
Depreciation increased in 1995 because of the opening of a new facility
located southwest of the main banking facility and the completion of the
remodeling of the old Champaign National Bank building.
Equipment expense decreased $183,000 in 1996. This was mostly due
to a decrease of $116,000 in depreciation expense and a decrease in
maintenance agreements because of converting more of CIFCI's computer
applications to a service bureau from an in-house computer system in the
fourth quarter of 1995.
Data processing fees increased $16,000 and $278,000 in 1996 and
1995, respectively. Included in the 1995 increase was $127,000 related to
the buyout of contracts in connection with BKI's data processing system as
well as the costs of computer system consolidation and conversion. The
remainder of the increase was due to the increased number of accounts and
volume processed by CIFCI's third-party data processor.
On August 8, 1995, the FDIC amended its regulations to change the
range of deposit insurance assessments charged to members of the Bank
Insurance Fund (the "BIF"), such as the two former subsidiary banks which
were recently merged into BKI, from the then-prevailing range of 0.23% to
0.31% of deposits, to a range of 0.04% to 0.31% of deposits. The change in
FDIC assessments has significantly decreased the amount of deposit insurance
assessments that well capitalized and well managed BIF-insured institutions,
such as BKI, pay to the FDIC. Additionally, because the change in BIF
assessments was applied retroactively to June 1, 1995, BIF-member
institutions, including BKI, became entitled to a refund of the difference
between the amount of assessments previously paid at the higher assessment
rates for the period from June 30, 1995 through September 30, 1995 and the
amount that would have been paid for that period at the new rates. On
September 15, 1995, BKI received a refund of $247,000, of which $61,000
represented the assessment overpayment for the quarter ended June 30, 1995,
and $186,000 represented the assessment overpayment for the quarter ended
September 30, 1995. As a result of the 1995 amendment, BKI, being a well
capitalized institution with a risk classification of 1A, was assessed the
minimum amount of $1,000 semiannually.
The Deposit Insurance Funds Act of 1996 (DIFA) eliminated the
minimum assessment. It established a Financing Corporation (FICO) rate that
is not tied to the FDIC risk classification. The FICO BIF annual rate is
1.296 basis points. The FDIC insurance assessment is a combined rate of the
FICO BIF and the FDIC risk classification. BKI projects 1997 FDIC insurance
assessments to be approximately $50,000.
Merger expenses include expenses directly related to the cost of
merging BankIllinois Financial Company and Central Illinois Financial
Corporation, now known as Central Illinois Financial Co., Inc., on June 30,
1995 and merging Champaign National Bank
<PAGE> 16
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
and BankIllinois, now known as
BankIllinois, on October 20, 1995. These expenses include attorney fees,
accountant fees, other professional fees, postage, communication with
stockholders and various other miscellaneous expenses.
Office supplies decreased $151,000 and increased $79,000 in 1996
and 1995, respectively. The 1995 increase was due to more activity and re-
stocking of supplies.
The loss on other real estate for 1995 included write downs to
market value of $100,000 on a contract receivable and $150,000 on two other
pieces of real estate that were foreclosed on in previous years.
Other noninterest expense decreased $1,033,000 in 1996 and
increased $793,000 in 1995. Included in these changes are restructuring
expenses, including write downs of the old Champaign National Bank main bank
building of $300,000 and $75,000 on computer equipment in 1995. Total
restructuring expenses amounted to $1,786,000 in 1995, most of which has
already been discussed in preceding paragraphs.
INCOME TAX EXPENSE CONTINUING OPERATIONS
Income tax expense increased $1,935,000 in 1996 compared to 1995,
primarily due to lower expenses in 1996 resulting in more taxable income for
1996 compared to 1995. Income tax expense decreased $1,218,000 in 1995
compared to 1994, primarily the result of higher expenses resulting in less
taxable income for 1995 compared to 1994.
The tax effects of temporary differences which gave rise to
significant portions of the deferred tax assets and deferred tax liabilities
at December 31, 1996 and 1995 are shown in note 10 in the Notes to
Consolidated Financial Statements.
DISCONTINUED OPERATIONS
On July 30, 1992, BKI divested its interest in its wholly owned
subsidiary, BankIllinois Co., which was involved in the processing of monthly
telephone bills for cellular telephone companies. At the time of the sale,
BKI received $1,000,000, which equalled BKI's carrying value of the
subsidiary. The total sales price was based upon the annual operating
revenues of the former subsidiary from July 1, 1992 through June 30, 1995 up
to a maximum of $15,000,000. Based upon operating revenues of the former
BankIllinois Co., CIFCI has recorded gains of $570,000 and $4,634,000 during
1995 and 1994, respectively. The decrease in the gain on sale of subsidiary
of $570,000 and $4,064,000 in 1996 and 1995, respectively is due to the last
payment on the sale being received early in 1995.
Through December 31, 1995, the maximum gross proceeds of
$15,000,000 have been realized by CIFCI related to the sale of BankIllinois
Co.
FINANCIAL CONDITION
Total assets were $5,146,000, or 1%, less at December 31, 1996 than
at December 31, 1995. Included in the decrease in assets was a decrease of
$25,800,000, or 48%, in federal funds sold, a decrease of $31,238,000, or
10%, in loans, net of allowance for loan losses, and a decrease in mortgage
loans available-for-sale of $8,144,000, or 86%. The decrease in loans and
mortgage loans available-for-sale are net of a transfer of $8,175,000 from
mortgage loans available-for-sale to loans. These decreases were somewhat
offset by an increase of $56,188,000, or 58%, in total investments in debt
and equity securities and an increase of $4,295,000, or 16%, in cash and due
from banks. The decrease in year-end assets was a direct result of deposits
being $15,027,000, or 4%, lower at December 31, 1996 than at December 31,
1995, offset by federal funds purchased and repos being $7,668,000, or 21%,
more at December 31, 1996 than at December 31, 1995. Average assets were
also $5,159,000, or 1%, less in 1996 than in 1995. Included in the decrease
in average assets was a decrease of $40,531,000, or 12%, in average net loans
including mortgage loans held for sale offset somewhat by an increase of
$19,236,000, or 19%, in total investments in debt and equity securities and
an increase of $17,746,000, or 105%, in federal funds sold. The decrease in
average assets was a result of lower deposits in 1996. Total average
deposits decreased $10,321,000, or 3%, in 1996 from 1995. Included in this
decrease were substantial shifts in the average deposit mix in 1996 versus
1995. Average time deposits decreased $17,213,000, or 8%, and average
savings deposits decreased $3,492,000, or 15%, from 1995 to 1996. Somewhat
offsetting this decrease was an increase of $11,886,000, or 11%, in interest
bearing demand deposits. Much of the shift in deposits can be attributed to
the introduction of the Prime Investment account.
<PAGE> 17
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INVESTMENT SECURITIES
The carrying value of investments in debt and equity securities was
as follows:
<TABLE>
CARRYING VALUE OF SECURITIES
(in thousands)
December 31, 1996 1995 1994
<S> <C> <C> <C>
Available-for-sale:
U.S. Treasury $42,969 $42,288 $30,167
Federal agencies 78,262 20,951 18,386
Mortgage-backed securities 8,226 9,190 8,544
Corporate and other obligations 470 1,027 970
Total available-for-sale $129,927 $73,456 $58,067
Held-to-maturity:
U.S. Treasury 2,004 $11,548 $27,896
Federal agencies 12,039 0 1,816
Mortgage-backed securities 257 703 4,360
State and municipal 7,570 9,179 11,122
Corporate and other obligations 0 0 25
Total held-to-maturity $21,870 $21,430 $45,219
Non-marketable equity securities 1,695 2,418 2,748
Total securities $153,492 $97,304 $106,034
</TABLE>
As of September 30, 1995, in conjunction with the merger of
BankIllinois Financial Co. and Central Illinois Financial Corporation, debt
securities with an amortized cost of $2,577,000 and an estimated market value
of $2,529,000 were transferred from held-to-maturity to available-for-sale.
A deferred tax asset of $16,000 was recorded to reflect the tax effect of the
market valuation adjustment and the net decrease resulting from the market
valuation adjustment of $32,000 was recorded to the separate component of
stockholders' equity.
As of December 31, 1995, in accordance with the provisions of a
special report issued by the Financial Accounting Standards Board (FASB) in
November 1995 entitled, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities," debt
securities with an amortized cost of $11,208,000 and an estimated market
value of $11,371,000 were transferred from held-to-maturity to available-for-
sale. A deferred tax liability of $55,000 was recorded to reflect the tax
effect of the market valuation increase of these debt securities resulting in
a net market valuation adjustment of $108,000 being recorded to the separate
component of stockholders' equity.
The unrealized gain (loss) on securities available-for-sale, net of
tax effect, decreased to a loss of $109,000 at December 31, 1996 from a net
gain of $112,000 at December 31, 1995.
Proceeds from sales of investments in debt and equity securities
during 1996, 1995 and 1994 were $2,723,000, $2,717,000 and $8,964,000,
respectively.
Total investments in debt and equity securities increased
$56,188,000, or 58%, at December 31, 1996 compared to December 31, 1995. The
increase was primarily due to an increase of $56,471,000, or 77%, in
available-for-sale securities. The increase was caused by a decrease in
loans due to the increased emphasis on loan quality and pricing and a shift
from lower yielding federal funds sold. Investments available-for-sale
increased $15,389,000, or 27%, from December 31, 1995 over December 31, 1994.
<PAGE> 18
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The following table shows the maturities and weighted-average
yields of investment securities at December 31, 1996:
<TABLE>
MATURITIES AND WEIGHTED AVERAGE YIELDS OF DEBT SECURITIES
(dollars in thousands)
December 31, 1996
1 year 1 to 5 5 to 10 Over
or less years years 10 years Total
<S> <C> <C> <C> <C> <C>
Securities available-for-sale
U.S. Treasury $19,085 $23,884 $0 $0 $42,969
Federal agencies 3,982 66,441 7,839 0 78,262
Mortgage-backed securities 30 0 1,128 7,069 8,227
Other securities 132 337 0 0 469
Total $23,229 $90,662 $8,967 $7,069 $129,927
Average Yield (TE) 6.28% 6.14% 6.26% 5.22% 6.19%
Securities held-to-maturity
U.S. Treasury $1,009 $995 $0 $0 $2,004
Federal agencies 0 7,404 4,635 0 12,039
Mortgage-backed securities 6 0 212 39 257
State and municipal 2,026 5,482 0 62 7,570
Total $3,041 $13,881 $4,847 $101 $21,870
Average Yield (TE) 6.19% 6.78% 7.41% 8.17% 6.84%
</TABLE>
LOANS
The following tables present the amounts and percentages of loans
at December 31 for the years indicated according to the categories of
commercial, financial and agricultural; real estate; and installment and
consumer loans.
<TABLE>
AMOUNT OF LOANS OUTSTANDING
(dollars in thousands)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $110,059 $121,180 $113,325 $118,906 $116,953
Real estate 127,724 127,893 136,098 105,952 90,421
Installment and consumer 48,101 68,425 82,579 86,379 96,005
Subtotal $285,884 $317,498 $332,002 $311,237 $303,379
Less: Unearned discount 16 97 535 1,802 4,628
Total loans $285,868 $317,401 $331,467 $309,435 $298,751
</TABLE>
<TABLE>
PERCENTAGE OF LOANS OUTSTANDING
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural 38.50% 38.17% 34.14% 38.21% 38.55%
Real estate 44.68% 40.28% 40.99% 34.04% 29.80%
Installment and consumer 16.82% 21.55% 24.87% 27.75% 31.65%
Total 100.00% 100.00% 100.00% 100.00% 100.00%
</TABLE>
<PAGE> 19
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Total loans decreased by $31,533,000 from December 31, 1995 to
December 31, 1996, with decreases in commercial, financial and agricultural
loans, real estate loans and installment and consumer loans of $11,121,000,
$169,000 and $20,324,000, respectively. $16,267,000 of the installment and
consumer loan decrease was attributable to a decrease in indirect auto
financing loans. The emphasis on loan quality and pricing, coupled with the
competitive nature of the market, was responsible for the decrease.
Real estate loans fell by $8,205,000, or 6%, in 1995 as a result of
large paydowns and payoffs of existing loans. In addition, CIFCI currently
sells fixed-rate residential mortgages which it originates in the secondary
market.
Installment and consumer loans decreased by $14,154,000 in 1995.
Included in this decrease was a decrease of $7,613,000 in total indirect auto
dealer financing loans. The Company had $54,233,000 of indirect auto dealer
financing loans outstanding at December 31, 1994 and $46,620,000 at December
31, 1995.
The balance of loans outstanding as of December 31, 1996 by
maturities is shown in the following table:
<TABLE>
MATURITY OF LOANS OUTSTANDING
(dollars in thousands)
December 31, 1996
1 year 1-5 over 5
or less years years Total
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $67,943 $33,730 $8,386 $110,059
Real estate 17,605 48,205 61,914 127,724
Installment and consumer 16,896 28,916 2,289 48,101
Total $102,444 $110,851 $72,589 $285,884
Percentage of total loans outstanding 35.83% 38.78% 25.39% 100.00%
</TABLE>
As of December 31, 1996, commercial, financial and agricultural
loans with maturities of greater than one year were comprised of $13,967,000
in fixed-rate loans and $28,149,000 in floating-rate loans. Real estate
loans with maturities greater than one year at December 31, 1996 included
$35,848,000 in fixed-rate loans and $74,271,000 in floating-rate loans.
ALLOWANCE FOR LOAN LOSSES AND LOAN QUALITY
The following table summarizes changes in the allowance for loan
losses by loan categories for each period and additions to the allowance for
loan losses which have been charged to operations.
