-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QivOrkdP96JPptximUEuA5lQUAJBTDAlp7tDi+2f1KroU1Qv9Nvj2NUjgBtRHsOk NQ2FqYguh29rpW60AaPGAQ== 0001013044-99-000001.txt : 19990326 0001013044-99-000001.hdr.sgml : 19990326 ACCESSION NUMBER: 0001013044-99-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRAND PREMIER FINANCIAL INC CENTRAL INDEX KEY: 0001013044 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 364077455 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20987 FILM NUMBER: 99572988 BUSINESS ADDRESS: STREET 1: 486 WEST LIBERTY STREET CITY: WAUCONDA STATE: IL ZIP: 60084-2989 BUSINESS PHONE: 8474871818 MAIL ADDRESS: STREET 1: 486 WEST LIBERTY STREET CITY: WAUCONDA STATE: IL ZIP: 60084-2989 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-20987 Grand Premier Financial, Inc. (Exact Name of Registrant as Specified in its Charter) Delaware 36-4077455 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 486 West Liberty, Wauconda, IL 60084 (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code: (847) 487-1818 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock ($.01 par value) 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 twelve 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 a 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 the definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to form 10-K. X The number of shares of the registrant's Common Stock outstanding on February 26, 1999 was 22,028,192 shares. The aggregate market value of the registrant's Common Stock held by nonaffiliates of the registrant as of February 26, 1999, based upon the closing sales price at this date was $143,827,785. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1998 Annual Report to Shareholders are incorporated by reference into Part II of the Form 10-K. Portions of the Proxy Statement for Registrant's 1999 Annual Meeting of Shareholders to be held May 26, 1999 have been incorporated by reference into Part III of the Form 10-K. No. of Pages Sequentially Numbered: 83 Exhibit Index is on Page 31 PART I Item 1. Business Grand Premier Financial, Inc. (the "Company") is a registered bank holding company organized in 1996 under Delaware law. The Company is the surviving corporation from the merger, effective August 22, 1996, of Northern Illinois Financial Corporation and Premier Financial Services, Inc. The operations of the Company and its subsidiaries consist primarily of those financial activities, including trust and investment services, common to the commercial banking industry. The Company operates as a single segment and, unless the context otherwise requires, the term "Company" as used herein includes Grand Premier Financial, Inc., and its subsidiaries on a consolidated basis. The primary function of the Company is to coordinate the policies and operations of its subsidiaries in order to improve and expand their services and effect economies in their operations by joint efforts in certain areas such as auditing, training, marketing, and business development. The Company also provides operational and data processing services for its subsidiaries. All services and counsel to subsidiaries are provided on a fee basis, with fees based upon fair market value. During first half of 1997, the Company's banking subsidiaries consisting of First Bank North, First Bank South, First National Bank of Northbrook, First Security Bank of Cary Grove and Grand National Bank were combined into the single charter of Grand National Bank ("GNB"). Although chartered as a commercial bank, the offices of GNB serve as general sales offices providing a full array of financial services and products to individuals, businesses, local governmental units and institutional customers throughout northern Illinois. Banking services include those generally associated with the commercial banking industry such as demand, savings and time deposits, loans to commercial, agricultural and individual customers, cash management, electronic funds transfers and other services tailored for the client. The Company has banking offices located in Cary, Crete, Crystal Lake, DeKalb, Dixon, Freeport, Gurnee, Island Lake, Mokena, Mundelein, Niles, Northbrook, Rockford, South Chicago Heights, Sterling, Wauconda, Waukegan and Woodstock, Illinois. Grand Premier Trust and Investment, Inc., ("Trust") a wholly owned subsidiary of GNB, provides a full line of fiduciary and investment services throughout the Company's general market area. Grand Premier Insurance Services, Inc., a direct subsidiary of the Company, is a full line casualty and life insurance agency. Grand Premier Operating Systems, Inc., ("GPOS"), is also a direct subsidiary of the Company. GPOS provides data processing and operational services to the Company and its subsidiaries. American Suburban Mortgage Corporation, ("ASMC") a direct subsidiary of the Company, was established to engage in secondary mortgage operations. ASMC is currently inactive, with secondary mortgage operations performed by the banking subsidiary. Competition Active competition exists in all principal areas where the Company and its subsidiaries are engaged, not only with commercial banking organizations, but also with savings and loan associations, finance companies, mortgage companies, credit unions, brokerage houses and other providers of financial services. The Company has seen the level of competition and number of competitors in its markets increase in recent years and expects a continuation of these aggressively competitive market conditions. To gain a competitive market advantage, the Company relies on a strategic marketing plan that is employed throughout the Company, reaching every level of its sales force. The marketing plan includes the identification of target markets and customers so that the Company's resources, both financial and manpower, can be utilized where the greatest opportunities for gaining market share exist. The differentiation between the Company's approach to providing products and services to its customers and that of the competition is in the individualized attention that the Company devotes to the needs of its customers. This focus on fulfilling customer's financial needs generally results in long-term customer relationships. Banking deposits are well balanced, with a large customer base and no dominant accounts in any category. The Company's loan portfolio is also characterized by a large customer base, balanced between loans to individuals, commercial and agricultural customers, with no dominant relationships. There is no readily available source of information which delineates the market for financial services, including services offered by non-bank competitors, in the company's market area. Supervision and Regulation Bank holding companies, banks and financial institutions generally are highly regulated, with numerous federal and state laws and regulations governing their activities. The Company is a registered bank holding company under and subject to the provisions of the Bank Holding Company Act ("BHCA".) As such, the Company is required to file with the Federal Reserve Board periodic reports and such additional information as the Federal Reserve Board may require. It also is subject to the supervision of, and examination by, the Federal Reserve Board. The Company is also subject to regulation under the Illinois Bank Holding Company Act of 1957, as amended (the "Illinois BHCA"). Grand National Bank is a national bank chartered under the laws of the United States and is subject to the supervision of, and examination by, the Office of the Comptroller of the Currency ("OCC"), its primary regulator. The OCC regularly examines such areas as reserves, loans, investments, management practices and other aspects of Grand National Bank's operations. Grand National Bank must also furnish to the OCC quarterly reports containing full and accurate statements of their affairs. All national banks are members of the Federal Reserve System and subject to the applicable provisions of the Federal Reserve Act and to regular examination by the Federal Reserve Bank of their district, in this case the Federal Reserve Bank of Chicago. Grand Premier Trust and Investment, Inc., is also chartered as a national bank under the laws of the United States and is subject to the supervision of, and examination by, the Office of the Comptroller of the Currency. The deposits of the bank, subject to FDIC limitations, are insured by the Bank Insurance Fund of the FDIC. As a result, the bank is also subject to the provisions of the Federal Deposit Insurance Act and to examination by the FDIC. The examinations of the various regulatory agencies are designed for the protection of bank depositors and not for stockholders of banks or their holding companies. The following references to material statutes and regulations affecting the Company and its subsidiaries are brief summaries thereof 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 the Company and its subsidiary bank. The BHCA requires prior Federal Reserve Board approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than five percent (5%) of the voting shares or substantially all the assets of any bank, or for a merger or consolidation of a bank holding company with another bank holding company. With certain exceptions, the BHCA prohibits a bank holding company from acquiring direct or indirect ownership or control of voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking or managing or controlling banks or performing services for its authorized subsidiaries. A bank holding company may, however, engage in or acquire an interest in a company that engages in activities which the Federal Reserve Board has determined by regulation or order to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. A bank holding company is a legal entity separate and distinct from its subsidiary bank or banks. Normally, the major source of a bank holding company's revenue is the dividends it receives from its subsidiary banks. The right of a bank holding company to participate as a stockholder in any distribution of assets of its subsidiary banks upon their liquidation or reorganization or otherwise is subject to the prior claims of creditors of such subsidiary banks. The subsidiary bank is subject to claims by creditors for long-term and short-term debt obligations, including substantial obligations for federal funds purchased and securities sold under repurchase agreements, as well as deposit liabilities. Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), in the event that the FDIC suffers a loss in connection with a banking subsidiary of a bank holding company, other banking subsidiaries of the same holding company may be held liable for such loss. Federal laws limit the transfer of funds by a subsidiary bank to its holding company and the non-bank subsidiaries of the holding company ("affiliates") in the form of loans or extensions of credit, investments in stock or other securities of the bank holding company or its other subsidiaries or advances to any borrower collateralized by such stock or other securities. Transfers of this kind are limited to 10 percent of a bank's capital and surplus with respect to each affiliate and to 20 percent with respect to all affiliates in the aggregate and are also subject to certain collateral requirements. These transactions, as well as other transactions between a subsidiary bank and its holding company and other affiliates, must also be on terms substantially the same as, or at least as favorable as, those prevailing at the time for comparable transactions with non-affiliated companies or, in the absence of comparable transactions, on terms or under circumstances, including credit standards, that would be offered to, or would apply to, non-affiliated companies. It is the policy of the Federal Reserve Board that a bank holding company is expected to act as a source of financial strength to each of its subsidiary banks and to commit resources to support each of its subsidiary banks. The Federal Reserve Board takes the position that, in implementing this policy, it may require bank holding companies to provide such support when the holding company otherwise would not consider itself able to do so. The Illinois BHCA permits bank holding companies domiciled in Illinois to make acquisitions throughout the state. It also permits bank holding companies located in any state of the United States to acquire banks or bank holding companies within the State of Illinois, subject to certain conditions, including a regulatory determination that the laws of the state in which the acquiring bank holding company is located permit bank holding companies in Illinois to acquire banks or bank holding companies in the acquiror's state under qualifications and conditions that are not unduly restrictive when compared to those imposed by Illinois law. Subject to these regulatory determinations, the Company may acquire banks and bank holding companies in such states, and bank holding companies in those states may acquire banks and bank holding companies in Illinois. The federal and state laws and regulations generally applicable to banks regulate, among other things, the scope of a bank's business, allowable investments, required reserves against deposits, loans and collateral, establishment of branch offices and activities performed at such offices. These laws and regulations are generally designed for the protection of bank depositors and not the stockholders of the bank. A national bank, such as Grand National Bank, may not pay a dividend in any calendar year in excess of its net profits for the current year plus its adjusted retained profits for the two prior years, unless it obtains OCC approval. Net profits from which dividends may be paid must be adjusted for losses and the amount of statutory bad debts in excess of the balance of the bank's allowance for possible credit losses. "Bad debts" are generally defined to include the principal amounts of loans which are in arrears with respect to interest by six months or more unless such loans are well secured and in the process of collection. The Community Reinvestment Act (the "CRA") is intended to encourage banks and thrifts to help meet the credit needs of their entire communities, including low- and moderate-income neighborhoods, consistent with safe and sound lending practices. Under the CRA, the federal banking agencies take into account a financial institution's record of helping to meet the credit needs of its entire community when evaluating various types of applications, such as applications for branches, office relocations, mergers, consolidations, and purchase and assumption transactions, and may deny or condition approval of an application on the basis of an institution's record. All depository institutions are reviewed and rated by their primary federal bank regulator. In reviewing applications by bank holding companies, the Federal Reserve Board takes into account the record of compliance of a holding company's subsidiary banking institutions with the CRA. The various federal bank regulators, including the Federal Reserve Board and the OCC, have adopted risk-based capital requirements for assessing bank holding company and bank capital adequacy. The capital standards (including the definitions of Tier 1 Capital and Tier 2 Capital) established by the OCC (for national banks such as Grand National Bank) are substantially the same as those established by the Federal Reserve Board for bank holding companies. These standards significantly revise the definition of capital and establish minimum capital standards in relation to assets and off-balance sheet exposures, as adjusted for credit risks. Capital is classified into two tiers. For bank holding companies, Tier 1 or "core" capital consists of common shareholders' equity, perpetual preferred stock (subject to certain limitations) and minority interests in the common equity accounts of consolidated subsidiaries and is reduced by goodwill and certain investments in other corporations ("Tier 1 Capital"). Tier 2 capital consists of (subject to certain conditions and limitations) the allowance for possible credit losses, perpetual preferred stock, "hybrid capital instruments," perpetual debt and mandatory convertible debt securities, and term subordinated debt and intermediate-term preferred stock ("Tier 2 Capital"). Under the risk-adjusted capital standards, a minimum total capital to total risk-weighted assets ratio of eight percent (8%) is required, and Tier 1 Capital must be at least 50 percent of total capital. The Federal Reserve Board also has adopted a minimum leverage ratio of Tier 1 Capital to total assets of three percent (3%). The three percent Tier 1 Capital to total assets ratio constitutes the leverage standard for bank holding companies and is used in conjunction with the risk-based ratio in determining the overall capital adequacy of banking organizations. The federal banking agencies have emphasized that the foregoing standards are supervisory minimums and that an institution would be permitted to maintain such minimum levels of capital only if it were rated in the highest category under the regulatory rating systems for bank holding companies and banks. All other bank holding companies and banks are required to maintain a leverage ratio of 3 percent plus at least one to two percent (1% to 2%) of additional capital. These rules further provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets. The Federal Reserve Board continues to consider a "tangible Tier 1 leverage ratio" in evaluating proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of a banking organization's Tier 1 Capital, less all intangibles, to total assets, less all intangibles. The Company and its banking subsidiary exceed the regulatory capital guidelines as currently defined. For additional information regarding the capital ratios of the Company and its banking subsidiary, see Note 10 to the Company's 1998 Annual Report to its shareholders which is included as Exhibit 13 to this report. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") imposed relatively detailed standards and mandated the development of additional regulations governing nearly every aspect of the operations, management and supervision of banks and bank holding companies. It also significantly enhanced the authority of bank regulators to intervene in the cases of deterioration of a bank's capital level. FDICIA requires that the banking regulators take prompt corrective action with respect to depository institutions that fall below certain capital levels and prohibits any depository institution from making any capital distribution that would cause it to be considered undercapitalized. Regulations adopted pursuant to FDICIA established five capital categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Institutions that are not adequately capitalized may be subjected to a broad range of restrictions on their activities and will be required to submit a capital restoration plan which, to be accepted by the regulators, must be guaranteed in part by any company having control of the institution. Only well-capitalized institutions and adequately capitalized institutions receiving a waiver from the FDIC will be permitted to accept brokered deposits, and only those institutions eligible to accept brokered deposits may provide pass-through deposit insurance for participants in employee benefit plans. A range of other regulations adopted as a result of FDICIA have established interagency guidelines standards for safety and soundness for depository institutions and their holding companies; requirements relating to annual audits of depository institutions; requirements applicable to closure of branches; additional requirements for disclosures to depositors with respect to terms and interest rates applicable to deposit accounts; requirements for the banking agencies to adopt uniform regulations for extensions of credit secured by real estate; modification of accounting standards to conform to GAAP, including the reporting of off-balance sheet items and supplemental disclosure of estimated fair market value of assets and liabilities in financial statements filed with the banking regulators; increased penalties for failing to file assessment reports with the FDIC; greater restrictions on extensions of credit to directors, officers and principal shareholders; and increased reporting requirements on agricultural loans and loans to small businesses. As required by FDICIA, the FDIC has established a risk-based assessment system for deposit insurance provided to depositors at depository institutions whereby assessments to each institution are calculated upon the probability that the insurance fund will incur a loss with respect to the institution, the likely amount of such loss, and the revenue needs of the insurance fund. Under the system, deposit insurance premiums are based upon an institution's assignment to one of three capital categories and a further assignment to one of three supervisory subcategories within each capital category. The result is a nine category assessment system. The classification of an institution into a category depends, among other things, on the results of off-site surveillance systems, capital ratio, and its CAMELS rating (a supervisory rating of capital, asset quality, management, earnings, liquidity and sensitivity to market risk). On September 29, 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") became law. Since September 29, 