-----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, KSIb2b1hzFEw0kLkJA/ZeW+rE43Kp87cWEkHiBPSahffvPO5li/XyJKfTfOgZtT6 XHMhiWpfn/EgnTD/T7vUnQ== 0001047469-99-012601.txt : 19990402 0001047469-99-012601.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012601 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARLINVILLE NATIONAL BANK SHARES INC/DE CENTRAL INDEX KEY: 0000753745 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 371125050 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 002-93383 FILM NUMBER: 99579970 BUSINESS ADDRESS: STREET 1: WEST SIDE SQUARE CITY: CARLINVILLE STATE: IL ZIP: 62626 BUSINESS PHONE: 2178543128 MAIL ADDRESS: STREET 1: WEST SIDE SQUARE CITY: CARLINVILLE STATE: IL ZIP: 62626 10-K405 1 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission File Number: 333-57917 CARLINVILLE NATIONAL BANK SHARES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 37-1125050 (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporated or organization) WEST SIDE SQUARE, CARLINVILLE, ILLINOIS 62626 (Address of principal executive offices) (Zip Code) (217) 854-2674 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes / / No /X/ * Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K /X/ State the aggregate market value of the voting and nonvoting common equity held by nonaffiliates computed by reference to the price at which common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days - $19,425,315, as of March 15, 1999. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of March 15, 1999, the registrant had outstanding 249,208 shares of common stock, $1.00 par value per share. DOCUMENTS INCORPORATED BY REFERENCE Certain exhibits are incorporated by reference - see Exhibit Index for listing thereof. - --------------- * Issuer became subject to the periodic reporting requirements of the Securities Exchange Act of 1934 on August 12, 1998, the effective date of the Issuer's Form S-4 Registration Statement. CARLINVILLE NATIONAL BANK SHARES, INC. 1998 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PAGE NUMBER ------ PART I Item 1. Business 1 Item 2. Properties 11 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 12 Item 6. Selected Consolidated Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 37 Item 8. Financial Statements and Supplementary Data 38 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 73 PART III Item 10. Directors and Executive Officers of the Registrant 73 Item 11. Executive Compensation 75 Item 12. Security Ownership of Certain Beneficial Owners and Management 76 Item 13. Certain Relationships and Related Transactions 77 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 78
PART I ITEM 1. BUSINESS THE COMPANY GENERAL Carlinville National Bank Shares, Inc. (the "Company"), founded in 1982, is a multi-bank holding company registered under the Bank Holding Company Act of 1956 (the "BHCA") which owns all of the issued and outstanding capital stock of Carlinville National Bank (the "Carlinville Bank"), Lincoln Trail Bancshares, Inc. ("Lincoln Trail"), and Shipman Bancorp, Inc. ("Shipman"). Lincoln Trail owns all of the issued and outstanding stock of Palmer Bank. Shipman owns all of the issued and outstanding stock of Citizens State Bank ("Citizens Bank"). The Company also owns all of the issued and outstanding stock of Carlinville Tax Service, Inc., a subsidiary engaged in the preparation of tax returns and provision of bookkeeping services for various clients ("CTS"). At December 31, 1998, the Company had consolidated assets of approximately $266.1 million, deposits of approximately $229.9 million, and stockholders' equity of approximately $27.8 million. After serving the local community for 109 years from its single location in Carlinville, Illinois, on December 13, 1996, the Carlinville Bank purchased certain assets and assumed the liabilities of a branch facility in Hillsboro, Illinois, from an unaffiliated regional banking group (the "Hillsboro Branch"). Approximately five weeks later, the Company purchased all of the outstanding capital stock of Lincoln Trail and its wholly-owned subsidiary, Palmer Bank in Taylorville, Illinois. On October 1, 1998, the Company purchased all of the outstanding capital stock of Shipman and its wholly-owned subsidiary, Citizens Bank in Shipman, Illinois. These strategic acquisitions have transformed the Company from a single location, one bank holding company to a multi-bank holding company with seven locations. THE BANKS The Carlinville Bank, Palmer Bank, and Citizens Bank (hereinafter referred to as "the Banks") engage in general full service retail banking within central and southwestern Illinois. Deposit products include certificates of deposit, individual retirement accounts and other time deposits, checking and other demand deposit accounts, NOW accounts, savings accounts and money market accounts. Loans include commercial and industrial, agricultural, real estate mortgage, consumer, home equity, leasing and lines of credit. Other products and services include VISA debit cards, automatic teller machines, safe deposit boxes and trust services. The Company continues to explore new products and services to meet the needs and demands of its customer base and to remain competitive with other financial institutions operating in its market areas. Although each of the Banks operates under the direction of its own board of directors, the Company has standard operating policies regarding asset/liability management, liquidity management, investment management, lending policies and deposit structure management. The Company has centralized certain operations where economies of scale can be achieved. MARKET AREA The Company's primary market area includes the four counties of Macoupin, Montgomery, Christian and Sangamon in central and southwestern Illinois. The Carlinville Bank has offices in Carlinville (Macoupin County) and Hillsboro (Montgomery County), while Palmer Bank has offices in Palmer and Taylorville (Christian County), and in Chatham (Sangamon County). Citizens Bank has offices in Shipman and Brighton (Macoupin County). Citizens Bank also maintains an automated teller machine in Bunker Hill (Macoupin County). While the local economies of this area are somewhat diverse, the primary industry of the four-county area is agriculture. The four counties served by the Banks include some of the richest and most fertile soil in the Midwest and the primary agricultural commodities are corn and soybeans. 1 The city of Carlinville has a population of approximately 5,500 and is the county seat of Macoupin County. While agriculture is a primary focus in Macoupin County, there are several other non-agricultural employers located in Carlinville. Monterey Coal Company employs 330 people, Carlinville Area Hospital employs 185 people, Curry Ice and Coal Company employs 175 people, Lippold and Arnett employs 135 people, Prairie Farms Dairy employs 128 people and the Carlinville School District employs 100 people. The city of Hillsboro has a population of approximately 4,500 and is the county seat of Montgomery County. The city of Taylorville has a population of approximately 11,500 and is the county seat of Christian County. The town of Palmer, also located in Christian County, has a population of 275. Palmer has few employers and most of the residents in the surrounding community are engaged in agriculture. The city of Chatham has a population of 8,000 and is located in Sangamon County, approximately five miles south of Springfield, the Illinois state capital. Chatham primarily serves as a "bedroom community" for the nearby city of Springfield. Most of the residents of Chatham are employed by state government agencies and other businesses located in and around Springfield. The local economy in Chatham is very stable because of the large number of jobs generated by the state government. Springfield also has a relatively large number of employment opportunities in the health care, education and insurance fields. The town of Shipman has a population of approximately 625. Agriculture is the primary industry with the largest employer being Shipman Elevator Company. The town of Brighton has a population of approximately 3,800. Brighton is a growing "bedroom community" of Jerseyville and Godfrey, Illinois. Godfrey is considered part of the St. Louis metropolitan area. Brighton has few employers, with most of its residents working in either Jerseyville, Godfrey or Alton, Illinois, and/or engaged in agriculture. GROWTH STRATEGY The Company seeks to diversify both its market area and asset base while increasing profitability through selected acquisitions and internal expansion. The Company's goal, as reflected by its acquisition policy, is to expand through the acquisition of established financial service organizations, primarily commercial banks or thrifts, to the extent suitable candidates can be identified and acceptable business terms negotiated. Although not actively seeking additional acquisitions at this time, the Company intends to continue exploring opportunities for acquisitions and expansion as they may arise. It is not presently known whether, or on what terms, such discussions would result in further acquisitions. Any interest the Company would have in additional acquisitions or expansion would most likely be focused on traditional community banks and thrifts located in stable and growing areas located in central and southwestern Illinois. At this time, a large number of such financial institutions are located within this geographic area. It is possible, however, that as a result of consolidation within the banking industry generally, as well as in the Company's current market areas, the Company may in the future look beyond these geographic areas for acquisition opportunities. In addition to price and terms, other factors considered by the Company in determining the desirability of an acquisition candidate are financial condition, earnings potential, quality of management, market area and competitive environment. The Company's Board of Directors may in the future consider establishing branches, loan production offices or other business facilities as a means of expanding its presence in current or new market areas. The Board may also investigate expansion into other lines of business closely related to banking if it believes these lines could be profitable without undue risk to the Company and if the Company can be competitive. 2 The Company does not currently have any definite understandings or agreements for any acquisitions material to the Company. However, the Company anticipates that it will continue to grow in the future either internally, by acquisition or a combination of both. Notwithstanding such anticipation, there is no assurance that any further acquisitions will be made or that any branches or other offices will be established. OPERATING STRATEGY Corporate policy, strategy and goals are established by the Company's Board of Directors. Pursuant to the Company's philosophy, operational and administrative policies for the Banks are also established by the Company. Within this framework, each of the Banks focuses on providing personalized services and quality products to its customers to meet the needs of the communities which it serves. The Company operates its banking subsidiaries as traditional community banks with conveniently-located facilities and professional, highly-motivated staffs which are active in the communities in which they are located. The Company focuses on long-term relationships with customers and provides individualized quality service. As part of its community banking approach, the Company encourages officers of the Banks to actively participate in community organizations. In addition, within credit and rate of return parameters, the Company attempts to ensure that each of the Banks meets the credit needs of its communities and invests in local municipal obligations. The Company uses a variety of marketing strategies to attract and retain customers, with a particular emphasis on a strong sales culture within the Banks and an outside officer calling program. Officers of each of the Banks regularly call on customers and potential customers of the institutions to maintain and develop deposit and other special service relationships, including cash management, employee benefit plan administration and lock box and fiduciary services. The Company has an internal data processing division and has attempted to remain at the forefront of the banking industry in new technological innovations. The Company believes that retaining control of its data processing leads to decreased operating costs, more effective service to its customers and increased efficiencies. To provide a high level of customer service and to manage effectively its growth, acquisition and operating strategies, the Company also focuses on continued improvement of the Banks' internal operating systems. LENDING ACTIVITIES GENERAL The Banks provide a broad range of commercial and retail lending services to corporations, partnerships, individuals and government agencies. These credit activities include agricultural, commercial, residential real estate and installment loans, as well as loan participations, leasing, lines of credit and purchases of municipal obligations. As more fully described below, commercial loans, as well as consumer loans and loans made for agricultural purposes, generally possess a greater repayment risk than do, for example, loans made for residential real estate. The Banks aggressively market their services to qualified lending customers. Lending officers actively solicit the business of new borrowers entering their market areas as well as long-standing members of the Banks' respective business communities. Through professional service and competitive pricing, the Banks have been successful in attracting new agricultural and commercial lending customers. The Banks also actively pursue consumer lending opportunities. Through convenient locations, advertising and customer communications, the Banks have been successful in capitalizing on the credit needs of their market areas. COMMERCIAL LOANS The Banks have a strong commercial loan base and the Carlinville Bank in particular continues to be an active commercial lender in Macoupin County. The Banks' areas of emphasis include, but are not limited to, loans to wholesalers, manufacturers, building contractors, developers, business services companies and retailers. 3 The Banks provide a wide range of business loans, including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment and other purposes. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower. Terms of commercial business loans generally range from one to five years. The majority of the Banks' commercial business loans have floating interest rates or reprice within one year. The primary repayment risk for commercial loans is the failure of the business due to economic or financial factors. In most cases, the Banks have collateralized these loans and/or taken personal guarantees to help assure repayment. As the credit portfolios of the Banks have continued to grow, several changes have been made in their lending departments resulting in an overall increase in these departments' skill levels. Loan review personnel and commercial lenders interact with their respective bank's boards of directors each month. The Company has also established a separate loan review function to analyze credits of the Banks. Management has attempted to identify problem loans at an early stage and to aggressively seek a resolution of these situations. AGRICULTURAL LOANS The Banks are active lenders to the agricultural industry. Agricultural loans continue to be emphasized by each of the Banks due to their concentration of customers in rural markets. Agricultural loans currently represent over 30% of the Company's consolidated loan portfolio. The Company's Board of Directors closely monitors its agricultural loan concentration. In connection with their agricultural lending, the Banks have remained close to their traditional geographical market areas. The majority of the Banks' outstanding agricultural operating and real estate loans primarily relate to ventures within 20 miles of their main or branch offices. Agricultural loans and direct financing leases, many of which are secured by crops, machinery and real estate, are provided to finance capital improvements and farm operations as well as acquisitions of livestock and machinery. The loan departments of the Banks work closely with all agricultural customers, including companies and individual farmers, and assist in the preparation of budgets and cash flow projections for the ensuing crop year. These budgets and cash flow projections are monitored closely during the year and reviewed with agricultural customers at least once a year. In addition, the Banks work closely with governmental agencies, including the Farmers Home Administration, to assist agricultural customers in obtaining credit enhancement products such as loan guarantees. There are certain unique risks associated with agricultural lending. Repayment of such loans may be affected by commodity prices obtained for crops or livestock and the overall size of borrowers' yields, which is substantially dependent upon such factors as climate and weather during the growing seasons. Additionally, agricultural lending results in seasonal fluctuations in the level of loans and liquidity of the Banks. Agricultural loans generally increase in the early Spring and continue to grow until the current crops or livestock are sold, at which time the operating lines of credit are generally repaid. Term loans for equipment and real estate are generally also paid down at this time as well. Accordingly, the level of funds available in the form of Federal funds sold is generally higher upon receipt of loan payments and is generally at its lowest point late in the crop/livestock season. REAL ESTATE MORTGAGE LOANS Mortgage lending has been a focal point of the Banks as each continues to build its real estate lending business. In 1997, the Company established a mortgage banking department inside the Banks to originate mortgage loans for sale in the secondary market. Additionally, prior to the Company's acquisition of Shipman, Citizens Bank had established secondary mortgage banking operations, which have continued to grow. Servicing rights are retained on certain of the loans originated and sold. In general, mortgage activity in 1998 and 1997 was active as low interest rates induced a large number of home owners to refinance existing homes and an equally large number of first time buyers to acquire or construct homes. In 1998 and 1997, the mortgage banking departments inside the Banks originated and sold into the secondary market approximately $16.5 and $9.4 million of mortgage loans, respectively. While the Banks do not require all of their residential mortgage loans to conform to the underwriting requirements of Freddie Mac and Fannie Mae, loans which the Banks intend to 4 resell in the secondary market are underwritten according to such standards. The Banks currently originate and resell approximately $1,300,000 per month of mortgage loans in the secondary market. CONSUMER LENDING The Banks' consumer lending departments provide all types of consumer loans including motor vehicle, home improvement, home equity, student loans, signature loans and small personal credit lines. The Banks have entered into a contract with a non-affiliated third party to provide credit card processing for their operations. Through this program, the Banks have increased profits and augmented the cross-selling opportunities by increasing their marketing bases. OTHER SERVICES CTS was originally established in 1995 to provide tax return preparation services for the local customers of the Carlinville Bank. Since that time, CTS has expanded to provide certain bookkeeping services for local clients as well. CTS is located in the main office of the Carlinville Bank in Carlinville. In 1998, CTS reported net income of approximately $5,000. The Banks also offer to their customers full service brokerage services through a third party brokerage house. These services are currently offered through the Company's offices in Carlinville and Hillsboro, and the Company is considering expanding operations to the offices of Palmer Bank in Taylorville, Palmer and Chatham, and Citizens Bank in Shipman and Brighton. COMPETITION The Company encounters competition in all areas of its business pursuits. In order to compete effectively, to develop its market base, to maintain flexibility and to move in pace with changing economic and social conditions, the Company continuously refines and develops its products and services. The principal methods of competition in the financial services industry are price, service and convenience. The Banks' combined market area is highly competitive. There are approximately thirty-six other commercial banks that currently operate banking offices in the four-county area in which the Banks primarily operate. In addition, many other financial institutions based in the communities surrounding these counties also actively compete for customers with the Company's market areas. The Banks also face competition from finance companies, insurance companies, mortgage companies, securities brokerage firms, money market funds, loan production offices and other providers of financial services. The Company competes for loans principally through the range and quality of the services to provides, interest rates and loan fees. The Company believes that its long-standing presence in the communities it serves and personal service philosophy enhance its ability to complete favorably in attracting and retaining individual and business customers. The Company actively solicits deposit-related clients and competes for deposits by offering customers personal attention, professional service and competitive interest rates. EMPLOYEES At December 31, 1998, the Company employed approximately 100 full-time equivalent employees. The Company places a high priority on staff development, which involves extensive training, including customer service training. New employees are selected on the basis of both technical skills and customer service capabilities. None of the Company's employees are covered by a collective bargaining agreement. The Company offers a variety of employee benefits and management considers its employee relations to be excellent. 5 SUPERVISION AND REGULATION GENERAL Financial institutions and their holding companies are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company and Banks can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities, including the Board of Governors of the Federal Reserve System (the "Federal Reserve"), the Office of the Comptroller of the Currency (the "OCC"), the Federal Deposit Insurance Corporation (the "FDIC"), the Illinois Commissioner of Banks and Real Estate (the "Commissioner"), the Internal Revenue Service and state taxing authorities, and the Securities and Exchange Commission (the "SEC"). The effect of applicable statutes, regulations and regulatory policies can be significant, and cannot be predicted with a high degree of certainty. Federal and state laws and regulations generally applicable to financial institutions, such as the Company and its subsidiaries, regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and its subsidiaries establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC's deposit insurance funds and the depositors, rather than the shareholders, of financial institutions. The following is a summary of the material elements of the regulatory framework that applies to the Company and its subsidiaries. It does not describe all of the statutes, regulations and regulatory policies that apply to the Company and its subsidiaries, nor does it restate all of the requirements of the statutes, regulations and regulatory policies that are described. As such, the following is qualified in its entirety by reference to the applicable statutes, regulations and regulatory policies. Any change in applicable law, regulations or regulatory policies may have a material effect on the business of the Company and its subsidiaries. RECENT REGULATORY DEVELOPMENTS PENDING LEGISLATION. Legislation has been introduced in the Congress that would allow bank holding companies to engage in a wider range of nonbanking activities, including greater authority to engage in securities and insurance activities. The expanded powers generally would be available to a bank holding company only if the bank holding company and its banking subsidiaries remain well-capitalized and well-managed. At this time, the Company is unable to predict whether the proposed legislation will be enacted and, therefore, is unable to predict the impact such legislation may have on the Company and its subsidiaries. THE HOLDING COMPANIES GENERAL. The Company (as the sole shareholder of the Carlinville Bank, Lincoln Trail and Shipman), Lincoln Trail (as the sole shareholder of Palmer Bank) and Shipman (as the sole shareholder of Citizens Bank) are bank holding companies. As bank holding companies, the Company, Lincoln Trail and Shipman are registered with, and are subject to regulation by, the Federal Reserve under the Bank Holding Company Act of 1956 (the "BHCA"). In accordance with Federal Reserve policy, the Company, Lincoln Trail and Shipman are expected to act as a source of financial strength to their subsidiary banks and to commit resources to support their subsidiary banks in circumstances where they might not otherwise do so. Under the BHCA, the Company, Lincoln Trail and Shipman are subject to periodic examination by the Federal Reserve. The Company, Lincoln Trail and Shipman are also required to file with the Federal Reserve periodic reports of their operations and such additional information as the Federal Reserve may require. The Company, Lincoln Trail and Shipman are also subject to regulation by the Commissioner under the Illinois Bank Holding Company Act, as amended. 6 INVESTMENTS AND ACTIVITIES. Under the BHCA, a bank holding company must obtain Federal Reserve approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after the acquisition, it would own or control more than 5% of the shares of the other bank or bank holding company (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank; or (iii) merging or consolidating with another bank holding company. Subject to certain conditions (including certain deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws which require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. The BHCA also generally prohibits the Company, Lincoln Trail and Shipman from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve to be "so closely related to banking ... as to be a proper incident thereto." Under current regulations of the Federal Reserve, the Company, Lincoln Trail, Shipman and their non-bank subsidiaries are permitted to engage in a variety of banking-related businesses, including the operation of a thrift, sales and consumer finance, equipment leasing, the operation of a computer service bureau (including software development), and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies. Federal law also prohibits any person or company from acquiring "control" of a bank or a bank holding company without prior notice to the appropriate federal bank regulator. "Control" is defined in certain cases as the acquisition of 10% of the outstanding shares of a bank or bank holding company. CAPITAL REQUIREMENTS. Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses. The Federal Reserve's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: a risk-based requirement expressed as a percentage of total risk-weighted assets, and a leverage requirement expressed as a percentage of total assets. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated companies, with a minimum requirement of 4% for all others. For purposes of these capital standards, Tier 1 capital consists primarily of permanent stockholders' equity less intangible assets (other than certain mortgage servicing rights and purchased credit card relationships). Total capital consists primarily of Tier 1 capital plus certain other debt and equity instruments which do not qualify as Tier 1 capital and a portion of the Company's reserve for possible loan losses. The risk-based and leverage standards described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve's capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels. 7 Under the Federal Reserve's guidelines, the capital standards described above apply on a consolidated basis to bank holding companies that have more than $150 million in total consolidated assets, but generally apply on a bank-only basis to bank holding companies that have less than $150 million in total consolidated assets. Both Lincoln Trail and Shipman have less than $150 million in total consolidated assets and, therefore, are not subject to the Federal Reserve's capital standards on a consolidated basis. The Company, however, has total consolidated assets in excess of $150 million and is subject to the Federal Reserve's capital standards on a consolidated basis. As of December 31, 1998, the Company had regulatory capital, calculated on a consolidated basis, in excess of the Federal Reserve's minimum requirements, with a total risk-based capital ratio of 14.21% and a leverage ratio of 8.61%. DIVIDENDS. The Delaware General Corporation Law (the "DGCL") allows Delaware corporations, such as the Company, to pay dividends only out of its surplus (as defined and computed in accordance with the provisions of the DGCL) or if the corporation has no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. The Illinois Business Corporation Act, as amended, prohibits Illinois corporations, such as Lincoln Trail and Shipman, from paying a dividend if, after giving effect to the dividend: (i) the corporation would be insolvent; or (ii) the net assets of the corporation would be less than zero; or (iii) the net assets of the corporation would be less than the maximum amount then payable to shareholders of the corporation who would have preferential distribution rights if the corporation were liquidated. Additionally, the Federal Reserve has issued a policy statement with regard to the payment of cash dividends by bank holding companies. The policy statement provides that a bank holding company should not pay cash dividends which exceed its net income or which can only be funded in ways that weaken the bank holding company's financial health, such as by borrowing. The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. FEDERAL SECURITIES REGULATION. The Company's common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. THE BANKS GENERAL. Palmer Bank and Citizens Bank are Illinois-chartered banks, the deposit accounts of which are insured by the FDIC's Bank Insurance Fund ("BIF"). As BIF-insured, Illinois-chartered banks, Palmer Bank and Citizens Bank are subject to the examination, supervision, reporting and enforcement requirements of the Commissioner, as the chartering authority for Illinois banks, and the FDIC, as administrator of the BIF. The Carlinville Bank is a national bank, chartered by the OCC under the National Bank Act. The deposit accounts of the Carlinville Bank are insured by the BIF of the FDIC, and the Carlinville Bank is a member of the Federal Reserve System. As a BIF-insured national bank, the Carlinville Bank is subject to the examination, supervision, reporting and enforcement requirements of the OCC, as the chartering authority for national banks, and the FDIC, as administrator of the BIF. DEPOSIT INSURANCE. As FDIC-insured institutions, the Banks are required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their respective levels of capital and results of supervisory evaluations. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period. 8 During the year ended December 31, 1998, BIF assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment period beginning January 1, 1999, BIF assessment rates will continue to range from 0% of deposits to 0.27% of deposits. The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution (i) has engaged or is engaging in unsafe or unsound practices, (ii) is in an unsafe or unsound condition to continue operations or (iii) has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Management of the Company is not aware of any activity or condition that could result in termination of the deposit insurance of any of the Banks. FICO ASSESSMENTS. Since 1987, a portion of the deposit insurance assessments paid by members of the FDIC's Savings Association Insurance Fund ("SAIF") has been used to cover interest payments due on the outstanding obligations of the Financing Corporation ("FICO"). FICO was created in 1987 to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the SAIF's predecessor insurance fund. As a result of federal legislation enacted in 1996, beginning as of January 1, 1997, both SAIF members and BIF members became subject to assessments to cover the interest payments on outstanding FICO obligations. These FICO assessments are in addition to amounts assessed by the FDIC for deposit insurance. Until January 1, 2000, the FICO assessments made against BIF members may not exceed 20% of the amount of the FICO assessments made against SAIF members. Between January 1, 2000 and the final maturity of the outstanding FICO obligations in 2019, BIF members and SAIF members will share the cost of the interest on the FICO bonds on a PRO RATA basis. During the year ended December 31, 1998, the FICO assessment rate for SAIF members ranged between approximately 0.061% of deposits and approximately 0.063% of deposits, while the FICO assessment rate for BIF members ranged between approximately 0.012% of deposits and approximately 0.013% of deposits. SUPERVISORY ASSESSMENTS. All Illinois banks and national banks are required to pay supervisory assessments to the Commissioner and the OCC, respectively, to fund the operations of the Commissioner and the OCC. The amount of the assessment paid by Illinois banks is calculated based on the institution's total assets, including consolidated subsidiaries, as reported to the Commissioner. The amount of the assessment paid by national banks is calculated using a formula which takes into account the bank's size and its supervisory condition (as determined by the composite rating assigned to the bank as a result of its most recent OCC examination). CAPITAL REQUIREMENTS. Under applicable regulations of the FDIC and the OCC, the Banks are subject to the following minimum capital standards: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with a minimum requirement of at least 4% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. For purposes of these capital standards, Tier 1 capital and total capital consist of substantially the same components as Tier 1 capital and total capital under the Federal Reserve's capital guidelines for bank holding companies (SEE "--The Holding Companies--Capital Requirements"). The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, the regulations of the FDIC and the OCC provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. During the year ended December 31, 1998, none of the Banks was required by the its primary federal regulator to increase its capital to an amount in excess of the minimum regulatory requirement. As of December 31, 1998, each of the Banks exceeded its minimum regulatory capital requirements, as follows:
TOTAL RISK-BASED LEVERAGE CAPITAL RATIO CAPITAL RATIO ---------------- ------------- Carlinville Bank 13.81% 8.20%
9 Palmer Bank 12.02% 7.23% Citizens Bank 15.85% 9.86%
Federal law and regulations provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators' powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized," in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: requiring the institution to submit a capital restoration plan; limiting the institution's asset growth and restricting its activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions between the institution and its affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. As of December 31, 1998, each of the Banks was considered well-capitalized, as defined by federal regulations. Additionally, institutions insured by the FDIC may be liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of commonly controlled FDIC insured depository institutions or any assistance provided by the FDIC to commonly controlled FDIC insured depository institutions in danger of default. Because the Banks are all directly or indirectly wholly-owned by the Company, the Banks are deemed to be commonly controlled. DIVIDENDS. Under the Illinois Banking Act, Illinois-chartered banks, such as Palmer Bank and Citizens Bank, may not pay, without prior regulatory approval, dividends in excess of their net profits. The National Bank Act also imposes limitations on the amount of dividends that may be paid by a national bank, such as the Carlinville Bank. Generally, a national bank may pay dividends out of its undivided profits, in such amounts and at such times as the bank's board of directors deems prudent. Without prior OCC approval, however, a national bank may not pay dividends in any calendar year which, in the aggregate, exceed the bank's year-to-date net income plus the bank's retained net income for the two preceding years. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, each of the Banks exceeded its minimum capital requirements under applicable guidelines as of December 31, 1998. Notwithstanding the availability of funds for dividends, however, the payment of dividends by a financial institution may be restricted or prohibited by the institution's primary federal regulator based upon a finding that such payment would constitute an unsafe or unsound practice. INSIDER TRANSACTIONS. The Banks are subject to certain restrictions imposed by federal law on extensions of credit to the Company and its subsidiaries, on investments in the stock or other securities of the Company and its subsidiaries and the acceptance of the stock or other securities of the Company or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by the Banks to their respective directors and officers, to directors and officers of the Company and its subsidiaries, to principal stockholders of the Company, and to "related interests" of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its subsidiaries or a principal stockholder of the Company may obtain credit from banks with which the Banks maintain a correspondent relationship. SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies have adopted guidelines which establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. In addition, in October 1998, the federal banking regulators issued safety and soundness 10 standards for achieving Year 2000 compliance, including standards for developing and managing Year 2000 project plans, testing remediation efforts and planning for contingencies. In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution's primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator's order is cured, the regulator may restrict the institution's rate of growth, require the institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal banking regulators, including cease and desist orders and civil money penalty assessments. BRANCHING AUTHORITY. Illinois banks, such as Palmer Bank and Citizens Bank, have the authority under Illinois law to establish branches anywhere in the State of Illinois, subject to receipt of all required regulatory approvals. National banks headquartered in Illinois, such as the Carlinville Bank, have the same branching rights in Illinois as banks chartered under Illinois law. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), both state and national banks are allowed to establish interstate branch networks through acquisitions of other banks, subject to certain conditions, including certain limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if specifically authorized by state law. The legislation allowed individual states to "opt-out" of certain provisions of the Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997. Illinois has enacted legislation permitting interstate mergers beginning on June 1, 1997, subject to certain conditions, including a prohibition against interstate mergers involving an Illinois bank that has been in existence and continuous operation for fewer than five years. STATE BANK ACTIVITIES. Under federal law and FDIC regulations, FDIC insured state banks, such as Palmer Bank and Citizens Bank, are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. These restrictions have not had, and are not currently expected to have, a material impact on the operations of Palmer Bank or Citizens Bank. FEDERAL RESERVE SYSTEM. Federal Reserve regulations, as presently in effect, require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts), as follows: for transaction accounts aggregating $46.5 million or less, the reserve requirement is 3% of total transaction accounts; and for transaction accounts aggregating in excess of $46.5 million, the reserve requirement is $1.395 million plus 10% of the aggregate amount of total transaction accounts in excess of $46.5 million. The first $4.9 million of otherwise reservable balances are exempted from the reserve requirements. These reserve requirements are subject to annual adjustment. Further information regarding the Company's business is discussed below in "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 2. PROPERTIES The principal offices of the Company are located in the Carlinville Bank's main office at West Side Square, Carlinville, Illinois 62626. This office is owned by the Carlinville Bank and consists of a two-story brick 11 building constructed in the 1920's, all of which is occupied by the Carlinville Bank, the Company, and CTS. The Carlinville Bank has one other banking office located in Hillsboro, Illinois. The Carlinville Bank leases this facility under a five-year lease. Palmer Bank owns its main office located at 620 North Webster Street, Taylorville, Illinois. Palmer Bank has two other facilities, one located in Palmer and the other located in Chatham, Illinois. Palmer Bank owns its office in Palmer and leases its office in Chatham under a two-year lease. Citizens Bank owns its main office located at 111 Keating Street, Shipman, Illinois, which consists of a one-story building with 5,700 square feet of space. This facility includes a 24-hour automated teller machine. Citizens Bank also maintains a full service branch at 202 North Maple in Brighton, Illinois. Citizens Bank owns this one-story building with 1,850 square feet of space, which was constructed in 1994. This facility also includes a 24-hour full service automated teller machine. Citizens Bank also owns a automated teller machine inside the Short Stop convenience store located at 702 Washington, in Bunker Hill. ITEM 3. LEGAL PROCEEDINGS From time to time, one or more of the Company's subsidiaries, including the Banks, becomes involved as plaintiff or defendant in various legal actions arising in the normal course of their respective businesses. While the ultimate outcome of these various legal proceedings cannot be predicted with certainty, it is the opinion of Company management that there are no material pending legal proceedings to which the Company or any of its subsidiaries is a party other than such ordinary routine litigation, the resolution of which would not reasonably be expected to have a material effect on the Company's consolidated financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no items submitted to a vote of security holders in the fourth quarter of 1998. PART II ITEM 5. MARKET FOR REGISTRANTS' COMMON STOCK AND RELATED SHAREHOLDER MATTERS There is no established public trading market for the Company's common stock. As of December 31, 1998, Common Stock was held of record by approximately 250 persons. To the knowledge of Company management, five sales of Company common stock occurred in 1997, involving an aggregate of 2,072 shares at prices ranging from $100 to $110 per share, and no sales of Company common stock occurred in 1998. The Company has paid the following dividends per share for the three year period ended December 31, 1998: June 30, 1996 $ 1.25 December 31, 1996 1.30 June 30, 1997 1.35 December 31, 1997 1.40 June 30, 1998 1.45 December 31, 1998 1.50 ---- ---- In determining cash dividends, the Board of Directors considers the earnings, capital requirements, debt and dividend servicing requirements, financial ratio guidelines it has established, financial condition of the Company and other relevant factors. The Banks' ability to pay dividends to the Company and the Company's ability to pay dividends to its stockholders are also subject to certain regulatory restrictions. The Company has in the past paid regular cash dividends on the common stock. There can be no assurance, however, that any such dividends will be paid by the Company or that such dividends will not be reduced or eliminated in the future. The timing and amount of dividends will depend upon the earnings, capital 12 requirements and financial condition of the Company and the Banks as well as the general economic conditions and other relevant factors affecting the Company and the Banks. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following summary sets forth selected consolidated financial information as of and for the years ended December 31 of the years shown for the Company and its subsidiaries, which is derived from the consolidated financial statements included elsewhere herein. This information should be read in conjunction with the consolidated financial statements and notes appearing elsewhere herein.
AS OF AND FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Balance Sheet Items Investments in debt and equity securities $ 73,986,227 $ 63,017,737 $ 57,048,466 $ 34,977,570 $ 37,208,483 Loans, net of unearned discount 152,599,692 111,878,149 79,378,828 78,947,722 75,468,178 Reserve for possible loan losses 1,641,212 1,098,038 800,418 1,016,000 1,102,000 Total assets 266,055,279 197,180,890 150,097,191 129,697,057 134,880,107 Total deposits 229,925,936 167,614,872 126,839,285 104,585,623 107,040,910 Long-term borrowings 1,252,000 -- -- -- -- Shareholders' equity 27,754,123 20,433,635 18,585,779 17,163,453 15,630,833 Results of Operations Interest income $ 15,728,856 $ 13,746,293 $ 9,724,896 $ 9,267,174 $ 8,162,651 Interest expense 8,568,029 7,433,808 4,761,039 4,452,634 3,568,536 ------------ ------------ ------------ ------------ ------------ Net interest income 7,160,827 6,312,485 4,963,857 4,814,540 4,594,115 Provision for possible loan losses 335,000 170,000 -- -- -- Net income 2,036,625 1,850,678 1,916,751 1,829,093 1,726,253 Per Share Data Net income $ 10.07 $ 9.93 $ 10.31 $ 9.84 $ 9.31 Cash dividends declared 2.95 2.75 2.55 2.35 2.05 Book value 111.37 109.56 99.98 92.33 84.08 Tangible book value 91.87 88.89 88.84 92.33 84.08
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following presents management's discussion and analysis of the consolidated financial condition and results of operations of the Company and its subsidiaries for each of the years in the three-year period ended December 31, 1998. This discussion and analysis is intended to review the significant factors affecting the financial condition and results of operations of the Company, and provides a more comprehensive review which is not otherwise apparent from the consolidated financial statements alone. This discussion should be read in conjunction with the above "Selected Consolidated Financial Data," and the Company's consolidated financial statements and the notes thereto and other financial data appearing elsewhere herein. OVERVIEW Bank acquisitions have significantly changed the Company's consolidated financial position and results of operations during the three-year period ended December 31, 1998. Total assets increased to $266,055,279 at December 31, 1998, while loans and deposits increased to $152,599,692 and $229,925,936, respectively, at the end of 1998, primarily as a result of the Shipman acquisition. A year earlier, total assets had increased to $197,180,890 at December 31, 1997, while loans and deposits increased to $111,878,149 and $167,614,872, respectively at the end of 1997, primarily as a result of the acquisitions of the Hillsboro Branch and Lincoln Trail. With these three significant acquisitions, the Company has worked to affect the synergies of a larger organization, while maintaining the personal service of a local community bank at each of its banking facilities. 13 At December 31, 1998, the increases achieved in assets, loans and deposits have translated into a moderately increased earnings level, early in the Company's "transition" stage. Prior to the Hillsboro Branch acquisition in December 1996, the Company had operated as a one-bank holding company with one banking location for 109 years. With the recent acquisitions of the Hillsboro Branch, Lincoln Trail, and Shipman, the Company anticipates that much of 1999 will be devoted to effecting an orderly transition to a multi-bank holding company. However, Company management has committed that any transition efforts will go unnoticed by its banking customers, with no loss of the personal service levels at any of the banking subsidiaries. Net income for the year ended December 31, 1998 was $2,036,625, which represented an increase of $185,947, or 10.05%, from the 1997 income level of $1,850,678, which represented a decrease of $66,073, or 3.45%, from the 1996 net income of $1,916,751. Earnings per share for the years ended December 31, 1998, 1997 and 1996 were $10.07, $9.93, and $10.31, respectively. The Company's earnings in 1998 and 1997 were impacted by the amortization of intangible assets incurred in connection with the Hillsboro Branch, Lincoln Trail, and Shipman acquisitions. Additionally, the acquisitions of the Hillsboro Branch and Lincoln Trail have lowered Company's loan-to-deposit ratio. The average loan-to-deposit ratio was 74.12% in 1996, 64.15% in 1997, and 67.34% in 1998. As more fully described herein, the acquisition of Lincoln Trail involved a bank which had experienced severe asset quality problems during the two years prior to the Company's acquisition thereof. The Company and Palmer Bank management spent considerable time and effort to resolve these problems in 1997 and 1998. Company management believes that a substantial portion of these problems are now behind them, allowing management to focus on more profitable endeavors. The Company continues to maintain a strong capital base, with consolidated Tier 1 regulatory capital of $22,389,470 at December 31, 1998, or 13.16% of risk-based assets, as computed by banking regulators. Cash dividends have continued to increase, growing 8.51% in 1996 to $2.55 per share, 7.84% in 1997 to $2.75 per share, and 7.27% in 1998 to $2.95 per share. Book value has continued to increase as well, growing 8.28% in 1996 to $99.98 per share, 9.58% in 1997 to $109.56, and 1.81% in 1998 to $111.37. Following are certain other ratios generally followed in the banking industry for the Company for each of the years in the three-year period ended December 31, 1998.