<TABLE>
ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at
beginning of year $5,882 $5,263 $4,686 $3,977 $3,506
Charge-offs during period:
Commercial, financial and agricultural ($610) ($1,827) ($159) ($1,818) ($2,802)
Real estate (203) (186) (40) (77) (30)
Installment and consumer (725) (661) (434) (802) (621)
Total ($1,538) ($2,674) ($633) ($2,697) ($3,453)
Recoveries of loans previously charged off:
Commercial, financial and agricultural $647 $54 $350 $97 $125
Real estate 37 24 159 24 40
Installment and consumer 184 118 136 270 85
Total $868 $196 $645 $391 $250
Net (charge-offs) recoveries ($670) ($2,478) $12 ($2,306) ($3,203)
Provision for loan losses 375 3,097 565 3,015 3,674
Allowance for loan losses at end of year $5,587 $5,882 $5,263 $4,686 $3,977
Ratio of net charge-offs to
average net loans 0.23% 0.74% 0.00% 0.76% 1.05%
</TABLE>
<PAGE> 20
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Management reviews criteria such as the customer's historic loan
payment performance, financial statements, financial ratios, cash flow, net
worth, collateral and guaranties, as well as local and national economic
factors, in determining whether loans should be written off as uncollectible.
CIFCI records a loss if it is probable that a loss will occur and the amount
can be reasonably estimated.
CIFCI's risk of loan loss is dependent on many factors: economic
conditions, the extent and values of underlying collateral, significant
concentrations of loans within the portfolio, the ability and willingness of
borrowers to perform according to loan terms and management's competence and
judgement in overseeing lending, collecting and loan-monitoring activities.
The risk of loss from commercial, financial and agricultural loans is
significantly impacted by economic factors and how these factors affect the
particular industries involved. The local economy has remained stable for
the past few years.
An analysis of the allowance for loan loss adequacy is performed on
a quarterly basis by CIFCI's credit administration department. This analysis
is reported to executive management and discussed at a quarterly meeting
where specific allocations for problem credits, charge-offs and monthly
provisions for loan losses are reviewed and revised, as necessary. The
results are reported to the Board of Directors. The analysis includes
assessment of the allowance for loan loss adequacy based on historic loan
losses and current quality grades of specific credits reviewed, credit
concentrations, current delinquent and nonperforming loans, current economic
conditions, peer group information and results of recent audits or regulatory
examinations. A significant portion of the increased charge-offs during 1995
were a result of the emphasis placed on the early detection of problem
credits.
The following table shows the percentage of the allowance for loan
losses allocated to each category.
<TABLE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Allocated:
Commercial, financial and agricultural 68% 72% 42% 50% 69%
Real estate <F1> 9% 8% 17% 12% 6%
Installment and consumer 10% 12% 13% 13% 12%
Total allocated allowance 87% 92% 72% 75% 87%
Unallocated allowances 13% 8% 28% 25% 13%
Total 100% 100% 100% 100% 100%
<FN>
<F1> Residential real estate only for 1996 and 1995.
</FN>
</TABLE>
The portion of the allowance for loan losses which was unallocated
increased to 13% at December 31, 1996 from 8% a year earlier. The reduction
in allocations to commercial, financial and agricultural and installment and
consumer loans is due primarily to reductions in these portfolio loan
balances of $11,121,000 and $20,324,000, respectively. The percentage
allocated increased slightly for residential real estate from December 31,
1995 to December 31, 1996 due to a reduction in the total allowance balance
of $295,000, as the dollar amount allocated to this portfolio was actually
reduced. The allocation of the allowance for 1995 was based on a different
method than had been used by either the former BankIllinois or Champaign
National Bank in prior years. Allocations were made based on loan portfolio
balances (commercial, financial and agricultural, including commercial real
estate; residential real estate; and installment and consumer loans) applied
to corresponding factors (percentages). The increase in the percentage
allocation to commercial, financial and agricultural loans from December 31,
1994 to December 31, 1995 and reduction in the percentage allocation to real
estate was due primarily to the inclusion of commercial real estate in the
commercial category for 1995 and 1996.
The unallocated portion of the allowance for loan losses (13%) at
December 31, 1996 represented additional reserves available to cover losses
in any of the three categories listed in the table which may exceed the
allocated amount.
Management believes that nonperforming and potential problem loans
are appropriately identified and monitored based on the extensive loan
analyses performed by the credit administration department, the internal loan
committees and the Board of Directors. Historically, there has not been a
significant amount of loans charged off which had not been previously
identified as problem loans by the credit administration department or the
loan committees.
The following table presents the aggregate amount of loans
considered to be nonperforming for the periods indicated. Nonperforming
loans include loans accounted for on a nonaccrual basis, accruing loans
contractually past due 90 days or more as to interest or principal payments
and loans which are troubled debt restructurings as defined in Statement of
Financial Accounting Standards No. 15, "Accounting by Debtors and Creditors
for Troubled Debt Restructurings."
<PAGE> 21
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<TABLE>
NONPERFORMING LOANS
(in thousands)
December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Nonaccrual loans <F1> $2,135 <F1> $2,270 $2,327 $1,520 $3,961
Loans past due 90 days or more $384 $846 $144 $317 $243
Renegotiated loans $162 $179 $198 $522 $1,231
<FN>
<F1> Includes $448,000 at December 31, 1996 and $109,000 at December 31,
1995 of first mortgage loans on personal residences which management does not
consider impaired as defined by the Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
(SFAS 114).
</FN>
</TABLE>
There were no other interest earning assets which would be required
to be disclosed as being nonperforming if such other assets were loans.
At December 31, 1996, BKI had approximately $6,905,000 in potential
problem loans, excluding nonperforming loans. Potential problem loans are
those loans identified by management as being worthy of special attention,
and although currently performing, may have some underlying weaknesses.
Approximately $2,438,000 of these potential problem loans were considered
impaired as defined in SFAS 114. The remaining $4,467,000 have either had
timely payments or were adequately secured and loss of principal or interest
was determined to be unlikely at that time. Potential problems loans were
reduced from $10,194,000 at December 31, 1995 to $6,905,000 at December 31,
1996, a 32.0% reduction, with only $280,000 attributable to net charge-offs
and $515,000 transferred to other real estate.
Loans over 90 days past due which are not well secured and in the
process of collection are placed on nonaccrual status. The total of
$2,135,000 nonaccrual loans at December 31, 1996 was $135,000 less than the
December 31, 1995 amount. Loans past due 90 days or more but still accruing
were reduced by $462,000 in 1996 to a balance of $384,000 at December 31,
1996.
The following table categorizes nonaccrual loans as of December 31,
1996 based on levels of performance and also details the allocation of
interest collected during the period in 1996 in which the loans were on
nonaccrual. Substantial performance, yet contractually past due, includes
borrowers making sizable periodic payments relative to the required periodic
payments due. A borrower that is not making substantial payments but is
making some periodic payments would be included in the limited performance
category.
<TABLE>
NONACCRUAL AND RELATED INTEREST PAYMENTS
(in thousands)
Cash Interest Payments Applied As:
At December 31, 1996 Recovery of Reduction
Book Contractual Interest Prior Partial of
Balance Balance Income Charge-offs Principal
<S> <C> <C> <C> <C> <C>
Contractually past due with:
Substantial performance $565 $615 $3 $0 $78
Limited performance 154 154 3 0 0
No performance 1,416 2,791 0 0 0
Total $2,135 $3,560 $6 $0 $78
</TABLE>
As shown in the table above, the nonaccrual loans with no
performance at December 31, 1996 made up the largest share of the total
(66.0%). The difference between the recorded balance and the contractual
balance represents charge-offs made since the loans were funded. Included in
this category was $465,000 in loans associated with a machine shop operation;
no principal has been charged off and the loans are largely secured by real
estate. Also included in this category was a $368,000 mortgage on an
apartment building and a $196,000 mortgage loan on a single-family residence;
both properties were sold subsequent to December 31, 1996.
<PAGE> 22
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Loans which are 90 days or more past due that continue to accrue
interest decreased by $462,000 from December 31, 1995 to December 31, 1996
and consisted largely of various commercial loans ($277,000) and personal
installment loans ($62,000). These loans are well secured and in the process
of collection.
Management believes that the allowance for loan losses at December
31, 1996 was adequate to absorb credit losses in the total loan portfolio and
that the policies and procedures in place to identify potential problem loans
are being effectively implemented.
PREMISES AND EQUIPMENT
Total premises and equipment decreased $275,000 in 1996 from 1995.
Included in the decrease was depreciation of $1,114,000, somewhat offset by
purchases of $854,000.
OTHER ASSETS
Other assets decreased $246,000 in 1996 from 1995. Included in the
change was a $667,000 decrease of net taxes receivable which was somewhat
offset by a $351,000 increase in cash surrender value life insurance.
DEPOSITS
The following table shows the average balance and weighted average
rate of deposits for each of the three years ended December 31, 1996:
<TABLE>
Average Balance and Weighted Average Rate of Deposits
(dollars in thousands)
1996 1995 1994
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
<S> <C> <C> <C> <C> <C> <C>
Demand
Noninterest bearing $54,229 0.00% $55,731 0.00% $53,516 0.00%
Interest bearing 118,296 3.17% 106,410 2.75% 123,588 2.46%
Savings 20,358 1.86% 23,850 2.45% 24,562 2.30%
Time
$100,000 and over 30,715 5.41% 38,122 4.38% 33,844 4.01%
Under $100,000 162,771 5.80% 172,577 5.81% 161,836 4.73%
Totals $386,369 $396,690 $397,346
</TABLE>
In analyzing its deposit activity, management has noted that
average total deposits decreased $10,321,000 during 1996. Included in this
decrease were substantial shifts in the average deposit mix in 1996 versus
1995. Average time deposits decreased $17,213,000, or 8%, and average
savings deposits decreased $3,492,000, or 15%, from 1995 to 1996. Somewhat
offsetting this decrease was an increase of $11,886,000, or 11%, in interest
bearing demand deposits. This shift in deposits was due to the success of
the Prime Investment account and appropriate pricing of its products in a
competitive environment.
The table below sets forth the maturity of deposits greater than
$100,000 at December 31, 1996:
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
(in thousands)
TIME
MATURITY AT DECEMBER 31, 1996 DEPOSITS
3 months or less $18,180
3 to 6 months 2,439
6 to 12 months 3,759
Over 12 months 11,172
Total $35,550
<PAGE> 23
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SHORT-TERM BORROWINGS
Short-term borrowings include federal funds purchased, which are
generally overnight transactions, and securities sold under repurchase
agreements, which mature from one day to three years from the date of sale.
The table in note 8 in the Notes to Consolidated Financial Statements shows
the balances of short-term borrowings at December 31, 1996 and 1995, the
average balance for the years ended December 31, 1996, 1995 and 1994, and the
maximum month-end value during each year.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments for which no
listed market exists and the fair values of investment securities, which are
based on listed market quotes at December 31, 1996 and 1995, are disclosed in
note 16 in the Notes to Consolidated Financial Statements.
CAPITAL
Total stockholders' equity rose $3,688,000 from $48,408,000 at
December 31, 1995 to $52,096,000 at December 31, 1996. The increase
represents net income of $4,501,000, a $60,000 increase from stock
appreciation rights, a $221,000 unrealized loss on investment in debt and
equity securities available-for-sale, net of tax, the purchase of $649,000 of
Treasury Stock and the purchase of $3,000 in fractional shares of common
stock following the stock dividend.
Financial institutions are required by regulatory agencies to
maintain minimum levels of capital based on asset size and risk
characteristics. Currently, CIFCI and BKI are required by their primary
regulators to maintain adequate capital based on two measurements: the total
assets leverage ratio and the risk-weighted assets ratio.
The total assets leverage ratio is the ratio of total stockholders'
equity (before unrealized holding gain [loss] for investments in debt and
equity securities available-for-sale) less intangible assets and unallowed
deferred tax assets, to total assets (plus unrealized losses for investments
in debt and equity securities available-for-sale) less intangible assets
(unrealized gains for investments in debt and equity securities available-
for-sale) and unallowed deferred tax assets. Based on Federal Reserve
guidelines, a bank holding company generally is required to maintain a
leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis
points. CIFCI's total assets leverage ratio at December 31, 1996 and 1995
were 10.7% and 9.7%, respectively. The leverage ratio for BKI for the same
periods were 10.2% and 9.2% well above the regulatory minimum for both CIFCI
and BKI.
For CIFCI, the risk-weighted assets ratio equals the sum of total
stockholders' equity (before unrealized holding gain [loss] for investments
in debt and equity securities available-for-sale) plus the allowance for loan
losses up to 1.25% of weighted-risk assets less intangible assets and the
unallowed portion of deferred tax assets, divided by total risk-adjusted
assets. Total risk-adjusted assets are derived by multiplying each asset
category and specific off-balance-sheet items, such as letters of credit and
loan commitments, by certain risk factors. The resulting totals are then
added, and that sum is the risk-adjusted assets used in the calculation. The
minimum risk-weighted assets ratio for bank holding companies is 8%. CIFCI's
total risk-weighted assets at December 31, 1996 and 1995 were 17.7% and
15.0% significantly higher than the regulatory minimum. BKI's total risk-
weighted assets were also significantly higher than the regulatory
minimum 17.0% and 14.5% for the years ended December 31, 1996 and 1995.
INFLATION AND CHANGING PRICES
Changes in interest rates and a bank's ability to react to interest
rate fluctuations have a much greater impact on a bank's balance sheet and
net income than inflation. A review of net interest income, liquidity and
rate sensitivity should assist in the understanding of how well CIFCI is
positioned to react to changes in interest rates.
LIQUIDITY AND CASH FLOWS
CIFCI requires cash to fund loan growth and deposit withdrawals.
Cash flows fluctuate with changes in economic conditions, current interest
rate trends and as a result of management strategies and programs. The Asset
Liability Committee ("ALCO") of BKI, which includes all executive managers,
meets monthly to monitor the demand for cash and initiates programs and
policies as considered necessary to meet funding gaps.
CIFCI was able to adequately fund loan demand and meet liquidity
needs in 1996. A review of the consolidated statement of cash flows in the
accompanying financial statements shows that CIFCI's cash and due from banks
and federal funds sold
<PAGE> 24
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(cash) decreased $21,505,000 from December 31, 1995 to
December 31, 1996. The decrease resulted from net cash used by investing and
financing activities, offset by cash provided by operating activities.
During 1996, cash was primarily used for originating loans held-
for-sale, purchases of investments in debt and equity securities, and
decreases in deposits, offset by cash provided by proceeds from sales of
loans, maturities of securities and decreases in loans.