1995, the Riegle-Neal Act has permitted adequately capitalized and managed bank holding companies to acquire banks across state lines, without regard to whether the transaction is prohibited by state law, except that state law may establish the minimum age of the banks in such state that are subject to acquisition by out-of-state bank holding companies (not to exceed five years). The acquiring bank holding company must maintain the acquired bank as a separately chartered institution. Under the Riegle-Neal Act, the Federal Reserve Board generally may not approve an acquisition if, upon consummation, the applicant bank holding company would control more than 10% of the total deposits of U.S. insured depository institutions or 30% or more of the deposits in the state where the target bank is located. The Federal Reserve Board could approve an acquisition, notwithstanding the 30% limit, if the state waives the limit either by statute, regulation or order of the appropriate state official. Since September 29, 1995, the Riegle-Neal Act has also permitted any bank subsidiary of a bank holding company to receive deposits, renew time deposits, close loans, service loans and receive payments on loans and other obligations as agent for a bank or thrift affiliate, whether such affiliate is located in a different state or in the same state. Beginning on June 1, 1997, banks may, with the approval of the appropriate Federal bank regulatory agency, merge with one another across state lines and thereby create a main bank with branches in separate states. After establishing branches in a state through an interstate merger transaction, the bank could establish and acquire additional branches at any location in the state where any bank involved in the merger could have established or acquired branches under applicable federal or state law. The responsible federal bank regulatory agency generally may not approve such a merger, however, if, after the merger, the resulting entity would control more than 10% of the total deposits of U.S. insured depository institutions or 30% or more of the deposits in the state where the target bank is located, the responsible federal bank regulatory agency may approve such a merger, notwithstanding the 30% limit, if the state waives the limit either by statute, regulation or order of the appropriate state official. Under the Riegle-Neal Act, states may adopt legislation permitting interstate mergers before June 1, 1997. Alternatively, states may adopt legislation before June 1, 1997, subject to certain conditions, opting-out of interstate branching. If a state opts out of interstate branching, no out-of-state bank may establish a branch in that state through an acquisition or de novo, and a bank whose home state opts-out may not participate in an interstate merger transaction. Illinois adopted legislation permitting interstate mergers beginning June 1, 1997. Deposits of the bank are insured by the FDIC primarily under the Bank Insurance Fund ("BIF"). The FDIC's deposit insurance premiums are assessed using a risk-based system under which all insured depository institutions are placed into one of nine categories based upon their level of capital and supervisory evaluation. Assessment rates range from $0.00 to $0.27 per $100 of deposits. The bank, for deposit insurance assessment purposes, is classified in the highest category and pays the lowest assessment rate for deposit insurance. The FDIC also maintains another insurance fund, the Savings Association Insurance Fund (the "SAIF"), which primarily insures savings association deposits. The bank holds approximately $9 million of deposits acquired in connection with the acquisition of a branch of a savings association. Those deposits are insured by SAIF and will continue to be subject to the assessment rates due on SAIF-insured deposits (currently the same as BIF insured deposits). The bank also pays Financing Corporation (FICO) debt assessments on its BIF and SAIF insured deposits. FICO assessment rates are not tied to the FDIC's risk classifications. FICO rates, which may be adjusted quarterly, were $0.01164 (annualized) per $100 of BIF assessable deposits and $0.05820 (annualized) per $100 of SAIF assessable deposits for the final quarter of 1998. 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 authorities. In particular, the Federal Reserve Board influences conditions in the money and capital markets, which affect interest rates and growth in bank credit and deposits. Federal Reserve Board monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to in the future. In view of changing conditions in the national economy and in the money markets, as well as the effect of credit policies by monetary and fiscal authorities, including the Federal Reserve System, no representation can be made as to possible future changes in interest rates, deposit levels and loan demand, or their effect on the business and earnings of the Company and its subsidiaries. Employees As of December 31, 1998 the Company and its subsidiaries had a total of 527 full-time and 112 part-time employees. Item 2. Properties The Company's corporate office is at 486 West Liberty Street, Wauconda, Illinois in a building owned by GNB. The Company leases approximately 5,000 square feet from GNB. The Company also conducts business in Freeport, Illinois. The two story office building in Freeport consists of approximately 13,000 square feet, and is located at 110 West Stephenson Street, Freeport, Illinois. The building and underlying land are owned by the Company. The banking affiliate, as of February 26, 1999, occupied 25 offices in 18 different communities within northern Illinois, of which 2 are leased and 23 are owned by GNB. Grand Premier Operating Systems, Inc., ("GPOS") conducts the majority of its operations from a 28,800 square foot, one story office building located at 588 Lakeview Parkway, Vernon Hills, Illinois. GPOS leases this building from an unaffiliated party (with an option to purchase) through September, 2001. Item 3. Legal Proceedings There are various legal claims pending against the Company arising in the normal course of business. Management believes, based upon the opinion of counsel, that liabilities arising from these proceedings, if any, will not be material to the Company's financial position as of December 31, 1998. Item 4. Submission of Matters to a Vote of Security Holders No matters, through the solicitation of proxies or otherwise, have been submitted to a vote of security holders for the quarter ended December 31, 1998. PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters The approximate number of Holders of Common Stock as of 12/31/98 was as follows: Title of Class No. of Record Holders Common Stock ($.01 Par Value) 1,279 Other information required by this item is incorporated herein by reference to the Registrant's Annual Report to its shareholders for the year ended December 31, 1998, which is included as Exhibit 13 to this report. Item 6. Selected Financial Data Incorporated herein by reference to the Registrant's Annual Report to its shareholders for the year ended December 31, 1998, which is included as Exhibit 13 to this report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Incorporated by reference to the Registrant's Annual Report to its shareholders for the year ended December 31, 1998, which is included as Exhibit 13 to this report. Submitted herewith is the following supplementary financial information of the registrant for each of the last three years (unless otherwise stated): Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential; Changes in Interest Margin for each of the last two years; Investment Portfolio; Maturities of Investments, December 31, 1998; Loan Portfolio for each of the last five years; Loan Maturities and Sensitivity to Changes in Interest Rates, December 31, 1998; Risk Elements in the Loan Portfolio for the last five years; Summary of Loan Loss Experience for the last five years; Deposits; Time Certificates and other Time Deposits of $100,000 or more as of December 31, 1998; Return on Equity and Assets; Short Term Borrowings. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differentials The following table presents the average balances of major categories of interest earning assets and interest bearing liabilities, the interest earned or paid on such categories, and the average yield on such categories of interest earning assets and the average rates paid on such categories of interest bearing liabilities during each of the reported periods, (in thousands)
Year Ended December 31, 1998 1997 1996 Average Average Average Average Yield/ Average Yield/ Average Yield/ Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate Interest earning assets Interest bearing deposits in other banks $ 1,624 $ 99 6.10% $ 2,608 $ 52 1.99% $ 4,071 $ 244 5.99% Investment securities (1) Taxable 316,211 18,469 5.84 339,176 21,873 6.45 424,754 26,514 6.24 Tax exempt (2) 143,332 8,451 9.07 132,549 7,771 9.32 126,830 7,142 8.79 Federal funds sold and securities purchased under agreements to resell 46,253 2,646 5.72 12,305 733 5.96 12,413 654 5.27 Loans (2)(3) 972,802 86,990 8.95 1,007,561 90,192 8.96 909,632 79,816 8.78 Total interest earning assets/interest income 1,480,222 116,655 8.19 1,494,199 120,621 8.39 1,477,700 114,370 8.01 Cash and due from banks 44,558 53,709 52,745 Premises and equipment 35,004 34,185 35,945 Nonaccruing loans 7,394 4,085 5,475 Other assets 49,795 49,585 46,138 Securities valuation - available for sale (1) 21,196 22,626 10,879 Allowance for loan losses (13,660) (10,424) (9,743) Total $1,624,509 $1,647,965 $1,619,139 Liabilities and Shareholders' Equity Interest bearing liabilities Demand deposits $ 337,177 10,421 3.09 $ 293,879 8,497 2.89 $ 289,698 8,357 2.88 Savings deposits 251,855 7,493 2.98 265,268 7,895 2.98 279,386 8,521 3.05 Other time deposits 558,527 31,132 5.57 627,642 35,874 5.72 613,910 35,380 5.76 Short-term borrowings 18,338 909 4.96 45,447 2,404 5.29 60,826 3,482 5.72 Long-term borrowings 70,000 4,340 6.20 39,534 2,496 6.31 12,758 818 6.41 Total interest bearing liabilities/ interest expense 1,235,897 54,295 4.39 1,271,770 57,166 4.49 1,256,578 56,558 4.50 Noninterest bearing deposits 182,206 187,019 189,645 Other liabilities 26,539 20,125 20,826 Shareholders' equity 179,867 169,051 152,090 Total $1,624,509 $1,647,965 $1,619,139 Net interest income $ 62,360 3.80% $ 63,455 3.90% $ 57,812 3.51% Net yield on interest earning assets 4.53% 4.56% 4.18% (1) Investments are at amortized cost. The valuation from amortized cost to market for available for sale securities is shown separately. (2) Yields are tax equivalent using a 35% federal tax rate. (3) Average volume excludes nonaccrual loans.
CHANGES IN INTEREST MARGIN The following table sets forth the registrant's dollar amount of change in interest earned on each major category of interest earning assets and the dollar amount of change in interest paid on each major category of interest bearing liabilities, as well as the portion of such changes attributable to changes in rate and changes in volume for each of the last two years (dollar figures in thousands): Increase (Decrease) 1998 over 1997 1997 over 1996 Rate Volume Rate Volume Changes in Interest Earned: Interest bearing deposits $ 73 $ (26) $ (125) $ (67) Taxable investment securities (1,981) (1,423) 853 (5,494) Tax exempt investment securities 44 636 300 329 Fed funds sold and securities purchased under agreements to resell (30) 1,943 85 (6) Loans (net of unearned discount) (94) (3,108) 1,637 8,739 Total (1,988) (1,978) 2,750 3,501 Changes in Interest Paid: Interest bearing deposits (262) (2,958) (476) 484 Short-term borrowings (142) (1,353) (249) (829) Long-term borrowings (46) 1,890 (13) 1,691 Total (450) (2,421) (738) 1,346 Changes in Interest Margin $(1,538) $ 443 $ 3,488 $ 2,155 Changes attributable to rate/volume, i.e., changes in the interest margin which occurred because of a combination rate/volume changes, are apportioned between rate and volume in proportion to the absolute dollar amount of the change in each category. INVESTMENT PORTFOLIO The following table sets forth the registrant's book values of investments in obligations of the U.S. Treasury and other U.S. Government Agencies and Corporations, State and Political Subdivisions (U.S.), and other securities for each of the last three years (dollar figures in thousands): 1998 1997 1996 U.S. Treasury and U.S. Agency Securities $311,621 $248,612 $348,877 Obligations of States and Political Subdivisions 167,402 148,742 134,633 Other Securities 37,060 57,046 52,177 Total $516,083 $454,400 $535,687 The following table sets forth the registrant's book values of investments in obligations of the U.S. Treasury and other U.S. Government Agencies and Corporations, State and Political Subdivisions (U.S.), and other securities as of December 31, 1998 by remaining maturity and also sets forth the weighted average yield for each range of maturities. Obligations U.S. Treasury of States and and Weighted U.S. Agency Political Other Average Book Value: Securities Subdivisions Securities Yield One Year or Less $ 89,854 $ 4,973 $21,426 5.60% After One Year to Five Years 18,534 22,848 2,964 8.12% After Five Years to Ten Years 21,442 19,559 1,527 7.80% Over Ten Years 181,791 120,022 11,143 6.44% Total $311,621 $167,402 $37,060 6.51% (1) Weighted Average Yields were calculated as follows: A. The weighted average yield for each category in the portfolio was calculated based upon the maturity distribution shown in the table above. B. The yields determined in step A were weighted in relation to the total investments in each maturity range shown in the table above. (2) Yields on tax exempt securities are full tax equivalent yields at a 35% rate. At December 31, 1998 the Company did not own any Obligation of a State or Political Subdivision or Other Security which was greater than 10% of its total equity capital. LOAN PORTFOLIO The following table sets forth the registrant's Loan Portfolio by major category for each of the last five years (dollar figures in thousands): Year Ended December 31, 1998 1997 1996 1995 1994 Commercial, financial and agricultural Loans $275,450 $ 231,707 $229,700 $229,589 $200,178 Real Estate - Construction 43,250 50,186 42,772 45,098 46,150 Mortgage 569,851 631,069 625,364 530,636 450,271 Loans to Individuals 68,602 115,901 68,488 71,010 68,453 Total $957,153 $1,028,863 $966,324 $876,333 $765,052 The following tables set forth the registrant's loan maturity distribution for certain major categories of loans as of December 31, 1998 (dollar figures in thousands). AMOUNT DUE IN 1 Year or Less 1-5 Years After 5 Years Commercial, financial and agricultural loans $123,465 $135,910 $ 16,075 Real Estate - Construction 36,779 5,219 1,252 Total $160,244 $141,129 $ 17,327 As of December 31, 1998 loans totaling $112,012,000, which are due after one year have predetermined interest rates, while $46,444,000 of loans due after one year have floating interest rates. RISK ELEMENTS IN THE LOAN PORTFOLIO The Company's financial statements are prepared on the accrual basis of accounting. All of the loans currently accruing interest are accruing at the rate contractually agreed upon when the loan was negotiated. It is the Company's policy to discontinue the accrual of interest thereon if payment in full of both interest and principal is doubtful and any scheduled or expected reduction of principal or interest is in default for 90 days or more unless the loan is both well secured and in the process of collection. At the time a loan is placed in non-accrual status, all interest accrued but not yet collected is reversed against current interest income. Troubled debt restructurings (renegotiated loans) are loans on which interest is being accrued at less than the original contractual rate of interest because of the inability of the borrower to service the obligation under the original terms of the agreement. Income is accrued at the renegotiated rate so long as the borrower is current under the revised terms and conditions of the agreement. Other Real Estate is real estate, sales contracts, and other assets acquired because of the inability of the borrower to serve the obligation of a previous loan collateralized by such assets. During 1997, the Company experienced rapid growth in the category of loans to individuals, primarily in the indirect segment of the portfolio. At December 31, 1997, the indirect segment of the portfolio totaled approximately $88.4 million and approximately 4% of the balance was more than 60 days past due. In December 1997, the Company made a provision for possible loan losses of approximately $6 million in response to deterioration in the indirect portfolio and discontinued this type of lending. As of December 31, 1998, the balance of the indirect portfolio has been reduced by approximately $47.3 million through normal principal repayments and a sale of loans with balances totaling approximately $8.1 million. The following table sets forth the registrant's non-accrual, past due, and renegotiated loans, for each of the last five years (dollar figures in thousands): Year Ended December 31, 1998 1997 1996 1995 1994 Non-accrual Loans $ 6,893 $ 6,223 $ 4,718 $ 6,118 $ 8,911 Loans past due 90 days or more and still accruing 170 1,347 1,946 539 703 Renegotiated Loans 413 436 510 551 3,395 Total $ 7,476 $ 8,006 $ 7,174 $ 7,208 $13,009 The following table sets forth interest information for certain non-performing loans for the year ended December 31, 1998 (dollar figures in thousands): Non-Accrual Loans Renegotiated Loans Balance December 31, 1998 $ 6,893 $ 413 Gross interest income that would have been recorded if the loans had been current in accordance with their original terms 775 25 Amount of interest included in net earnings. 481 32 SUMMARY OF LOAN LOSS EXPERIENCE The Company and its subsidiary bank have historically evaluated the adequacy of the Allowance for Possible Loan Losses on an overall basis, and the resulting provision charged to expense has similarly been determined in relation to management's evaluation of the entire loan portfolio. In determining the adequacy of its Allowance for Possible Loan Losses, management considers such factors as the size, composition and quality of the loan portfolio, historical loss experience, current loan losses, current potential risks, economic conditions, and other risks inherent in the loan portfolio. In addition to provisions made within the context of these factors, the Company made an additional provision for possible loan losses of approximately $6 million in the fourth quarter of 1997 in response to deterioration identified in the indirect segment of the loan portfolio (included in the installment loans to individuals category). For additional information on the determination of provisions, see Provision for Possible Loan Losses in Management's Discussion and Analysis of Financial Condition and Results of Operations included in Exhibit 13 to this report. The following table sets forth the registrant's loan loss experience for each of the last five years (dollar figures in thousands): Year Ended December 31, 1998 1997 1996 1995 1994 Balance at beginning of year $15,404 $10,116 $ 9,435 $ 9,738 $10,595 Charge-offs: Commercial, financial and agricultural 1,415 1,431 1,896 1,707 1,437 Real estate construction 19 11 - - 55 Real estate mortgage 159 618 91 235 140 Installment loans to individuals 9,170 3,267 778 912 706 10,763 5,327 2,766 2,854 2,338 Recoveries: Commercial, financial and agricultural 545 522 286 865 578 Real estate mortgage 243 36 26 28 15 Installment loans to individuals 3,414 357 259 223 333 4,202 915 572 1,116 926 Net charge-offs 6,561 4,412 2,194 1,738 1,412 Operating expense provision 3,600 9,700 2,875 1,435 555 Balance at end of year $12,443 $15,404 $10,116 $ 9,435 $ 9,738 Ratio of net charge-offs during the year to average loans .67% .44% .24% .21% .19% Allocation of the Allowance for Loan Losses (dollar figures in thousands) Year End December 31,
1998 1997 1996 1995 1994 Percent Percent Percent Percent Percent of Loans of Loans of Loans of Loans of Loans in Each in Each in Each in Each in Each Category Category Category Category Category to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans Commercial, financial and agricultural $ 4,000 28.8% $ 4,000 22.5% $ 3,343 23.8% $2,475 26.2% $2,964 26.2% Real estate-construction 443 4.5 454 4.9 445 4.4 445 5.1 186 6.0 Real estate-mortgage 5,000 59.5 5,500 61.3 5,628 64.7 5,693 60.6 5,396 58.9 Installment loans to individuals 3,000 7.2 5,450 11.3 700 7.1 822 8.1 1,192 8.9 $12,443 100.0% $15,404 100.0% $10,116 100.0% $9,435 100.0% $9,738 100.0% The amount of the additions to the allowance for possible loan losses charged to expense for the periods indicated were based on a variety of factors, including actual charge-offs during the year, historical loss experience, character of portfolio, specific loan allocations, industry guidelines and an evaluation of economic conditions in the Bank's market areas. Because the Company has historically evaluated its Allowance for Loan Losses on an overall basis, the Allowance has not been allocated by category. The allocation shown in the table above, encompassing the major segments of the loan portfolio judged most informative by management, represents only an estimate for each category of loans based upon historical loss experience and management's judgement of amounts deemed reasonable to provide for the possibility of losses being incurred within each category.