AS OF AND FOR THE YEARS ENDED DECEMBER 31, -------------------------= 1998 1997 1996 ------ ------ ------ Percentage of net income to: Average total assets 0.92% 0.96% 1.46% Average shareholders' equity 8.88 9.31 10.65 Percentage of common dividends declared to net income per common share 29.29 27.69 24.73 Percentage of average shareholders' equity to average total assets 10.40 10.27 13.68
RESULTS OF OPERATIONS NET INTEREST INCOME The Company's net interest income increased by $848,342 (13.44%) to $7,160,827 for the year ended December 31, 1998 from $6,312,485 for the year ended December 31, 1997, which was $1,348,628 (27.16%) higher than the net interest income for the year ended December 31, 1996. These increases, however, did not translate into an increased net interest margin, as the Company's net interest margin has declined from 4.20% in 1996, to 3.67% in 1997, to 3.70% in 1998. Average earning assets in 1998 increased by $22,722,116 (12.55%) to $203,826,009. Average earning assets in 1997 increased by $56,024,657 (44.79%) to $181,103,893 from the $125,079,236 of average earning assets in 1996. The percentage of average earning assets comprised of loans, which is the Company's highest earning asset, declined during this same three-year period. In 1995, average loans as a percentage of average earning assets was 64.1%. In 1996, this percentage declined to 62.76%; in 1997, after completing the Hillsboro 14 Branch and Lincoln Trail acquisitions mentioned above, the percentage declined to 57.78%; while rebounding somewhat in 1998 to 61.77%. With an average tax-effective yield of 8.93% earned on loans in 1998, compared with a weighted average tax-effective yield of 6.25% earned on other interest earning assets in 1998, for every $1,000,000 which would have been channeled into loans instead of other interest earning assets, the Company's net interest income on a tax equivalent basis would have increased approximately $26,800. Accordingly, a shift of $10,000,000 from investment securities to loans would have equated to an increase in pretax income of $268,000. This is one of the Company's primary goals in transitioning from a one-bank to a multi-bank holding company, i.e., more effective deployment of the consolidated assets and liabilities by increasing the percentage of loans comprising total earning assets. With the aforementioned acquisition of the Hillsboro Branch, the Company assumed approximately $24.4 million of deposits and acquired approximately $318,000 of loans. The net cash received of approximately $22,000,000 was invested at that time primarily in taxable debt securities. Accordingly, the average taxable securities increased to $27,424,164 in 1996, to $53,085,041 in 1997, and then declined in 1998 to $50,294,752, as maturing funds were not totally reinvested in the taxable bond market with its present low rate environment. Interest rates earned on such investments have remained relatively stable during this period, as the Company earned 5.92% in 1996, 6.05% in 1997, and 6.04% in 1998. With the aforementioned acquisition of Lincoln Trail, the Company acquired an organization with total assets of $35.4 million, loans of $22.9 million, and deposits of $33.9 million. This acquisition accounts for the majority of the growth in average loans in 1997. Average loans grew $26,161,001 (33.33%) to $104,656,135 in 1997, after remaining relatively stable in 1996, when compared to 1995. Rates earned on loans were 8.88% in 1996 and 8.83% in 1997. While the general level of interest rates in the national economy was up only slightly in 1997, the Company actually experienced a slight decrease, primarily due to the increased level of nonperforming loans which the Company inherited with the Lincoln Trail acquisition. This factor is discussed more fully below in the section entitled "Credit Risk Management." With the aforementioned acquisition of Shipman on October 1, 1998, the company acquired an organization with total assets of $49.4 million, loans of $32.2 million, and deposits of $41.5 million. This acquisition accounts for approximately one-third of the growth in average loans in 1998. The remaining growth has been achieved from increased loan volume available to a larger banking organization, and a more focused approach to loan growth in 1998 after cleaning up the Palmer Bank loan portfolio in 1997. Total average loans in 1998 increased $21,255,854 (20.31%) to $125,911,989, while the tax-effective yield earned thereon increased to 8.93%. The Company's level of Federal funds sold is directly attributable to the level of securities sold under repurchase agreements maintained with certain significant local customers of the Carlinville Bank. These customers invest on a short-term basis, generally overnight, in securities sold under repurchase agreements by the Carlinville Bank, thus providing a return on their excess funds. These funds are invested by the Carlinville Bank in Federal funds sold to match the maturities of the repurchase agreements, with the Carlinville Bank generally earning approximately 50 basis points on the transaction. As the excess funds of these local customers fluctuate, so too has the Company's overall level of Federal funds sold. Additionally, the acquisitions of the Hillsboro Branch, Lincoln Trail and Shipman have provided increased liquidity in the form of Federal funds sold, as has the decline in average taxable investment securities in 1998. With the strong bond market prevalent during most of 1998, the rates available to investors have declined to their lowest levels in several years. Accordingly, the Company has chosen not to reinvest as much of the maturing investments in the bond market at these low rates. Following is a summary of the average balances and weighted average rates earned or paid on Federal funds sold and securities sold under agreements to repurchase for each of the years in the three-year period ended December 31, 1998: 15
1998 1997 1996 ----------------------- ----------------------- ----------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE RATE BALANCE RATE BALANCE RATE Federal funds sold $14,868,495 5.27% $10,758,965 5.26% $7,452,361 5.44% Securities sold under repurchase agreements 7,646,395 4.84% 8,179,403 4.80% 6,410,524 4.84% ----------- ---- ----------- ---- ---------- ---- ----------- ---- ----------- ---- ---------- ----
The Company believes the cash management service with securities sold under repurchase agreements to certain local customers will continue in a consistent manner. The Company has experienced an increase in its cost of funds during the three-year period ended December 31, 1998. The average cost of funds has increased each year, from 4.70% in 1996 to 4.75% in 1997, and to 4.84% in 1998. With the acquisition of the Hillsboro Branch, Lincoln Trail, and Shipman, the level of interest-bearing liabilities has also increased significantly. In 1998, average total interest-bearing deposits increased $20,811,246 (14.11%) to $168,255,764, while growing $53,026,637 (56.16%) in 1997 to $147,444,518. The acquisition of the Hillsboro Branch in late 1996 added approximately $24 million of interest-bearing deposits, consisting of the following types of deposits (in thousands). Interest-bearing transaction accounts $ 2,200 Savings accounts 3,680 Individual retirement accounts 1,440 Certificates of deposit of $100,000 or more 830 Other certificates of deposits 15,850 ------ ------ $ 24,000 Since the acquisition of the Hillsboro Branch, the Company has experienced very little deposit run-off from this branch. The acquisition of Lincoln Trail added approximately $31.1 million of interest-bearing deposits on the January 24, 1997 acquisition date, consisting of the following types of deposits (in thousands): Interest-bearing transaction accounts $ 5,380 Savings accounts 3,000 Individual retirement accounts 1,050 Certificates of deposit of $100,000 or more 2,950 Other certificates of deposits 18,720 ------ ------ $ 31,100 The acquisition of Shipman added approximately $37.6 million of interest-bearing deposits on the October 1, 1998 acquisition date, consisting of the following types of deposits (in thousands): Interest-bearing transaction accounts $ 6,200 Savings accounts 5,500 Individual retirement accounts 2,900 Certificates of deposit of $100,000 or more 2,500 Other certificates of deposits 20,500 ------ ------ $ 37,600 The Company's banking subsidiaries have experienced a general shift in deposits similar to most Midwestern financial institutions, with certificates of deposit comprising a growing proportion of its deposits. Following is an analysis of the change in average deposit composition for each of the years in the three-year period ended December 31, 1998: 16
AS A PERCENTAGE OF AVERAGE DEPOSITS --------------------------------------------- 1998 1997 1996 ------ ------ ------ Noninterest-bearing deposits 10.02% 9.63% 10.85% Interest-bearing transaction accounts 14.58 15.29 15.94 Savings accounts 12.96 12.40 13.25 Certificates of deposit: $100,000 and over 10.44 8.65 11.21 Under $100,000 52.00 54.03 48.75 ------- ------- ------- 100.00% 100.00% 100.00% ------- ------- ------- ------- ------- -------
The acquisitions of the Hillsboro Branch, Lincoln Trail and Shipman have accelerated the increased percentage of deposits comprising certificates of deposit. Such deposits were 65.0% of the Hillsboro Branch deposits assumed, and 55.2% and 55.5% of the Palmer Bank and Citizens Bank deposits acquired, respectively. Such changes in the composition of the Company's deposits have served to increase the overall cost of funds. In addition to the interest paid on securities sold under repurchase agreements, the Company also incurred interest on other short-term borrowings of $45,524, $63,483, and $20,337 for the years ended December 31, 1998, 1997, and 1996, respectively. Such short-term borrowings consist of borrowings under the Federal Reserve Bank's treasury, tax and loan note option, and short-term notes payable of the Company. In 1997, the Company borrowed $1,750,000 from an unaffiliated financial institution for approximately three months, to temporarily assist in funding the Lincoln Trail acquisition. This short-term borrowing was repaid from additional dividends paid by the Carlinville Bank to the Company. In 1998, the Company drew $400,000 on its $2.5 million line of credit with an unaffiliated financial institution to fund the cash portion of the Shipman acquisition. Additionally, prior to the Company's acquisition of Shipman, a $550,000 note payable was maintained by Shipman, which has paid off shortly after the acquisition was closed. Long-term borrowings consist of borrowings by Citizens Bank from the Federal Home Loan Bank in Chicago, which are matched against certain long-term mortgage loans financed by Citizens Bank for its own portfolio. The following table sets forth, on a tax-equivalent basis for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in volume and changes in yield/rates: 17 AMOUNT OF INCREASE (DECREASE) ---------------------------------------------------------------------- CHANGE FROM 1997 CHANGE FROM 1996 TO 1998 DUE TO TO 1997 DUE TO -------------------------- -------------------------- Volume Yield/ Volume Yield/ (1) RATE (2) TOTAL (1) RATE (2) TOTAL ------ --------- ----- ------ --------- ----- INTEREST INCOME: Loans $ 1,860,156 $ 138,677 $ 1,998,833 $ 2,318,202 $ (39,330) $ 2,278,872 ----------- ---------- ----------- ----------- ---------- ----------- Investment securities: Taxable (169,901) (5,343) (175,244) 1,554,487 36,481 1,590,968 Nontaxable (32,119) (7,653) (39,772) 76,940 (34,514) 42,426 ----------- ---------- ----------- ----------- ---------- ----------- Total investment securities (202,020) (12,996) (215,016) 1,631,427 1,967 1,633,394 ----------- ---------- ----------- ----------- ---------- ----------- Interest-earning deposits in financial institutions 25,16 - 25,168 - - - Federal funds sold 216,197 1,076 217,273 173,965 (13,855) 160,110 ----------- ---------- ----------- ----------- ---------- ----------- Total interest income 1,899,501 126,757 2,026,258 4,123,594 (51,218) 4,072,376 ----------- ---------- ----------- ----------- ---------- ----------- INTEREST EXPENSE: Interest bearing transaction accounts 61,269 (22,827) 38,442 217,211 10,337 227,548 Savings 130,464 55,506 185,970 190,753 13,004 203,757 Time deposits of $100,000 or more 308,142 23,123 331,265 124,131 - 124,131 Other time deposits 517,035 81,346 598,381 2,028,374 (36,640) 1,991,734 ----------- ---------- ----------- ----------- ---------- ----------- Total deposits 1,016,910 137,148 1,154,058 2,560,469 (13,299) 2,547,170 Long-term borrowings 21,355 - 21,355 - - - Securities sold under repurchase agreements (26,400) 3,167 (23,233) 85,034 (2,581) 82,453 Other short-term borrowings (17,282) (677) (17,959) 36,597 6,549 43,146 ----------- ---------- ----------- ----------- ---------- ----------- Total interest expense 994,583 139,638 1,134,221 2,682,100 (9,331) 2,672,769 ----------- ---------- ----------- ----------- ---------- ----------- Net interest income $ 904,918 $ (12,881) $ 892,037 $ 1,441,494 $ (41,887) $ 1,399,607 ----------- ---------- ----------- ----------- ---------- ----------- ----------- ---------- ----------- ----------- ---------- -----------
- --------------- Notes to Table: (1) Change in volume multiplied by yield/rate of prior year. (2) Change in yield/rate multiplied by volume of prior year. NOTE: The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. PROVISION FOR POSSIBLE LOAN LOSSES The provision for possible loan losses charged to earnings in 1998 totaled $335,000, an increase of $165,000 over the $170,000 charged in 1997. The 1997 provision was the first such provision recorded by the Company for several years. As a one-bank holding company prior to 1997, the Company's net charge-off ratio was historically much lower than its peer group. Accordingly, the level of the reserve for possible loan losses had been maintained at a lower level as well. As mentioned above and discussed more fully below in the section entitled "Credit Risk Management," the Company's acquisition of Lincoln Trail in 1997 brought with it a problem bank in Palmer Bank, with a significant level of problem loans which had been made prior to the Company's acquisition thereof. The cleanup efforts at Palmer Bank resulted in a higher level of charge-offs than had been experienced by the Company prior to 1997. Additionally, in 1998, the Company has increased its reserve for possible loan losses for certain specific agricultural borrowers experiencing difficulties due to the low level of commodity prices experienced throughout the year. A more detailed presentation of asset quality and the reserve for possible loan losses is included in the section below entitled "Credit Risk Management." 18 NONINTEREST INCOME Total noninterest income in 1998 increased $434,069 (35.76%) to $1,648,022 from the $1,213,953 recorded in 1997, which was an increase in 1997 of $608,430 (100.48%) over the $605,523 recorded in 1996. Several factors have caused these increases, including the following: - 1998 included the operations of Palmer Bank for the entire year and Citizens Bank for the final three months of the year, while 1997 excluded the operation of Palmer Bank and Citizens Bank prior to their acquisition dates of January 24, 1997 and October 1, 1998, respectively. 1997 included the operations of Palmer Bank from January 24, 1997 and the Hillsboro Branch for the entire year, while 1996 included only the operations of the Hillsboro Branch from its acquisition date of December 13, 1996 forward. Accordingly, the increases achieved in 1998 and 1997 in service charges on deposit accounts and other noninterest income were primarily a result of the expanded operations of the Company. - In 1997, the Carlinville Bank introduced a fee-based commercial checking product which has proven quite successful. This program and the aforementioned expanded operations have resulted in increases in service charges on deposit accounts of $102,258 (20.91%) in 1998 and $199,713 (69.05%) in 1997. - In 1997, Palmer Bank received approximately $32,000 from an insurance claim for certain incidents occurring prior to the Company's acquisition thereof. This claim receipt and the aforementioned expanded operations resulted in an increase in other noninterest income of $112,185 (57.31%). The increase of $61,890 (20.10%) in other noninterest income in 1998 results from the addition of Shipman operations in the fourth quarter of 1998. - Income from fiduciary activities at the Carlinville Bank increased $11,395 (7.33%) in 1998 to $166,853 from the $155,458 earned in 1997, which was an increase of $50,351 (47.90%) from the $105,107 earned in 1996. A significant determinant in the level of trust earnings each year is the amount of estate work performed in any given year. In 1996, a minimal level of estate work was required of the trust operations, which caused a reduction of trust earnings in that year. In 1998 and 1997, the level of estate work performed by the trust operations increased. Additionally, the Carlinville Bank's fee structure was revised upward in 1997, resulting in higher levels of trust revenue in 1997 and 1998. - In 1997, the Company established a mortgage banking department, which originates loans for sale in the secondary market. The acquisition of Shipman in 1998 provided additional mortgage operations, and also provided a loan servicing function. Approximately $16.5 million and $9.4 million were originated and sold in 1998 and 1997, respectively, resulting in net gains and fees totaling $206,648 and $68,455, respectively. The current low interest rate environment has caused many borrowers to refinance their existing mortgages and many first-time home buyers to enter the market, resulting in increased demand for the Company's mortgage banking products. - The Company had net security sale gains of $313,506, $193,173, and $15,447 for the years ended December 31, 1998, 1997, and 1996, respectively. $9,474 and $1,960 of the 1998 and 1997 gains, respectively, and the total gains in 1996 resulted from early calls on securities held by the Company's banking subsidiaries. Approximately $9,000 of the net gains in 1997 were recorded at Palmer Bank, shortly after the Company's acquisition thereof, on sales made to restructure the portfolio in line with the Company's investment strategies. The remaining $304,032 and $182,000 of gains in 1998 and 1997, respectively, were recorded at the holding company, primarily the result of the Company "cashing in" some of the appreciation earned on a mutual fund investment. In 1997, the proceeds of such sales were reinvested in a similar fund, and in 1998, the proceeds were injected into Palmer Bank to accommodate that bank's growth. In late 1995 and throughout 1996, the Company invested a total of $1,000,000 in a mutual fund comprised of regional bank stocks. With the banking consolidation and "merger mania" occurring during the past few years, these funds have appreciated significantly. By year-end 1996, the fund appreciated to $1,215,719. By June 1997, the fund had further appreciated to a total of $1,446,915, at which time the Company "cashed in" a portion of the fund to invest $450,000 in a similar fund, recording a gain of $170,483 in the process. During 1998, the Company "cashed in" an additional 19 $705,000, resulting in a gain of $304,032, and injected the proceeds into the capital at Palmer Bank. The mutual funds are included in available for sale securities, with an amortized cost of $854,248, and market value of $1,174,750 at December 31, 1998. NONINTEREST EXPENSE Noninterest expense increased $690,462 (13.86%) in 1998 to $5,671,744 from the 1997 level of $4,981,282, which represented an increase of $2,084,849 (71.98%) from the $2,896,433 of noninterest expense recorded in 1996. The primary reason for the increase in all noninterest expense categories is due to the expanded operations of the Company with the acquisitions of the Hillsboro Branch, Lincoln Trail, and Shipman. Amortization of intangible assets resulting from these acquisitions totaled $302,146 in 1998 and $261,930 in 1997. APPLICABLE INCOME TAXES Applicable income taxes in 1998 increased $241,002 (45.95%) to $765,480 from the $524,478 recorded in 1997, which was a decrease of $231,718 (30.64%) from the $756,196 recorded in 1996. The effective tax rates for 1998, 1997, and 1996 were 27.32%, 22.08%, and 28.29%, respectively. The decrease in taxes in 1997 is attributable to a lower level of taxable income, plus a reduced state income tax expense, resulting from the purchase of a significant level of state tax-exempt U.S. agency securities in late 1996 and early 1997. BALANCE SHEET ANALYSIS Total assets of the Company grew $68,874,389 (34.93%) in 1998 to $266,055,279 at December 31, 1998 from the $197,180,890 level at December 31, 1997. Approximately $49.4 million of this increase has occurred as a result of the acquisition of Shipman. Total deposits increased $62,311,064 (37.18%) to $229,925,936 at December 31, 1998 from the $167,614,872 level at December 31, 1997. Approximately $41.5 million of this increase has occurred as a result of the acquisition of Shipman. The remaining increase of approximately $20.8 million is due to normal internal growth, a high level of public deposits on hand at December 31, 1998 from Macoupin County, and increased deposit levels resulting from the timing of social security deposits. These deposits are normally paid on the third day of each month; however, when the third day is a nonbusiness day (as was January 3, 1999), the payments revert back to the previous business day, which in this case was December 31, 1998. Short-term borrowings decreased $3,433,464 (43.28%) to $4,499,417 at December 31, 1998 from the $7,932,881 level at December 31, 1997. As mentioned previously, such balances will have significant fluctuations therein, depending on the available collected balances of the local customers using the cash management facilities of the Carlinville Bank through the purchase of securities under repurchase agreements. As previously mentioned, the level of Federal funds sold generally tracks the level of securities sold under repurchase agreements; however, at December 31, 1998, Federal funds sold totaled $15,997,000, which represents an increase of $7,568,000 (89.78%) over the $8,429,000 of Federal funds sold at December 31, 1997. This increase occurred, despite the decrease in securities sold under repurchase agreements, due to higher levels of liquidity maintained as a result of a reduced level of investment securities, and the aforementioned increased deposit levels resulting from the timing of social security deposits. Total loans increased $41,254,860 (36.86%) to $153,180,069 at December 31, 1998 from the $111,925,209 level at December 31, 1997. Approximately $32.2 million of this increase has occurred as a result of the acquisition of Shipman. The remaining $9.1 million increase in loans in 1998 is due to certain large borrowers being added to the Company's loan portfolio, due to the increased lending availability of the combined organization. Investment securities decreased $10,968,490 (17.41%) to $73,986,227 at December 31, 1998 from the $63,017,737 level at December 31, 1997. As mentioned previously, due to the low interest rates currently available in the bond market, the Company has chosen to reinvest only a portion of its maturing investments at these lower rates. 20 The capitalization of the Company remained strong in 1998. Total capital at December 31, 1998 was $27,754,123, or 10.43% of total assets at year end. At December 31, 1997, total capital was $20,433,635, or 10.36% of total assets. Regulatory capital of the Company and each of its banking subsidiaries remains well above the minimum capital levels, and the Company and its banking subsidiaries are all considered well-capitalized for regulatory reporting purposes. At December 31, 1998, the Company had outstanding debt of $400,000 drawn on its $2.5 million line of credit, and $1,252,000 of long-term borrowings with Federal Home Loan Bank of Chicago. The following table shows the condensed average balance sheets for the periods reported and the percentage of each principal category of assets, liabilities and stockholders' equity to total assets. Also shown is the average yield on each category of interest-earning assets and the average rate paid on each category of interest-bearing liabilities for each of the periods reported.
YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------------------------- Percent Interest Average Average of Total Income/ Yield/ BALANCE ASSETS EXPENSE RATE ------- -------- -------- ------- ASSETS Earning assets: Loans (1) (2) (3) $125,911,989 57.12% $11,244,965 8.93% Investment securities, at amortized cost: Taxable 50,294,752 22.81 3,038,311 6.04 Nontaxable (3) 12,227,725 5.55 1,024,158 8.38 Interest-earning deposits in financial institutions 523,048 0.24 25,168 4.81 Federal funds sold 14,868,495 6.74 782,880 5.27 ----------- ------- ---------- Total earning assets 203,826,009 92.46 16,115,482 7.91 ----------- ------- ---------- ---- ---- Nonearning assets: Cash and due from banks 5,562,793 2.52 Reserve for possible loan losses (1,152,755) (0.52) Premises and equipment 2,761,369 1.25 Available-for-sale investment market valuation 690,359 0.32 Other assets 8,762,140 3.97 ----------- ------ Total nonearning assets 16,623,906 7.54 ----------- ------ Total assets $220,449,915 100.00% ----------- ------ ----------- ------ LIABILITIES Interest-bearing liabilities: Interest-bearing transaction $ 27,255,988 12.36% 711,710 2.61% accounts Savings 24,239,745 11.00 809,494 3.34 Time deposits of $100,000 or more 19,528,128 8.86 1,114,729 5.71 Other time deposits 97,231,903 44.11 5,495,846 5.65 Long-term borrowings 329,315 0.15 21,355 6.48 Securities sold under repurchase agreements 7,646,395 3.47 369,371 4.84 Other short-term borrowings 709,752 0.32 45,524 6.41 ----------- ------ ---------- Total interest-bearing liabilities 176,941,226 80.27 8,568,029 4.84 ---------- ---- ---- Noninterest-bearing deposits 18,726,365 8.49 Other liabilities 1,846,627 0.84 ----------- ------ Total liabilities 197,514,218 89.60 SHAREHOLDERS' EQUITY 22,935,697 10.40 ----------- ------ Total liabilities and shareholders' equity $220,449,915 100.00% ----------- ------ ----------- ------ Net interest income/net yield on earninng assets $ 7,547,453 3.70% ---------- ---- ---------- ---- (Continued)
21
YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------------------------- Percent Interest Average Average of Total Income/ Yield/ BALANCE ASSETS EXPENSE RATE ------- -------- -------- ------- ASSETS Earning assets: Loans (1) (2) (3) $104,656,135 54.08% $ 9,246,132 8.83% Investment securities, at amortized cost: Taxable 53,085,041 27.43 3,213,555 6.05 Nontaxable (3) 12,603,752 6.51 1,063,930 8.44 Federal funds sold 10,758,965 5.56 565,607 5.26 ----------- ------- ---------- Total earning assets 181,103,893 93.58 14,089,224 7.78 ----------- ------- ---------- ---- ---- Nonearning assets: Cash and due from banks 4,749,367 2.45 Reserve for possible loan losses (1,398,105) (0.72) Premises and equipment 2,545,557 1.32 Available-for-sale investment market valuation 318,515 0.16 Other assets 6,207,491 3.21 ----------- ------ Total nonearning assets 12,422,825 6.42 ----------- ------ Total assets $193,526,718 100.00% ----------- ------ ----------- ------ LIABILITIES Interest-bearing liabilities: Interest-bearing transaction accounts $ 24,948,371 12.89% 673,268 2.70% Savings 20,226,549 10.45 623,524 3.08 Time deposits of $100,000 or more 14,108,154 7.29 783,464 5.55 Other time deposits 88,161,444 45.56 4,897,465 5.56 Securities sold under repurchase agreements 8,179,403 4.23 392,604 4.80 Other short-term borrowings 980,072 0.50 63,483 6.48 ----------- ------ ---------- Total interest-bearing liabilities 156,603,993 80.92 7,433,808 4.75 Noninterest-bearing deposits 15,707,064 8.12 ---------- ---- Other liabilities 1,332,222 0.69 ---- ----------- ------ Total liabilities 173,643,279 89.73 SHAREHOLDERS' EQUITY 19,883,439 10.27 ----------- ------ Total liabilities and shareholders' equity $193,526,718 100.00% ----------- ------ ----------- ------ Net interest income/net yield on earning assets $ 6,655,416 3.67% ---------- ---- ---------- ---- (Continued)
22
YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------------------------- Percent Interest Average Average of Total Income/ Yield/ BALANCE ASSETS EXPENSE RATE ------- -------- -------- ------- ASSETS Earning assets: Loans (1) (2) (3) $ 78,495,134 59.66% $ 6,967,260 8.88% Investment securities, at amortized cost: Taxable 27,424,164 20.85 1,622,587 5.92 Nontaxable (3) 11,707,577 8.90 1,021,504 8.73 Federal funds sold 7,452,361 5.66 405,497 5.44 ------------ ------ ------------ Total earning assets 125,079,236 95.07 10,016,848 8.01 ------------ ------ ------------ ---- ---- Nonearning assets: Cash and due from banks 3,509,587 2.67 Reserve for possible loan losses (854,219) (0.65) Premises and equipment 1,393,425 1.06 Available-for-sale investment market valuation 69,794 0.05 Other assets 2,364,541 1.80 ----------- ------ Total nonearning assets 6,483,128 4.93 ----------- ------ Total assets $131,562,364 100.00% ----------- ------ ----------- ------ LIABILITIES Interest-bearing liabilities: Interest-bearing transaction accounts $ 16,884,376 12.83% 445,720 2.64% Savings 14,031,443 10.67 419,767 2.99 Time deposits of $100,000 or more 11,875,431 9.03 659,333 5.55 Other time deposits 51,626,631 39.24 2,905,731 5.63 Securities sold under repurchase agreements 6,410,524 4.87 310,151 4.84 Other short-term borrowings 396,714 0.30 20,337 5.13 ------------ ------ ------------ Total interest-bearing liabilities 101,225,119 76.94 4,761,039 4.70 ------------ ---- ---- Noninterest-bearing deposits 11,488,835 8.73 Other liabilities 852,053 0.65 ----------- ------ Total liabilities 113,566,007 86.32 SHAREHOLDERS' EQUITY 17,996,357 13.68 ----------- ------ Total liabilities and shareholders' equity $131,562,364 100.00% ----------- ------ ----------- ------ Net interest income/net yield on earning assets $ 5,255,809 4.20% ---------- ---- ---------- ----
(1) Interest includes loan fees, recorded as discussed in Note 1 to the Company's consolidated financial statements. (2) Average balances include nonaccrual loans. The income on such loans is included in interest, but is recognized only upon receipt. (3) Interest yields are presented on a tax-equivalent basis. Nontaxable income has been adjusted upward by the amount of Federal income tax that would have been paid if the income had been taxable at a rate of 34%, adjusted downward by the disallowance of the interest cost to carry nontaxable loans and securities. RISK MANAGEMENT Management's objective in structuring the balance sheet is to maximize the return on average assets while minimizing the associated risks. The major risks with which the Company is concerned are credit, liquidity, interest rate and technology risks. The following is a discussion of the Company's management of these risks. 23 CREDIT RISK MANAGEMENT Managing risks the Company assumes in providing credit products to customers is extremely important. Credit risk management includes defining an acceptable level of risk and return, establishing appropriate policies and procedures to govern the credit process, and maintaining a thorough portfolio review process. Credit policies are drafted and approved at the individual bank level, with appropriate input from Company management. Of equal importance in the credit risk management process are the ongoing monitoring procedures performed as part of the Company's loan review process. Credit policies are examined and procedures reviewed for compliance each year. Loan personnel also continually monitor loans after disbursement in an attempt to recognize any deterioration which may occur, so that appropriate corrective action can be initiated on a timely basis. These programs have long served the Company well and have resulted in the maintenance of quality in the Company's loan portfolio. The addition of the loans at Palmer Bank to the Company's loan portfolio in 1997 magnified the importance of the credit risk management policies discussed above. When the Company acquired Lincoln Trail on January 24, 1997, it was undercapitalized, due primarily to a significant level of problem loans in Palmer Bank's portfolio made prior to the Company's acquisition thereof. Prior to acquisition, Palmer Bank increased its reserve for possible loan losses to $1,183,535 or 5.18% of the net outstanding loans in the portfolio on the acquisition date. In the ensuing months of 1997, as Company management began to work through these problem loans, $968,372 of charge-offs were recorded at Palmer Bank, with $115,275 of recoveries received during 1997. The levels of nonaccrual (impaired) loans at Palmer Bank at December 31, 1998 and 1997 were $298,977 and $545,949, respectively, compared with $1,494,585 on the acquisition date. The problems experienced by Palmer Bank prior to CNB's acquisition thereof resulted in considerably increased regulatory scrutiny in the past few years. As a result of the FDIC's examination as of March 31, 1997, Palmer Bank's Board of Directors was required to enter into a Memorandum of Understanding with the FDIC requiring Palmer Bank to: (i) adopt a written plan of action to reduce the level of problem loans; (ii) adopt a written plan of action to improve the bank's earnings level; (iii) maintain the reserve for possible loan losses at an adequate level; (iv) maintain Tier 1 capital at a level equal to or exceeding 6.75% of the bank's total assets; (v) not declare or pay any dividends without prior regulatory approval; (vi) adopt a written funds management policy and appropriate interest rate risk measurement and monitoring procedures at the bank; and (vii) adopt a strategic business plan. This Memorandum of Understanding has since been terminated by the FDIC. Company management realized the problems inherent in Palmer Bank when it was purchased, but continues to believe that, with proper management and controls, the Bank will turn around and provide excellent market opportunities for the Company. At December 31, 1998, the Company believes that substantially all of the loan problems at Palmer Bank have been addressed. The Company's nonperforming loans totaled $1,772,786 at December 31, 1998, compared with $1,107,121 and $423,054 at December 31, 1997 and 1996, respectively. Nonperforming loans as a percentage of net outstanding loans at December 31, 1998, 1997, and 1996 were 1.16%, 0.99%, and 0.53%, respectively. The reserve for possible loan losses as a percentage of net outstanding loans and nonperforming loans was 1.08% and 92.58%, respectively, at December 31, 1998, 0.98% and 99.18%, respectively, at December 31, 1997, and 1.01% and 189.20%, respectively, at December 31, 1996. The Company believes that, while these percentages would appear to indicate a deterioration in the loan portfolio, the levels of nonperforming loans are manageable, in that the specific reserves allocated to nonaccrual loans of $132,791 at December 31, 1998, coupled with the collateral positions maintained on such credits provide adequate coverage of the risks involved therein. The Company had no loans to any foreign countries at December 31, 1998 and 1997, nor did it have any concentration of loans to any industry, other than the agricultural industry, on these dates. The Company has also refrained from financing speculative transactions such as highly leveraged corporate buyouts. Additionally, the Company had no other interest-bearing assets which were considered to be risk-element assets at December 31, 1998 or 1997. 24 At December 31, 1998 and 1997, the Company had loans outstanding to the agricultural sector of $48,979,497 and $35,423,239, respectively, which comprised 32.0% and 31.6%, respectively, of the Company's total loan portfolio. Additionally, the Company's direct financing leases involve agricultural equipment, which is being leased to local area farmers. The Company's agricultural credits are concentrated in Macoupin, Montgomery, Christian, and Sangamon counties in central Illinois, and are generally fully-secured with either growing crops, farmland, livestock and/or machinery and equipment. Additionally, Company loan personnel work with their agricultural borrowers to monitor the cash flow capabilities thereof. A summary of loans by type is as follows:
DECEMBER 31, --------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ------------- ----------- ------------ --------- Commercial: Real estate $ 13,331,656 $ 8,314,650 $ 3,312,673 $ 4,032,000 $ 4,532,000 Agricultural production 27,164,525 19,358,620 17,901,733 18,435,000 16,028,000 Other 29,315,652 24,258,850 16,827,859 15,361,000 15,507,000 Real estate: Construction 8,017,578 4,757,992 3,602,969 4,359,000 3,313,000 Residential 29,468,706 24,241,201 14,252,639 14,010,000 12,989,000 Farmland 21,814,972 16,064,619 14,391,654 14,184,000 13,782,000 Loans for sale 2,110,409 152,450 - - - Consumer 16,606,858 12,822,806 6,891,640 6,232,000 5,891,000 Direct financing leases 5,349,713 1,954,021 2,249,932 2,396,000 3,509,000 ----------- ------------- ----------- ------------ ---------- $ 153,180,069 $ 111,925,209 $79,431,099 $ 79,009,000 75,551,000 ----------- ------------- ----------- ------------ ---------- ----------- ------------- ----------- ------------ ----------
Commercial real estate loans consist of loans secured by commercial property located in the four-county area served by the Company's banking subsidiaries, and generally represent properties used by the Banks' customers in their trade or business. Other commercial loans include operating, equipment, inventory and accounts receivable financing to small and medium size businesses in the four-county area. Such loans are generally secured by the business assets of the entity and are personally guaranteed by the principal owners thereof. While collateral value is an important element of the underwriting process, cash flow analyses and debt service capacity are considered the most critical factors. Real estate construction loans represent an extension of the Company's real estate lending activities. These loans are made on local construction projects for which permanent financing commitments are already in progress. The Company does not finance speculative construction projects. Loan disbursements are typically based on actual material and labor costs incurred, with the loans being collateralized by the actual construction project property. Residential real estate loans are predominantly made to finance single-family, owner-occupied properties in the four-county area. Loan-to-value percentage requirements for collateral are based on the lower of the purchase price or appraisal and are normally limited to 80%, unless credit enhancements are added. Appraisals are required on all owner-occupied residential real estate loans and private mortgage insurance is required if the loan to value percentage exceeds 85%. These loans generally have a short duration of three years or less, with some loans repricing more frequently. Long-term, fixed rate mortgages are generally not retained in the Company's loan portfolio, but rather are sold into the secondary market. Consumer loans consist of installment loans made predominantly for the purchase of new or used cars. These loans are underwritten directly at the Banks and are secured by the underlying vehicles. The Company does not have a heavy involvement with indirect dealer lending arrangements. The Company's level of credit card lending has remained fairly stable over the past few years with minimal losses incurred thereon. 25 The Company's loan portfolio contains certain risk elements which are identified in the following table, which include nonperforming loans (including loans on nonaccrual status and loans contractually past due 90 days or more as to interest and principal payments):