Proceeds from sales of mortgage loans held-for-sale totaled
$17,726,000, providing the cash needed to fund the origination of mortgage
loans held-for-sale of $17,491,000. Proceeds from sales of loans originated
for sale in 1996 were $4,154,000 more than they were in 1995, and there were
$2,512,000 fewer loan originations in 1996 than in 1995.
The increase of $4,165,000 in net income from last year also
contributed to the increase of net cash provided by operating activities.
The increase in cash used by investing activities of $44,173,000
over 1995 levels was mostly due to greater purchases of investments in debt
and equity securities than maturities and sales. Purchases of available-for-
sale securities were $69,968,000 more in 1996 than in 1995, while maturities
and sales of these securities increased $10,193,000 from $26,244,000 in 1995
to $36,437,000 in 1996. Purchases of held-to-maturity investment securities
increased $1,299,000 in 1996 over 1995 while maturities of these securities
decreased $9,127,000 over 1995. There was also a $39,038,000 decrease in
loans in 1996 compared to an $11,588,000 decrease in 1995.
A net decrease in deposits of $15,027,000, a decrease of
$39,507,000 over 1995, offset by an increase in short-term borrowings of
$7,668,000, which is an increase of $9,899,000 over 1995, is the reason for
the $29,778,000 increase in cash used by financing activities.
CIFCI's future short-term requirements for cash are not expected to
significantly change and will continue to be provided by investment
maturities, sales of loans and deposits. Cash required to meet longer-term
liquidity requirements will mostly depend on future goals and strategies of
management, the competitive environment, economic factors and changes in the
needs of customers. No outside borrowing is anticipated. CIFCI expects to
maintain FHLB borrowings at or near the current level. These funds are
matched to seven-year balloon and ten-year fixed-rate residential mortgage
loans booked in previous years. If current sources of liquidity cannot
provide needed cash in the future, CIFCI can obtain funds from several
sources. CIFCI is able to borrow funds on a temporary basis from the Federal
Reserve Bank, the FHLB and correspondent banks to meet short-term
requirements. With no parent company debt and sound capital levels, CIFCI
has several options for longer-term cash needs, such as for future expansion
and acquisitions.
Management is not aware of any current recommendations by CIFCI's
primary regulators which if implemented would have a material effect on
CIFCI's liquidity, capital resources or operations.
INTEREST RATE SENSITIVITY
The concept of interest sensitivity attempts to gauge exposure of
BKI's net interest income to adverse changes in market driven interest rates
by measuring the amount of interest-sensitive assets and interest-sensitive
liabilities maturing or subject to repricing within a specified time period.
Liquidity represents the ability of BKI to meet the day-to-day demands of
deposit customers balanced by its investments of these deposits. BKI must
also be prepared to fulfill the needs of credit customers for loans with
various types of maturities and other financing arrangements. BKI monitors
its interest rate sensitivity and liquidity through the use of static gap
reports which measure the difference between assets and liabilities maturing
or repricing within specified time periods.
BKI's asset and liability management policy addresses interest rate
sensitivity and liquidity in terms of operating ranges for BKI's gap ratios
and establishes maximum limits on the size of gaps. The policy states that
the cumulative ratio of rate-sensitive assets to rate-sensitive liabilities
for the 12-month period should fall within a range of 0.80-1.00 to 1.20-1.00.
<PAGE> 25
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
The following table presents CIFCI's interest rate sensitivity
position at various intervals at December 31, 1996:
<TABLE>
RATE SENSITIVITY OF EARNING ASSETS AND INTEREST BEARING LIABILITIES
(dollars in thousands)
1-30 31-90 91-180 181-365 Over
Days Days Days Days 1 Year Total
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $28,000 $0 $0 $0 $0 $28,000
Debt and equity securities <F1> 9,492 20,064 10,415 25,504 88,017 153,492
Loans <F2> 83,319 23,145 25,533 35,034 120,114 287,145
Total interest earning assets $120,811 $43,209 $35,948 $60,538 $208,131 $468.637
Interest bearing liabilities:
Savings and interest bearing
demand deposits $145,201 $0 $0 $0 $0 $145,201
Time deposits 23,158 20,254 24,356 29,998 96,326 194,092
Federal funds purchased and
securities sold under
repurchase agreements 38,045 150 5,112 284 350 43,941
Federal Home Loan Bank advances 0 0 0 1,000 8,000 9,000
Total interest bearing
liabilities $206,404 $20,404 $29,468 $31,282 $104,676 $392,234
Net asset (liability) funding gap ($85,593) $22,805 $6,480 $29,256 $103,455 $76,403
Repricing gap 0.59 2.12 1.22 1.94 1.99 1.19
Cumulative repricing gap 0.59 0.72 0.78 0.91 1.19 1.19
<FN>
<F1> Debt and equity securities include available-for-sale securities.
<F2> Loans include held-for-sale mortgage loans.
</FN>
</TABLE>
At December 31, 1996, CIFCI tended to be liability sensitive due to
the levels of savings and interest bearing demand deposits and Federal funds
sold and securities sold under repurchase agreements. As such, the effect of
a decrease in the prime rate of 100 basis points would increase net interest
income by approximately $856,000 in 30 days and $628,000 in 90 days assuming
no management intervention. A rise in interest rates would have the opposite
effect for the same periods.
In addition to managing interest sensitivity and liquidity through
the use of gap reports, CIFCI has provided for emergency liquidity situations
with informal agreements with correspondent banks which permit CIFCI to
borrow federal funds on an unsecured basis and $3,623,000 from the Federal
Home Loan Bank on a secured basis.
NEW ACCOUNTING RULES AND REGULATIONS
In June 1996, the Financial Accounting Standards Board issued
Statement No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities" (SFAS No. 125). SFAS No. 125
distinguishes transfers of financial assets that are sales from transfers
that are secured borrowings. A transfer of financial assets in which the
transferor surrenders control over those assets is accounted for as a sale to
the extent that consideration other than beneficial interest in the
transferred assets is received in exchange. SFAS No. 125 also establishes
standards on the initial recognition and measurement of servicing assets and
other retained interests and servicing liabilities, and their subsequent
measurement.
SFAS No. 125 requires that debtors reclassify financial assets
pledged as collateral and that secured parties recognize those assets and
their obligation to return them in certain circumstances in which the secured
party has taken control of those assets. In addition, SFAS No. 125 requires
that a liability be derecognized only if the debtor is relieved of its
obligation through payment to the creditor or by being legally released from
being the primary obligor under the liability either judicially or by the
creditor.
SFAS No. 125 is effective for transactions occurring after December
31, 1996, except for transactions relating to secured borrowings and
collateral for which the effective date is December 31, 1997. The Company
believes the adoption of SFAS No. 125 will not have a material impact on its
consolidated financial statements.
<PAGE> 26
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements begin on page 28.
<PAGE> 27
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CENTRAL ILLINOIS FINANCIAL CO., INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1996, 1995, and 1994
<PAGE> 28
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CENTRAL ILLINOIS FINANCIAL CO., INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
INDEPENDENT AUDITOR'S REPORT 30
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 31
Consolidated Statements of Income 32
Consolidated Statements of Changes in Stockholders' Equity 33
Consolidated Statements of Cash Flows 34
Notes to Consolidated Financial Statements 35-54
<PAGE> 29
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INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Central Illinois Financial Co., Inc.:
We have audited the accompanying consolidated balance sheet of Central
Illinois Financial Co., Inc. and subsidiaries as of December 31, 1996, and
the related consolidated statements of income, changes in 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 consolidated financial
statements based on our audit.
The consolidated financial statements of Central Illinois Financial Co.,
Inc. and subsidiaries, for the years ended December 31, 1995 and 1994 were
audited by other auditors whose reports expressed unqualified opinions on
those statements.
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 state-
ments. 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 Financial Co., Inc. and subsidiaries as of December 31, 1996, and
the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Champaign, Illinois
February 7, 1997
<PAGE> 30
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<TABLE>
CENTRAL ILLINOIS FINANCIAL CO., INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
(in thousands, except share data)
1996 1995
<S> <C> <C>
Assets
Cash and due from banks $31,195 $26,900
Federal funds sold 28,000 53,800
Cash and cash equivalents 59,195 80,700
Investments in debt and equity securities:
Available-for-sale, at estimated market value 129,927 73,456
Held-to-maturity, estimated market value of $21,945
and $21,528 at December 31, 1996 and 1995, respectively 21,870 21,430
Non-marketable equity securities 1,695 2,418
Total investments in debt and equity securities 153,492 97,304
Mortgage loans held for sale 1,277 9,421
Loans, net of allowance for loan losses of $5,587 and
$5,882 at December 31, 1996 and 1995, respectively 280,281 311,519
Premises and equipment, net 10,717 10,992
Accrued interest receivable 4,517 4,443
Other assets 5,961 6,207
Total assets $515,440 $520,586
Liabilities and Stockholders' Equity
Deposits:
Demand, noninterest bearing $64,837 $66,693
Demand, interest bearing 127,414 107,363
Savings 17,787 23,997
Time, $100 and over 35,550 42,839
Other time 158,542 178,265
Total deposits 404,130 419,157
Short-term borrowings 43,941 36,273
Federal Home Loan Bank advances 9,000 9,000
Accrued interest payable 1,576 1,964
Other liabilities 4,697 5,784
Total liabilities 463,344 472,178
Stockholders' equity:
Preferred stock, no par value; 300,000 shares authorized 0 0
Common stock, $0.01 par value; 6,500,000 shares authorized;
4,958,891 and 4,959,132 shares issued at December 31, 1996
and 1995, respectively 50 50
Paid-in capital 19,123 19,066
Retained earnings 33,681 29,180
Unrealized gain (loss) on securities available-for-sale (109) 112
52,745 48,408
Less treasury stock, at cost, 46,400 shares (649) 0
Total stockholders' equity 52,096 48,408
Total liabilities and stockholders' equity $515,440 $520,586
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 31
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<TABLE>
CENTRAL ILLINOIS FINANCIAL CO., INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 1996, 1995 and 1994
(in thousands, except share data)
1996 1995 1994
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $26,037 $29,471 $26,680
Interest and dividends on investments in debt
and equity securities:
Taxable 6,797 4,992 5,560
Tax-exempt 380 489 564
Interest on federal funds sold and interest-bearing deposits 1,874 951 282
Total interest income 35,088 35,903 33,086
Interest expense:
Interest on demand, savings, and other time deposits 13,558 13,541 11,287
Interest on time deposits $100 and over 1,662 1,669 1,334
Interest on short-term borrowings 2,006 1,882 1,216
Interest on Federal Home Loan Bank advances 599 597 650
Total interest expense 17,825 17,689 14,487
Net interest income 17,263 18,214 18,599
Provision for loan losses 375 3,097 565
Net interest income after provision for loan losses 16,888 15,117 18,034
Noninterest income:
Service charges and fees 1,839 1,857 1,810
Trust fees 1,931 1,600 1,608
Securities transactions, net (4) 3 175
Gains on sales of loans, net 266 199 62
Other 289 320 603
Total noninterest income 4,321 3,979 4,258
Noninterest expense:
Salaries and employee benefits 7,795 9,483 9,537
Occupancy 1,485 1,455 1,315
Equipment 967 1,150 1,232
Data processing fees 716 700 422
Federal deposit insurance premiums 2 455 899
Advertising and marketing 822 631 630
Merger expenses 0 1,036 0
Office supplies 591 742 663
Loss on other real estate 0 250 395
Other 2,147 3,180 2,387
Total noninterest expense 14,525 19,082 17,480
Income from continuing operations before income taxes 6,684 14 4,812
Income taxes 2,183 248 1,466
Income (loss) from continuing operations 4,501 (234) 3,346
Discontinued operations - gain on disposal of subsidiary, net of applicable
income taxes of $0, $293, and $2,387, respectively 0 570 4,634
Net income $4,501 $336 $7,980
Per share data:
Income (loss) from continuing operations $0.90 ($0.04) $0.67
Income from discontinued operations 0.00 0.11 0.93
Net income $0.90 $0.07 $1.60
Weighted average shares of common
stock and equivalents outstanding 5,022,007 5,005,907 4,969,689
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 32
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<TABLE>
CENTRAL ILLINOIS FINANCIAL CO., INC., AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1996, 1995, and 1994
(in thousands, except share data)
UNREALIZED GAIN
COMMON STOCK PAID-IN RETAINED (LOSS) ON SECURITIES TREASURY STOCK
SHARES AMOUNT CAPITAL EARNINGS AVAILABLE-FOR-SALE SHARES AMOUNT TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994, as
previously reported 4,733,925 $48 $15,908 $25,782 $392 0 $0 $42,130
Restated for 5% stock
dividend 236,696 3 3,244 (3,247) 0 0 0 0
Balance, January 1, 1994, as
restated 4,970,621 51 19,152 22,535 392 0 0 42,130
Net income 0 0 0 7,980 0 0 0 7,980
Cash dividends of pooled
companies prior to merger 0 0 0 (594) 0 0 0 (594)
Issuance of common stock
of pooled companies
prior to merger 1,288 0 11 0 0 0 0 11
Purchase of common stock
of pooled companies
prior to merger (20,651) (1) (189) 0 0 0 0 (190)
Change in unrealized
gain (loss) on securities
available-for-sale 0 0 0 0 (2,571) 0 0 (2,571)
Balance, December 31, 1994 4,951,258 50 18,974 29,921 (2,179) 0 0 46,766
Net income 0 0 0 336 0 0 0 336
Cash dividends of pooled
companies prior to merger 0 0 0 (321) 0 0 0 (321)
Cash dividends
($0.15 per share) 0 0 0 (756) 0 0 0 (756)
Issuance of common stock
of pooled companies
prior to merger 8,773 0 6 0 0 0 0 6
Fractional shares of common
stock purchased in merger (899) 0 (2) 0 0 0 0 (2)
Stock appreciation rights 0 0 88 0 0 0 0 88
Change in unrealized
gain (loss) on securities
available-for-sale 0 0 0 0 2,291 0 0 2,291
Balance, December 31, 1995 4,959,132 50 19,066 29,180 112 0 0 48,408
Net income 0 0 0 4,501 0 0 0 4,501
Fractional shares of common
stock purchased following
stock dividend (241) 0 (3) 0 0 0 0 (3)
Stock appreciation rights 0 0 60 0 0 0 0 60
Change in unrealized
gain (loss) on securities
available-for-sale 0 0 0 0 (221) 0 0 (221)
Treasury stock transactions, net 0 0 0 0 0 46,400 (649) (649)
Balance, December 31, 1996 4,958,891 $50 $19,123 $33,681 ($109) 46,400 ($649) $52,096
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 33
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<TABLE>
CENTRAL ILLINOIS FINANCIAL CO., INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $4,501 $336 $7,980
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,157 1,214 1,226
Amortization of bond premiums, net 140 114 369
Provision for loan losses 375 3,097 565
Loss on other real estate 0 250 395
Deferred income taxes 417 (1,633) (72)
(Gain) loss on sales of securities 4 (3) (175)
(Gain) on sales of loans, net (266) (199) (62)
(Gain) on sale of subsidiary 0 (570) (4,634)
(Gain) on sale of premises and equipment, net 0 0 (101)
Change in valuation allowance on premises and equipment 0 375 0
(Increase) in accrued interest receivable (74) (147) (390)
(Decrease) increase in accrued interest payable (388) 585 (89)
Other, net (811) 42 2,239
Stock appreciation rights 60 88 0
Proceeds from sales of loans originated for sale 17,726 13,572 33,773
Loans originated for sale (17,491) (20,003) (28,358)