DEPOSITS The following table sets forth the classification of average deposits for the indicated periods (dollar figures in thousands): Year ended December 31, 1998 1997 1996 Noninterest bearing demand deposits $182,206 $187,019 $189,645 Interest bearing demand deposits 337,177 293,879 289,698 Savings deposits 251,855 265,268 279,386 Time deposits 558,527 627,642 613,910 The following table sets forth the average rates paid on deposits for the indicated periods: Year Ended December 31, 1998 1997 1996 Interest bearing demand deposits 3.09% 2.89% 2.88% Savings deposits 2.98 2.98 3.05 Time deposits 5.57 5.72 5.76 The following table sets forth the remaining maturities of time deposits of $100,000 or more for the period indicated (dollar figures in thousands): Year Ended December 31, 1998 Three months or less $ 55,122 Over three months to six months 49,209 Over six months to twelve months 46,936 Over twelve months 18,609 Total $169,876 RETURN ON EQUITY AND ASSETS The following table presents certain ratios relating to the Registrant's equity and assets: Year Ended December 31, 1998 1997 1996 Return on average assets 1.69% 1.03% .82% Return on average equity 15.23 10.04 8.76 Dividend payout ratio 27.66 40.74 43.55 Average total shareholders' equity to average total assets 11.07 10.26 9.39 SHORT TERM BORROWINGS The following table sets forth a summary of the registrant's short-term borrowings for each of the last three years (dollar figures in thousands): Year Ended December 31 1998 1997 1996 Balance at End of Period: Federal funds purchased $ - $33,000 $ - Securities sold under repurchase agreements 11,887 14,598 23,486 Total $11,887 $47,598 $23,486 Weighted Average Interest Rate at the end of period: Federal funds purchased -% 7.10% -% Securities sold under repurchase agreements 4.26 4.42 4.33 Highest amount outstanding at any month-end: Federal funds purchased $32,000 $45,200 $ 42,469 Securities sold under repurchase agreements 17,629 20,859 54,952 Other - 40,000 13,953 Average outstanding during the year: Federal funds purchased $ 4,819 $ 15,004 $ 10,101 Securities sold under repurchase agreements 13,519 16,197 39,550 Other - 14,247 11,175 Weighted average interest rate during the year: Federal funds purchased 5.89% 5.66% 5.25% Securities sold under repurchase agreements 4.63 4.55 5.13 Other - 5.67 8.27 Item 7a. Quantitative and Qualitative Disclosure About Market Risk Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The Company's exposure to market risk arises primarily from changes in interest rates. Net interest income is the largest contributor to the earnings of the Company. The Company's success is largely dependent upon its ability to manage risk associated with changes in interest rates. Reducing the volatility of net interest income by managing this risk is one of the Company's primary objectives. Interest rate risk management is the responsibility of the Company's Asset/Liability Management Committee ("ALCO") established by the Board of Directors. The committee is composed of senior management representatives. ALCO actively manages the characteristics of the Company's interest earning assets and interest bearing liabilities. ALCO has several strategies available to manage interest rate risk including: controlling asset mix, defining product offerings and their maturities, establishing pricing parameters and hedging identified risks with off-balance sheet interest rate derivative instruments. ALCO uses three different measurement methods to analyze and quantify the effect of hypothetical changes in interest rates on net interest income. The methods are static gap analysis, income simulation and market value sensitivity. In gap analysis, the carrying amounts of rate-sensitive assets and liabilities are grouped by expected maturity dates. The results are summed to show a cumulative interest sensitivity "gap" between assets and liabilities. Income simulation attempts to project net interest income over the following twelve month period under various hypothetical interest rate scenarios. Under income simulation, maturing and repricing assets and liabilities are replaced at the new rates in effect at that time. Market value sensitivity analysis measures the hypothetical effects of possible changes in market prices of rate-sensitive assets and liabilities under different interest rate scenarios. The following tables of financial instruments represents the Company's static gap positions based on estimated maturities of interest sensitive assets and liabilities, as of December 31, 1998 and 1997 (dollars in thousands): December 31, 1998 Expected Maturity Date
Fair 1999 2000 2001 2002 2003 Thereafter Total Value Assets: Debt Securities (1): Fixed Rate $209,151 $ 50,200 $ 54,239 $ 19,756 $ 8,854 $153,911 $496,111 $507,373 Average rate 4.98% 5.73% 6.21% 6.55% 6.72% 5.71% 5.51% Loans: Fixed Rate $232,376 $138,130 $ 94,160 $ 52,945 $ 35,103 $ 29,500 $582,214 $591,110 Average rate 8.60% 8.79% 8.95% 8.93% 8.00% 7.93% 8.66% Variable Rate $178,507 $ 33,029 $ 26,978 $ 56,361 $ 26,906 $ 52,205 $373,986 $375,448 Average rate 7.68% 7.71% 7.67% 7.68% 7.77% 7.48% 7.66% Interest bearing deposits: $ 1,718 $ 1,718 $ 1,718 Average Rate 4.68% 4.68% Securities purchased under agreements to resell and federal funds sold $ 58,195 $ 58,195 $ 58,195 Average Rate 4.88% 4.88% Total interest sensitive assets $679,947 $221,359 $175,377 $129,062 $ 70,863 $235,616 Liabilities: Savings: Fixed Rate $105,976 $ 97,809 $ 97,809 $ 58,681 $ 58,681 $ 78,182 $497,138 $497,138 Average rate 2.69% 2.35% 2.35% 2.35% 2.35% 2.35% 2.42% Variable Rate $ 53,839 $ 17,619 $ 16,416 $ 9,801 $ 9,801 $ 13,067 $120,543 $120,543 Average rate 4.53% 4.53% 4.52% 4.52% 4.52% 4.52% 4.53% Time Deposits: Fixed Rate $425,429 $ 81,138 $ 24,478 $ 8,094 $ 4,655 $ 461 $544,255 $548,914 Average rate 5.29% 5.87% 5.58% 5.67% 5.38% 5.58% 5.40% Short-Term Borrowings: Fixed Rate $ 11,887 $ 11,887 $ 11,834 Average rate 4.19% 4.19% Long-Term Borrowings: Fixed Rate $ 5,000 $ 5,000 $ 20,000 $ 40,000 $ 70,000 $ 72,498 Average rate 5.85% 6.54% 6.37% 5.97% 6.13% Total interest sensitive liabilities $602,131 $201,566 $158,703 $116,576 $ 73,137 $ 91,710 Asset (liability) gap $ 77,816 $ 19,793 $ 16,674 $ 12,486 $( 2,274) $143,906 Cumulative asset (liability) gap $ 77,816 $ 97,609 $114,283 $126,769 $124,495 $268,401 (1) Rates are not on a taxable equivalent basis.
December 31, 1997 Expected Maturity Date
Fair 1998 1999 2000 2001 2002 Thereafter Total Value Assets: Debt Securities (1): Fixed Rate $102,346 $ 56,881 $ 37,793 $ 40,840 $ 28,872 $141,369 $408,101 $415,601 Average rate 6.27% 6.65% 6.69% 6.68% 6.74% 6.15% 6.39% Loans: Fixed Rate $255,605 $157,587 $102,973 $ 63,671 $ 37,058 $ 39,506 $656,400 $661,911 Average rate 8.63% 9.15% 9.40% 9.91% 9.81% 8.60% 9.06% Variable Rate $170,097 $ 36,319 $ 36,564 $ 26,538 $ 68,436 $ 33,518 $371,472 $372,043 Average rate 8.70% 8.57% 8.55% 8.52% 8.61% 7.32% 8.52% Other Earning Assets: Interest bearing deposits $ 159 $ 159 $ 159 Average Rate 5.40% 5.40% Securities purchased under agreements to resell $ 19,922 $ 19,922 $ 19,922 Average Rate 6.22% 6.22% Total interest sensitive assets $548,129 $250,787 $177,330 $131,049 $134,366 $214,393 Liabilities: Savings: Fixed Rate $108,565 $388,073 $496,638 $496,638 Average rate 3.61% 2.61% 2.83% Variable Rate $ 16,208 $ 49,942 $ 66,150 $ 66,150 Average rate 5.18% 5.18% 5.18% Time Deposits: Fixed Rate $421,492 $103,382 $ 40,041 $ 9,898 $ 4,632 $ 355 $579,800 $581,499 Average rate 5.74% 5.91% 6.21% 5.88% 5.95% 5.61% 5.81% Short-Term Borrowings: Fixed Rate $ 47,598 $ 47,598 $ 47,609 Average rate 5.17% 5.17% Long-Term Borrowings: Fixed Rate $ 5,000 $ 5,000 $ 20,000 $ 40,000 $ 70,000 $ 70,530 Average rate 5.85% 6.54% 6.37% 5.97% 6.13% Total interest sensitive liabilities $593,863 $108,382 $ 45,041 $ 29,898 $ 44,632 $438,370 Asset (liability) gap $(45,734) $142,405 $132,289 $101,151 $ 89,734 $(223,977) Cumulative asset (liability) gap $(45,734) $ 96,671 $228,960 $330,111 $419,845 $195,868 (1) Rates are not on a taxable equivalent basis.
Assets maturing within one year increased by approximately $131.8 million in 1998 when compared to 1997. The increase was primarily attributable to an increase in short-term debt securities maintained to fund the pending sales of four branch offices and their associated deposit liabilities in the first quarter 1999. A decline in loans maturing within one year is largely offset by increased short-term investments in securities purchased under agreements to resell and federal funds sold. Fixed rate debt securities include collateralized mortgage obligations ("CMO's"). CMO's were approximately $159.6 million and $121.5 million as of December 31, 1998 and 1997, respectively. Principal cash flows for CMO's are spread over their projected amortization periods under the interest rate environment in effect at the time the gap analysis is performed. The timing of principal payments on CMO's, however, can be subject to substantial volatility under different interest rate environments due to prepayment options on the underlying mortgage loans and their effect on the general structure of the CMO. Generally, the CMO's held by the Company are shorter-maturity bonds structured to provide more predictable cash flows by being less sensitive to prepayments during periods of changing interest rates. Principal payments on amortizing loans are based on their contractual schedules. Additional principal prepayments are estimated, generally between six and ten percent annually, for certain fixed rate loans. The vast majority of variable rate loans are tied to the U.S. prime rate and can reprice on a daily basis. Savings (including N.O.W., money market and regular savings) accounts have no contractual maturity. The Company considers a substantial portion of its savings accounts as a stable source of funding (i.e. "core balances"). Ninety percent of the lowest average monthly balance during the two most recent years is considered "core" for purposes of estimating maturities. Core balances were re-allocated by ALCO during 1998 based on the committee's evaluation of anticipated customer behavior. In 1998, these core balances were allocated as follows: twenty-five percent within two years, twenty-five percent within three years, fifteen percent within four years, fifteen percent within 5 years, and twenty percent in more than five years. In 1997, the Company considered all core balances as maturing beyond five years. The remaining savings balances are considered due in one year or less. Changes in the maturities of fixed rate liabilities during 1998 were primarily the result of the core deposit allocation changes made by ALCO as discussed in the preceding paragraph. An increase of approximately $50 million in variable rate money market accounts during 1998 was the main reason for the change in variable rate savings liabilities due in one year or less. Fair value for debt securities is based on market prices or dealer quotes for U.S. Treasury and U.S. Government Agency securities and quoted market prices, if available, for other investment securities. If a quoted market price is not available for other securities, fair value is estimated using quoted market prices for similar securities. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of savings accounts is the amount payable on demand at the reporting date. Fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value of short-term and long-term borrowings is estimated by discounting the future cash flows using the current interest rates at which similar borrowings could be made for the same maturities. Income simulation, another measurement tool used by the Company, estimates net interest income over the next twelve months under different, hypothetical interest rate scenarios. As of December 31, 1998, the simulation model indicated a minimal change (less than 3.3 percent) in net interest income under the different rate scenarios when compared to the base model. For additional information on income simulation, see the discussion under the caption "Interest Rate Risk Management" in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 1998 Annual Report to Shareholders. The Company purchases off-balance sheet derivative instruments to hedge interest rate exposure. As of December 31, 1998, the Company had interest rate swap contracts with an aggregate notional value of $30 million outstanding with an aggregate negative market value of approximately $178 thousand. The Company does not believe that market risk associated with its off-balance sheet derivative instruments as of December 31, 1998 is material to its overall market risk position. All of the Company's financial instruments are held for other than trading purposes. During 1998, the Company sold its portfolio of listed equity securities. As a result of the sales, the Company essentially eliminated its 1997 risk exposure from adverse changes in equity prices. As of December 31, 1998, the Company's remaining equity portfolio totaled $8.7 million. The portfolio consisted of 1) $7.8 million of Federal Reserve Bank ("FRB") stock and Federal Home Loan Bank ("FHLB") stock, both of which are not readily marketable and 2) unlisted equity securities. FHLB, FRB and other unlisted equity securities are deemed to have a market value equal to cost. Item 8. Financial Statements and Supplementary Data The following consolidated financial statements of the Company, which are included in the registrant's Annual Report to its shareholders for the year ended December 31, 1998, are submitted herewith as Exhibit 13, and are incorporated by reference: 1. Consolidated Balance Sheets, December 31, 1998 and 1997 2. Consolidated Statements of Earnings, for the three years ended December 31, 1998 3. Consolidated Statements of Changes in Stockholders' Equity for the three years ended December 31, 1998 4. Consolidated Statements of Cash Flows for the three years ended December 31, 1998 5. Notes to Consolidated Financial Statements 6. Independent Auditors' Report 7. Selected Quarterly Financial Information Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosures None. PART III Item 10. Directors and Executive Officers of the Registrant Incorporated herein by reference to the Registrant's Proxy Statement dated on or about April 12, 1999 in connection with its annual meeting to be held on May 26, 1999. Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16 of the Exchange Act. This disclosure is contained in the Registrant's Proxy Statement dated on or about April 12, 1999 under the Section "Compliance with Section 16 (a) of the Exchange Act" and is incorporated herein by reference in this Annual Report on Form 10-K. Item 11. Executive Compensation Incorporated herein by reference to the Registrant's Proxy Statement dated on or about April 12, 1999, in connection with its annual meeting to be held on May 26, 1999. Item 12. Security Ownership of Certain Beneficial Owners and Management Incorporated herein by reference to the Registrant's Proxy Statement dated on or about April 12, 1999, in connection with its annual meeting to be held on May 26, 1999. Item 13. Certain Relationships and Related Transactions Incorporated herein by reference to the Registrant's Proxy Statement dated on or about April 12, 1999, in connection with its annual meeting to be held on May 26, 1999. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 1. The following documents are filed as a part of this report: A. Consolidated Financial Statements of the Company which are included in the Annual Report of the registrant to its shareholders for the year ended December 31, 1998 as follows: 1. Consolidated Balance Sheets, December 31, 1998 and 1997. 2. Consolidated Statements of Earnings, for the three years ended December 31, 1998. 3. Consolidated Statements of Cash Flows, for the three years ended December 31, 1998. 4. Consolidated Statements of Changes in Stockholders' Equity, for the three years ended December 31, 1998. 5. Independent Auditors' Report. 6. Notes to Consolidated Financial Statements. B. Financial Statement Schedules as follows: 1. Selected Quarterly Financial Information included in Note 15 of Registrant's 1998 Annual Report to shareholders. C. Exhibits as follows: The following exhibits are filed with, or incorporated by reference in, this report. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report has been marked with an asterisk. 2.1 Agreement and Plan of Merger, dated January 22, 1996, among Northern Illinois Financial Corporation, Premier Financial Services, Inc and the Company (incorporated by referenced to Exhibit 2.1 to the Company's Registration Statement on Form S-4, as amended, File No. 333-03327), as amended by the First Amendment thereto, dated March 18, 1996 (incorporated by reference to Exhibit 2.2 to the Company's Registration Statement on Form S-4, as amended, File No. 333-03327), and the Second Amendment thereto, (incorporated by reference to Exhibit 2.3 to the Company's Current Report on Form 8-K, dated August 22, 1996, Commission File No. 0-20987). 3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Appendix F to the final proxy statement prospectus included in the Company's Registration Statement on Form S-4, as amended, File No. 333-03327). 3.2 By-laws of the Company (incorporated by reference to Exhibit 3.4 to the Company's Registration Statement on Form S-4, as amended, File No. 333-03327). 4. Rights Agreement, dated as of July 8, 1996, between Grand Premier Financial, Inc. and Premier Trust Services, Inc. (incorporated by reference to the Company's Registration Statement on Form S-4, as amended, File No. 333-03327). 10.1* Form of Change in Control Agreement, dated October (2)/(8), 1996, entered into between the Company and each of Richard L. Geach, David L. Murray, Kenneth A. Urban, Steven E. Flahaven and Scott Dixon (incorporated by reference to the Company's Form 10-Q dated September 30, 1996 Commission file No. 0-20987.) 10.2* Form of Change in Control Agreement, dated October (2)/(8), 1996, entered into between the Company and each of Robert Hinman, Alan Emerick, Jack Emerick, Joseph Esposito, William Theobald, Reid French, Larry O'Hara and Ralph Zicco (incorporated by reference to the Company's Form 10-Q dated September 30, 1996 Commission file No. 0-20987.) 10.3* Grand Premier Financial, Inc. 1996 Non-Qualified Stock Option Plan, as amended (incorporated by reference to Exhibit 10.3 of the Company's Annual Report on Form 10-K dated December 31, 1997, Commission file No. 0-20987). 10.4* Premier Financial Services, Inc. 1995 Non-Qualified Stock Option Plan, as amended (incorporated by reference to Exhibit 10.4 of the Company's Annual Report on Form 10-K dated December 31, 1997, Commission file No. 0-20987). 10.5* Premier Financial Services, Inc. 1988 Non-Qualified Stock Option Plan, as amended (incorporated by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K dated December 31, 1997, Commission file No. 0-20987).. 10.6* Premier Financial Services, Inc. Senior Leadership and Directors Deferred Compensation Plan, as amended (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, File No. 333-11645). 10.7* Consulting Agreement, dated February, 17, 1995, between Howard A. McKee and Grand National Bank (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-4, as amended, File No. 333-03327). 10.8* Grand Premier Financial, Inc. Deferred Compensation Plan (incorporated by reference to Exhibit 10.8 to the Company's Form 10-K dated December 31, 1996 Commission file No. 0-20987). 10.9* Grand Premier Financial, Inc. Savings and Stock Plan and Trust (incorporated by reference to Exhibit 10.9 to the Company's Form 10-K dated December 31, 1996 Commission file No. 0-20987). 10.10* Employment and Consulting Agreement, dated May 1, 1997, between Grand Premier Financial, Inc., and Howard A. McKee (incorporated by reference to Exhibit 10.10 to the Company's Form 10-Q dated June 30, 1997 Commission file No. 0-20987). 10.11* Grand Premier Financial, Inc. Non-Employee Directors Stock Option Plan (incorporated by reference to Appendix A of the Companys' Definitive Proxy Statement dated April 13, 1998). 11. Statement re computation of per share earnings (see Notes 1 and 16 to the 1998 Annual Report to Stockholders included as Exhibit 13 to this report). 