DECEMBER 31, --------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- --------- Nonaccrual (1) (2) $ 1,315,786 $ 865,299 $ 359,826 $ 556,000 $ 226,000 Accruing loans past due 90 days or more (3) 457,000 241,822 63,228 56,000 55,000 ---------- ---------- -------- -------- ------- $ 1,772,786 $1,107,121 $ 423,054 $ 612,000 $ 281,000 ---------- ---------- -------- -------- ------- ---------- ---------- -------- -------- -------
(1) It is the policy of the Company to periodically review its loans and to discontinue the accrual of interest on any loan on which full collectibility of principal or interest is doubtful. Subsequent interest payments received on such loans are applied to principal if there is any doubt as to the collectibility of such principal; otherwise, these receipts are recorded as interest income. (2) The interest income which would have been received under the original terms of the nonaccrual loans in 1998 and 1997 was $90,966 and $80,563, respectively. Interest income actually recorded on such loans in 1998 and 1997 was $20,495 and $35,279, respectively. (3) Excludes loans accounted for on a nonaccrual basis. The Company had no restructured loans at any of the dates in the preceding table. In the normal course of business, the Company's practice is to consider and act upon borrowers' requests for renewal of loans at their maturity. Evaluation of such requests includes a review of the borrower's credit history, the collateral securing the loan, and the purpose for such request. In general, loans which the Company renews at maturity require payment of accrued interest, a reduction in the loan balance, and/or the pledging of additional collateral and a potential adjustment of the interest rate to reflect changes in the economic conditions. POTENTIAL PROBLEM LOANS As of December 31, 1998, 65 loans with a total principal balance of approximately $15,145,000 were identified by management as having possible credit problems that raise doubts as to the ability of the borrowers to comply with the current repayment terms. While these borrowers are currently meeting all the terms of the applicable loan agreements, their financial condition has caused management to believe that their loans may result in disclosure at some future time as nonaccrual, past due or restructured. The following table summarizes the Company's loan loss experience for each of the last five years. Management believes its strong ongoing monitoring system has enhanced its ability to identify problem credits and allowed the Company to maintain an adequate reserve position. 26
DECEMBER 31, ------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- (in thousands of dollars) Average loans outstanding $ 125,912 $ 104,656 $ 78,495 $ 78,164 $ 68,693 ------- ------- ------ ------ ------ ------- ------- ------ ------ ------ Reserve at beginning of year $ 1,098 $ 800 $ 1,016 $ 1,102 $ 1,114 Provision for possible loan losses 335 170 - - - Reserve balance of acquired subsidiary 662 1,184 - - - --------- --------- ------ ------ ------- 2,095 2,154 1,016 1,102 1,114 --------- --------- ------ ------ ------- Charge-offs: Commercial loans: Real estate (38) (172) - - - Agricultural production (150) - (139) (17) (16) Other (126) (683) (155) (76) (11) Real estate: Construction - (17) - - - Residential (100) (102) - - - Farmland - - - - - Consumer (180) (268) (25) (17) (39) Direct financing leases - - (1) (12) - --------- --------- ------ ------ ------- Total charge-offs (594) (1,242) (320) (122) (66) --------- --------- ------ ------ ------- Recoveries: Commercial loans: Real estate - - - - - Agricultural production 1 44 1 5 25 Other 74 73 68 24 18 Real estate: Construction - - - - - Residential 14 19 2 - 8 Farmland - - - - - Consumer 51 50 21 7 3 Direct financing leases - - 12 - - --------- --------- ------ ------ ------- Total recoveries 140 186 104 36 54 --------- --------- ------ ------ ------- Reserve at end of year $ 1,641 $ 1,098 $ 800 $ 1,016 $ 1,102 --------- --------- ------ ------ ------- --------- --------- ------ ------ ------- Net charge-offs to average loans 0.36% 1.01% 0.28% 0.11% 0.02% --------- --------- ------ ------ ------- --------- --------- ------ ------ ------- Ending reserve to net outstanding loans at end of year 1.08% 0.98% 1.01% 1.29% 1.46% --------- --------- ------ ------ ------- --------- --------- ------ ------ -------
In determining an adequate balance in the reserve for possible loan losses, management places its emphasis as follows: evaluation of the loan portfolio with regard to potential future exposure on loans to specific customers and industries, including a formal internal loan review function; reevaluation of each nonperforming loan or loan classified by supervisory authorities; and an overall review of the remaining portfolio in light of past loan loss experience. Any problems or loss exposure estimated in these categories was provided for in the total current period reserve. Management views the reserve for possible loan losses as being available for all potential or presently unidentifiable loan losses which may occur in the future. The risk of future losses that is inherent in the loan portfolio is not precisely attributable to a particular loan or category of loans. Based on its review for adequacy, management has estimated those portions of the reserve that could be attributable to major categories of loans as detailed in the following table. 27
1998 1997 1996 ---------------------- ---------------------- ------------------ Categories Categories Categories % of % of % of Total Total Total AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS ------ ---------- ------ ---------- ------ ---------- Reserve allocation: Commercial: Real estate $ 146,000 8.70% $ 62,000 7.43% $ 175,000 4.17% Agricultural production 530,000 17.73 285,500 17.30 300,000 22.54 Other 218,000 19.14 218,500 21.67 110,000 21.19 Real estate: Construction 24,000 5.23 15,500 4.25 10,500 4.54 Residential 135,500 20.62 169,250 21.80 40,000 17.94 Farmland 88,400 14.24 43,500 14.35 40,000 18.12 Consumer 280,000 10.85 200,000 11.46 115,000 8.68 Direct financing leases 30,000 3.49 - 1.74 - 2.82 Unallocated 189,312 - 103,788 - 9,918 - --------- ------- --------- ------ ------- ------ $1,641,212 100.00% $ 1,098,038 100.00% $800,418 100.00% --------- ------- --------- ------ ------- ------ --------- ------- --------- ------ ------- ------
1995 1994 --------------------------------- ---------------------------- Categories Categories % of % of Total Total AMOUNT LOANS AMOUNT LOANS ------ ---------- ------ ---------- Reserve allocation: Commercial: Real estate $ 220,000 5.10% $ 230,000 6.00% Agricultural production 325,000 23.33 350,000 21.21 Other 140,000 19.44 150,000 20.53 Real estate: Construction 13,000 5.52 15,000 4.39 Residential 50,000 17.73 55,000 17.19 Farmland 50,000 17.95 55,000 18.24 Consumer 150,000 7.90 160,000 7.80 Direct financing leases - 3.03 - 4.64 Unallocated 68,000 - 87,000 - --------- ------ --------- ------ $ 1,016,000 100.00% $1,102,000 100.00% --------- ------ --------- ------ --------- ------ --------- ------
Allocations estimated for the loan categories do not specifically represent that loan charge-offs of that magnitude will be experienced in each of the respective categories. The allocation does not restrict future loan losses attributable to a particular category of loans from being absorbed either by the portion of the reserve attributable to other categories or by the unallocated portion of the reserve. The risk factors considered when determining the overall level of the reserve are the same when estimating the allocation by major category, as specified in the reserve summary. The amount of anticipated net charge-offs during the next full year is not expected to vary significantly from the levels reported in 1998. The level of anticipated charge-offs for 1999 reflects the Company's belief that the economy in the Company's markets will remain stable in 1999, that substantially all of the loan portfolio problems at Palmer Bank have been addressed, and sufficient collateral positions are maintained on the potential problem credits to preclude a significant level of additional charge-offs in 1999. LIQUIDITY AND RATE SENSITIVITY MANAGEMENT Management of rate-sensitive earning assets and interest-bearing liabilities remains key to the Company's profitability. Management's objective is to produce the optimal yield and maturity mix consistent with interest rate expectations and projected liquidity needs. 28 Liquidity is a measurement of the Company's ability to meet the borrowing needs and the deposit withdrawal requirements of its customers. The composition of assets and liabilities is actively managed to maintain the appropriate level of liquidity in the balance sheet. Management is guided by regularly-reviewed policies when determining the appropriate portion of total assets which should be comprised of readily-marketable assets available to meet conditions that are reasonably expected to occur. Liquidity is primarily provided to the Company through earning assets, including Federal funds sold and maturities and principal payments in the investment portfolio, all funded through continued deposit growth. Secondary sources of liquidity available to the Company include sale of securities included in the available-for-sale category (with a carrying value of $61,380,481 at December 31, 1998), and borrowing capabilities through the Federal Reserve Bank's Seasonal Borrowing Privilege of $4.1 million. Additionally, maturing loans also provide liquidity on an ongoing basis. Accordingly, the Company believes it has the liquidity necessary to meet unexpected deposit withdrawal requirements or increases in loan demand. Each of the Company's subsidiary banks controls its own asset/liability mix within the constraints of its individual policies and loan and deposit structure, with overall guidance from the Company. The asset/liability management process, which involves structuring the consolidated balance sheet to allow approximately equal amounts of assets and liabilities to reprice at the same time, is a dynamic process essential to minimize the effect of fluctuating interest rates on net interest income. The following table reflects the Company's consolidated interest rate gap (rate-sensitive assets minus rate-sensitive liabilities) analysis as of December 31, 1998, individually and cumulatively, through various time horizons:
Remaining Maturity if Fixed Rate; EARLIEST POSSIBLE REPRICING INTERVAL IF FLOATING RATE -------------------------------------------------------------------- 3 Over 3 Over 1 months months year or through through Over 5 less 12 months 5 years years total ------ --------- ------- ------ ----- (in thousands of dollars) Interest-earning assets Loans $ 42,815 $ 32,946 $ 65,195 $ 11,644 $ 152,600 Investment securities 8,819 5,952 27,846 31,369 73,986 Other interest-earning assets 16,997 - - - 16,997 -------- ------- -------- -------- --------- Total interest-earnings assets $ 68,631 $ 38,898 $ 93,041 $ 43,013 $ 243,583 -------- ------- -------- -------- --------- -------- ------- -------- -------- --------- Interest-bearing liabilities Savings, and interest bearing transaction accounts $ 66,913 $ - $ - $ - $ 66,913 Time certificates of deposit of $100,000 or more 10,954 7,081 3,737 - 21,772 All other time deposits 25,746 48,995 41,538 23 116,302 Nondeposit interest- bearing liabilities 4,499 62 295 895 5,751 -------- ------- -------- -------- --------- Total interest- bearing liabilities $ 108,112 $ 56,138 $ 45,570 $ 918 $ 210,738 -------- ------- -------- -------- --------- -------- ------- -------- -------- --------- Gap by period $ (39,481) $ (17,240) $ 47,471 $ 42,095 $ 32,845 -------- ------- -------- -------- --------- -------- ------- -------- -------- --------- Cumulative gap $ (39,481) $ (56,721) $ (9,250) $ 32,845 $ 32,845 -------- ------- -------- -------- --------- -------- ------- -------- -------- --------- Ratio of interest-sensitive assets to interest-sensitive liabilities 0.63x 0.69x 2.04x 46.86x 1.16x -------- ------- -------- -------- --------- -------- ------- -------- -------- --------- Cumulative ratio of interest- sensitive assets to interest- sensitive liabilities 0.63x 0.65x 0.96x 1.16x 1.16x -------- ------- -------- -------- --------- -------- ------- -------- -------- ---------
29 As indicated in this table, the Company operates on a short-term basis similar to most other financial institutions, as its liabilities, with savings and interest-bearing transaction accounts included, could reprice more quickly than its assets. However, the process of asset/liability management in a financial institution is dynamic. The Company believes its current asset/liability management program will allow adequate reaction time for trends in the marketplace as they occur, allowing maintenance of adequate net interest margins. Additionally, the Company's historical analyses of customer savings and interest-bearing transaction accounts indicate that such deposits have certain "core deposit" characteristics and are not as susceptible to changes in the marketplace. Following is a more detailed analysis of the maturity and interest rate sensitivity of the Company's loan portfolio at December 31, 1998:
Over One Through Over One Year Five Five Or Less Years Years Total -------- -------- ----- ----- Commercial: Real estate $ 6,180,419 $ 4,637,506 $ 2,513,731 $ 13,331,656 Agricultural production 22,492,737 4,072,267 599,521 27,164,525 Other 21,469,757 6,357,419 1,488,476 29,315,652 Real estate: Construction 3,287,643 4,553,532 176,403 8,017,578 Residential 9,043,405 17,116,781 3,308,520 29,468,706 Farmland 5,371,173 14,212,687 2,231,112 21,814,972 Loans for sale 2,110,409 - - 2,110,409 Consumer 5,419,538 9,960,236 1,227,084 16,606,858 Direct financing leases 385,440 4,284,648 99,248 4,769,336 ------------ ------------ ------------ ------------ $ 75,760,521 $ 65,195,076 $ 11,644,095 $ 152,599,692
For all loans maturing or repricing beyond the one year time horizon, following is a breakdown of such loans into fixed and floating rates.