Net cash provided by (used in) operating activities 5,350 (2,882) 12,666
Cash flows from investing activities:
Net decrease (increase) in loans 39,038 11,588 (15,934)
Proceeds from sale of subsidiary 0 4,065 3,700
Proceeds from maturity of investments in debt securities:
Held to maturity 15,053 24,180 19,639
Available for sale 34,437 23,527 7,048
Proceeds from sales of investments in debt and equity securities:
Available for sale 2,000 2,717 8,964
Non-marketable securities 723 0 0
Purchases of investments in debt and equity securities:
Held to maturity (16,038) (14,739) (14,434)
Available for sale (94,212) (24,244) (16,572)
Principal paydowns from mortgage-backed
and mortgage-related securities:
Held to maturity 446 626 5,830
Available for sale 926 46 527
Purchases of premises and equipment (854) (2,108) (2,622)
Proceeds from sale of premises and equipment 15 49 460
Net cash provided by (used in) investing activities (18,466) 25,707 (3,394)
Cash flows from financing activities:
Net increase (decrease) in deposits (15,027) 24,480 (11,361)
Net increase (decrease) in short-term borrowings 7,668 (2,231) 3,516
Cash dividends paid (378) (860) (578)
Treasury stock transactions, net (649) 0 0
Fractional shares purchased following stock dividend (3) 0 0
Net cash provided by (used in) financing activities (8,389) 21,389 (8,423)
Net increase (decrease) in cash and cash equivalents (21,505) 44,214 849
Cash and cash equivalents, beginning of year 80,700 36,486 35,637
Cash and cash equivalents, end of year $59,195 $80,700 $36,486
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $18,213 $17,104 $14,576
Taxes 1,748 3,115 3,190
Transfer of mortgage loans held for sale to loans 8,175 0 2,352
Loan made to facilitate sale of premises and equipment 0 0 2,442
Transfer of debt and equity securities
held to maturity to available for sale 0 13,785 0
Securitization of mortgage loans into investments 0 1,417 1,464
Disposal of equipment subject to valuation allowance 71 0 0
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 34
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
CENTRAL ILLINOIS FINANCIAL CO., INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) ORGANIZATION
On December 13, 1994, BankIllinois Financial Co. and Central Illinois
Financial Corporation entered into an Agreement and Plan of Merger which
provided for a merger of the two companies into Central Illinois Financial
Co., Inc. (the Company). The merger, which was accounted for as a pooling
of interests, was completed on June 30, 1995. Accordingly, prior period
consolidated financial statements have been restated as if the prior
entities had been consolidated for all periods presented. As a result of
the merger, former stockholders of BankIllinois Financial Co. and Central
Illinois Financial Corporation received 2,648,625 and 2,310,748 shares of
Company common stock, respectively. On October 20, 1995 the two subsidiary
banks, BankIllinois and the Champaign National Bank, were merged into a
single resulting bank known as BankIllinois. Additionally, on October 20,
1995 the Company transferred its trust operations to a newly formed trust
company subsidiary known as BankIllinois Trust Company.
The Company and its subsidiaries provide a full range of banking
services to individual and corporate customers located within Champaign,
Illinois, and the surrounding communities. BankIllinois and BankIllinois
Trust Company are subject to competition from other financial institutions
and nonfinancial institutions providing financial products. Additionally,
the Company, BankIllinois, and BankIllinois Trust Company are subject to
the regulations of certain regulatory agencies and undergo periodic exami-
nations by those regulatory agencies.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company have been
prepared in conformity with generally accepted accounting principles and
conform to predominant practices within the banking industry. The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions, including the determination of the allowance for
loan losses and the valuation of real estate acquired in connection with
foreclosure or in satisfaction of loans, that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The significant accounting policies used by the Company in the
preparation of the consolidated financial statements are summarized below:
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, BankIllinois and BankIllinois
Trust Company. Significant intercompany accounts and transactions have
been eliminated in consolidation.
Property held by BankIllinois Trust Company in fiduciary or
agency capacities for its customers is not included in the accompanying
consolidated balance sheets, since such items are not assets of the
Company. Trust fees are recognized on the accrual basis.
<PAGE> 35
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
(b) INVESTMENTS IN DEBT AND EQUITY SECURITIES
Debt securities classified as held-to-maturity are those
securities which the Company has the ability and intent to hold until
maturity. These securities are carried at amortized cost, in which the
amortization of premiums and accretion of discounts, which are recognized
as adjustments to interest income, are recorded using methods which
approximate the interest method. These methods consider the timing and
amount of prepayments of underlying mortgages in estimating future cash
flows on individual mortgage-related securities. Unrealized holding gains
and losses for held-to-maturity securities are excluded from earnings and
stockholders' equity.
Debt and equity securities classified as available-for-sale are
those securities that the Company intends to hold for an indefinite period
of time but not necessarily to maturity. Any decision to sell a security
classified as available-for-sale would be based on various factors,
including significant movements in interest rates, changes in the maturity
mix of the Company's assets and liabilities, liquidity needs, regulatory
capital considerations, and other similar factors. Securities available-
for-sale are carried at fair value. The difference between fair value and
cost, adjusted for amortization of premium and accretion of discounts,
results in an unrealized gain or loss. Unrealized gains or losses are
reported as increases or decreases in stockholders' equity, net of the
related deferred tax effect. Gains or losses from the sale of securities
are determined using the specific identification method.
A decline in the market value of any available-for-sale or held-
to-maturity security below cost that is deemed other than temporary is
charged to earnings and results in the establishment of a new cost basis
for the security.
Non-marketable equity securities, including BankIllinois'
required investment in the capital stock of the Federal Home Loan Bank are
carried at cost, as fair values are not readily determinable.
(c) LOANS
Loans are stated at the principal amount outstanding, net of
unearned discount and the allowance for loan losses. Interest on
commercial, financial, and agricultural; real estate; and selected in-
stallment loans is credited to income as earned, based upon the principal
amount outstanding. Interest on the remaining installment loans is
credited to income using a method which approximates the interest method.
The accrual of interest on loans is discontinued when, in the
opinion of management, the borrower may be unable to meet payments as they
become due. Interest accrued in the current year is reversed against
interest income, and prior years' interest is charged to the allowance for
loan losses. Interest income on impaired loans is recognized to the extent
interest payments are received and the principal is considered fully
collectible.
Loan origination fees and costs are deferred at origination and
are recognized over the life of the loan as an adjustment to yield.
Mortgage loans held for sale are carried at the lower of
aggregate cost or estimated market value. Net unrealized losses are
recognized in a valuation allowance by charges to income. Gains or losses
<PAGE> 36
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
on sales of loans held for sale are computed using the specific-
identification method and are reflected in income at the time of sale.
The Company originates certain mortgage loans and creates
mortgage-backed securities for sale in the secondary market. Because the
resulting security is collateralized by the identical loans previously
held, no gain or loss is recognized at the time of the securitization
transaction. When securitized loans are sold to an outside party, the
specific-identification method is used to determine the cost of the
security sold and a gain or loss is recognized in income at the time of
sale.
(d) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by provisions charged
to operations and is reduced by loan charge-offs less recoveries.
Management utilizes a systematic, documented approach in determining the
appropriate level of the allowance for loan losses. Management's approach,
which provides for general and specific valuation allowances, is based on
current economic conditions, past losses, collection experience, risk
characteristics of the portfolio, assessment of collateral values by
obtaining independent appraisals for significant properties, and such other
factors which, in management's judgment, deserve current recognition in
estimating loan losses.
The allowance for loan losses related to impaired loans that are
identified for evaluation is based on discounted cash flow using the loans
initial effective interest rate or the fair value, less selling costs, of
the collateral for collateral dependent loans.
Management believes the allowance for loan losses is adequate to
absorb possible losses in the loan portfolio. While management uses
available information to recognize loan losses, future additions to the
allowance for loan losses 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 adequacy of the
allowance for loan losses. Such agencies may require BankIllinois to
recognize additions to the allowance for loan losses based on their
judgments of information available to them at the time of their
examination.
(e) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization applicable to
furniture and equipment and buildings and leasehold improvements is charged
to occupancy expense using straight-line and accelerated methods over the
estimated useful lives of the assets. Such lives are estimated to be three
to seven years for furniture and equipment and five to 31-1/2 years for
buildings and leasehold improvements. Maintenance and repairs are charged
to operations as incurred.
(f) OTHER REAL ESTATE
Other real estate, included in other assets in the accompanying
consolidated balance sheets, is initially recorded at fair value. If,
subsequent to foreclosure, the fair value is less than the carrying amount,
the difference is recorded as a valuation allowance through a charge to
income. Subsequent increases in fair value are recorded through a reversal
of the valuation allowance, but not below zero. Expenses incurred in
maintaining the properties are charged to operations.
<PAGE> 37
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
(g) MORTGAGE SERVICING RIGHTS
In 1995, the Company adopted Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights" (SFAS 122).
The cost of mortgage servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based on the fair value of those
rights. Fair values are estimated using discounted cash flows based on a
current market interest rate. For purposes of measuring impairment, the
rights are stratified primarily based on the contractual maturities of the
underlying mortgages. The amount of impairment recognized is the amount by
which the capitalized mortgage servicing rights for a stratum exceed their
fair value.
(h) INCOME TAXES
Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(i) EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the
weighted average number of common and common stock equivalent shares out-
standing. Options to purchase shares of the Company's common stock and
stock appreciation rights, as discussed in note 12 to the consolidated
financial statements, are the only common stock equivalents. The weighted
average number of common stock equivalents is calculated using the treasury
stock method.
(j) CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash
and cash equivalents include cash and due from banks and federal funds
sold. Generally, federal funds are sold for one-day periods.
(k) STOCK DIVIDEND
During May 1996, the Company effected a 5% stock dividend. All
references in the accompanying financial statements to number of shares and
per share amounts have been retroactively restated to reflect the stock
dividend.
(l) RECLASSIFICATION
Certain amounts in the 1995 and 1994 consolidated financial
statements have been reclassified to conform with the 1996 presentation.
Such reclassifications have no effect on previously reported net income.
(m) ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENT OF LIABILITIES
In June 1996, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and
<PAGE> 38
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
Extinguishment of
Liabilities" (SFAS 125). SFAS 125 distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings. A
transfer of financial assets in which the transferor surrenders control
over those assets is accounted for as a sale to the extent that
consideration other than beneficial interest in the transferred assets is
received in exchange. SFAS 125 also established standards on the initial
recognition and measurement of servicing assets and other retained
interests and servicing liabilities, and their subsequent measurement.
SFAS 125 requires that debtors reclassify financial assets
pledged as collateral and that secured parties recognize those assets and
their obligation to return them in certain circumstances in which the
secured party has taken control of those assets. In addition, SFAS 125
requires that a liability be derecognized only if the debtor is relieved of
its obligation through payment to the creditor or by being legally released
from being the primary obligor under the liability either judicially or by
the creditor.
SFAS 125 is effective for transactions occurring after December
31, 1996, except for transactions relating to secured borrowings and
collateral for which the effective date is December 31, 1997. The Company
believes the adoption of SFAS 125 will not have a material impact on its
consolidated financial statements.
(3) CASH AND DUE FROM BANKS
The compensating balances held at correspondent banks was $632,000 and
$1,208,000 at December 31, 1996 and 1995, respectively. BankIllinois
maintains such compensating balances with correspondent banks to offset
charges for services rendered by those banks. In addition, BankIllinois
was required by the Federal Reserve Bank to maintain reserves in the form
of cash on hand or balances at the Federal Reserve Bank. The balance of
reserves required to be held was $3,726,000 and $1,876,000 at December 31,
1996 and 1995, respectively.
(4) INVESTMENTS IN DEBT AND EQUITY SECURITIES
As of September 30, 1995, in conjunction with the merger of
BankIllinois Financial Co. and Central Illinois Financial Corporation, debt
securities with an amortized cost of $2,577,000 and an estimated market
value of $2,529,000 were transferred from held-to-maturity to available-
for-sale. A deferred asset of $16,000 was recorded to reflect the tax
effect of the market valuation adjustment and the net decrease resulting
from the market valuation adjustment of $32,000 was recorded to the
separate component of stockholders' equity.
<PAGE> 39
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
During 1995, the FASB decided to allow a one-time reassessment of the
classifications of securities made under Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115). The Company transferred debt securities with an
amortized cost of $11,208,000 and an estimated market value of $11,371,000
from held-to-maturity to available-for-sale. A deferred tax liability of
$55,000 was recorded to reflect the tax effect of the market valuation in-
crease of these debt securities resulting in a net market valuation
adjustment of $108,000 being recorded to the separate component of
stockholders' equity.