13. Grand Premier Financial, Inc. 1998 Annual Report to Stockholders 21. Subsidiaries of the Registrant 23. Consent of KPMG LLP 27. Article 9 Financial Data Schedule for the Fiscal Year Ended December 31, 1998 2. Reports on Form 8-K The registrant has not filed a report on Form 8-K during the quarter ended December 31, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Grand Premier Financial, Inc. By:/s/ Richard L. Geach Richard L. Geach, Chief Executive Officer Date: March 22, 1999 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 and on the dates indicated. /s/ Richard L. Geach /s/ David L. Murray By: Richard L. Geach, Chief By: David L. Murray, Senior Executive Officer, President Executive Vice President, Chief and Director Financial Officer and Director Date: March 22, 1999 Date: March 22, 1999 /s/ Frank J. Callero /s/ Nanette K. Donton By: Frank J. Callero, Director By: Nanette K. Donton, Chief Date: March 22, 1999 Accounting Officer Date: March 22, 1999 /s/ Alan J. Emerick /s/ Brenton J. Emerick By: Alan J. Emerick, Director By: Brenton J. Emerick, Director Date: March 22, 1999 Date: March 22, 1999 /s/ James Esposito /s/ Thomas D. Flanagan By: James Esposito, Director By: Thomas D. Flanagan, Director Date: March 22, 1999 Date: March 22, 1999 /s/ R. Gerald Fox /s/ Noa W. Horner By: R. Gerald Fox, Director By: Noa W. Horner, Director Date: March 22, 1999 Date: March 22, 1999 /s/ Howard A. McKee /s/ Stephen J. Schostok By: Howard A. McKee, Director By: Stephen J. Schostok, Director Date: March 22, 1999 Date: March 22, 1999 EXHIBIT INDEX TO FORM 10-K The following exhibits are filed herewith or incorporated herein by reference. All documents incorporated by reference to prior filings have been filed under Commission File No. 0-20987. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report has been marked with an asterisk. Exhibit No. Description 2.1 Agreement and Plan of Merger, dated January 22, 1996, among Northern Illinois Financial Corporation, Premier Financial Services, Inc. and the Company (incorporated by referenced to Exhibit 2.1 to the Company's Registration Statement on Form S-4, as amended, File No. 333-03327), as amended by the First Amendment thereto, dated March 18, 1996 (incorporated by referenced to Exhibit 2.2 to the Company's Registration Statement on Form S-4, as amended, File No. 333-03327), and the second Amendment thereto, incorporated by reference to Exhibit 2.3 to the Company's Current Report on Form 8-K, dated August 22, 1996, Commission File No. 0-20987. 3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Appendix F to the final proxy-statement prospectus included in the Company's Registration Statement on Form S-4, as amended, File No. 333-03327). 3.2 By-laws of the Company (incorporated by reference to Exhibit 3.4 to the Company's Registration Statement on Form S-4, as amended, File No. 333-03327). 4. Rights Agreement, dated as of July 8, 1996, between Grand Premier Financial, Inc. and Premier Trust Services, Inc. (incorporated by reference to the Company's Registration Statement on Form S-4, as amended, File No.333-03327). 10.1* Form of Change in Control Agreement, dated October (2)/(8), 1996, entered into between the Company and each of Richard L. Geach, David L. Murray, Kenneth A. Urban, Steven E. Flahaven and Scott Dixon (incorporated by reference to the Company's Form 10-Q dated September 30, 1996 Commission file No. 0-20987.) 10.2* Form of Change in Control Agreement, dated October (2)/(8), 1996, entered into between the Company and each of Robert Hinman, Alan Emerick, Jack Emerick, Joseph Esposito, William Theobald, Reid French, Larry O'Hara and Ralph Zicco(incorporated by reference to the Company's Form 10-Q dated September 30, 1996 Commission file No. 0-20987.) 10.3* Grand Premier Financial, Inc. 1996 Non-Qualified Stock Option Plan, as amended (incorporated by reference to Exhibit 10.3 of the Company's Annual Report on Form 10-K dated December 31, 1997, Commission file No. 0-20987). 10.4* Premier Financial Services, Inc. 1995 Non-Qualified Stock Option Plan, as amended (incorporated by reference to Exhibit 10.4 of the Company's Annual Report on Form 10-K dated December 31, 1997, Commission file No. 0-20987). 10.5* Premier Financial Services, Inc. 1988 Non-Qualified Stock Option Plan, as amended (incorporated by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K dated December 31, 1997, Commission file No. 0-20987). 10.6* Premier Financial Services, Inc. Senior Leadership and Directors Deferred Compensation Plan, as amended (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, File No. 333-11645). 10.7* Consulting Agreement, dated February, 17, 1995, between Howard A. McKee and Grand National Bank (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-4, as amended, File No. 333-03327). 10.8* Grand Premier Financial, Inc. Deferred Compensation Plan (incorporated by reference to Exhibit 10.8 to the Company's Form 10-K dated December 31, 1996 Commission file No. 0-20987). 10.9* Grand Premier Financial, Inc. Savings and Stock Plan and Trust (incorporated by reference to Exhibit 10.9 to the Company's Form 10-K dated December 31, 1996 Commission file No. 0-20987). 10.10* Employment and Consulting Agreement, dated May 1, 1997, between Grand Premier Financial, Inc., and Howard A. McKee (incorporated by reference to Exhibit 10.10 to the Company's Form 10-Q dated June 30, 1997 Commission file No. 0-20987). 10.11* Grand Premier Financial, Inc. Non-Employee Directors Stock Option Plan (incorporated by reference to Appendix A of the Companys' Definitive Proxy Statement dated April 13, 1998). 11. Statement re computation of per share earnings (see Notes 1 and 16 to the 1998 Annual Report to Stockholders included as Exhibit 13 to this report). 13. Grand Premier Financial, Inc. 1998 Annual Report to Stockholders. 21. Subsidiaries of the Registrant. 23. Consent of KPMG LLP. 27. Article 9 Financial Data Schedule for the Fiscal Year Ended December 31, 1998. EXHIBIT 13 1998 Annual Report Grand Premier Financial, Inc. Contents Corporate Message to the shareholders 2 Independent Auditors' Report 3 Consolidated Balance Sheets 4 Consolidated Statements of Earnings 5 Consolidated Statements of Cash Flows 7 Consolidated Statements of Changes in Stockholders' Equity 8 Notes to Consolidated Financial Statements 26 Management's Discussion and Analysis of Financial Condition and Results of Operations 36 Supplementary Business and Stock Information 37 Five Year Summary of Selected Financial Data 38 Board of Directors and Executive Officers Letter to Shareholders Over the past the past two years we've devoted much of our time and effort to making the changes necessary to merge two companies into one, and to putting the building blocks in place for the future of Grand Premier Financial, Inc. We've completely changed the way we do business from one of simply reacting to our customer's needs to actively anticipating them and providing financial solutions that exceed their expectations. Along the way we've experienced successes and a few setbacks. We've closed (or sold) some offices, dealt with a significant loss in our loan portfolio (in 1997), written off quite a bit of obsolete equipment and computer software and generally experienced the changes in systems, processes and people associated with a merger of this size. As we enter 1999, we're pleased with the fact that all of our officers and associates who deserve credit for the transition, as well as our Directors who provided guidance along the way, are confident that the major building blocks are or soon will be in place. The final step will be replacing our current data processing system in the first quarter of 1999 with one which is much more customer friendly. The actions we've taken in the past two years, although necessary, have naturally had an impact on financial results. We'd encourage you to review the section in this report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a more detailed analysis. Suffice it to say that while our net earnings in 1997 and 1998 were acceptable, they certainly didn't meet the expectations we set for ourselves. The financial strengths Grand Premier evidences revolve around the quality of our assets, a significant capital base and a respected, profitable group of fiduciary, trust and investment services. The challenge is to convert those strengths into continually improving financial performance. In reviewing this report you'll also note that in the section titled "Supplementary Business and Stock Information" we've included the internet address of our home page, www.grandpremier.com. In the future, we intend to publish all of our earnings and other press releases, as well as link access to our quarterly and financial filings, on our home page. The process began effective with our earnings release for the year ended December 31, 1998. In December 1998, your Board of Directors distributed a 10% stock dividend followed by declaration of a $.09 per share cash dividend. That action effectively raised the annual cash dividend by 10% and is reflective of our confidence in Grand Premier going forward. We appreciate your support and your investment in Grand Premier, and will continue our efforts to make Grand Premier an exceptional financial services company. /s/ Richard L. Geach Chairman of the Board, President and Chief Executive Officer /s/ David L. Murray Senior Executive Vice President and Chief Financial Officer Independent Auditors' Report The Board of Directors Grand Premier Financial, Inc: We have audited the accompanying consolidated balance sheets of Grand Premier Financial, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, cash flows, and changes in stockholders' equity for each of the years in the three-year period ended December 31, 1998. 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 audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Grand Premier Financial, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP Chicago, Illinois January 22, 1999, except for Note 18, which is as of February 18, 1999 Consolidated Balance Sheets December 31, 1998 and 1997 (000's omitted except share and per share data) ASSETS 1998 1997 Cash & non-interest bearing deposits $ 52,994 $ 63,502 Interest bearing deposits 1,718 159 Federal funds sold 48,000 - Cash and cash equivalents 102,712 63,661 Securities available for sale, at fair value 516,083 454,400 Securities purchased under agreement to resell 10,195 19,922 Loans 957,153 1,028,863 Less: Unearned income (953) (991) Allowance for possible loan losses (12,443) (15,404) Net loans 943,757 1,012,468 Bank premises and equipment 34,099 35,154 Excess cost over fair value of net assets acquired 15,281 16,885 Accrued interest receivable 11,573 12,994 Other assets 14,541 30,896 Total assets $1,648,241 $1,646,380 See accompanying notes to consolidated financial statements. Consolidated Balance Sheets (continued) December 31, 1998 and 1997 (000's omitted except share and per share data) LIABILITIES & STOCKHOLDERS' EQUITY Liabilities Non-interest bearing deposits $ 199,084 $ 187,943 Interest bearing deposits 1,161,936 1,142,588 Total deposits 1,361,020 1,330,531 Short-term borrowings 11,887 47,598 Long-term borrowings 70,000 70,000 Other liabilities 21,945 25,742 Total liabilities 1,464,852 1,473,871 Stockholders' equity Preferred stock - $1 par value, 2,000,000 shares authorized: Series B convertible, $1,000 stated value 8.00%, 7,250 shares authorized, issued and outstanding 7,250 7,250 Series C perpetual, $1,000 stated value, 8.00%, 2,000 shares authorized, issued and outstanding 2,000 2,000 Common stock - $.01 par value No. of Shares 1998 1997 Authorized 30,000,000 30,000,000 Issued 22,047,672 22,002,819 Outstanding 21,981,739 22,002,819 220 220 Surplus 79,056 79,003 Retained earnings 88,756 69,487 Accumulated other comprehensive income 6,794 14,549 Treasury stock, at cost (65,933 shares at 12/31/98) (687) - Stockholders' equity 183,389 172,509 Total liabilities & stockholders' equity $1,648,241 $1,646,380 See accompanying notes to consolidated financial statements. Consolidated Statements of Earnings Years ended December 31, 1998, 1997 and 1996 (000's omitted except per share data) 1998 1997 1996 Interest income Interest & fees on loans $ 86,990 $ 90,192 $ 79,816 Interest & dividends on investment securities: Taxable 18,469 21,873 26,514 Exempt from federal income tax 8,451 7,771 7,142 Other interest income 2,745 785 898 Interest income 116,655 120,621 114,370 Interest expense Interest on deposits 49,046 52,266 52,258 Interest on short-term borrowings 909 2,404 3,482 Interest on long-term borrowings 4,340 2,496 818 Interest expense 54,295 57,166 56,558 Net interest income 62,360 63,455 57,812 Provision for possible loan losses 3,600 9,700 2,875 Net interest income after provision for possible loan losses 58,760 53,755 54,937 Other income Service charges on deposits 5,657 5,715 5,732 Trust fees 3,494 3,207 2,875 Investment securities gains, net 20,196 7,669 3,838 Other operating income 4,315 4,504 5,271 Other income 33,662 21,095 17,716 Other expenses Salaries 19,082 20,052 21,972 Pension, profit sharing & other employee benefits 4,925 4,149 4,643 Net occupancy of bank premises 4,585 4,686 4,676 Furniture & equipment 3,964 3,772 3,050 Data processing 2,045 1,857 1,514 Professional services 2,089 1,637 1,386 Amortization of excess cost over fair value of net assets acquired 1,604 1,604 1,738 Write-down of real estate held for development - - 2,506 Other 12,164 12,455 12,566 Other expenses 50,458 50,212 54,051 Earnings before income taxes 41,964 24,638 18,602 Income tax expense 14,564 7,668 5,285 Net earnings $ 27,400 $ 16,970 $ 13,317 Earnings per share Basic $1.21 $.74 $.57 Diluted $1.17 $.73 $.56 See accompanying notes to consolidated financial statements. Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996 (000's omitted) 1998 1997 1996 Cash flows from operating activities: Net earnings $ 27,400 $ 16,970 $ 13,317 Adjustments to reconcile net earnings to net cash from operating activities: Amortization net, related to: Investment securities 752 1,034 1,260 Excess of cost over fair value of net assets acquired 1,604 1,604 1,738 Other 366 771 (133) Depreciation 4,070 3,569 3,059 Provision for possible loan losses 3,600 9,700 2,875 Write-down of real-estate held for development - - 2,506 Gain on sale related to: Investment securities (20,196) (7,669) (3,838) Loans sold to secondary market (656) (264) (185) Other real estate owned (164) (142) (545) Loans originated for sale (74,202) (29,567) (38,163) Loans sold to secondary market 74,858 29,567 38,163 Deferred income tax expense (benefit) 6,431 (4,425) (5,165) Change in: Other assets 14,495 (14,307) (2,738) Other liabilities (3,975) 11,966 1,473 Net cash from operating activities 34,383 18,807 13,624 Cash flows from investing activities: Purchase of securities available for sale (413,790) (116,304) (304,580) Proceeds from: Maturities of securities available for sale 303,840 104,225 227,389 Sales of securities available for sale 55,048 107,833 142,485 Sales of other real estate owned 2,098 1,201 2,351 Net (increase) decrease in loans 64,605 (67,055) (92,395) Purchase of bank premises & equipment (3,051) (5,656) (4,224) Net (increase) decrease in securities purchased under resale agreements 9,727 (15,517) (4,405) Net cash from investing activities $ 18,477 $ 8,727 $(33,379) See accompanying notes to consolidated financial statements. Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996 (continued) (000's omitted) 1998 1997 1996 Cash flows from financing activities: Net increase (decrease) in: Deposits $ 30,489 $(86,863) $ 65,737 Short-term borrowings (35,711) 24,112 (64,746) Long-term borrowings - 40,000 18,412 Redemption of preferred stock - - (5,000) Cash dividends paid (7,947) (7,142) (6,322) All other financing activities (640) 65 326 Net cash from financing activities (13,809) (29,828) 8,407 Increase (decrease) in cash and cash equivalents 39,051 (2,294) (11,348) Cash and cash equivalents, beginning of year 63,661 65,955 77,303 Cash and cash equivalents, end of year $102,712 $ 63,661 $ 65,955 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 55,065 $ 57,367 $ 56,926 Income taxes 4,475 11,911 10,526 Non-cash activities: Loans transferred to other real estate owned 176 986 988 Land transferred to other assets - - 1,803 See accompanying notes to consolidated financial statements. Consolidated Statements of Changes in Stockholders' Equity Years ended December 31, 1998, 1997 and 1996 (000's omitted except per share data)
Accumulated Other Comprehensive Preferred Common Retained Income, Treasury Stock Stock Surplus Earnings Net of Tax Stock Total Balance January 1, 1996 $14,250 $219 $78,613 $52,865 $10,050 $ 0 $155,997 Net earnings 13,317 13,317 Other comprehensive income, net of tax: Unrealized gains on securities, net of reclassification adjustment (235) (235) Comprehensive income 13,082 Cash dividends on common stock ($.25 per share) (5,382) (5,382) Cash dividends on preferred stock (940) (940) Exercised stock options 1 329 330 Redemption of Series A preferred stock (5,000) (5,000) Cash paid out for fractional shares (4) (4) Balance December 31, 1996 $ 9,250 $220 $78,938 $59,860 $ 9,815 $ 0 $158,083 Net earnings 16,970 16,970 Other comprehensive income, net of tax: Unrealized gains on securities, net of reclassification adjustment 4,734 4,734 Comprehensive income 21,704 Cash dividends on common stock ($.30 per share) (6,603) (6,603) Cash dividends on preferred stock (740) (740) Exercised stock options 65 65 Balance December 31, 1997 $ 9,250 $220 $79,003 $69,487 $14,549 $ 0 $172,509 Net earnings 27,400 27,400 Other comprehensive income, net of tax: Unrealized gains on securities, net of reclassification adjustment (7,755) (7,755) Comprehensive income 19,645 Cash dividends on common stock ($.34 per share) (7,391) (7,391) Cash dividends on preferred stock (740) (740) Purchase of treasury stock (687) (687) Exercised stock options 53 53 Balance December 31, 1998 $ 9,250 $220 $79,056 $88,756 $ 6,794 $(687) $183,389 See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Nature of operations Grand Premier Financial, Inc. (the "Company") is a registered bank holding company organized in 1996 under Delaware law. The operations of the Company and its subsidiaries consist primarily of those financial activities, including trust and investment services, common to the commercial banking industry. The Company's markets are throughout northern Illinois. Principles of presentation The accompanying consolidated financial statements conform to generally accepted accounting principles and to general practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates. The accompanying consolidated financial statements include the financial information of the Company and its subsidiaries, all of which are wholly owned. Significant intercompany balances and transactions have been eliminated. Securities available for sale Securities classified as securities available for sale are carried at fair value. Unrealized gains and losses, net of income taxes, are excluded from earnings but are included in accumulated other comprehensive income as a component of stockholders' equity. Gains or losses on sale of securities are determined on the basis of specific identification. Investments held-to-maturity Investments held-to-maturity are stated at cost adjusted for amortization of premiums and accretion of discounts using the level yield method over the life of the security. Management has the positive intent and ability to hold these investment securities to maturity. The Company has no investments designated as held-to-maturity at December 31, 1998 and 1997. Loans Loans are stated at face value less unearned discounts. Interest income on loans not discounted is computed on the principal balance outstanding. Interest income on discounted loans is computed on a basis which results in an approximate level rate of return over the term of the loan. Accrual of interest is discontinued on a loan when management believes that the borrower's financial condition is such that collection of interest is doubtful. Impaired loans Impaired loans are loans for which it is probable that the creditor will be unable to collect all amounts due according to the terms of the loan agreement. The specific factors that influence management's judgment in determining when a loan is impaired include evaluation of the financial strength of the borrower and the fair value of the collateral. A loan is not impaired during a period of "minimum delay" in payment, regardless of the amount of shortfall, if the ultimate collectibility of all amounts due is expected. The Company defines "minimum delay" as past due less than 90 days. Large groups of homogeneous loans such as real estate-residential and loans to individuals are collectively evaluated for impairment. Impaired loans are measured and reported based on the present value of expected cash flows discounted at the loan's effective interest rate, or at the fair value of the loan's collateral if the loan is deemed "collateral dependent." A valuation allowance is required to the extent that the measure of the impaired loans is less than the recorded investment. The Company applies the measurement methods described above to loans on a loan-by-loan basis. The Company's impaired