Fixed Floating Rate Rate Total ---------- ----------- ------------ Due after one but within five years $ 24,354,303 $ 40,840,773 $ 65,195,076 Due after five years 10,737,283 906,812 11,644,095 ---------- ------------ ---------- $ 35,091,586 $ 41,747,585 $ 76,839,171 ---------- ------------ ---------- ---------- ------------ ----------
The Company has attempted to maintain a "laddered" maturity distribution in its investment portfolio. This "laddered" approach has historically taken into account the probable call of securities, as well as the contractual maturity thereof. Additionally, the Company maintains a significant level of public funds against which securities were required to be pledged. At December 31, 1998, debt securities with carrying values totaling approximately $25.4 million were pledged to secure public funds, securities sold under repurchase agreements, Federal Home Loan Bank borrowings, and for other purposes, representing approximately 34.25% of the Company's total securities portfolio. The investment portfolio is closely monitored to assure that the Company has no unreasonable concentration of securities in the obligations of any single debtor. Other than U.S. Treasury or government agency securities, the Company maintains no concentration of investments in any one political subdivision greater than 10% of its total portfolio. The book value and estimated market value of the Company's debt and equity securities at December 31, 1998, 1997 and 1996 are summarized in the following table: 30
1998 1997 1996 ----------------------- ----------------------- ----------------------- Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value --------- ------ --------- ------ --------- ------ (in thousands of dollars) AVAILABLE-FOR-SALE U.S. Treasury issues and obligations of U.S. Government agencies and corporations $ 35,073,679 $ 35,177,327 $ 32,924,621 $ 32,952,679 $ 27,767,879 $ 27,666,828 Obligations of states and political subdivisions 7,922,188 8,126,566 4,946,354 5,084,707 3,358,187 3,421,275 Other debt and equity securities 4,084,360 4,437,686 2,995,870 3,635,915 2,906,979 3,104,074 Mortgage-backed securities 13,604,540 13,638,902 2,478,757 2,469,115 1,059,615 1,031,526 ---------- ---------- ---------- ---------- ---------- ---------- $ 60,684,767 $ 61,380,481 $ 43,345,602 $ 44,142,416 $ 35,092,660 $ 35,223,703 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- HELD-TO-MATURITY U.S. Treasury issues and obligations of U.S. Government agencies and corporations $ 1,904,670 $ 1,933,320 $ 5,049,439 $ 5,063,524 $ 6,412,053 $ 6,379,326 Obligations of states and political subdivisions 7,606,458 7,916,819 9,299,904 9,617,694 10,647,183 10,942,433 Other debt securities 199,987 200,024 400,958 401,000 708,846 703,250 Mortgage-backed securities 2,894,631 2,915,279 4,125,020 4,156,232 4,056,681 4,047,577 ---------- ---------- ---------- ---------- ---------- ---------- $ 12,605,746 $ 12,965,442 $ 18,875,321 $ 19,238,450 $ 21,824,763 $ 22,072,586 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
The following tables summarize maturity and yield information on the Company's investment portfolio at December 31, 1998:
WEIGHTED AVERAGE TAX- AMORTIZED EQUIVALENT COST YIELD --------- ------------ AVAILABLE-FOR-SALE U.S. Government and U.S. agencies and corporations: 0 to 1 year $ 8,954,660 6.25% 1 to 5 years 19,893,840 5.97 5 to 10 years 6,225,179 6.09 Over 10 years - - -------------- Total $ 35,073,679 6.06 -------------- ---- -------------- ---- State and political subdivisions: 0 to 1 year $ 250,000 8.14% 1 to 5 years 2,442,674 6.65 5 to 10 years 3,631,670 6.97 Over 10 years 1,597,844 7.16 -------------- Total $ 7,922,188 6.95 -------------- ---- -------------- ---- Other debt and equity and mortgage-backed securities: 0 to 1 year $ - - % 1 to 5 years 1,528,312 5.93 5 to 10 years - - Over 10 years - - Mortgage-backed securities 13,604,540 6.12 No stated maturity 2,556,048 3.62 -------------- Total $ 17,688,900 5.74 -------------- ---- -------------- ----
31
WEIGHTED AVERAGE TAX- AMORTIZED EQUIVALENT COST YIELD --------- ------------ HELD-TO-MATURITY U.S. Government and U.S. agencies and corporations: 0 to 1 year $ 1,200,001 6.94% 1 to 5 years 704,669 6.73 5 to 10 years - - Over 10 years - - -------------- Total $ 1,904,670 6.86 -------------- ---- -------------- ---- State and political subdivisions: 0 to 1 year $ 1,252,315 9.02% 1 to 5 years 3,117,613 8.47 5 to 10 years 2,811,530 8.14 Over 10 years 425,000 8.17 -------------- Total $ 7,606,458 8.42 -------------- ---- -------------- ---- Other debt and mortgage-backed securities: 0 to 1 year $ 199,987 5.65% 1 to 5 years - - 5 to 10 years - - Over 10 years - - Mortgage-backed securities 2,894,631 5.58 -------------- Total $ 3,094,618 5.58 -------------- ---- -------------- ---- AVAILABLE-FOR-SALE AND HELD-TO-MATURITY COMBINED: 0 to 1 year $ 11,856,963 6.64% 1 to 5 years 27,687,108 6.33 5 to 10 years 12,668,379 6.80 Over 10 years 2,022,844 7.37 Mortgage-backed securities 16,499,171 6.03 No stated maturity 2,556,048 3.62 -------------- Total $ 73,290,513 6.33 -------------- ---- -------------- ----
NOTE: While yields by range of maturity are routinely provided by the Company's accounting system on a tax-equivalent basis, the individual amounts of adjustments are not so provided. In total, at an assumed Federal income tax rate of 34%, the adjustment amounted to approximately $342,000, appropriately adjusted by the disallowance of interest cost to carry nontaxable securities. The Company's primary source of liquidity to fund growth is ultimately the generation of new deposits. The following table shows the average daily amount of deposits and the average rate paid on each type of deposit for the years ended December 31, 1998, 1997 and 1996:
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------ 1998 1997 1996 -------------------- ----------------------- -------------------- Average Average Average Average Average Average BALANCE RATE BALANCE RATE BALANCE RATE ------- ------- ------- ------- ------- ------- Noninterest-bearing demand deposits $ 18,726,365 - % $ 15,707,064 - % $ 11,488,835 - % Interest-bearing transaction accounts 27,255,988 2.61 24,948,371 2.70 16,884,376 2.64 Savings deposits 24,239,745 3.34 20,226,549 3.08 14,031,443 2.99 Time deposits of $100,000 or more 19,528,128 5.71 14,108,154 5.55 11,875,431 5.55 All other time deposits 97,231,903 5.65 88,161,444 5.56 51,626,631 5.63 ----------- ----------- ----------- $186,982,129 4.35% $163,151,582 4.28% $105,906,716 4.18% ----------- ---- ----------- ---- ----------- ---- ----------- ---- ----------- ---- ----------- ----
32 The following table shows the maturity of time deposits of $100,000 or more at December 31, 1998:
TIME OTHER CERTIFICATES TIME MATURITY OF DEPOSITS DEPOSITS TOTAL -------- ----------- -------- ----- Three months or less $ 9,221,309 $ 1,732,828 $ 10,954,137 Three to six months 2,145,754 2,007,299 4,153,053 Six to twelve months 2,928,205 - 2,928,205 Over twelve months 3,736,942 - 3,736,942 ----------- ---------- ----------- $ 18,032,210 $ 3,740,127 $ 21,772,337 ----------- ---------- ----------- ----------- ---------- -----------
CAPITAL ADEQUACY The Federal Reserve Board established risk-based capital guidelines for bank holding companies effective March 15, 1989. The guidelines define Tier 1 Capital and Total Capital. Tier 1 Capital consists of common and qualifying preferred stockholders' equity and minority interests in equity accounts of consolidated subsidiaries, less goodwill and 50% of investments in unconsolidated subsidiaries. Total capital consists of, in addition to Tier 1 Capital, mandatory convertible debt, preferred stock not qualifying as Tier 1 Capital, subordinated and other qualifying term debt and a portion of the reserve for possible loan losses, less the remaining 50% of qualifying total capital. Risk-based capital ratios are calculated with reference to risk-weighted assets, which include both on-and off-balance sheet exposures. The minimum required ratio for qualifying Total Capital is 8%, of which at least 4% must consist of Tier 1 Capital. In addition, a minimum leverage ratio is 3% Tier 1 Capital to average total assets (net of goodwill). The Federal Reserve Board stated that the above capital ratios are the minimum requirements for the most highly rated banking organizations, and other banking organizations are expected to maintain capital at higher levels. As of December 31, 1998, the Company and each of its banking subsidiaries were in compliance with the Tier 1 Capital ratio requirement and all other applicable regulatory capital requirements, as calculated in accordance with risk-based capital guidelines. The Company's Tier 1, Total Capital, and Leverage Ratios were 13.16%, 14.21%, and 8.61%, respectively, at December 31, 1998. TECHNOLOGY RISK The Company utilizes and is dependent upon data processing hardware systems and banking application software to conduct its business. The data processing hardware systems and banking application software include those developed and maintained by the Company's data processing hardware providers and purchased banking application software which is run on in-house computer networks. The Year 2000 has posed a unique set of challenges to those industries reliant on information technology. As a result of methods employed by early programmers, many software applications and operational programs may be unable to distinguish the Year 2000 from the Year 1900. If not effectively addressed, this problem could result in the production of inaccurate data, or in the worst cases, the inability of the systems to continue to function altogether. Financial institutions are particularly vulnerable due to the industry's dependence on electronic data processing systems. In 1997, the Company started the process of identifying the hardware and software issues required to be addressed to assure Year 2000 compliance. The Company began by assessing the issues related to the Year 2000 and the potential for those issues to adversely affect the Company's operations and those of its subsidiaries. Since that time, the Company has established a Year 2000 management committee to deal with this issue. The management committee meets with and utilizes various representatives from key areas throughout the organization to aid in analysis and testing. It is the mission of this committee to identify areas subject to complications related to the Year 2000 and to initiate remedial measures designed to eliminate any adverse effects on the Company's operations. The committee has identified all mission-critical software and hardware that may be adversely affected by the Year 2000 and has required vendors to represent that the systems and products provided are or will be Year 2000 compliant. 33 The Company licenses all software used in conducting its business from third party vendors. None of the Company's software has been internally developed. The Company has developed a comprehensive list of all software, all hardware and all service providers used by the Company. Every vendor has been contacted regarding the Year 2000 issue, and the Company continues to closely track the progress each vendor is making in resolving the problems associated with the issue. The Company's vendor of primary software (Information Technologies, Inc. (ITI)) has maintained that its products have been Year 2000 compliant since their inception. Nevertheless, testing standards were formulated and comprehensive testing was successfully performed on the ITI software in the fourth quarter of 1998. In addition, the Company continues to monitor all other major vendors of services to the Company for Year 2000 issues in order to avoid shortages of supplies and services in the coming months. The Company has not had any material delay regarding its information systems projects as a result of the Year 2000 project. The Company's main commercial banking relationship is with United Missouri Bank in St. Louis (UMB). UMB correspondence indicates substantial progress with Year 2000 readiness. There are several third party utilities with which the Company has an important relationship, i.e., PNG Communications (phone service), and Illinois Power (electricity and natural gas). The Company has not identified any practical, long-term alternatives to relying on these companies for basic utility services. In the event that the utilities significantly curtailed or interrupted their services to the Company, it would have a significant adverse effect on the Company's ability to conduct its business. The Company is also in the process of testing such things as vault doors, alarm systems, networks, etc. and is not aware of any significant problems with such systems. The Company decided to consolidate computer processing among its three banks and benefit from economies of scale and from savings derived through conversion to check imaging. In the process, Year 2000 testing on new equipment was actually simplified. Costs specific to Year 2000 remediation and testing are therefore not anticipated to be material. At the present time, no situations that will require material cost expenditures to become fully compliant have been identified. However, the Year 2000 problem is pervasive and complex and can potentially affect any computer process. Accordingly, no assurance can be given that Year 2000 compliance can be achieved without additional unanticipated expenditures and uncertainties that might affect future financial results. It is not possible at this time to quantify the estimated future costs due to possible business disruption caused by vendors, suppliers, customers, and even the possible loss of electric power or phone service; however, such costs could be substantial. The Company is committed to a plan for achieving compliance, focusing not only on its own data processing systems, but also on its loan customers. The management committee has taken steps to educate and assist its customers with identifying their Year 2000 compliance problems. In addition, the management committee has proposed policy and procedure changes to help identify potential risks to the Company and to gain an understanding of how customers are managing the risks associated with the Year 2000. The Company is assessing the impact, if any, the Year 2000 will have on its credit risk and loan underwriting. In connection with potential credit risk related to the Year 2000 issue, the Company has contacted its large commercial loan customers regarding their level of preparedness for the Year 2000. The Company has developed contingency plans for various Year 2000 problems and continues to revise those plans based on testing results and vendor notifications. ACCOUNTING PRONOUNCEMENTS Several accounting rule changes which will or have gone into effect recently, as promulgated by the Financial Accounting Standards Board, will have an effect on the Company's financial reporting process. These accounting rule changes, issued in the form of Financial Accounting Standards (FAS) include the following: 34 - - FAS 121 - The Company adopted the provisions of Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (FAS 121) on January 1, 1996. FAS 121 requires that long-lived assets, such as bank premises and equipment, and certain identifiable intangible assets, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less