The amortized cost and fair values of investments in debt and equity
securities (in thousands) were as follows:
<TABLE>
DECEMBER 31, 1996
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury and other
government agencies $121,311 $355 $435 $121,231
Mortgage-backed securities 8,364 1 138 8,227
Other 416 53 0 469
$130,091 $409 $573 $129,927
Held-to-maturity:
U.S. Treasury and other
government agencies $14,043 $32 $10 $14,065
Obligations of states and
political subdivisions 7,570 67 14 7,623
Mortgage-backed securities 257 0 0 257
$21,870 $99 $24 $21,945
</TABLE>
<TABLE>
DECEMBER 31, 1995
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury and other
government agencies $62,921 $527 $209 $63,239
Mortgage-backed securities 9,336 2 148 9,190
Other 1,030 0 3 1,027
$73,287 $529 $360 $73,456
Held-to-maturity:
U.S. Treasury and other
government agencies $11,548 $12 $11 $11,549
Obligations of states and
political subdivisions 9,179 93 0 9,272
Mortgage-backed securities 703 4 0 707
$21,430 $109 $11 $21,528
</TABLE>
Proceeds from sales of investments in debt and equity securities
available-for-sale during 1996, 1995, and 1994 were $2,000,000, $2,717,000,
and $8,964,000, respectively. Gross gains (losses) of ($4,000), $3,000,
and $175,000, respectively, were realized on those sales.
<PAGE> 40
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
Investments in debt and equity securities with a carrying value of
$76,885,000 and $64,782,000 were pledged at December 31, 1996 and 1995,
respectively, to secure public deposits, securities sold under agreements
to repurchase, and for other purposes as required by law.
During 1996, 1995, and 1994, the Company securitized approximately $0,
$1,417,000, and $1,464,000, respectively, of mortgage loans by exchanging
such loans for Federal Home Loan Mortgage Corporation (FHLMC) mortgage-
backed securities.
The amortized cost and fair value of investments in debt and equity
securities (in thousands) at December 31, 1996, by contractual maturity,
are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less $23,087 $23,199 $3,035 $3,036
Due after one year through five years 90,740 90,662 13,881 13,946
Due after five years through ten years 7,901 7,839 4,635 4,648
Due after ten years 0 0 62 58
121,728 121,700 21,613 21,688
Mortgage-backed securities 8,363 8,227 257 257
Total debt securities $130,091 $129,927 $21,870 $21,945
</TABLE>
(5) LOANS
A summary of loans (in thousands), by classification, at December 31,
1996 and 1995 is as follows:
<TABLE>
1996 1995
<S> <C> <C>
Commercial, financial, and agricultural $110,059 $121,180
Real estate 127,724 127,893
Installment and consumer 48,101 68,425
285,884 317,498
Less:
Unearned discount 16 97
Allowance for loan losses 5,587 5,882
$280,281 $311,519
</TABLE>
The Company makes commercial, financial, and agricultural; real
estate; and installment and consumer loans to customers located in east-
central Illinois and the surrounding communities. As such, the Company is
susceptible to changes in the economic environment in east-central
Illinois.
During 1996, 1995, and 1994, the Company sold approximately
$17,726,000, $13,572,000, and $33,773,000, respectively, of residential
mortgage loans in the secondary market, primarily to the Federal National
Mortgage Association (FNMA). Gross gains of approximately $315,000,
$229,000, and $249,000 and gross losses of approximately $49,000, $30,000,
and $187,000 were realized on the sales during 1996, 1995, and 1994,
respectively.
<PAGE> 41
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
Mortgage loans serviced for others are not included in the
accompanying consolidated financial statements. The unpaid balances of
these loans consisted of the following (in thousands) at December 31, 1996
and 1995:
<TABLE>
1996 1995
<S> <C> <C>
FHLMC $4,558 $6,373
FNMA 104,088 98,540
Illinois Housing Development Authority 3,718 3,401
</TABLE>
In the normal course of business, loans are made to directors,
executive officers, and principal stockholders of the Company and to
parties which the Company or its directors, executive officers, and
stockholders have the ability to significantly influence its management or
operating policies (related parties). The terms of these loans, including
interest rates and collateral, are similar to those prevailing for
comparable transactions with other customers and do not involve more than a
normal risk of collectibility. Activity associated with loans (in
thousands) made to related parties during 1996 and 1995 was as follows:
<TABLE>
1996 1995
<S> <C> <C>
Balance, January 1 $9,790 $12,134
New loans 9,012 2,285
Repayments (2,905) (4,388)
Changes in relationship (610) (241)
Balance, December 31 $15,287 $9,790
</TABLE>
Activity in the allowance for loan losses (in thousands) for 1996,
1995, and 1994 was as follows:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Balance, beginning of year $5,882 $5,263 $4,686
Provision charged to expense 375 3,097 565
Loans charged off (1,538) (2,674) (633)
Recoveries on loans previously charged off 868 196 645
Balance, end of year $5,587 $5,882 $5,263
</TABLE>
The following table presents summary data on nonaccrual and other
impaired loans (in thousands) at December 31, 1996 and 1995:
<TABLE>
1996 1995
<S> <C> <C>
Impaired loans on nonaccrual $1,687 $2,161
Impaired loans continuing to accrue interest 751 1,534
Total impaired loans $2,438 3,695
Allowance for loan losses on impaired loans 644 862
Impaired loans for which there is no related allowance for
loan losses 0 0
Average recorded investment in impaired loans 3,051 4,788
Interest income recognized from impaired loans 106 201
Cash basis interest income recognized from impaired loans 5 0
</TABLE>
<PAGE> 42
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
At December 31, 1994, nonaccrual loans totaled $2,327,000. The
reduction in interest income associated with nonaccrual loans for 1994 was
$184,000.
(6) PREMISES AND EQUIPMENT
A summary of premises and equipment (in thousands) at December 31,
1996 and 1995 is as follows:
<TABLE>
1996 1995
<S> <C> <C>
Land $2,825 $2,825
Furniture and equipment 6,512 6,351
Buildings and leasehold improvements 12,736 12,542
22,073 21,718
Less accumulated depreciation and
amortization 11,356 10,726
$10,717 $10,992
</TABLE>
Depreciation and amortization expense was $1,114,000, $1,203,000, and
$1,215,000, for 1996, 1995, and 1994, respectively.
The Company leases various operating facilities and equipment under
noncancellable operating lease arrangements. These leases expire at
various dates through March 2003 and have renewal options to extend the
lease terms for various dates through March 2013. The rental expense for
these operating leases was $226,000, $222,000, and $190,000 in 1996, 1995,
and 1994, respectively.
Minimum annual rental payments required under the operating leases (in
thousands), which have initial
<PAGE> 43
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
or remaining terms in excess of one year at
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $193
1998 118
1999 78
2000 52
2001 52
Thereafter 64
$557
</TABLE>
On January 24, 1994, the Company entered into an agreement to sell the
BankIllinois Executive Center (Executive Center). The net sales price of
the building was $2,609,000. The carrying value of the property at the
time of the sale was $1,966,000. The resulting gain of $643,000 is being
recognized using the installment method with monthly payments being
received through March 15, 2014. At December 31, 1996 and 1995, the
deferred gain on the sale of the Executive Center totaled $528,000 and
$577,000, respectively, and is included in other liabilities in the
accompanying consolidated balance sheet.
The Company, as lessor, leases a portion of the main bank building and
leased the Executive Center, prior to its sale, to other parties. Rental
income amounted to $170,000, $158,000, and $149,000 in 1996, 1995, and
1994, respectively. Future minimum rental receipts under operating leases
that have initial or remaining non-cancelable lease terms in excess of one
year at December 31, 1996 (in thousands) are as follows:
<TABLE>
<S> <C>
1997 $61
1998 12
$73
</TABLE>
As a result of the merger between BankIllinois Financial Co. and
Central Illinois Financial Corporation, certain banking facilities were
deemed to be unnecessary for the ongoing operations of the merged entity.
Accordingly, premises and equipment was identified to be disposed of and a
charge of $375,000 was recorded to other noninterest expense in 1995 to
reduce the book value of these assets. During 1996, certain data
processing equipment was disposed of, and bank premises with an amortized
cost of $2,007,000 and a corresponding valuation allowance of $304,000 as
of December 31, 1996 are currently held for sale.
(7) DEPOSITS
As of December 31, 1996, the scheduled maturities of time deposits
were as follows:
<TABLE>
<S> <C>
1997 $97,765
1998 81,393
1999 9,869
2000 4,790
2001 and Thereafter 275
$194,092
</TABLE>
(8) SHORT-TERM BORROWINGS
A summary of short-term borrowings (in thousands) at December 31, 1996
and 1995 is as follows:
<TABLE>
1996 1995
<S> <C> <C>
Federal funds purchased $7,300 $3,775
Securities sold under agreements to repurchase:
U.S. Treasury and other government agency securities
with carrying values of $60,641,000 and $49,849,000
and market values of $60,646,000 and $49,848,000
at December 31, 1996 and 1995, respectively 36,641 32,498
$43,941 $36,273
</TABLE>
Information relating to short-term borrowings (dollars in thousands)
is as follows:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Federal funds purchased:
Average daily balance $4,267 $2,423 $5,863
Maximum balance at month-end (September 7,650 6,600 13,200
1996, January 1995 and November 1994)
Weighted average interest rate at year-end 6.99% 5.50% 5.93%
Weighted average interest rate for the year 5.32% 5.82% 4.29%
<PAGE> 44
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
Securities sold under agreements to repurchase:
Average daily balance $35,415 $32,480 $23,811
Maximum balance at month-end (January 38,277 36,268 36,189
1996, August 1995 and December 1994)
Weighted average interest rate at year-end 5.20% 5.00% 5.41%
Weighted average interest rate for the year 5.02% 5.36% 4.02%
</TABLE>
The securities underlying the agreements to repurchase are under the
control of BankIllinois.
(9) FEDERAL HOME LOAN BANK ADVANCES
A summary of Federal Home Loan Bank (FHLB) advances (dollars in
thousands) at December 31, 1996 and 1995 is as follows:
<TABLE>
WEIGHTED
AVERAGE
AMOUNT RATE
<S> <C> <C>
Maturing in year ending:
1997 $1,000 6.57%
1998 3,000 6.49%
1999 3,000 6.51%
2000 1,000 6.57%
2001 1,000 6.76%
$9,000 6.55%
</TABLE>
The terms of a security agreement with the FHLB require BankIllinois
to pledge as collateral for advances both qualifying first mortgage loans
in an amount equal to at least 150% of these advances and all stock of the
FHLB. Advances are subject to restrictions or penalties in the event of
prepayment. BankIllinois has a total remaining borrowing capacity with the
FHLB of approximately $3,623,000 at December 31, 1996 at a rate equal to
the FHLB current variable advance rate.
(10) INCOME TAXES
Income tax expense (in thousands) for 1996, 1995, and 1994 is
summarized as follows:
<TABLE>
CURRENT DEFERRED TOTAL
<S> <C> <C> <C>
Federal:
1996 $1,766 $417 $2,183
1995 2,174 (1,633) 541
1994 3,925 (72) 3,853
</TABLE>
<PAGE> 45
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
Income taxes (in thousands) are included in the following categories:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Income from continuing operations $2,183 $248 $1,466
Gain on disposal of subsidiary 0 293 2,387
$2,183 $541 $3,853
</TABLE>
Actual income tax expense (in thousands) for 1996, 1995, and 1994
differ from the "expected" income taxes (computed by applying the U.S.
federal corporate income tax rate of 34% to earnings before income taxes)
as follows:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Computed "expected" income taxes $2,272 $298 $4,023
Tax-exempt interest income, net of disallowed
interest expense (113) (153) (187)
Nondeductible merger-related expenses 0 360 0
Other, net 24 36 17
$2,183 $541 $3,853
</TABLE>
The tax effects of temporary differences (in thousands) that give rise
to significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1996 and 1995 are as follows:
<TABLE>
1996 1995
<S> <C> <C>
Deferred tax assets:
Unrealized holding loss on available-for-sale securities $55 $0
Allowance for loan losses 976 1,076
Deferred compensation 814 692
Other real estate 184 189
Severance payable 181 354
Other 271 248
Total deferred tax assets $2,481 $2,559
Deferred tax liabilities:
Unrealized holding gain on available-for-sale securities $0 $57
Premises and equipment 818 811
Gain on sale of subsidiary 83 0
Other 439 245
Total deferred tax liabilities $1,340 $1,113
Net deferred tax assets $1,141 $1,446
</TABLE>
A valuation allowance would be provided when it is more likely than
not that some portion of the deferred tax assets will not be realized. The
Company has not established a valuation allowance as of December 31, 1996
or 1995, due to management's belief that all criteria for asset recognition
have been met, including the existence of a history of taxes paid
sufficient to support the realization of the deferred tax assets.
<PAGE> 46
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(11) RETIREMENT PLANS
The Company has established a profit sharing plan and a 401(k) plan
for substantially all employees who meet the eligibility requirements. The
401(k) plan, which replaces the BankIllinois Financial Co. defined
contribution and Central Illinois Financial Corporation profit sharing plan
discussed below, allows for participants' contributions of up to 10% of
gross salary, the first 6% of which is available for the Company's 50%
match. The profit sharing plan is non-contributory. All contributions to
the profit sharing plan are at the discretion of the Company.
The former BankIllinois Financial Co. maintained a defined
contribution retirement plan for substantially all employees who met the
eligibility requirements. The plan allowed for employee contributions
under Internal Revenue Service Code 401(k). Through 1995, the Company
contributed 7% of qualified employees' salaries and matched 50% of employee
401(k) contributions up to 6% of the employees' salary.
The former Central Illinois Financial Corporation maintained a defined
contribution profit sharing plan and a 401(k) plan for substantially all
employees who met the eligibility requirements. The Company made
contributions of up to 10% of eligible salaries to the profit sharing plan.
The 401(k) plan provided for employee contributions of up to 5% of the
participant's gross salary, which was then available for the Company's 25%
match.
The Company has merged the profit sharing plan and the defined
contribution and 401(k) plans into the respective Central Illinois
Financial Co., Inc. profit sharing and 401(k) plans. The assets of the
plans will be transferred during 1997.
Total contributions by the Company under the retirement plans
discussed above totaled $379,000, $493,000 and $571,000 for 1996, 1995 and
1994, respectively.