loans are nonaccrual loans, as generally loans are placed on nonaccrual status on the earlier of the date that principal or interest amounts are 90 days or more past due or the date that collection of such amounts is judged uncertain based on evaluation of the financial strength of the borrower and the fair market value of the collateral. Restructured loans are impaired loans in the year of restructuring; thereafter, such loans are subject to management's evaluation of impairment based on the restructured terms. An impaired loan, or portion thereof, is charged-off when the impaired loan is considered uncollectible or when transferred to foreclosed properties and the collateral value is less than the outstanding loan balance. Consistent with the Company's method for nonaccrual loans, interest receipts on impaired loans are recognized as interest income or are applied to principal if the ultimate collectibility of principal is in doubt. Allowance for possible loan losses The allowance for possible loan losses is increased by provisions charged to expense and recoveries on loans previously charged off, and reduced by loans charged off in the period. The allowance is based on past loan loss experience, management's evaluation of the loan portfolio considering current economic conditions and such other factors, which, in management's best judgement, deserve current recognition in estimating loan losses. Regulatory examiners may require the Company to recognize additions to the allowances based upon their judgments about information available to them at the time of their examination. Bank premises and equipment Bank premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation expense is computed by the straight line method for furniture and equipment and both the straight line method and the declining balance method for buildings based on the estimated useful lives of the assets. Rates of depreciation are based on the following: buildings 31-40 years and equipment 3-15 years. Cost of major additions and improvements are capitalized. Expenditures for maintenance and repairs are reflected as expense when incurred. Excess cost over fair value of net assets acquired The excess cost over fair value of net assets acquired is being amortized over 25 years for acquisitions prior to 1985, and over 15 years for acquisitions subsequent to that date using the straight line method. Income taxes The Company and its subsidiaries file consolidated federal and state income tax returns. Deferred tax assets and liabilities are recognized for the 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 expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Stock Option Plan The Company follows SFAS No. 123, "Accounting for Stock-based Compensation" ("SFAS No. 123"). SFAS No. 123 permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. Earnings per share In 1997, the Company adopted SFAS No. 128, "Earnings per share". Under SFAS No. 128, basic earnings per share is computed by dividing net income less preferred stock dividends by the average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income less preferred stock dividends excluding dividends on convertible preferred stock by the average number of common shares outstanding during the period plus the average number of shares that would be issued upon exercise of dilutive stock options using the treasury method plus the average number of shares that would be issued upon conversion of dilutive convertible preferred stock. Earnings per share amounts for the year ended December 31, 1996 have been restated in accordance with SFAS No. 128. All share and per share amounts have been restated for a 10% stock dividend distributed December 1, 1998 to shareholders of record on November 15, 1998. Cash and non-interest bearing deposits Cash and non-interest bearing deposits include reserve balances that the Company's subsidiary bank is required to maintain with the Federal Reserve Bank of Chicago. These required reserves vary and are based principally on deposits outstanding. The reserve balance requirement as of December 31, 1998 and 1997 was approximately $0 and $11.8 million, respectively. Statements of Cash Flows For purposes of Statements of Cash Flows, cash and cash equivalents consists of cash, due from banks and federal funds sold. Derivative financial instruments Derivatives used by the Company consist of off-balance sheet interest rate contracts. These instruments are used by the Company to assist in asset and liability management activities which include hedging of specific groups of on-balance sheet assets. Amounts to be paid or received are recognized as an adjustment to interest income relating to the specific group of assets hedged. Premiums paid are amortized over the life of the contract as an adjustment to interest income relating to the group of assets hedged. Any gain or loss upon the early termination of a contract would be deferred and amortized as an adjustment to interest income. Finacial reporting of segments In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related information." SFAS 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements. Operating segments are components of an enterprise for which separate financial information is available, and is evaluated regularly by management in deciding how to allocate resources and in assessing performance. SFAS 131 establishes standards for related disclosures about products, services, geographic areas, and major customers. The Company operates as a single segment. Basis of presentation Certain amounts for 1996 and 1997 have been reclassified to conform to the 1998 presentation. 2. Merger The merger of Northern Illinois Financial Corporation ("Northern Illinois") and Premier Financial Services, Inc. ("Premier") with and into the Company was consummated on August 22, 1996 and was accounted for as a pooling of interests. Each outstanding share of Northern Illinois and Premier common stock was converted into 4.25 shares and 1.116 shares of the Company common stock, respectively. Total shares issued of the Company's common stock was 19,940,181. Each of the 7,250 shares of Premier Series B Preferred Stock was converted into one share of Grand Premier Series B Preferred Stock, and each of the 2,000 shares of Premier Series D Preferred Stock was converted into one share of Grand Premier Series C Preferred Stock. All financial statements and information prior to the merger date have been restated to reflect the merger. 3. Securities Available for Sale The amortized cost and approximate fair value of securities available for sale at December 31, 1998 are as follows (in thousands): Gross Gross Approximate Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury obligations $ 52,018 $ 725 $ - $ 52,743 U.S. Government agencies 72,844 421 (106) 73,159 Obligations of state & political subdivisions 158,833 8,891 (322) 167,402 Corporate debt securities 25,845 119 (47) 25,917 Mortgage-backed securities 186,571 1,842 (261) 188,152 Equity securities 8,710 - - 8,710 $504,821 $11,998 $ (736) $516,083 The amortized cost and approximate fair value of securities available for sale at December 31, 1997 are as follows (in thousands): Gross Gross Approximate Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury obligations $ 68,241 $ 425 $ (18) $ 68,648 U.S. Government agencies 25,873 158 (38) 25,993 Obligations of state & political subdivisions 143,345 5,427 (30) 148,742 Corporate debt securities 6,594 38 (2) 6,630 Mortgage-backed securities 164,048 1,756 (216) 165,588 Equity securities 22,374 16,425 - 38,799 $430,475 $24,229 $ (304) $454,400 The amortized cost and fair value of securities available for sale as of December 31, 1998 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. (In thousands) Approximate Amortized Fair Cost Value Due in one year or less $116,172 $116,253 Due after one year through five years 42,132 43,895 Due after five years through ten years 20,775 22,239 Due after ten years 130,461 136,834 Mortgage-backed and equity securities 195,281 196,862 $504,821 $516,083 Proceeds from sales of securities available for sale during 1998 were $55,048,000. Gross gains of $20,224,000 and gross losses of $28,000 were realized on those sales. During 1997, proceeds from sales of securities available for sale were $107,833,000. Gross gains of $8,835,000 and gross losses of $1,166,000 were realized on those sales. Proceeds from sales of securities available for sale in 1996 were $142,485,000. Gross gains of $4,389,000 and gross losses of $551,000 were realized on those sales. On December 31, 1998, securities with a carrying value of approximately $252,614,000 were pledged to secure funds and trust deposits and for other purposes as required or permitted by law. 4. Loans The following is a summary of loans by major classification as of December 31, 1998 and 1997 (in thousands): 1998 1997 Commercial, financial and agricultural loans $275,450 $ 231,707 Real estate-construction loans 43,250 50,186 Real estate-mortgage loans 569,851 631,069 Loans to individuals 68,602 115,901 $957,153 $1,028,863 The Company services loans for others. The total principal balance outstanding on serviced loans was $139,315,000, $100,996,000 and $87,983,000 as of December 31, 1998, 1997 and 1996, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing and included in demand deposits were approximately $502,000 and $213,000 at December 31, 1998 and 1997, respectively. A summary of changes in the allowance for possible loan losses for the three years ended December 31 is as follows (in thousands): 1998 1997 1996 Balance beginning of year $15,404 $10,116 $ 9,435 Provision for possible loan losses 3,600 9,700 2,875 Less: loans charged off (10,763) (5,327) (2,766) Recoveries 4,202 915 572 Balance end of year $12,443 $15,404 $10,116 The recorded investment of impaired loans at December 31, 1998 and 1997 was $6,893,000 and $6,223,000, respectively. The recorded investment in loans for which an impairment has been recognized was $1,134,000 and $1,320,000 and the related allowance for possible loan losses was $533,000 and $528,000 at December 31, 1998 and 1997, respectively. The average recorded investment in impaired loans during 1998, 1997 and 1996 was $7,394,000, $4,085,000 and $5,475,000, respectively. Interest income recognized on impaired loans during 1998, 1997 and 1996 was approximately $481,000, $355,000 and $188,000, respectively. Had interest on such loans been accrued, interest and fees on loans in the accompanying consolidated statements of earnings would have been greater by approximately $294,000, $240,000 and $369,000 in 1998, 1997 and 1996, respectively. The Company's subsidiary bank makes loans to its executive officers, directors, principal holders of the Company's equity securities and to associates of such persons. These loans were made in the ordinary course of business on the same terms and conditions, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers and do not involve more than a normal risk. The following is a summary of activity with respect to such loans for the latest fiscal year (in thousands): Balance, January 1, 1998 $ 9,523 New loans 5,292 Less repayments (5,025) Balance, December 31, 1998 $ 9,790 5. Bank premises and equipment Bank premises and equipment are recorded at cost less accumulated depreciation as follows (in thousands): 1998 1997 Land $ 6,621 $ 6,621 Buildings and improvements 37,299 36,969 Furniture, fixtures and equipment 17,750 22,691 61,670 66,281 Less accumulated depreciation 27,571 31,127 $34,099 $35,154 6. Short-term borrowings The following is a summary of short-term borrowings and securities sold under agreements to repurchase at December 31, 1998 and 1997 (in thousands): 1998 1997 Federal funds purchased $ - $33,000 Securities sold under agreements to repurchase 11,887 14,598 $11,887 $47,598 At December 31, 1998 and 1997, there were no material amounts of assets at risk with any one customer under agreements to repurchase securities sold. At December 31, 1998 and 1997 securities sold under agreements to repurchase are summarized as follows (in thousands): Weighted Average Collateral Collateral Repurchase Interest Book Market Liability Rate Value Value 1998 Demand $ 8,091 3.54% $12,341 $12,417 Term 3,796 5.81 4,989 4,950 $11,887 4.26% $17,330 $17,367 1997 Demand $10,246 3.83% $12,863 $12,913 Term 4,352 5.80 5,202 5,252 $14,598 4.42% $18,065 $18,165 At December 31, 1998, the Company had an unused line of credit of $20,000,000 maturing January, 1999. The line bears interest at the option of the Company of prime rate floating or fixed at one month, two month, three month or six month periods at LIBOR plus 1 3/4%. The note agreement contains certain restrictive covenants. The Company was in compliance with such covenants at December 31, 1998. 7. Long-term borrowings At December 31, 1998 and 1997, long-term borrowings consisted of the following (in thousands): 1998 1997 FHLB advances, 5.85%, interest payable monthly, due December 20, 1999 $ 5,000 $ 5,000 FHLB advances, 6.54%, interest payable monthly, due August 23, 2000 5,000 5,000 FHLB advances, 6.75%, interest payable monthly, due July 2, 2001 5,000 5,000 FHLB advances, 6.24%, interest payable monthly, due November 6, 2001 15,000 15,000 FHLB advances, 5.97%, interest payable monthly, due October 7, 2002 40,000 40,000 $70,000 $70,000 Advances from the Federal Home Loan Bank are collateralized by a blanket lien on the Company's loans secured by first liens on 1-4 family residential properties. At December 31, 1998, securities with an approximate carrying value of $10,657,000 are also pledged against advances from the Federal Home Loan Bank. 8. Employee Benefit Plans The Company has a savings and stock plan for officers and employees. Company contributions to the plan are discretionary. The plan includes provisions for employee contributions which are considered tax-deferred under Section 401(k) of the Internal Revenue Code. Total expense was $761,000 for 1998, $697,000 for 1997 and $886,000 for 1996. The Company has stock option plans for key employees and non-employee Directors. Options are granted at the fair market value of the stock at the grant date. Options vest at the rate of 20% of granted shares at the end of each year in the succeeding five year period after the grant date, with the exception of 120,000 options granted in 1996 which vest ratably over a three year period beginning September 23, 1997. The plan provides for adjusting the total number of shares of common stock that may be available for options under the Plan on January 1, of each calendar year, so that the total number of shares of common stock that may be issued and sold under the Plan as of January 1 of each calendar year to be equal to four percent (4%) of the outstanding shares of common stock of the Company on such date; provided, however, that no such adjustment will reduce the total number of shares of common stock that may be issued and sold under the plan below 400,000. The Company applies APB Opinion 25 and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method contained in SFAS No.123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1998 1997 1996 Net Income As reported $27,400 $16,970 $13,317 Pro forma $27,258 $16,782 $13,244 Earnings per share Basic As reported $1.21 $.74 $.57 Pro forma $1.21 $.73 $.56 Diluted As reported $1.17 $.73 $.56 Pro forma $1.17 $.72 $.56 The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for 1996, 1997 and 1998, respectively; risk-free interest rates of 5.9%, 5.7% and 4.8%; expected dividend yield of 3.0% for all years; expected lives of 5, 10 and 10 years; and expected volatility of 30%, 28% and 35%. The weighted fair value of the options granted in 1996, 1997 and 1998 was $2.34, $4.19 and $4.40, respectively. A summary of the status of the Company's stock option plan as of and for each of the years in the three year period ended December 31, 1998 is presented below. Number of options Exercise price Outstanding at January 1, 1996 488,338 $ 2.03 to $ 5.84 Granted 244,783 9.77 Exercised (125,818) 2.03 to 5.84 Forfeited (11,981) 2.03 to 5.84 Outstanding at December 31, 1996 595,322 2.03 to 9.77 Granted 95,150 13.07 Exercised (20,772) 2.57 to 5.84 Forfeited (18,685) 5.60 to 9.77 Outstanding at December 31, 1997 651,015 2.03 to 13.07 Granted 112,200 12.13 to 14.66 Exercised (49,824) 2.03 to 5.84 Forfeited (26,721) 9.77 to 13.07 Outstanding at December 31, 1998 686,670 $ 2.23 to $14.66 The number of options exercisable at December 31, 1998, 1997 and 1996 were 384,228, 337,662 and 272,359, respectively. The following table summarizes information about stock options outstanding at December 31, 1998. Number Remaining Number Exercise Price of Shares Contractual Life Exercisable 2.58 98,248 .5 years 98,248 2.23 38,126 2 years 38,126 3.70 35,213 3 years 35,213 5.84 38,316 5 years 38,316 5.60 59,317 6 years 34,076 9.77 220,000 8 years 123,199 13.07 85,250 9 years 17,050 14.66 22,000 9 years - 12.13 90,200 10 years - 686,670 384,228 The Company has a Deferred Compensation Plan for Directors and certain officers designated by the Board of Directors. Participants may elect to defer up to 50% of salary, 100% of any bonus or 100% of director fees under the Plan. The Company makes a 25% matching contribution. Seventy-five thousand shares are registered for purchase by the Plan. Company contributions are 100% vested on the earlier of 1) the end of the fifth year following the year in which deferrals are made, 2) normal retirement, or 3) employment termination due to death or disability. Total expense was approximately $157,000 in 1998, $135,000 in 1997 and $329,000 in 1996. 9. Stockholders' equity On September 28, 1998, the Company declared a 10% stock dividend to be distributed on December 1, 1998 to shareholders of record on November 15, 1998. All share information has been restated to reflect the stock dividend. In 1996, the Company redeemed all of the outstanding Premier Series A Preferred Perpetual Stock for $5,000,000. The Company's Series B Preferred Stock is convertible into 936,852 shares of common stock at the option of the holder. Under the Company's shareholder rights plan, each share of common stock entitles its holder to one right. Under certain conditions, each right entitles the holder to purchase one one-hundredth of a share of Junior Preferred Stock at a price of $24.7727 per share, subject to adjustment. The rights will only be exercisable if a person or group has acquired, or announced an intention to acquire 15% or more of the outstanding shares of Company common stock or any person or group would be the beneficial owner of 30% or more of the voting power of the Company. Under certain circumstances, including the existence of a 15% acquiring party, each holder of a right, other than the acquiring party, will be entitled to purchase at the exercise price Company common stock having a market value of two times the exercise price. The rights may be redeemed at a price of $.01 per right prior to the existence of a 15% acquiring party, and thereafter, may be exchanged for one common share per right to the existence of a 50% acquiring party. The rights will expire on June 30, 2006. The rights do not have voting or dividend rights and until they become exercisable, have no dilutive effect on the earnings of the Company. 10. Regulatory matters The Company and its banking subsidiary 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 financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its banking subsidiary must meet specific capital guidelines that involve quantitative measures of each entities' assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and its banking subsidiary 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 its banking subsidiary to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). As of December 31, 1998 the Company and its banking subsidiary met all regulatory capital adequacy requirements. As of December 31, 1998 and 1997, the Company and it's banking subsidiary were categorized as well capitalized under the regulatory framework. There are no conditions or events since year end that management believes have changed that categorization.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ($ Amounts in thousands) Amount Ratio Amount Ratio Amount Ratio As of December 31, 1998: Total Capital (to risk weighted assets): Grand Premier Financial, Inc. $173,092 14.82% $93,425 8.00% $116,781 10.00% Grand National Bank 163,040 14.13 92,295 8.00 115,369 10.00 Tier 1 Capital (to risk weighted assets): Grand Premier Financial, Inc. 160,649 13.76 46,713 4.00 70,069 6.00 Grand National Bank 150,597 13.05 46,148 4.00 69,221 6.00 Tier 1 Capital (to average assets): Grand Premier Financial, Inc. 160,649 9.99 64,309 4.00 80,387 5.00 Grand National Bank 150,597 9.48 63,565 4.00 79,456 5.00 As of December 31, 1997: Total Capital (to risk weighted assets): Grand Premier Financial, Inc. $154,878 13.28% $93,272 8.00% $116,590 10.00% Grand National Bank 143,602 12.50 91,906 8.00 114,882 10.00 Tier 1 Capital (to risk weighted assets): Grand Premier Financial, Inc. 140,304 12.03 46,636 4.00 69,954 6.00 Grand National Bank 129,242 11.25 45,953 4.00 68,929 6.00 Tier 1 Capital (to average assets): Grand Premier Financial, Inc. 140,304 8.51 65,919 4.00 82,398 5.00 Grand National Bank 129,242 7.95 65,053 4.00 81,316 5.00