Certain key officers and directors participate in various deferred
compensation or supplemental retirement agreements with the Company. The
Company accrues the liability for these agreements based on the present
value of the amount the employee or director is currently eligible to
receive. The Company recorded expenses of $207,000, $714,000, and $720,000
in 1996, 1995, and 1994, respectively, related to these agreements.
(12) STOCKHOLDERS' EQUITY
SHARE PURCHASE RIGHTS PLAN
Pursuant to the merger described in note 1 to the consolidated
financial statements, the Company established the Central Illinois
Financial Co., Inc. Rights Agreement (the Rights Agreement). The Rights
Agreement gives the holder of each share of common stock of the Company a
purchase right to acquire one one-hundredth of a share of the authorized no
par value preferred stock (Purchase Right). The Rights Agreement has the
effect of substantially diluting the percentage of ownership of certain
acquirers of common stock of the Company unless sale or merger of the
Company is approved by certain continuing directors of the Company. Each
Purchase Right trades in tandem with its respective share of common stock
until the occurrence of certain events, in which case it would separate and
entitle the registered holder, subject to the terms of the Rights
Agreement, to purchase certain equity securities at a price below market
value.
<PAGE> 47
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
In 1994, the former BankIllinois Financial Co. established a stock
incentive plan, which provides for the granting of shares of the Company's
common stock to certain key managerial employees. These options vest and
thus become exercisable ratably over a three-year period from the date
granted. In 1994, the former Central Illinois Financial Corporation
established a stock option plan which provides for the granting of
non-qualified stock options and stock appreciation rights (SARs) to certain
key managerial employees. The option price must be at least 100% of the
fair market value of the common stock on the date the option is granted and
the maximum option term cannot exceed 10 years. The plan allows for the
granting of options in tandem with SARs. Exercise of an SAR cancels the
related option and entitles the holder to receive a payment in return,
equal to the excess of the fair market value of the shares subject to the
option surrendered over the exercise price. Payment by the Company will be
made in shares of the Company's common stock with cash paid in lieu of
fractional shares. The exercise of an SAR is subject to all of the terms
and conditions of the related option.
During October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123).
SFAS 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans and also applies to transactions in
which an entity issues its equity instruments to acquire goods or services
from non-employees. SFAS 123 defines a fair value-based method of
accounting for an employee stock option or similar equity instruments and
encourages all entities to adopt that method of accounting. SFAS 123 also
allows an entity to continue to measure compensation cost for those plans
using the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees (APB 25).
SFAS 123 is effective for transactions entered into in fiscal years
beginning after December 15, 1995. Pro forma disclosures required for
entities that elect to continue to measure compensation cost using APB 25
must include the effect of all awards granted in fiscal years beginning
after December 15, 1994. The Company plans to continue to measure
compensation cost using APB 25.
The following is a summary of the changes in options outstanding under
the stock incentive and stock option plans:
<TABLE>
1996 1995 1994
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning 263,534 $7.14 263,534 $7.14 0 $0.00
of year
Granted ($6.85-$8.83 per share) 0 0 0 0 263,534 $7.14
Exercised 542 $8.83 0 0 0 $0.00
Options outstanding, end of year 262,992 $7.14 263,534 $7.14 263,534 $7.14
Options exercisable, end of year 260,478 $7.13 183,327 $7.22 105,093 $7.43
</TABLE>
At December 31, 1996, 23,117 SARs remained outstanding.
<PAGE> 48
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
(13) DIVIDEND RESTRICTIONS
Banking regulations and capital guidelines limit the amount of
dividends that may be paid by banks. Retained earnings of BankIllinois
available for payment of dividends, subject to maintenance of minimum
capital requirements, was $1,222,000 at December 31, 1996.
(14) DISCONTINUED OPERATIONS
On July 30, 1992, BankIllinois divested its interest in its wholly
owned subsidiary, BankIllinois Co., which was involved in the processing of
monthly telephone bills for cellular telephone companies. At the time of
sale, BankIllinois received $1,000,000, which equaled the carrying value of
the subsidiary. The total sales price was based upon the annual operating
revenues of the former subsidiary from July 1, 1992 through June 30, 1995
up to a maximum of $15.0 million. Based upon operating revenues of the
former BankIllinois Co., the Company has recorded the following gain (in
thousands) during 1995 and 1994:
<TABLE>
1995 1994
<S> <C> <C>
Gross gain on sale $926 $7,491
Expenses incurred in the sale (63) (470)
Income tax effect (293) (2,387)
Net gain on disposal $570 $4,634
</TABLE>
The maximum gross proceeds of $15.0 million have been realized by the
Company related to the sale of BankIllinois Co.
(15) CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Following are the condensed balance sheets as of December 31, 1996 and
1995 and the related condensed schedules of income and cash flows for 1996,
1995, and 1994 for Central Illinois Financial Co., Inc.:
<TABLE>
CONDENSED BALANCE SHEETS
(in thousands)
1996 1995
<S> <C> <C>
Assets:
Cash $171 $493
Investment in BankIllinois 49,643 46,474
Investment in BankIllinois Trust Company 2,097 1,756
Investment in equity securities 91 0
Organization costs, net 22 33
Other assets 164 113
$52,188 $48,869
<PAGE> 49
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
Liabilities and stockholders' equity:
Dividends payable $0 $378
Other liabilities 92 83
Stockholders' equity 52,096 48,408
$52,188 $48,869
</TABLE>
<TABLE>
CONDENSED SCHEDULES OF INCOME
(in thousands)
1996 1995 1994
<S> <C> <C> <C>
Revenue:
Dividends received from subsidiaries $1,000 $4,085 $1,140
Interest income on deposits 1 2 1
1,001 4,087 1,141
Expenses:
Amortization of organization costs 11 11 11
Merger expenses 0 1,036 0
Other 471 315 314
482 1,362 325
Income before applicable income tax
benefit and equity in undistributed
income (loss) of subsidiaries 519 2,725 816
Applicable income tax benefit 163 110 110
Equity in undistributed income (loss) of
subsidiaries 3,819 (2,499) 7,054
Net income $4,501 $336 $7,980
</TABLE>
<TABLE>
CONDENSED SCHEDULES OF CASH FLOWS
(in thousands)
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $4,501 $336 $7,980
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed (income) loss
of subsidiaries (3,819) 2,499 (7,054)
Amortization of organization costs 11 11 11
Stock appreciation rights 60 88 0
Other, net 46 99 (64)
Net cash provided by operating activities 799 3,033 873
Cash flows from investing activities:
Investment in BankIllinois Trust Company 0 (2,000) 0
Purchases of equity securities (91) 0 0
Net cash (used in) investing
activities (91) (2,000) 0
Cash flows from financing activities:
Treasury stock transactions, net (649) 4 (179)
Fractional shares purchased following stock dividend (3) 0 0
Cash dividends paid (378) (860) (578)
Net cash (used in) financing activities (1,030) (856) (757)
Cash at beginning of year 493 316 200
Cash at end of year $171 $493 $316
</TABLE>
<PAGE> 50
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(16) DISCLOSURES ABOUT FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of
amounts recognized in the consolidated balance sheets. The contractual
amounts of those instruments reflect the extent of involvement the Company
has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-
sheet instruments. Management does not anticipate any significant losses
as a result of these transactions.
The following table summarizes these financial instruments and
commitments (in thousands) at December 31, 1996 and 1995:
<TABLE>
1996 1995
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $66,295 $52,700
Standby letters of credit 2,765 4,395
</TABLE>
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, principally variable interest rates, generally have fixed
expiration dates or other termination clauses and may require 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. For commitments to extend credit, the Company
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation.
Collateral held varies, but may include accounts receivable; inventory;
property, plant and equipment; and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loans to customers. The standby letters of
credit are unsecured.
The Company does not engage in the use of interest rate swaps,
futures, forwards or options contracts.
<PAGE> 51
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Following is a summary of the carrying amounts and fair values of the
Company's financial instruments at December 31, 1996 and 1995:
<TABLE>
1996 1995
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $59,195 $59,195 $80,700 $80,700
Investments in debt and equity securities 153,492 153,567 97,304 97,402
Mortgage loans held-for-sale 1,277 1,277 9,421 9,424
Loans 280,281 279,951 311,519 308,071
Accrued interest receivable 4,517 4,517 4,443 4,443
498,762 498,507 503,387 500,040
Liabilities:
Deposits 404,130 404,712 419,157 420,781
Short-term borrowings 43,941 43,946 36,273 36,211
Federal Home Loan Bank advances 9,000 9,083 9,000 9,338
Accrued interest payable 1,576 1,576 1,964 1,964
$458,647 $459,317 $466,394 $468,294
</TABLE>
Management's fair value estimates, methods, and assumptions are set
forth below for the Company's financial instruments.
CASH AND CASH EQUIVALENTS
The carrying value of cash and cash equivalents approximates fair
value due to the relatively short period of time between the origination of
the instrument and its expected realization.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
The fair value of investments in debt and equity securities is estimated
based on bid prices received from securities dealers.
LOANS
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential mortgage, and consumer.
Each loan category is further segmented into fixed and adjustable rate
interest terms and by performing and nonperforming categories. The fair
value of performing loans is calculated by discounting scheduled cash flows
through the estimated maturity using estimated market discount rates equal
to rates at which loans, similar in type, would be originated at December
31, 1996 and 1995. Estimated maturities are based upon the average remain-
ing contractual lives for each loan classification. Fair value for non-
performing loans is based on the use of discounted cash flow techniques.
ACCRUED INTEREST RECEIVABLE
The carrying value of accrued interest receivable approximates fair
value due to the relatively short period of time between the origination of
the instrument and its expected realization.
DEPOSIT LIABILITIES
The fair value of deposits with no stated maturity, such as non-
interest-bearing and interest-bearing demand deposits and savings deposits
is the amount payable on demand. The fair value of time deposits is based
<PAGE> 52
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on the discounted value of contractual cash flows. The discount rate is
estimated using rates currently offered for deposits of similar remaining
maturities. The fair value estimates do not include the benefit that
results from the low-cost funding provided by the deposit liabilities
compared to the cost of borrowing funds in the market nor the benefit
derived from the customer relationship inherent in existing deposits.
SHORT-TERM BORROWINGS
The fair value of federal funds purchased and securities sold under
agreements to repurchase is based on the discounted value of contractual
cash flows. The discount rate is estimated using current rates on federal
funds purchased and securities sold under agreements to repurchase with
similar remaining maturities..
FEDERAL HOME LOAN BANK ADVANCES
The fair value of FHLB advances is based on the discounted value of
contractual cash flows. The discount rate is estimated using rates on
current FHLB advances with similar remaining maturities.
ACCRUED INTEREST PAYABLE
The carrying value of accrued interest payable approximates fair value
due to the relatively short period of time between the origination of the
instrument and its expected realization.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit is generally estimated
using the fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan commitments,
fair value also considers the difference between current levels of interest
rates and the committed rates. The fair value of letters of credit is
based on fees currently charged for similar agreements or on the estimated
cost to terminate them or otherwise settle the obligations with the
counterparties. The estimated fair value of commitments to extend credit
and standby letters of credit approximates the balances of such
commitments.
(17) LITIGATION
Various legal claims have arisen in the normal course of business,
which, in the opinion of Company management, will not result in any mate-
rial liability to the Company.
(18) REGULATORY CAPITAL
The Company and BankIllinois are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company's and BankIllinois' financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, BankIllinois must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and BankIllinois' capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and BankIllinois to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital (as
<PAGE> 53
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
defined) to average assets (as defined). Management
believes, as of December 31, 1996, that the Company and BankIllinois meet
all capital adequacy requirements to which they are subject.
As of December 31, 1996, the most recent notification from the State
of Illinois Office of Banks and Real Estate categorized BankIllinois as
well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, BankIllinois must maintain
minimum total capital to risk-weighted assets, Tier I capital to risk-
weighted assets, and Tier I capital to average assets ratios as set forth
in the table. There are no conditions or events since that notification
that management believes have changed BankIllinois' category.
The Company's and BankIllinois' actual capital amounts and ratios are
presented in the following table:
<TABLE>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total capital
(to risk-weighted assets)
Consolidated $56,104 17.7% $25,340 8.0% N/A
BankIllinois $53,691 17.0% $25,332 8.0% $31,665 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated $52,125 16.5% $12,670 4.0% N/A
BankIllinois $49,713 15.7% $12,666 4.0% $18,999 6.0%
Tier I capital
(to average assets)
Consolidated $52,125 10.7% $19,538 4.0% N/A
BankIllinois $49,713 10.2% $19,451 4.0% $24,313 5.0%
</TABLE>
<PAGE> 54
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ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
McGladrey & Pullen, LLP was the independent auditor for the fiscal
year ended December 31, 1996. KPMG Peat Marwick LLP was the independent
auditor for BankIllinois Financial Co. prior to the Merger. Geo. S. Olive &
Co., LLC was the independent auditor for Central Illinois Financial
Corporation prior to the Merger. Following the Merger, KPMG Peat Marwick LLP
was selected to be CIFCI's independent auditor for the fiscal year ended
December 31, 1995.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
DIRECTORS
POSITION WITH THE COMPANY AND
NAME DIRECTOR THE SUBSIDIARIES AND OCCUPATION
(AGE) SINCE <Fl> FOR THE LAST FIVE YEARS
CLASS I
(TERM EXPIRES 1999)
<S> <C> <C>
David J. Downey 1992 Director of the Company;
(Age 55) President, The Downey
Group, Inc. (estate
planning, wealth transfer
and executive compensation
organization) (1963-present)
Van A. Dukeman 1994 Director, President and Chief
(Age 38) Operating Officer of the Company
and the Bank; Director and President
of BIF and BKI (1994-1995); Executive
Vice President and Chief Investment
Officer, First Busey Trust &
Investment Co. (1991-1993); Executive
Vice President, Busey Bank (1989-1991)
Gene A. Salmon 1991 Director of the Company;
(Age 52) President, Cross
Construction, Inc. (1979-present)
James A. Sullivan 1984 Director of the Company;
(Age 69) Chief Executive Officer,
Sullivan Chevrolet Company
(1976-present)
CLASS II
(TERM EXPIRES 2000)
Robert J. Cochran 1987 Director of the Company;
(Age 56) Executive Vice President,
General Counsel and
Secretary of the Company and
the Bank; President and Chief
Executive Officer of BITCO; Senior
Vice President, Trust Officer,
Secretary and General Counsel,
CIF (1987-1995)
<PAGE> 55
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Gregory B. Lykins 1994 Director, Chairman of the Board and
(Age 49) Chief Executive Officer of the Company
and the Bank; Director, Chairman of
the Board and Chief Executive Officer
of BIF and BKI (1994-1995); President
and Chief Financial Officer, First
Busey Corporation (1984-1993);
Chairman, President and Chief
Executive Officer, First Busey Trust &
Investment Co. (1992-1993)
August C. Meyer, Jr. 1962 Director of the Company;
(Age 59) President, Midwest
Television Inc. (1976-present)
CLASS III
(TERM EXPIRES 1998)
Roy V. Van Buskirk 1991 Director of the Company;
(Age 66) President, Bacon and Van
Buskirk Glass Company and
Danville Bacon and Van
Buskirk Glass Company, Inc.