Certain legal and regulatory restrictions exist regarding the payment of cash dividends from the banking subsidiary to the Company. Although the Company is not subject to these restrictions, future Company cash dividends may depend upon dividends from the banking subsidiary. 11. Income taxes The components of consolidated income tax expense (benefit) for the years ended December 31, 1998, 1997, and 1996 are as follows (in thousands): 1998 1997 1996 Current $ 8,133 $12,093 $10,450 Deferred 6,431 (4,425) (5,165) Total income tax expense $14,564 $ 7,668 $ 5,285 The actual tax expense differs from the expected tax expense computed by applying the Federal Corporate tax rate of 35% to earnings before income taxes as follows (in thousands): 1998 1997 1996 Federal income tax expense at statutory rate $14,688 $8,623 $6,511 Tax-exempt income, net of disallowed interest deduction (2,639) (2,503) (2,650) State income tax expense, net of federal income tax benefit 1,772 931 1,369 Valuation allowance on state NOLs - - (763) Goodwill amortization 561 561 583 Other, net 182 56 235 Total income tax expense $14,564 $7,668 $5,285 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are presented below (in thousands): 1998 1997 Deferred tax assets Securities, sections 475 and 481 adjustments $ 1,509 $ 7,687 Loans, principally due to allowance for losses 4,936 6,110 Deferred compensation 2,201 1,589 Other 511 636 Total gross deferred tax assets $ 9,157 $16,022 Deferred tax liabilities: Security accretion $ 90 $ 103 Tax depreciation in excess of book depreciation (167) 91 Difference between tax and book basis of assets acquired 280 402 Deferred loan fees 240 280 Other 6 7 Total gross deferred tax liabilities 449 883 Deferred tax asset before unrealized gain on securities available for sale 8,708 15,139 Unrealized gain on securities available for sale (4,468) (9,490) Net deferred tax asset $ 4,240 $ 5,649 At December 31, 1996, the Company had net operating loss carryforwards for Illinois state income tax purposes of approximately $17.8 million which were fully utilized. No valuation allowance has been recorded as of December 31, 1998 and 1997 as the Company believes it is likely that the deferred tax assets will be fully utilized. 12. Financial instruments with off-balance sheet risk and contingencies The company utilizes various financial instruments with off-balance sheet risk to meet the financing needs of its customers, to generate profits and to reduce its own exposure to fluctuations in interest rates. These financial instruments, many of which are considered "off-balance sheet" transactions, involve to varying degrees, credit and interest rate risk in excess of the amount recognized as either an asset or liability in the consolidated balance sheets. Credit risk is the possibility that a loss may occur because a party to a transaction failed to perform according to the terms of the contract. Interest rate risk is the possibility that future changes in market interest rates will cause a financial instrument to be less valuable or more onerous. The Company controls the credit risk arising from these instruments through its credit approval process and through the use of risk control limits and monitoring procedures. The Company uses the same credit policies when entering into financial instruments with off-balance sheet risk as it does for on-balance sheet instruments. At December 31, 1998 and 1997, such commitments and off-balance sheet financial instruments are as follows (in thousands). 1998 1997 Letters of credit $ 18,088 $ 11,880 Lines of credit and other loan commitments 333,906 258,684 $351,994 $270,564 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 standby letters of credit is essentially the same as that involved in extending loan facilities to customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses off-balance sheet derivatives as an end user in connection with its risk management activities. The derivatives currently used are interest rate products and are used to manage interest rate risk relating to specific groups of on-balance sheet assets. The market and credit risks associated with these products, as well as the operating risks, are similar to those relating to other types of financial instruments. Market risk is the exposure created by potential fluctuations in interest rates and other values, and is a function of the product type, the volume of transactions, the tenor and terms of the agreement, and the underlying volatility. Credit risk is the exposure to loss in the event of nonperformance by the other party to the transaction. Credit exposure at the reporting date is represented by the fair value of instruments with a positive fair value at that date. Balance sheet credit exposure is limited to the amount of any unrealized gains at the reporting date. In 1998, the Company entered into an interest rate swap agreement as a means of hedging interest rate exposure on its fixed rate loans. Interest rate swaps involve the exchange of interest rate payments based on differentials between specified financial indices as applied to a notional principal amount. Amounts to be paid or received under the interest rate swap agreement are recognized as interest income in the periods in which they accrue. Any gain or loss on the early termination of the agreement would be deferred and amortized as an adjustment to interest income over the remaining term of the original agreement. The Company also purchased an interest rate cap in 1998 as a means of hedging interest rate exposure on collateralized mortgage obligation securities owned by the Company. Purchased interest rate caps are used to effectively reduce the risk of rising interest rates. Purchased interest rate caps are option contracts that require the payment of an up front fee or premium for the right to receive interest payments on a contract notional amount when a specified rate index rises above a strike rate during the life of the contract. Premiums paid are amortized over the term of the contract as an adjustment to interest income. Amounts received under the agreement are recorded in interest income as earned. A summary of off-balance sheet interest rate derivatives outstanding at December 31, 1998 is as follows: Notional Company Company Amount Pays Receives Interest rate swap $10,000,000 5.85% 3 Month LIBOR Interest rate cap 20,000,000 - 5 Year CMT less 6% There are various claims pending against the Company and its subsidiaries arising in the normal course of business. Management believes, based upon the opinion of counsel, that liabilities arising from these proceedings, if any, will not be material to the Company's financial position. 13. Disclosures About Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practical to estimate that value: Securities For U.S. Treasury and U.S. Government Agency securities, fair values are based on market prices or dealer quotes. For other investment securities, fair value equals quoted market price if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposits The fair value of demand deposits, savings accounts, NOW and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Short-term and Long-term Borrowings The fair value of short-term and long-term borrowings is estimated by discounting the future cash flows using the current interest rates at which similar borrowings could be made for the same maturities. Commitments to Extend Credit and Standby Letters of Credit The fair value of commitments is 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 counter parties. 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 counter parties at the reporting date. The fair value of these commitments is not material. Off-Balance Sheet Derivative Instruments The fair value of off-balance sheet interest rate contracts is based on dealer quotes and represents the estimated amount the Company would receive or pay to terminate the contracts. The estimated fair value of the Company's financial instruments at December 31, 1998 and 1997 are as follows (in thousands): 1998 1997 Carrying Fair Carrying Fair Amount Value Amount Value Financial Assets: Cash $ 52,994 $ 52,994 $ 63,502 $ 63,502 Interest bearing deposits 1,718 1,718 159 159 Securities available for sale 516,083 516,083 454,400 454,400 Federal funds sold and securities purchased under agreements to resell 58,195 58,195 19,922 19,922 Loans, gross 956,200 966,558 1,027,872 1,033,954 Financial Liabilities: Deposits 1,361,020 1,365,679 1,330,531 1,332,230 Short-term borrowings 11,887 11,834 47,598 47,609 Long-term borrowings 70,000 72,498 70,000 70,530 Off-Balance Sheet Items: Interest rate contracts - (179) - - 14. Condensed financial information (Parent Company only) The following is a summary of condensed financial information for the Parent Company only (in thousands): Condensed balance sheets - December 31, 1998 1997 Assets Investment in subsidiaries $179,815 $161,074 Cash & interest bearing deposits 5,370 4,276 Securities available for sale 912 9,621 Premises and equipment 659 1,297 Other assets 7,022 7,234 Total assets $193,778 $183,502 Liabilities and stockholders' equity Dividend payable $ 1,984 $ 1,800 Other liabilities 8,405 9,193 Total liabilities 10,389 10,993 Stockholders' equity 183,389 172,509 Total liabilities and stockholders' equity $193,778 $183,502 Condensed statements of earnings For the years ended December 31, 1998 1997 1996 Income: Dividends from subsidiaries $ 5,000 $ 9,300 $22,285 Investment security gains, net 4,300 - 2,513 Other 12,070 9,270 8,504 21,370 18,570 33,302 Expenses: Interest on borrowings - - 924 Salaries 5,489 6,607 7,372 Other 5,938 3,252 9,757 11,427 9,859 18,053 Earnings before income tax and equity in undistributed earnings of subsidiaries 9,943 8,711 15,249 Income tax expense (benefit) 1,962 (215) (2,298) Earnings before equity in undistributed earnings of subsidiaries 7,981 8,926 17,547 Equity in undistributed earnings of subsidiaries 19,419 8,044 (4,230) Net earnings $27,400 $16,970 $13,317 Condensed statements of cash flows For the years ended December 31, 1998 1997 1996 Operating activities: Net cash provided by operating activities $ 4,695 $ 13,166 $19,276 Investing activities: Sale of securities available for sale 10,445 3 7,077 Purchase of securities available for sale (22) (572) (3,459) (Purchase) disposals of bank premises and equipment 263 (664) (894) Net advances to subsidiary (5,700) (1,331) - Net cash provided by (used in) investing activities 4,986 (2,564) 2,724 Financing activities: Decrease in short-term debt - - (13,250) Redemption of preferred stock - - (5,000) Purchase of treasury stock (687) - - Dividends paid (7,947) (7,142) (6,322) Other 47 65 2,841 Net cash used in financing activities (8,587) (7,077) (21,731) Increase in cash $ 1,094 $ 3,525 $ 269 Cash paid (received) for: Interest $ (124) $ (17) $ 985 Income taxes $ 2,543 $ (1,443) $(1,453) 15. Quarterly financial information (unaudited) (in thousands except per share data) First Second Third Fourth Quarter Quarter Quarter Quarter 1998 Interest income $29,202 $29,186 $29,423 $28,844 Interest expense 13,612 13,385 13,800 13,498 Net interest income 15,590 15,801 15,623 15,346 Provision for loan losses 900 900 900 900 Other operating income 3,659 4,789 21,695 3,519 Other operating expense 11,803 12,335 13,155 13,165 Income before income taxes 6,546 7,355 23,263 4,800 Provision for income taxes 2,088 2,394 8,747 1,335 Net income $ 4,458 $ 4,961 $14,516 $ 3,465 Net income per share - basic $.19 $.22 $.65 $.15 Net income per share - diluted $.19 $.21 $.62 $.15 1997 Interest income $29,099 $30,633 $30,716 $30,173 Interest expense 14,020 14,298 14,498 14,350 Net interest income 15,079 16,335 16,218 15,823 Provision for loan losses 410 950 925 7,415 Other operating income 6,778 2,617 4,204 7,496 Other operating expense 12,440 12,251 12,227 13,294 Income before income taxes 9,007 5,751 7,270 2,610 Provision for income taxes 3,100 1,767 2,503 298 Net income $ 5,907 $ 3,984 $ 4,767 $ 2,312 Net income per share - basic $.26 $.17 $.21 $.10 Net income per share - diluted $.25 $.17 $.20 $.10 Earnings per share amounts have been restated for a 10% stock dividend declared September 28, 1998. 16. Earnings per share The following schedule reconciles net income to income available to common stockholders and the number of average shares used in the computation of basic and diluted earnings per share. All share and per share amounts have been restated for a 10% stock dividend distributed December 1, 1998 to shareholders of record on November 15, 1998. Income Shares Per-Share (Numerator) (Denominator) Amount (in thousands) December 31, 1998: Net income $27,400 Less: Preferred stock dividends (740) Basic EPS Income available to common stockholders 26,660 21,977,029 $1.21 Effect of dilutive securities Stock options 288,966 Convertible preferred stock 580 936,852 Diluted EPS Income available to common stockholders and assumed conversions $27,240 23,202,847 $1.17 December 31, 1997: Net income $16,970 Less: Preferred stock dividends (740) Basic EPS Income available to common stockholders 16,230 22,002,136 $ .74 Effect of dilutive securities Stock options 239,446 Convertible preferred stock 580 936,852 Diluted EPS Income available to common stockholders and assumed conversions $16,810 23,178,434 $ .73 December 31, 1996: Net income $13,317 Less: Preferred stock dividends (940) Basic EPS Income available to common stockholders 12,377 21,904,710 $ .57 Effect of dilutive securities Stock options 117,148 Convertible preferred stock 559 936,852 Diluted EPS Income available to common stockholders and assumed conversions $12,936 22,958,710 $ .56 17. Comprehensive income The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") effective January 1, 1998. SFAS 130 establishes standards for reporting and the display of comprehensive income and its components in a full set of general purpose financial statements. The Company's comprehensive income includes net income and other comprehensive income comprised entirely of unrealized gains or losses on securities available for sale, net of tax. Tax Before Tax (Expense) Net of Tax Amount Benefit Amount December 31, 1998 Net income $41,964 $(14,564) $27,400 Other comprehensive income: Unrealized holding gains arising during the period 4,100 (1,589) 2,511 Less: reclassification adjustment for gains included in net income (16,763) 6,497 (10,266) Net other comprehensive effect (12,663) 4,908 (7,755) Comprehensive income $29,301 $ (9,656) $19,645 December 31, 1997 Net income $24,638 $ (7,668) $16,970 Other comprehensive income: Unrealized holding gains arising during the period 13,068 (5,169) 7,899 Less: reclassification adjustment for gains included in net income (5,236) 2,071 (3,165) Net other comprehensive effect 7,832 (3,098) 4,734 Comprehensive income $32,470 $(10,766) $21,704 December 31, 1996 Net income $18,602 $ (5,285) $13,317 Other comprehensive income: Unrealized holding gains arising during the period 3,496 (1,387) 2,109 Less: reclassification adjustment for gains included in net income (3,886) 1,542 (2,344) Net other comprehensive effect (390) 155 (235) Comprehensive income $18,212 $ (5,130) $13,082 18. Subsequent events During the fourth quarter of 1998, the Company entered into separate agreements to sell four of its branch offices located in Polo, Mount Carroll, Stockton and Warren, Illinois along with deposit accounts with balances totaling approximately $85.1 million associated with those offices. The Company completed the last of the sales in February 1999 and recognized one-time aggregate gains, before tax, of approximately $7.8 million. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The discussion presented below provides an analysis of the Company's financial condition and results of operations for the past three years, and is intended to cover significant factors affecting the Company's overall performance during that time. It is designed to provide shareholders with a more comprehensive review of the operating results and financial condition than could be obtained from an examination of the consolidated financial statements alone, and should be read in conjunction with the consolidated financial statements, accompanying notes and other financial information presented in the 1998 Annual Report to Shareholders. All financial statements and information have been restated to reflect the merger of Northern Illinois Financial Corporation and Premier Financial Services, Inc. with and into Grand Premier Financial, Inc. on August 22, 1996. The merger was accounted for as a pooling of interests. Statements or comments contained in the following discussion and analysis of financial condition and results of operations that are not historical facts may contain forward looking information. These "forward looking statements" fall within the meaning of Section 27 A of the Securities Act of 1933, as amended, and Section 21 E of the Securities Exchange Act of 1934, as amended, and represent the Company's expectations concerning future events and involve substantial risks and uncertainties. The Company cautions that actual results, performance or achievement could differ materially from the results, performance or achievements expressed or implied by these forward looking statements. Important factors that might cause actual results to differ materially include, but are not limited to: federal and state legislative and regulatory requirements; changes in management's estimate of the adequacy of the allowance for loan losses and/or other significant estimates; changes in the level and direction of loan delinquencies and charge-offs; interest rate movements and their impact on customer behavior and the Company's net interest income; the impact of pricing, re-pricing and competitors' pricing on loans, deposits and other sources or uses of funds; the Company's ability to adapt successfully to technological changes to meet customers' needs and developments in the marketplace; the Company's ability to access cost effective funding; changes in the Company's estimate of the steps and costs necessary to address the Year 2000 Issue including ensuring that not only the Company's automated systems, but also those of vendors and customers, can become or are Year 2000 compliant; and general / economic and business conditions. The Company does not undertake, and specifically disclaims, any obligation to update any forward looking statements to reflect events or circumstances occurring after the date of such statements. RESULTS OF OPERATIONS Net earnings totaled $27.4 million, or $1.17 diluted earnings per share, in 1998 compared to $17.0 million, or $.73 diluted earnings per share, in 1997 and $13.3 million, or $.56 diluted earnings per share, in 1996. The significant increase in 1998 over the previous two years was primarily the result of selling the Company's portfolio of listed equity securities. In 1998, pre-tax gains on sales of equity securities contributed $19.8 million to total securities gains of $20.2 million. By comparison, total securities gains were $7.7 million and $3.8 million in 1997 and 1996, respectively. Excluding securities gains, net earnings were approximately $15.2 million, $12.3 million and $11.0 million in 1998, 1997 and 1996, respectively and diluted earnings per share were $.64, $.53 and $.46 during the respective years. Other significant factors, which reduced net earnings by approximately $1.1 million, include charges associated with the closing of two branch offices, a write-off of obsolete computer software, and expenses associated with the Company's pending conversion to a new data processing system early in 1999. Net earnings in 1997 were affected by a provision for possible loan losses much larger than provisions recorded in 1998 and 1996. The Company also combined its five banking subsidiaries into a single charter in 1997, operating as Grand National Bank. The resulting conversion to a common data processing system, along with supplies, printing and other associated costs resulted in increased expenses during the year. Earnings in 1996 were affected significantly by a number of non-recurring items, many of them related to the Company's formation and organization as a result of the merger noted above. Included were charges for contract and lease terminations, severance benefits related to staff reductions, and investment banking and professional fees. Also during 1996, the Company recorded a write-down on a parcel of real estate that had previously been held for future development. Net Interest Income A generally lower interest rate environment, combined with a decline in average loan balances and extremely competitive market conditions contributed to a slight decline in taxable equivalent net interest income from 1997 ($67.9 million) to 1998 ($67.0 million). Tax equivalent interest income fell by $3.8 million (from $125.1 million in 1997 to $121.3 million in 1998), while interest expense declined only $2.9 million (from $57.2 million in 1997 to $54.3 million in 1998), accounting for the overall drop. Taxable equivalent net interest income increased by $6.2 million from 1996 to 1997, largely as a result of growth in net earning assets and a change in asset mix favoring loans. The Company's tax equivalent net interest margin also declined slightly from 1997 (4.48%) to 1998 (4.46%), both of which significantly exceeded the 1996 margin of 4.14%. Various components of the earning asset portfolio were affected differently by changes in asset mix, market rates, actions taken by management to improve Grand Premier's net interest margin, and other factors. Average earning assets were $1.50 billion in 1998, $1.52 billion in 1997 and $1.49 billion in 1996. Average loans, which are generally the highest yielding component in the earning asset portfolio, represented 61.1% of earning assets in 1996, increased to 66.4% in 1997, and declined to 64.8% in 1998. The net decline in average loans from 1997 to 1998 resulted primarily from the Company's actions directed at reducing its indirect loan portfolio. (See "Provision for Possible Loan Losses".) Average investment securities represented 32.0%, 32.6% and 37.8% of the earning asset portfolio in 1998, 1997 and 1996 respectively. Short-term investments in federal funds sold, securities purchased under agreements to resell and other short-term interest bearing balances comprise the remainder of the Company's earning assets, averaging 3.2% of total earning assets in 1998, 1.0% in 1997 and 1.1% in 1996. This year-to year change in asset mix was the single largest factor affecting the Company's tax equivalent interest income. During 1998, the average tax equivalent yield on loans remained steady at 8.95% when compared to 8.96% during 1997. The average yield in 1996 was 8.78%. The higher yields in both 1997 and 1998 were achieved despite generally lower market rates as a result of the Company's focus on yield enhancement and relationship pricing. During the three year period from 1996 to 1998, Grand Premier's tax equivalent yield on its investment portfolio rose from 6.67% in 1996 to 6.88% in 1997, falling to 6.55% in 1998. The year-to-year changes in yield are reflective of 1) reinvesting proceeds from maturing securities at lower prevailing market rates, and 2) accelerated prepayments on mortgage backed securities prompted by borrowers refinancing at lower rates in 1997 and 1998. Short-term investments are also subject to re-investment at market rates upon maturity or sale, with yields averaging 5.45% in 1996, 5.27% in 1997 and 5.73% in 1998. Grand Premier's cost of funds, which is primarily influenced by rates paid on interest bearing deposits, averaged 3.80%, 3.77% and 3.62% in 1996, 1997 and 1998. Average rates paid on interest bearing deposits were 4.42% in 1996, 4.40% in 1997 and 4.27% in 1998. Interest Rate Risk Management One of the Company's objectives is to manage volatility in net interest income resulting from changes in interest rates. This is accomplished by actively managing the re-pricing characteristics of its interest earning assets and interest bearing liabilities in a dynamic environment. Grand Premier uses simulation modeling to analyze the effect of predicted or assumed changes in interest rates on balances and subsequently net interest income. The model provides for simultaneously comparing six different interest rate scenarios and their estimated effect on net interest income over various time horizons. Two "rising" and two "declining" rate scenarios, driven by short-term interest rates changing 300 basis points up and down over twelve and twenty four month periods, along with "most likely" and "flat rate" scenarios are used to identify the potential impact of rapid changes, up or down, from current rates. The "base" or "flat rate" simulation, (more traditionally known as "gap measurement") is used as a control to quantify the effect of changes in net interest income caused solely by re-pricing existing balances at market rates as they mature. Changes in balances reflecting repayment risk, likely changes in customer behavior under different interest rate environments and other "what if" assumptions based on management estimates are also simulated under each scenario. Interest sensitivity, i.e., the Company's exposure to changes in net interest income, is normally measured over a rolling 12 month period under the different rate scenarios and compared to the base case forecast. Generally, Grand Premier's policy is to maximize net interest income while limiting negative interest sensitivity (i.e., a decline in net interest income) to no more than 5% of net interest income under any interest rate scenario. As of December 31, 1998, the simulation model indicated a change in net interest income of less than 3.3% in either the rising or declining rate environments described above. The following table shows the Company's base or flat rate measurement (i.e., "gap position") as of December 31, 1998: Volumes Subject to Re-pricing (in thousands) within within within over 90 days 1 year 5 years 5 years Loans (net of unearned income) $422,898 $169,639 $331,038 $ 32,625 Investment securities 130,997 79,046 133,048 172,992 Other earning assets 59,913 - - - Total earning assets 613,808 248,685 464,086 205,617 Transaction accounts 23,301 23,301 124,811 31,202 Savings accounts 145,778 29,692 188,169 47,053 Time deposit accounts 146,738 283,065 118,365 461 Short-term borrowing 9,379 2,508 - - Long-term borrowing - 5,000 65,000 - Total interest-bearing liabilities 325,196 343,566 496,345 78,716 Asset (liability) gap.. $288,612 $(94,881) $(32,259) $126,901 Cumulative asset gap... $288,612 $193,731 $161,472 $288,373 In reviewing the table, it should be noted that the balances are shown for a specific point in time and because interest sensitivity is dynamic, it can change significantly over time. Furthermore, the balances reflect both contractual re-pricing of deposits and management's re-pricing assumptions on certain deposits. Approximately 63.8% of core demand deposit accounts and regular savings accounts have been classified as re-pricing beyond one year. While these accounts are subject to immediate withdrawal, experience indicates they are relatively rate insensitive. Provision for Possible Loan Losses The Company's provision for possible loan losses is based on periodic (but no less than quarterly) evaluations by management. In these evaluations, numerous factors are considered including, but not limited to, current economic conditions, loan portfolio composition, prior loan loss experience, and an estimation of potential losses. Each loan in the portfolio is graded according to specific financial risk and repayment criteria. The aggregate required reserve balance for the entire portfolio is maintained through earnings provisions as required. The provision for loan losses in 1998 totaled $3.6 million as compared to $9.7 million and $2.9 million in 1997 and 1996, respectively. The Company's 1998 provision was reflective of management's evaluation of the loan portfolio within the context of the factors outlined above. In 1997, approximately $6.0 million of the $9.7 million provision was made as an additional provision in response to deterioration identified by management in the indirect segment of the loan portfolio (totaling $88.4 million, or 8.60% of the loan portfolio, at December 31, 1997). Over the first six months of 1997, the Company had experienced rapid growth in indirect loans originated for the purchase of automobiles, recreation vehicles and other consumer goods. Management performed an extensive internal review of the indirect portfolio in the fourth quarter of 1997 prompted by an increase in the delinquency rate (i.e. past due 60 days or more), which rose from 1.0% in June, 1997 to 4.0% at the end of November, 1997. As a result of the review, management determined that an additional provision was prudent. The Company discontinued this type of lending concurrent with recording the provision. The remainder of the Company's 1997 provision ($3.7 million), as well as the 1996 provision, was essentially tied to overall portfolio growth. At December 31, 1998 the allowance for possible loan losses totaled $12.4 million (1.3% of gross loans) compared to $15.4 million (1.5% of gross loans) at December 31,1997 and $10.1 million (1.05% of gross loans) at December 31, 1996. Net charge-offs as a percentage of average loans were .67% in 1998, compared with .44% and .24% in 1997 and 1996, respectively. The year-to-year increases in net charge-offs were mainly attributable to indirect loans, with net charge-offs totaling $5.51 million in 1998 (.56% of average loans) and $2.77 million in 1997 (.27% of average loans). Although management believes that the allowance for possible loan losses currently provides adequate risk coverage for the loan portfolio, there can be no assurance that significant provisions for losses will not be required in the future based on factors such as portfolio growth, deterioration of market conditions, major changes in borrowers' financial conditions, delinquencies and defaults. Future provisions will continue to be determined in relation to overall asset quality as well as other factors mentioned previously. Other Income Other income, excluding net investment securities gains, increased modestly (.3%), from $13,426,000 in 1997 to $13,466,000 in 1998. By comparison, other income decreased 3.3% in 1997 from $13,878,000 in 1996. Service charges on deposits and trust fees are the primary components of non-interest income. Service charges on deposits represent Grand Premier's largest fee-based source of income. The majority of service charges on deposits are generated from transaction based accounts. During the three years from 1996 through 1998, aggregate balances in these accounts remained relatively stable, averaging $378.5 million in 1996, $369.7 million in 1997 and $369.1 million in 1998. As a result, service charges on deposits remained virtually unchanged at $5.7 million in each of the three years. Trust fees totaled $3.5 million in 1998 compared to $3.2 million in 1997 and $2.9 million 1996. The year-to-year growth was primarily due to favorable performance of managed assets and increases in the amount of assets under administration. Trust fees are based on providing fiduciary, investment management, custodial and related services to corporate and personal clients. As of December 31, 1998, the market value of total managed assets approximated $840 million. Management anticipates continued growth in relationships and fees in future years. Net investment security gains totaled $20.2 million in 1998 and was the main reason for a 59.6% increase in total other income, which increased from $21.1 million in 1997 to $33.7 million in 1998. The substantial increase was primarily a result of $19.8 million in gains realized from selling the Company's portfolio of listed equity securities during the third quarter. Net investment security gains were $7.7 million in 1997 and $3.8 million in 1996. Securities available for sale are utilized to manage interest rate risk, to provide liquidity, and as a contributor to earnings. As conditions change over time, overall interest rate risk, liquidity demands and return on the investment security portfolio will vary. The Company will continue to use its securities available for sale portfolio to manage interest rate risk, meet liquidity needs and optimize overall investment returns and net interest income. Other operating income decreased to $4,315,000 in 1998 from $4,504,000 in 1997 and $5,271,000 in 1996. The Company recorded gains from the sale of other real estate owned totaling $164,000, $142,000 and $545,000 in 1998, 1997 and 1996, respectively. During 1998, the Company also recorded gains from the sale of loans to the secondary market totaling $656,000. In 1997, other operating income included gains totaling approximately $399,000, primarily from the sale of loans to the secondary market, as well as a one-time gain of $132,000 from sale of a marginally profitable line of business in its insurance subsidiary. In 1996, gains totaling approximately $429,000, primarily from the sale of loans to the secondary market, are included in other operating income. During 1998, the Company standardized its processing of merchant credit card transactions and its method of realizing income from rentals of safe deposit boxes. In aggregate, these changes resulted in a decrease in other income totaling approximately $225,000. Other Expenses Total other expenses increased a minimal $246,000 (.5%) to $50.5 million in 1998 from $50.2 million in 1997. The small increase followed a decrease of $3.8 million (7.1%) from $54.0 million in 1996. Salaries and benefits, the largest component of other expense, totaled $24.0 million in 1998, down slightly from $24.2 million in 1997 and substantially less than the $26.6 million recorded in 1996. The decrease in 1998 was mainly attributable to a reduction of full-time equivalent employees, from 635 at December 31, 1997 to 583 at December 31, 1998. The decrease (9.0%) from 1996 to 1997 was the result of a combination of factors. In 1996, $350,000 in severance benefits were paid to employees whose positions were eliminated as a result of combining four subsidiary banks into one charter in February, 1996 and $614,000 was subsequently expensed in recognition of the Company's liability for earned vacation pay as of December 31, 1996. In addition, Grand Premier accrued an expense of $700,000 in the fourth quarter of 1996 for anticipated severance payments to employees whose positions would be eliminated as the Company completed consolidating its operations in early 1997. Three employee groups, including officials and managers, technicians, and office and clerical totaling 46 employees were included in the restructuring plan. Severance payments, including benefits, totaling $811,000 were paid to 45 employees in the first quarter of 1997 concluding the restructuring plan. At December 31, 1996, full-time equivalent employees totaled 642 not including approximately 40 full-time equivalent positions filled by office temporaries. Net occupancy expense declined slightly in 1998, to $4.6 million, as compared to $4.7 million in both 1997 and 1996. Furniture and equipment expense increased $192,000 (to $4.0 million) in 1998, following an increase of $722,000 in 1997 compared to 1996. The year-to-year increases are mainly attributable to depreciation expense associated with upgrading and standardizing computer hardware, telephone systems, data communication lines and signage throughout the Company. Data processing expenses were $2.05 million, $1.86 million, and $1.51 million in 1998, 1997 and 1996, respectively. The 1998 increase is mainly attributable to expenses associated with preparing for conversion to a fully integrated, in-house core data processing system in early 1999. Management believes that an in-house system will provide the tools necessary to expand its array of relationship based financial services while stabilizing costs. The increase from 1996 to 1997 was the result of activity volume added to the Company's current third party core processing system when the Company combined its five remaining bank charters into one. Prior to combining the bank charters, four of the banks processed on an in-house system and were not subject to third party fees. Fees paid to outside professionals approximated $2.09 million in 1998, $1.64 million in 1997 and $1.39 million in 1996. The primary reason for the year-to-year increase was fees paid for training and implementation of a company-wide sales management program ($300,000 in 1998 and $100,000 in 1997). In addition, the Company out-sourced its internal audit function in 1998 and retained information technology consultants in both 1997 and 1998 to assist in 1) standardizing its voice and data communications networks, and 2) selecting a core processing solution. The Company owned 5.5 acres of property in Riverwoods, Illinois, which it acquired in 1993 for possible future expansion. In October 1996, Grand Premier decided that developing the property was no longer consistent with its long-term plans. The Company recorded a $2.5 million charge to 1996 pre-tax earnings reflecting the write-down of the property to approximate fair value. The sale of the property was completed in December 1997 for approximately $35,000 greater than the recorded book value. Other expenses decreased to $12.2 million in 1998, from $12.5 million in 1997 and $12.6 million in 1996. The majority of other expenses are recurring normal operating expenses. Several one-time or non-recurring expenses are also included in each of the three years ending December 31, 1998. One-time charges in 1998 include 1) write-off of obsolete computer software ($231,000), 2) expenses associated with closing two branch offices ($365,000) and 3) expenses related to the Company's pending conversion to a new data processing system in 1999 ($550,000). In addition, loan recovery expenses increased approximately $703,000 from 1997 to 1998 as a result of the Company's aggressive collection efforts relating to its indirect loan portfolio. Non-recurring expenses that resulted from consolidating bank charters and data processing conversions in 1997 approximated $1.3 million. Other expenses in 1997 also included costs associated with closing a branch office in Homewood, Illinois ($200,000) and losses from check and credit card fraud ($456,000). In 1996, other expenses included just under $2.0 million for several non-recurring items; 1) expenses of approximately $750,000 for contract and lease terminations, and 2) $1.2 million in investment banking, professional expenses and other organizational start up costs associated with the merger. Income Taxes Income taxes for 1998 totaled $14.6 million as compared to $7.7 million in 1997 and $5.3 million in 1996. Grand Premier's effective tax rate was 34.7% in 1998, 31.1% in 1997 and 28.4% in 1996. The significant securities gains recorded in 1998 are the main reason for the increase in the effective tax rate from 1997. In 1996, the Company reversed a deferred tax valuation allowance of approximately $763,000, thereby reducing the effective tax rate for the year. The remaining changes in the effective tax rates from year to year are primarily the result of changes in the amount of interest income exempt from income taxes as a percentage of income before taxes. FINANCIAL CONDITION Average assets decreased slightly (1.4%) from 1997 to 1998. During the same two years average earning assets as a percent of average total assets increased slightly, from 92.0% in 1997 to 92.4% in 1998. Balance sheet mix over the two-year period was relatively stable, with modest decreases in average loans and deposits, and increases in average investment securities and long-term and short-term borrowings. The Company increased its long-term advances from the Federal Home Loan Bank during 1997, to $70.0 million at year-end, a balance which remained unchanged during the year ended December 31, 1998. The action was taken as a result of favorable market conditions. Long-term borrowings averaged $40.0 million in 1997 and $70.0 million in 1998. Securities Grand Premier's securities available for sale portfolio is used by the Company as an integral part of its interest rate risk management, earnings and tax planning strategies. The portfolio largely consists of debt securities, any of which may be sold in response to changes in interest rates, for liquidity, or for tax purposes. At December 31, 1998, $516.1 million was invested in securities available for sale, compared to $454.4 million at year-end 1997. The increase is due to a decline in loans outstanding, primarily as a result of the actions taken by management to reduce its portfolio of indirect loans (See "Provision for Possible Loan Losses"). The Company also increased its short-term investments in anticipation of funding requirements relating to the pending sales of four branch offices and their associated deposit