(1968-present)
George T. Shapland 1994 Director of the Company;
(Age 66) President, Shapland
Management Co. (1990-present)
Dean R. Stewart 1984 Director of the Company;
(Age 68) Chairman of the Board, CIF
(1991-1995); Chairman and
Chief Executive Officer,
Tri Star Marketing, Inc.
(1974-present)
<FN>
<F1> Indicates year first elected to the board of directors of
the Company, CIF, CNB, BIF or the Bank.
</FN>
</TABLE>
All of the Company s directors will hold office for the terms
indicated, or until their respective successors are duly elected and
qualified, and all executive officers hold office for a term of one year.
There are no arrangements or understandings between any of the directors,
executive officers or any other person pursuant to which any of the
Company s directors or executive officers have been selected for their
respective positions. Non-employee directors of the Company received a
$6,250 quarterly retainer for serving on the Boards of Directors and
committees of the Company and certain of the Subsidiaries in 1996.
Directors of the Company who are also employees of the Company were not
separately compensated for service on such Boards or committees.
<PAGE> 56
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BOARD COMMITTEES AND MEETINGS
A total of 12 regularly scheduled and special meetings were held by
the Board of Directors of the Company during 1996. The Board of Directors
of the Company has established an Audit Committee, a Compensation Committee
and an Ad Hoc committee. During 1996, all directors attended at least 75
percent of the meetings of the Board and the committees on which they
served.
Members of the Audit Committee are Messrs. Stewart (Chair), Meyer,
Sullivan, Van Buskirk and Lykins (ex officio). The Audit Committee reports
to the Board of Directors and has the responsibility to review and approve
internal control procedures, accounting practices and reporting activities
of the Subsidiaries. The committee also has the responsibility for
establishing and maintaining communications between the Board and the
independent auditors and regulatory agencies. The Audit Committee reviews
with the independent auditors the scope of their examinations, with
particular emphasis on the areas to which either the Audit Committee or the
auditors believe special attention should be directed. It also reviews the
examination reports of regulatory agencies and reports to the full Board
regarding matters discussed therein. Finally, it oversees the
establishment and maintenance of effective controls over the business
operations of the Subsidiaries. The Audit Committee met four times in
1996.
The members of the Compensation Committee are Messrs. Van Buskirk
(Chair), Meyer, Stewart and Lykins (ex officio). The Compensation
Committee reports to the Board of Directors and has responsibility for all
matters related to compensation of executive officers of the Company,
including review and approval of base salaries, review of salaries of
executive officers compared to other financial services holding companies
in the region, fringe benefits, including modification of the retirement
plan, and incentive compensation. The Compensation Committee met two times
in 1996.
The members of the Ad Hoc Committee are Messrs. Van Buskirk (Chair),
Downey, Lykins, Shapland and Stewart. The Ad Hoc Committee reviews
compensation to be paid to the Company's directors for service on the Board
of Directors and attendance at Board and committee meetings, reviews the
Company's dividend policy and nominates persons to serve on the Company's
Board of Directors. The Ad Hoc Committee will consider nominations to the
Board of Directors submitted by stockholders if such nominations are made
in writing to the committee and otherwise comply with Article 2, Section 14
of the Company's bylaws. The Ad Hoc Committee met one time in 1996.
EXECUTIVE OFFICERS
The term of office for the executive officers of CIFCI is from
the date of election until the next annual organizational meeting of the
Board of Directors. The names and ages of the executive officers of CIFCI
as of December 31, 1996, as well as the offices held by these officers on
that date, other positions held with CIFCI and its subsidiaries and
principal occupations for the past five years are set forth below.
<PAGE> 57
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<TABLE>
POSITION WITH CIFCI AND
NAME AGE SUBSIDIARIES AND PRINCIPAL OCCUPATION
<S> <C> <C>
Gregory B. Lykins 49 Chairman of the Board and Chief
Executive Officer of CIFCI and
BankIllinois; Director of BankIllinois
Trust Company. Prior to the Merger,
Mr. Lykins served as Chairman of the
Board and Chief Executive Officer of
BankIllinois Financial Co. and
BankIllinois. Mr. Lykins was President
and Chief Financial Officer of First
Busey Corporation, a bank holding
company in Urbana, Illinois, and had
been Chairman, President and Chief
Executive Officer of First Busey Trust &
Investment Co., a trust company
subsidiary of First Busey Corporation,
prior to joining BankIllinois Financial
Co.
Van A. Dukeman 38 Director, President and Chief Operating
Officer of CIFCI and BankIllinois;
Director, BankIllinois Trust Company.
Prior to the Merger, Mr. Dukeman
served as President and director of
BankIllinois Financial Co. Mr.
Dukeman was Executive Vice President
and Chief Investment Officer of First
Busey Trust & Investment Co. prior to
joining BankIllinois Financial Co.
Robert J. Cochran 55 Director of CIFCI and Executive Vice
President, Secretary and General
Counsel of CIFCI and BankIllinois and
Chairman, President and Chief Executive
Officer of BankIllinois Trust Company.
Prior to the Merger, Mr. Cochran served
as Director, Senior Vice President,
Secretary and General Counsel of
Central Illinois Financial Corporation
and Senior Vice President, Trust
Officer, Secretary and General Counsel
of The Champaign National Bank.
David B. White 45 Executive Vice President and Chief
Financial Officer of CIFCI and
BankIllinois. Prior to the Merger, Mr.
White served as Executive Vice
President and Chief Financial Officer of
BankIllinois. Mr. White was Senior
Vice President and Chief Financial
Officer of Bank One, Champaign-Urbana,
Illinois, prior to joining
BankIllinois Financial Co.
Charles R. Eyman 50 Executive Vice President of BankIllinois.
Prior to the Merger, Mr. Eyman served
as Senior Vice President of The
Champaign National Bank.
<PAGE> 58
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Mary E. Slack 40 Executive Vice President of BankIllinois.
Prior to the Merger, Ms. Slack served as
Executive Vice President of BankIllinois.
Ms. Slack was Senior Vice President of
First Busey Securities, Inc., a securities
brokerage subsidiary of Busey Bank,
Urbana, Illinois, prior to joining
BankIllinois Financial Co.
Larry J. Kallembach 40 Executive Vice President and Cashier of
BankIllinois. Prior to the Merger, Mr.
Kallembach served as Senior Vice
President and Cashier of The Champaign
National Bank.
</TABLE>
<PAGE> 59
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ITEM 11. EXECUTIVE COMPENSATION
CASH COMPENSATION
The following table shows the compensation earned during the
two most recently completed fiscal years by the Chief Executive
Officer and the four other most highly compensated executive
officers of CIFCI (including those employed by CIFCI's subsidiaries)
whose 1996 salary and bonus exceeded $100,000:
<TABLE>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
(a) (b) (c) (d) (g) (i)
SECURITIES ALL OTHER
NAME AND UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) <F1> BONUS($) OPTIONS/SARS (#) ($) <F2>
<S> <C> <C> <C> <S> <C>
Gregory B. Lykins,
Chairman of the Board 1995 $175,000 $55,000 -- $18,993
and Chief Executive Officer 1996 180,000 35,000 -- 17,177
Van A. Dukeman,
President and Chief 1995 115,000 40,000 -- 15,559
Operating Officer 1996 127,000 30,000 12,540
Robert J. Cochran,
Executive Vice President 1995 108,625 15,000 -- 14,872
and General Counsel 1996 118,500 12,000 11,254
David B. White,
Executive Vice President 1995 90,000 16,350 -- 11,368
and Chief Financial Officer 1996 95,000 12,000 9,080
Charles R. Eyman, 1995 91,500 15,000 -- 13,540
Executive Vice President 1996 95,000 12,000 9,208
<FN>
<F1> Includes amounts deferred and, with respect to Mr. Lykins, includes
amounts received for service as Chairman of the Board of the company.
<F2> The total amounts in this column reflect CIFCI's contributions under
its 401(K) Plan, Non-Qualified Retirement Plan, Profit Sharing Plan and
amounts paid for premiums on insurance policies with respect to each named
executive officer. These amounts were $4,500, $1,443, $10,500 and $2,550 for
Mr. Lykins for 1995 and $3,238, $3,189, $7,500 and $3,250 for 1996; $3,820,
$929, $10,500 and $310 for Mr. Dukeman for 1995 and $3,162, $1,493, $7,500
and $385 for 1996; $1,452, $0.00, $11,618 and $1,802 for Mr. Cochran for 1995
and $2,756, $1,517, $6,489 and $492 for 1996; $2,615, $1,255, $7,498 and
$0.00 for Mr. White for 1995 and $2,248, $1,510, $5,045 and $277 for 1996;
and $1,247, $0.00, $9,978 and $2,315 for Mr. Eyman for 1995 and $2,254,
$1,300, $5,268 and $386 for 1996.
</FN>
</TABLE>
<PAGE> 60
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Stock Option Information
No stock options were granted by CIFCI during 1996. The following table
sets forth certain information concerning the exercisable and nonexercisable
stock options at December 31, 1996, held by the individuals named in the
Summary Compensation Table:
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
Shares Number of Securities
Acquired Underlying Unexercised Value of Unexercised In-
on Value Options at FY-End the-Money Options
Name Exercise Realized (#)(d) <F1> at FY-End ($)(e)
(#)(a) (#)(b) ($)(c) Exercisable Unexercisable Exercisable Unexercisable
<S> <S> <C> <C> <S> <C> <S>
Gregory B. Lykins --- $--- 105,945 --- $890,997 ---
Van A. Dukeman --- --- 105,945 --- 890,997 ---
Robert J. Cochran --- --- 2,720 --- 17,462 ---
David B. White --- --- 10,595 --- 89,104 ---
Charles R. Eyman --- --- 2,720 --- 17,462 ---
<FN>
<F1> Represents options granted prior to the Merger and converted into the
right to purchase Company Common Stock at the effective date of the Merger.
</FN>
</TABLE>
EMPLOYMENT AGREEMENTS
CIFCI has entered into employment agreements with certain of its
executive officers, including each of the executive officers named in the
Summary Compensation Table. Each employment agreement provides for an
initial term of one year and, at the end of its initial term as well as any
subsequent term, is automatically extended for one year until either CIFCI or
the employee gives written notice to the contrary. Each agreement terminates
upon the employee's death, disability, discharge for cause or in the event of
"constructive discharge" or a change of control (as defined in the employment
agreements). The employment agreements are also terminable by the employee
upon 90 days' notice to CIFCI.
The employment agreements set forth the salaries, bonuses and
benefits to be provided to the respective officer and provide for severance
payments in the event employment is terminated by CIFCI without cause or in
the event of "constructively discharge" (as defined in the employment
agreements). The "severance payment" each officer would be entitled to
receive in such a case equals the sum of the applicable base salary, the
officer's most recent performance bonus and the value of contributions under
retirement and employee benefit plans that would have been made through the
term of the agreement. Mr. Lykins and Mr. Dukeman (or their estates) are
also entitled to receive such severance payment in the event of termination
because of disability or death.
In the event employment is terminated within one year of a change
of control (as defined in the agreements), or at any time by CIFCI or its
successor for any reason other than death or disability, the affected officer
would be entitled to receive similar amounts. The amounts payable upon a
change of control are subject to reduction, if necessary, to prevent certain
adverse tax treatment.
The employment agreements also provide that the respective officer
may not compete within a 50-mile radius of CIFCI's main office, or against
CIFCI or any successor, for one year following the termination of their
employment agreement. Each employment agreement also requires CIFCI to
indemnify and to advance certain legal expenses to the covered employee to
the maximum extent permitted by law.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of CIFCI establishes compensation and
benefits for the Chief Executive Officer and reviews and recommends
compensation and benefits for other officers and employees of the Bank.
During 1996, no executive officer of CIFCI served as a member of (i) the
compensation committee of another entity in which one of the executive
officers of such entity served on the Bank's Compensation Committee, (ii) the
Board of Directors of another entity in which one of the executive officers
of such entity served on the Bank's Compensation Committee or (iii) the
compensation committee of another entity in which one of
<PAGE> 61
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
the executive
officers of such entity served as a member of CIFCI's Board of Directors.
During 1996, the Company incurred approximately $67,200 in advertising costs
through a television station owned by Midwest Television, Inc. ("Midwest").
Mr. Meyer, a director of the Company and a member of the Compensation
Committee, serves as a director and President of Midwest. Management
believes that the terms of these transactions for advertising and the
coverage afforded by the media owned by Midwest were no less favorable to the
Company than would have been obtained from non-affiliated parties.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the Company s
Common Stock beneficially owned on March 17, 1997 with respect to all persons
known to the Company to be the beneficial owner of more than five percent of
the Company Common Stock, each director and nominee and all directors and
executive officers of the Company as a group.