liabilities in the first quarter of 1999. At December 31, 1998, approximately 24% of the total carrying value of securities available for sale were U. S. Treasury and U.S. government agency securities, 33% obligations of states and political subdivisions, 36% mortgage-backed securities, 5% corporate securities and commercial paper, and 2% equity securities. The Company's mortgage-backed securities included $159.6 million invested in collateralized mortgage obligations ("CMO's") and $28.6 million in other mortgage-backed securities. The CMO's held by the Company are primarily shorter-maturity bonds (average lives generally less than 3 years). At December 31, 1998, substantially all of the mortgage-backed securities held by the Company were issued or backed by U.S. Government and U.S. Government-sponsored agencies. Loans The Company's lending strategy stresses quality growth, diversified by product, geography and industry. Loans represent the largest component of Grand Premier's earning assets. Gross loans outstanding totaled $956.2 million at December 31, 1998, $71.7 million (7%) lower than year-end 1997. Active refinancing combined with the Company's practice of retaining customer servicing while selling loans secured by first liens on 1-4 family residential properties to the secondary mortgage market, resulted in a decrease ($38.6 million) in these loans from year-end 1997 to 1998. The Company also sold indirect loans with balances totaling approximately $8.1 million from its portfolio in 1998, realizing a net loss of $266,000. Combined with normal principal repayments, the sale resulted in a $47.3 million reduction in indirect loans outstanding, from $88.4 million at December 31, 1997 to $41.1 at year-end 1998. The reductions in the 1-4 family and indirect portfolios were partially offset by strong growth (18.9%) in commercial loans. As of December 31, 1998, the loan portfolio consisted of 28.8% commercial loans, 4.5% loans for construction purposes, 59.5% real estate-mortgages, and 7.2% loans to individuals. Asset Quality The Company reduced non-performing assets from $10.2 million at year-end 1997 to $7.9 million at year-end 1998. Non-performing assets, consisting of loans 90 days or more past due, loans not accruing interest, loans with renegotiated credit terms, and other real estate owned were .48% of total assets compared to .62% of total assets at year-end 1998 and 1997, respectively. Non-accruing loans increased slightly, from $6.2 million at year-end 1997 to $6.9 million at December 31, 1998. Loans past due 90 days or more and still accruing were $170,000 at year-end 1998, a decrease of $1.2 million from the previous year-end. Sales of other real estate owned during 1998 resulted in a significant reduction in properties owned at year-end, from $2.2 million in 1997 to $392,000 in 1998. Renegotiated loans decreased modestly, from $436,000 at year-end 1997 to $414,000 at December 31, 1998. At December 31, 1998, the allowance for possible loan losses totaled $12.4 million or 1.30% of gross loans compared to $15.4 million or 1.50% of gross loans at December 31, 1997. Sources of Funds The Company considers core deposits, which include transaction accounts, savings accounts, and consumer time deposits less than $100,000 as its most stable sources of funding. These deposits are supplemented by time deposits from governmental entities, time deposits greater than $100,000 and securities sold under agreements to repurchase. Other short-term borrowings, long-term borrowings and stockholders' equity provides the remainder of the Company's funding sources. Total deposits increased $30.5 million (2.3%) to $1.36 billion at December 31, 1998 when compared to $1.33 billion at year-end 1997. Non-interest bearing deposits were 14.6% and 14.1% of total deposits at December 31, 1998 and 1997, respectively. Total short-term borrowings, including repurchase agreements, were $11.9 million at December 31, 1998 compared to $47.6 million at December 31, 1997. The lower year-end balance is the result of a $33.0 million reduction in federal funds purchased. Long-term borrowings, consisting solely of advances from the Federal Home Loan Bank, were unchanged at $70.0 million at December 31, 1998 and 1997. Liquidity Grand Premier defines liquidity as having funds available to meet cash flow requirements. Effective management of balance sheet liquidity is necessary to fund growth in earning assets, to pay liabilities, to satisfy depositors' withdrawal requirements and to accommodate changes in balance sheet mix. The Company has three major sources for generating cash other than through operations: 1) primary and secondary market deposits, 2) securities available for sale, and 3) lines of credit from unaffiliated banks. Liquid assets are compared to the potential needs for funds on an ongoing basis to determine if the Company has sufficient coverage for future liquidity needs. Management believes a primary liquidity position that provides for a minimum 100% coverage and total liquidity that provides for a minimum 150% coverage relative to the anticipated likelihood of potential events taking place is prudent. At year-end 1998, the Company's primary and secondary liquidity coverage exceeded these minimums. Stockholders' Equity Stockholders' equity increased by $10.9 million (6.3%) during 1998, from $172.5 million at December 31, 1997 to $183.4 million in 1998. The increase was primarily due to retained net earnings of $19.3 million (net income of $27.4 million less total common and preferred stock dividends of $8.1 million). Accumulated other comprehensive income decreased $7.8 million from year-end 1997 to 1998, primarily from sales of investment securities, resulting in previously unrealized gains being realized as income during 1998. The Federal Reserve Board currently specifies three capital measurements under their risk-based capital guidelines: 1) "tier 1 capital" (i.e., stockholders' equity less goodwill to risk-adjusted assets), 2) "total risk-based capital" (i.e., tier 1 capital plus the lesser of 1.25% of risk-adjusted assets or the allowance for possible loan losses), and 3) "tier 1 leverage ratio" (i.e., stockholders' equity less goodwill to total assets less goodwill). Bank holding companies are required to maintain minimum risk-based capital ratios of 4% for "tier 1 capital", 8% for "total risk-based capital," and a "tier 1 leverage ratio" of 3% or greater. At December 31, 1998, Grand Premier's "tier 1 capital" ratio was 13.76%, well above the regulatory minimum. The Company's "total risk-based capital" and "tier 1 leverage" ratios were 14.82% and 9.99% respectively, also considerably greater than required. The Company's banking subsidiary met the definition of "well capitalized" under the FDIC's risk related premium system at December 31, 1998. CURRENT ACCOUNTING DEVELOPMENTS The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") in June 1998. SFAS 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the statement of financial position at fair value. The accounting changes in the fair value (i.e. gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss is reported in earnings immediately. Accounting for foreign currency hedges is similar to the accounting for fair value and cash flow hedges. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change. SFAS 133 shall be effective for all fiscal quarters of all fiscal years beginning after June 15, 1999, but earlier application is permitted. The adoption of SFAS 133 is not expected to have a material impact on the Company. In October 1998, the FASB issued Statement of Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS 134"). SFAS 134 amends Statement No. 65, "Accounting for Certain Mortgage Banking Activities" to conform the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the subsequent accounting for securities retained after the securitization of other types of assets by a non-mortgage banking enterprise. SFAS 134 is effective for the first quarter beginning after December 15, 1998 and enterprises may reclassify mortgage-backed securities and other beneficial interests retained after the securitization of mortgage loans held for sale from the trading category, except for those with sales commitments in place. The reclassification is to be done only by those enterprises covered by SFAS 134 and is to be done when the statement is initially applied. The adoption of SFAS 134 is not expected to have a material impact on the Company. YEAR 2000 Many existing computer programs use only two digits to identify a year in a date field. These programs were designed and developed without considering the impact of a change in century. If not corrected, many computer programs could fail or create erroneous results which could affect a company's ability to do business prior to, at, or after December 31, 1999. Financial service organizations such as Grand Premier are heavily reliant upon computer systems for processing transactions and accounting for services provided to customers. Substantially all of the Company's major computer systems are currently contracted with third party providers. Beginning during the second quarter of 1999, the Company will operate licensed software "in-house." Although the contracted vendors bear the responsibility for making their systems "year 2000 compliant", assuming the costs associated with necessary changes, keeping the Company appraised of their progress in meeting established benchmarks, and certifying to the Company that the systems are in fact "year 2000 ready", the Company bears ultimate responsibility for testing, due diligence and assurance that its major vendors will continue to provide service without interruption due to the change in century at year-end 1999. In mid 1997, the Company established an internal task force to identify and/or resolve issues related to the year 2000 change. In addition to the internal task force, the Company employs one full-time project manager as well as outside consultants dedicated to the year 2000 project. The task force has completed a comprehensive inventory of all systems used by the Company. These systems include not only data processing and technology driven systems, but also systems which may have embedded chips such as elevators, security systems, building controls, and various office handling equipment. Further, the Company has identified those systems which are deemed "mission critical" to its business. The Company maintains regular communications with vendors who provide critical systems to the Company to verify that 1) their time-lines and benchmarks are met, 2) testing is performed regularly and according to schedule, and 3) necessary changes are being identified and addressed. Similarly, the task force has established its own benchmarks and timelines for managing the "year 2000 project", for evaluating and changing (if necessary) other systems used internally by the Company, and for prioritizing efforts with regard to overall year 2000 issues as they apply to the Company. Management has developed contingency plans in the event that efforts to remedy the Company's systems are not fully successful or are not completed in accordance with current expectations. The contingency plans are being designed to address any failure to remedy the Company's internal systems and to address failures of any third party vendors. The contingency plans primarily include the use of substitute third party service providers and/or a shift to manual processes. The Company has begun testing all mission critical systems. Mission critical testing for third party systems is partially dependent on the vendor and accomplished mostly through user group and/or proxy testing. Mission critical testing for in house systems is being performed by the Company's year 2000 task force members, key members of the technology group, and outside consultants. Management plans on having all testing of mission critical systems completed by June 30, 1999. After extensive investigation, the Company entered into an agreement in August 1998 to change core data processing systems for strategic business reasons unrelated to the Year 2000. Conversion to the new system is anticipated to occur early in the second quarter of 1999. The new data processing system will be licensed software operated "in-house". The software was originally developed with four digit date fields, and accordingly, the vendor has asserted that its system is fully "year 2000 ready". Other licensees of the software have reviewed and participated in the vendor's testing relative to Year 2000. Based on review of the vendor's testing scripts and discussions with other licensees, the Company believes the testing to be satisfactory and the system "year 2000 compliant". As a part of its credit analysis process, the Company has also developed a project plan for assessing the Year 2000 readiness of its significant credit customers. Initial information has been obtained from significant borrowers relative to their year 2000 preparedness. The Company will continue correspondence with these significant customers to ensure continued progress and preparedness for year 2000. The projected total cost of the year 2000 project is currently estimated to be less than $200,000, consisting primarily of the internal project manager's salary and external consulting fees. As of December 31, 1998, a cumulative total of approximately $60,000 had been spent on the Year 2000 project. All costs associated with the year 2000 project are being charged to expense as incurred. The estimate does not include the time that internal staff and user departments are devoting to task force meetings, planning, and testing relative to Year 2000. These costs are not anticipated to have a material impact on operations. Supplementary Business and Stock Information GRAND PREMIER FINANCIAL, INC. is a registered bank holding company established under Delaware Law. The operations of Grand Premier and its subsidiaries consist primarily of financial activities common to the commercial banking industry, as well as trust and investment services, data processing and electronic banking services and insurance. Services are extended to individuals, businesses, local government units and institutional customers throughout Northern Illinois. Stock information The Company's common stock is traded on The Nasdaq Stock Market under the symbol GPFI. As of December 31, 1998 there were 1,279 shareholders of record. A two-year record of trade prices by quarter, as well as cash dividends declared, is as follows: 1998 1997 Quarter High Low Cash Quarter High Low Cash Dividends Dividends 1st 17.50 12.73 .082 1st 10.34 8.18 .073 2nd 17.61 12.96 .082 2nd 13.64 9.77 .073 3rd 15.00 10.68 .082 3rd 13.64 11.65 .073 4th 14.00 10.00 .090 4th 13.52 11.71 .081 Total .34 Total .30 10K notice The Annual Report to the Securities and Exchange Commission, Form 10-K, may be obtained by shareholders free of charge upon written request to Alan J. Emerick, Secretary of the Corporation, Grand Premier Financial, Inc., 486 West Liberty Street, Wauconda, Illinois 60084. The Company's Form 10-K is also available on the EDGAR database at the Securities and Exchange Commission's web site at http://www.sec.gov. Web Site Information Product information, financial information and other news concerning the Company including earnings and other press releases are available at Grand Premier's corporate web site at http://www.grandpremier.com.
Five Year Summary of Selected Financial Data 1998 1997 1996 1995 1994 Earnings: Interest income $116,655 $120,621 $114,370 $108,782 $92,166 Interest expense 54,295 57,166 56,558 53,541 38,928 Net interest income 62,360 63,455 57,812 55,241 53,238 Provision for possible loan losses 3,600 9,700 2,875 1,435 555 Earnings before income taxes 41,964 24,638 18,602 23,185 17,893 Net earnings 27,400 16,970 13,317 17,029 13,344 Net earnings available to common shareholders $ 26,660 $ 16,230 $ 12,377 $ 15,923 $ 12,140 Per common share statistics*: Basic earnings per share $1.21 $ .74 $ .57 $ .73 $ .55 Diluted earnings per share 1.17 .73 .56 .71 .54 Cash dividends declared .34 .30 .25 .17 .16 Book value $7.92 $7.42 $6.77 $6.48 $5.12 Common shares outstanding - year end* 21,981,739 22,002,819 21,982,047 21,856,805 22,040,666 Return on beginning stockholders' equity 15.88% 10.73% 8.54% 13.39% 10.03% Financial position - year end: Securities held-to-maturity $ - $ - $ - $ - $ 114,174 Securities available for sale 516,083 454,400 535,687 598,570 457,161 Loans, net 943,757 1,012,468 955,366 865,317 752,973 Allowance for possible loan losses 12,443 15,404 10,116 9,435 9,738 Excess cost over fair value of net assets acquired 15,281 16,885 18,489 20,227 21,601 Non-interest bearing deposits 199,084 187,943 211,015 196,534 198,659 Interest bearing deposits 1,161,936 1,142,588 1,206,379 1,155,123 1,066,735 Total deposits 1,361,020 1,330,531 1,417,394 1,351,657 1,265,394 Short-term borrowings - 33,000 - 38,475 29,210 Securities sold under agreements to repurchase 11,887 14,598 23,486 49,757 53,638 Long-term borrowings 70,000 70,000 30,000 11,588 5,650 Stockholders' equity 183,389 172,509 158,083 155,997 127,130 Total assets $1,648,241 $1,646,380 $1,642,538 $1,624,673 $1,493,067 * Share statistics have been adjusted to reflect a three-for-one stock split in the form of a 200% stock dividend to shareholders of record June 8, 1994 and a 10% stock dividend to shareholders of record on November 15, 1998.
Board of Directors Jean M. Barry Senior Investment Officer Frank J. Callero Partner Callero and Callero LLP (Certified Public Accountants) Alan J. Emerick Executive Vice President and Chief Administrative Officer Brenton J. Emerick Retired Chief Executive Officer Northern Illinois Financial Corporation (Bank holding company) James Esposito Executive Vice President Grand National Bank Thomas D. Flanagan Founding Partner Flanagan, Bilton & Branagan (law firm) R. Gerald Fox President and Chief Executive Officer F.I.A. Publishing Company (Publisher of Financial Books and Periodicals) Richard L. Geach Chairman of the Board, President and Chief Executive Officer Noa W. Horner President, The Municipal Insurance Company of America of Elgin, Illinois (insurance company) Edward G. Maris Private Investor Howard A. McKee Chairman of the Executive Committee David L. Murray Senior Executive Vice President and Chief Financial Officer H. Barry Musgrove Chairman of the Board and President Franz Manufacturing Company (Manufacturer of anti-friction products) Joseph C. Piland Educational Consultant and retired President Highland Community College Stephen J. Schostok Attorney and Partner Dimonte Schostok & Lizak, Attorneys at Law John Simcic Chairman of the Board, Maki & Associates, Inc. (d/b/a Century 21 United - real estate sales) Executive Officers Richard L. Geach Chairman of the Board, President and Chief Executive Officer David L. Murray Senior Executive Vice President and Chief Financial Officer Alan J. Emerick Executive Vice President and Chief Administrative Officer Scott Dixon Executive Vice President and Senior Sales Leader Larry W. O'Hara Executive Vice President William R. Theobald Executive Vice President Kenneth A. Urban President, Grand Premier Trust and Investment, Inc. Jack R. Croffoot Senior Vice President Nanette K. Donton Senior Vice President Al Lutton Senior Vice President James K. Watts Senior Vice President EXHIBIT 21 Subsidiaries of the Registrant The following subsidiaries are 100% owned by Grand Premier Financial, Inc. Grand National Bank Grand Premier Trust and Investment Services, Inc. Grand Premier Operating Systems, Inc. Grand Premier Insurance Services, Inc. American Suburban Mortgage Corporation (inactive) EXHIBIT 23 Independent Auditor's Consent The Board of Directors Grand Premier Financial, Inc.: We consent to incorporation by reference in the Registration Statement (No. 333-03327) on Form S-4 and (Nos., 333-11635, 333-11645, 333-11663, 333-65455, and 333-65453) on Form S-8 of Grand Premier Financial, Inc. of our report dated January 22, 1999, except for Note 18, which is as of February 18, 1999 relating to the consolidated balance sheets of Grand Premier Financial, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of Grand Premier Financial, Inc. /s/ KPMG LLP Chicago, Illinois March 22, 1999 EX-27 2
9 12-MOS DEC-31-1998 DEC-31-1998 52,994,000 1,718,000 48,000,000 0 516,083,000 0 0 956,200,000 12,443,000 1,648,241,000 1,361,020,000 11,887,000 21,945,000 70,000,000 0 9,250,000 220,000 173,919,000 1,648,241,000 86,990,000 26,920,000 2,745,000 116,655,000 49,046,000 54,295,000 62,360,000 3,600,000 20,196,000 50,458,000 41,964,000 27,400,000 0 0 27,400,000 1.21 1.17 4.21 6,893,000 170,000 413,000 0 15,404,000 10,763,000 4,202,000 12,443,000 12,443,000 0 0
-----END PRIVACY-ENHANCED MESSAGE-----