<TABLE>
NAME OF INDIVIDUAL AND AMOUNT AND NATURE OF PERCENT
NUMBER OF PERSONS IN GROUP BENEFICIAL OWNERSHIP<F1> OF CLASS
DIRECTORS AND NOMINEES
<S> <C> <C>
Robert J. Cochran 37,831 <F2> <F10>
David J. Downey 280,144 5.7%
Van A. Dukeman 160,186 <F3> 3.2%
Gregory B. Lykins 371,016 <F4> 7.4%
August C. Meyer, Jr. 1,492,851 <F5> 30.5%
Gene A. Salmon 74,146 1.5%
George T. Shapland 265,543 5.4%
Dean R. Stewart 17,896 <F6> <F10>
James A. Sullivan 26,236 <F10>
Roy V. Van Buskirk 22,923 <F10>
NAMED EXECUTIVE OFFICERS
Charles R. Eyman 9,749 <F7> <F10>
David B. White 11,440 <F8> <F10>
All directors and executive
officers as a group
(14 persons)<F9> 2,803,027 54.5%
<FN>
<F1> The information contained in this column is based upon information
furnished to the Company by the persons named above and the members of the
designated group. The nature of beneficial ownership for shares shown in
this column is sole voting and investment power, except as set forth in the
footnotes below. Inclusion of shares shall not constitute an admission of
beneficial ownership or voting or investment power over such shares.
<F2> Includes 2,930 shares obtainable through the exercise of options
considered presently exercisable, over which shares Mr. Cochran has no voting
and sole investment power. Also includes 1,734 shares held by Mr. Cochran's
spouse, over which shares Mr. Cochran has no voting or investment power.
<F3> Includes 106,155 shares obtainable through the exercise of options
considered presently exercisable, over which shares Mr. Dukeman has no voting
and sole investment power.
<F4> Includes 106,155 shares obtainable through the exercise of options
considered presently exercisable, over which shares Mr. Lykins has no voting
and sole investment power. Also includes 6,300 shares over which Mr. Lykins
has shared voting and sole investment power.
<F5> Represents shares held by certain trusts for which Mr. Meyer serves
as trustee. Mr. Meyer exercises sole voting and investment power over such
shares. Also represents 52,975 shares held by Mr. Meyer's spouse. Mr. Meyer
disclaims beneficial ownership over all such shares.
<F6> Includes 9,248 shares held jointly with Mr. Stewart's spouse, over
which shares Mr. Stewart has shared voting and investment power.
<PAGE> 62
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
<F7> Includes 2,930 shares obtainable through the exercise of options
considered presently exercisable, over which shares Mr. Eyman has no voting
and sole investment power.
<F8> Includes 10,805 shares obtainable through the exercise of options
considered presently exercisable, over which shares Mr. White has no voting
and sole investment power.
<F9> Includes 241,386 shares subject to options exercisable within 60
days of the date of the information provided in the table.
<F10> Less than one percent.
</FN>
</TABLE>
AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT
Certain principal stockholders of the Company have executed an Amended and
Restated Shareholders' Agreement (the "Shareholders' Agreement"). The
Shareholders' Agreement affects the purchase and sale of the capital stock of
the Company owned by the parties thereto. The parties to the agreement are
August C. Meyer, Jr. and certain related entities, David J. Downey, George T.
Shapland, Gregory B. Lykins and Van A. Dukeman (the "Parties").
The Shareholders' Agreement provides that the Parties to the Shareholders'
Agreement may not make voluntary transfers of their shares of Company stock
except for transfers to each other, family transfers, certain pledges and
certain open market sales. In addition, involuntary transfers occurring upon
death are permitted. Parties to the Shareholders' Agreement are permitted to
sell shares on the open market, but only after the other Parties have elected
not to exercise a right of first refusal to purchase the shares. Also, in
the event any Party to the Shareholders' Agreement purchases shares from any
third party, the purchasing stockholder must allow the other Parties the
right to purchase a proportionate amount of such shares.
Commencing three years after the Merger, each Party to the Shareholders'
Agreement other than August C. Meyer Jr. will have the right to put his
shares to Mr. Meyer, in which event Mr. Meyer will be obligated to purchase
all such shares subject to the rights of the other Parties to join in the
purchase on a proportionate basis. Puts may be exercised prior to the
expiration of the three-year period following the Merger only in the event of
the death of a Party. In any case, if a put is exercised, and within 18
months thereafter there is a sale of the Company, any profits realized on the
sale of the put shares must be repaid to the Party that previously exercised
the put.
The Shareholders' Agreement will terminate ten years after it becomes
effective. It also will terminate upon a sale, dissolution or liquidation of
the Company or upon the written agreement of the Parties.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors and officers of the Company and the Subsidiaries and their
associates were customers of, and had transactions with, the Company and the
Subsidiaries during 1996. Additional transactions may be expected to take
place in the future. All outstanding loans, commitments to loan,
transactions in repurchase agreements and certificates of deposit and
depository relationships, in the opinion of management, were made in the
ordinary course of business, on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons and did not involve more than the normal risk
of collectibility or present other unfavorable features. During 1996, the
Company incurred approximately $67,200 in advertising costs through a
television station owned by Midwest Television, Inc. ("Midwest"). Mr. Meyer,
a director of the Company, serves as a director and President of Midwest.
Management believes that the terms of these transactions for advertising and
the coverage afforded by the media owned by Midwest were no less favorable to
the Company than would have been obtained from non-affiliated parties.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a)(1) Index to Financial Statements
See page 29.
(a)(2) Financial Statement Schedules
N/A
<PAGE> 63
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(a)(3) Schedule of Exhibits
The Exhibit Index which immediately follows the signature pages to
this Form 10-K is incorporated by reference.
(b) Reports on Form 8-K
CIFCI did not file any Current Reports on Form 8-K during the fourth
quarter of 1996.
(c) Exhibits
The exhibits required to be filed with this Form 10-K are included
with this Form 10-K and are located immediately following the Exhibit Index
to this Form 10-K.
(d) Financial Data Schedule
Exhibit 27.1
<PAGE> 64
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on March 27, 1997.
By: /s/ Gregory B. Lykins
Chairman and Principal Executive Officer
By: /s/ David B. White
Executive Vice President and
Principal Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 27, 1997.
By: /s/ Gregory B. Lykins
Chairman, CEO and Director
By: /s/ Van A. Dukeman
President, COO and Director
By: /s/ Robert J. Cochran
Executive Vice President and Director
By: /s/ David J. Downey
Director
By: /s/ August C. Meyer, Jr.
Director
By: /s/ Gene A. Salmon
Director
By: /s/ George T. Shapland
Director
By: /s/ Myron J. Sholem
Director
By: /s/ Dean R. Stewart
Director
By: /s/ James A. Sullivan
Director
By: /s/ Roy V. Van Buskirk
Director
By: /s/ David B. White
Executive Vice President and Chief
Financial Officer
<PAGE> 65
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<TABLE>
CENTRAL ILLINOIS FINANCIAL CO., INC.
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
INCORPORATED
EXHIBIT HEREIN BY FILED SEQUENTIAL
NO. DESCRIPTION REFERENCE TO HEREWITH PAGE NO.
<S> <C> <C> <C>
3.1 Amended and Restated Exhibit 3.1 to the Form 10-K filed
Certificate of with the Commission April 1,
Incorporation of Central 1996 (SEC File No. 33-90342)
Illinois Financial Co.,
Inc.
3.2 Bylaws of Central Illinois Exhibit 3.2 to the Form 10-K filed
Financial Co., Inc. with the Commission April 1,
1996 (SEC File No. 33-90342)
4.1 Amended and Restated Exhibit 4.1 to the Registration
Shareholders' Statement on Form S-4 filed with
Agreement, dated as of the Commission March 15, 1995,
December 13, 1994, as amended (SEC File
among certain No. 33-90342)
shareholders of Central
Illinois Financial Co.,
Inc.
10.1 Employment Agreement Exhibit 10.3 to the Registration
Statement on Form S-4 filed with
for Gregory B. Lykins
the Commission March 15, 1995,
as amended (SEC File No. 33-
90342)
10.2 Employment Agreement Exhibit 10.4 to the Registration
Statement on Form S-4 filed with
for Van A. Dukeman
the Commission March 15, 1995,
as amended (SEC File
No. 33-90342)
10.3 Employment Agreement Exhibit 10.5 to the Registration
for David B. White Statement on Form S-4 filed with
the Commission March 15, 1995,
as amended (SEC File
No. 33-90342)
10.4 Employment Agreement Exhibit 10.5 to the Form 10-K
for Robert J. Cochran filed with the Commission on
April 1, 1996 (SEC File
No. 33-90342)
10.5 Employment Agreement Exhibit 10.7 to the Form 10-K
for Larry J. Kallembach filed with the Commission on
April 1, 1996 (SEC File
No. 33-90342)
<PAGE> 66
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10.6 Employment Agreement Exhibit 10.8 to the Form 10-K
for Charles R. Eyman filed with the Commission on
April 1, 1996 (SEC File
No. 33-90342)
10.7 Employment Agreement Exhibit 10.9 to the Form 10-K
for Mary E. Slack filed with the Commission on
April 1, 1996 (SEC File
No. 33-90342)
21.1 Subsidiaries of the
Registrant X
23.1 Consent of KPMG Peat
Marwick, LLP X
23.2 Consent of Geo. S. Olive
& Co., LLC X
23.3 Consent of McGladrey &
Pullen, LLP X
27.1 Financial Data Schedule X
99.1 Manually Signed
Auditors' Report from
KPMG Peat Marwick,
LLP X
99.2 Manually Signed
Auditors' Report from
McGladrey & Pullen,
LLP X
</TABLE>
<PAGE> 67
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Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
1. BankIllinois, an Illinois chartered bank located in Champaign, Illinois.
2. BankIllinois Trust Company, an Illinois corporation located in
Champaign, Illinois.
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
The Board of Directors
Central Illinois Financial Co., Inc.:
We consent to incorporation by reference in the registration statement No.
33-94096 on Form S-8 of Central Illinois Financial Co., Inc. (CIFCI) of our
report dated March 1, 1996, relating to the consolidated balance sheet of
CIFCI and subsidiaries as of December 31, 1995, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
year ended December 31, 1995 and the combination of the consolidated statements
of income, changes in stockholders' equity, and cash flows for the year ended
December 31, 1994, after restatement for the 1995 pooling of interests, which
report appears in the December 31, 1996 annual report on Form 10-K of CIFCI.
KPMG Peat Marwick, LLP
St. Louis, Missouri
March 24, 1997
Exhibit 23.2
INDEPENDENT AUDITORS CONSENT
We consent to the use of our report dated February 2, 1995, on the
consolidated statements of income, changes in stockholders' equity, and
cash flows of Central Illinois Financial Corporation and subsidiary for the
year ended December 31, 1994, which statements are included in the restated
financial statements of Central Illinois Financial Co., Inc. filed with the
U.S. Securities and Exchange Commission on Form 10-K.
GEO. S. OLIVE & CO.
Decatur, Illinois
March 17, 1997
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 33-94096) of our report, dated February 7, 1997, with respect to
the financial statements of Central Illinois Financial Co., Inc., appearing in
the Annual Report on Form 10-K for the year ended December 31, 1996.
McGLADREY & PULLEN
Champaign, Illinois
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 31,195
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 28,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 131,622
<INVESTMENTS-CARRYING> 21,870
<INVESTMENTS-MARKET> 21,945
<LOANS> 281,558<F1>
<ALLOWANCE> 5,587
<TOTAL-ASSETS> 515,440
<DEPOSITS> 404,130
<SHORT-TERM> 43,941
<LIABILITIES-OTHER> 6,273
<LONG-TERM> 9,000
0
0
<COMMON> 50
<OTHER-SE> 52,046
<TOTAL-LIABILITIES-AND-EQUITY> 515,440
<INTEREST-LOAN> 26,037
<INTEREST-INVEST> 7,177
<INTEREST-OTHER> 1,874
<INTEREST-TOTAL> 35,088
<INTEREST-DEPOSIT> 15,220
<INTEREST-EXPENSE> 17,825
<INTEREST-INCOME-NET> 17,263
<LOAN-LOSSES> 375
<SECURITIES-GAINS> (4)
<EXPENSE-OTHER> 14,525
<INCOME-PRETAX> 6,684
<INCOME-PRE-EXTRAORDINARY> 6,684
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,501
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.90
<YIELD-ACTUAL> 7.84
<LOANS-NON> 2,135
<LOANS-PAST> 384
<LOANS-TROUBLED> 162
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,882
<CHARGE-OFFS> 1,538
<RECOVERIES> 868
<ALLOWANCE-CLOSE> 5,587
<ALLOWANCE-DOMESTIC> 5,587
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Net of allowance for loan losses of $5,587.
</FN>
</TABLE>
Exhibit 99.1
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Central Illinois Financial Co., Inc.:
We have audited the accompanying consolidated balance sheet of Central
Illinois Financial Co., Inc. and subsidiaries as of December 31, 1995, and
the related consolidated statements of income, changes in stockholders
equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company s management.
Our re-sponsibility is to express an opinion on these consolidated
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 Financial Co., Inc. and subsidiaries as of December 31, 1995, and
the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
We previously audited and reported on the consolidated statements of
income, changes in stockholders' equity, and cash flows of BankIllinois
Financial Co. and subsidiary for the year ended December 31, 1994 prior to
restatement for the 1995 pooling of interests. The contribution of
BankIllinois Financial Co. and subsidiary to total stockholders' equity,
revenue and net income represented 55%, 44% and 68% of the respective
restated totals for the year ended December 31, 1994. Separate
consolidated financial statements of the other companies included in the
December 31, 1994 restated consolidated statements of income, changes in
stockholders' equity, and cash flows of the years ended December 31, 1994
were audited and reported on separately by other auditors. We also audited
the combination of the accompanying consolidated statements of income,
changes in stockholders' equity, and cash flows for the year ended December
31, 1994 after restatement for the 1995 pooling of interests; in our
opinion, such consolidated statements have been properly combined on the
basis described in note 1 of the notes to the consolidated financial
statements.
By: /s/ KPMG Peat Marwick LLP
Saint Louis, Missouri
March 1, 1996
Exhibit 99.2
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Central Illinois Financial Co., Inc.:
We have audited the accompanying consolidated balance sheet of Central
Illinois Financial Co., Inc. and subsidiaries as of December 31, 1996, and
the related consolidated statements of income, changes in 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 consolidated 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 state-
ments. 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 Financial Co., Inc. and subsidiaries as of December 31, 1996, and
the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
By: /s/ McGLADREY & PULLEN, LLP
Champaign, Illinois
February 7, 1997