selling costs. The Company's adoption of FAS 121 in 1996 had no impact on the Company's financial position, results of operations, or liquidity. - - FAS 125 - The Company adopted the provisions of Statement of Financial Accounting Standards No. 125, TRANSFER AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES (FAS 125), on January 1, 1997. FAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial components approach that focuses on control. FAS 125 distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Adoption of FAS 125 did not have a material impact on the Company's financial position, results of operations, or liquidity. - - FAS 128 - In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE (FAS 128) which amends existing accounting requirements and establishes standards for computing and presenting earnings per share for entities with publicly-held common stock or potential common stock. FAS 128 simplifies the standards for computing earnings per share, replacing the presentation of primary earnings per share with basic earnings per share, which excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. FAS 128 also requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures, and requires a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shares in the earnings of the entity. FAS 128 is effective for financial statements issued for periods ending after December 15, 1997, and requires restatement of all prior period earnings per share information presented. For the three years ended December 31, 1998, the Company did not maintain a complex capital structure as defined by FAS 128. - - FAS 130 - In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (FAS 130). FAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in financial statements. FAS 130 defines comprehensive income as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources, including all changes in equity during a period, except those resulting from investments by and distributions to owners. FAS 130 requires that all items that are required to be recognized as comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. FAS 130 also requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid in capital in the equity section of the consolidated balance sheet. FAS 130 is effective for fiscal years beginning after December 15, 1997, with reclassification of financial statements of earlier periods required for comparative purposes. The consolidated balance sheets as of December 31, 1998 and 1997, and the related consolidated statements of income and comprehensive 35 income, stockholders' equity, and cash flows for each of the year sin the three year period ended December 31, 1998 included herein have been prepared in accordance with FAS 130. - - FAS 133 - In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (FAS 133), which establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. FAS 133 defines a derivative instrument as a financial instrument or other contract with all three of the following characteristics: a. It has (a) one or more underlyings and (b) one or more notional amounts or payment provisions, or both. These terms determine the amount of the settlement or settlements and, in some cases, whether or not a settlement is required. An underlying is a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable. An underlying may be a price or rate of an asset or liability but is not the asset or liability itself. A notional amount is a number of currency units specified in the contract. The settlement of a derivative instrument with a notional amount is determined by interaction of that notional amount with the underlying. A payment provision specifies a fixed or determinable settlement to be made if the underlying behaves in a specified manner. b. It requires no initial net investment or an initial net investment than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. c. Its terms require or permit net settlement, it can readily be settled by a means outside the contract, or it provides for delivery of an asset that puts the recipient in a position not substantially different than net settlement. FAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, the gains and losses) depends on the intended use of the derivative and the resulting designation. The Company and Banks have not engaged in any hedging activities during the three-year period ended December 31, 1998. For a derivative not designated as a hedging instrument, the gain or loss is recognized in earnings in the period of change. FAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Company management believes the implementation of FAS 133 will not have a material impact on the Company's consolidated financial position, results of operations, or liquidity. At December 31, 1998, the only financial instruments meeting the above definition of a derivative instrument are fixed rate loan commitments and standby letters of credit. The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments, and the present credit worthiness of such counterparties. The Company believes such commitments have been made on terms which are competitive in the markets in which it operates and are relatively short-term in nature; however, no premium or discount is offered thereon and, accordingly, the Company has not assigned a value to such instruments. EFFECTS OF INFLATION Persistent high rates of inflation can have a significant effect on the reported financial condition and results of operations of all industries. However, the asset and liability structure of a bank holding company is 36 substantially different from that of an industrial company, in that virtually all assets and liabilities of a bank holding company are monetary in nature. Accordingly, changes in interest rates may have a significant impact on a bank holding company's performance. Interest rates do not necessarily move in the same direction, or in the same magnitude, as the prices of other goods and services. Inflation, however, does have an important impact on the growth of total assets in the banking industry, often resulting in a need to increase equity capital at higher than normal rates to maintain an appropriate equity-to-assets ratio. One of the most important effects that inflation has had on the banking industry has been to reduce the proportion of earnings paid out in the form of dividends. Although it is obvious that inflation affects the growth of total assets, it is difficult to measure the impact precisely. Only new assets acquired each year are directly affected, so a simple adjustment of asset totals by use of an inflation index is not meaningful. The results of operations also have been affected by inflation, but again there is no simple way to measure the effect on the various categories of income and expense. Interest rates in particular are significantly affected by inflation, but neither the timing nor the magnitude of the changes coincide with changes in the consumer price index. Additionally, changes in interest rates on some types of consumer deposits may be delayed. These factors, in turn, affect the composition of sources of funds by reducing the growth of deposits that are less interest sensitive and increasing the need for funds that are more interest sensitive. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company believes this item is not applicable, as neither the Company nor any of its subsidiaries have any financial instruments considered to be derivative securities. 37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
Page ------ Independent Auditors' Report.......................................................... 39 Consolidated Balance Sheets, December 31, 1998 and 1997............................... 40 Consolidated Statements of Income, Years Ended December 31, 1998, 1997, and 1996...... 41 Consolidated Statements of Stockholders' Equity, Years Ended December 31, 1998, 1997, and 1996...................................................................... 42 Consolidated Statements of Cash Flows, Years Ended December 31, 1998, 1997, and 1996...................................................................... 43 Notes to Consolidated Financial Statements, December 31, 1998, 1997, and 1996...................................................................... 44
38 INDEPENDENT AUDITORS' REPORT The Board of Directors Carlinville National Bank Shares, Inc. We have audited the accompanying consolidated balance sheets of Carlinville National Bank Shares, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows 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 audits 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 Carlinville National Bank Shares, 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. CUMMINGS & ASSOCIATES, P.C. February 3, 1999 St. Louis, Missouri 39 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 and 1997
ASSETS 1998 1997 ------ ---- ---- Cash and due from banks (note 3) $ 9,385,889 4,803,829 Interest-earning deposits in other financial institutions 1,000,197 - Federal funds sold 15,997,000 8,429,000 Investments in debt and equity securities (note 4): Available-for-sale, at fair value 61,380,481 44,142,416 Held-to-maturity, at amortized cost (fair value of $12,965,442 and $19,238,450 at December 31, 1998 and 1997, respectively) 12,605,746 18,875,321 Loans (notes 5 and 9) 153,180,069 111,925,209 Less: Unearned discount (580,377) (47,060) Reserve for possible loan losses (1,641,212) (1,098,038) ------------- ------------- Net loans 150,958,480 110,780,111 ------------- ------------- Bank premises and equipment, net (note 6) 3,782,400 2,421,358 Accrued interest receivable 3,503,844 2,619,870 Intangible assets (note 2) 4,860,553 3,855,584 Other assets 2,580,689 1,253,401 ------------- ------------- $ 266,055,279 197,180,890 ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Noninterest-bearing deposits $ 24,938,780 16,442,262 Interest-bearing deposits (note 7) 204,987,156 151,172,610 ------------- ------------- Total deposits 229,925,936 167,614,872 Short-term borrowings (note 9) 4,499,417 7,932,881 Accrued interest payable 1,404,827 966,818 Long-term borrowings (note 10) 1,252,000 - Other liabilities (note 8) 1,218,976 232,684 ------------- ------------- Total liabilities 238,301,156 176,747,255 ------------- ------------- Commitments and contingencies (notes 12 and 14) Stockholders' equity (notes 13 and 15); Common stock, $1 par value; 310,000 shares authorized, 262,710 and 200,000 shares issued and outstanding at December 31, 1998 and 1997, respectively 262,710 200,000 Surplus 6,165,204 270,464 Retained earnings 21,150,744 19,758,353 Accumulated other comprehensive income - unrealized holding gains (losses) on available-for-sale securities, net 496,553 525,906 Treasury stock at cost - 13,502 shares (321,088) (321,088) ------------- ------------- Total stockholders' equity 27,754,123 20,433,635 ------------- ------------- $ 266,055,279 197,180,890 ------------- ------------- ------------- -------------
See accompanying notes to consolidated financial statements. 40 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Consolidated Statements of Income and Comprehensive Income Years ended December 31, 1998, 1997, and 1996
1998 1997 1996 ---- ---- ---- Interest income: Interest and fees on loans (note 5) $ 11,183,905 9,204,207 6,966,006 Interest and dividends on debt and equity securities: Taxable 3,038,311 3,213,555 1,622,587 Exempt from Federal income taxes 698,592 762,924 730,806 Interest on short-term investments 808,048 565,607 405,497 ------------ ---------- --------- Total interest income 15,728,856 13,746,293 9,724,896 ------------ ---------- --------- Interest expense: Interest on deposits (note 7) 8,131,779 6,977,721 4,430,551 Interest on short-term borrowings (note 9) 414,895 456,087 330,488 Interest on long-term borrowings (note 10) 21,355 -- -- ------------ ---------- --------- Total interest expense 8,568,029 7,433,808 4,761,039 ------------ ---------- --------- Net interest income 7,160,827 6,312,485 4,963,857 Provision for possible loan losses (note 5) 335,000 170,000 -- ------------ ---------- --------- Net interest income after provision for possible loan losses 6,825,827 6,142,485 4,963,857 ------------ ---------- --------- Noninterest income: Service charges on deposit accounts 591,192 488,934 289,221 Income from fiduciary activities 166,853 155,458 105,107 Net security sale gains (note 4) 313,506 193,173 15,447 Mortgage banking revenues 206,648 68,455 -- Other noninterest income 369,823 307,933 195,748 ------------ ---------- --------- Total noninterest income 1,648,022 1,213,953 605,523 ------------ ---------- --------- Noninterest expense: Salaries and employee benefits (note 11) 3,098,898 2,676,043 1,811,648 Occupancy and equipment expense (note 6) 824,933 707,723 378,786 Legal and professional fees 91,792 82,824 49,997 Postage, printing and supplies 320,275 320,048 181,675 Amortization of intangible assets (note 2) 303,617 263,401 1,471 Other noninterest expense 1,032,229 931,243 472,856 ------------ ---------- --------- Total noninterest expense 5,671,744 4,981,282 2,896,433 ------------ ---------- --------- Income before applicable income taxes 2,802,105 2,375,156 2,672,947 Applicable income taxes (note 8) 765,480 524,478 756,196 ------------ ---------- --------- Net income 2,036,625 1,850,678 1,916,751 ------------ ---------- --------- Other comprehensive income (loss) before tax: Net unrealized gains (losses) on available-for-sale securities 269,032 875,064 (16,198) Less reclassification adjustment for gains included in net income (313,506) (193,173) (15,447) ------------ ---------- --------- Other comprehensive income (loss) before tax (44,474) 681,891 (31,645) Income tax related to items of other comprehensive income (loss) (15,121) 231,843 (10,759) ------------ ---------- --------- Other comprehensive income (loss) net of tax (29,353) 450,048 (20,886) ------------ ---------- --------- Total comprehensive income $ 2,007,272 2,300,726 1,895,865 ------------ ---------- --------- ------------ ---------- --------- Net income per common share: Average common shares outstanding 202,304 186,390 185,898 ------------ ---------- --------- ------------ ---------- --------- Net income per common share $ 10.07 9.93 10.31 ------------ ---------- --------- ------------ ---------- ---------
See accompanying notes to consolidated financial statements. 41 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended December 31, 1998, 1997, and 1996
Accumulated Total other stock- Common Retained Treasury compensation holders' stock surplus earnings stock income equity --------- ---------- ----------- -------- ------------ ----------- Balance at December 31, 1995 $200,000 224,732 16,977,333 (335,356) 96,744 17,163,453 Net income - - 1,916,751 - - 1,916,751 Cash dividends declared ($2.55 per share) - - (473,539) - - (473,539) Unrealized gains (losses) on available-for-sale securities, net of related tax effect - - - - (20,886) (20,886) --------- ---------- ----------- -------- ------------ ----------- Balance at December 31, 1996 200,000 224,732 18,420,545 (335,356) 75,858 18,585,779 Issuance of 600 shares from treasury 45,732 - 14,268 - 60,000 Net income - - 1,850,678 - - 1,850,678 Cash dividends declared ($ 2.75 per share) - - (512,870) - - (512,870) Unrealized gains (losses) on available-for-sale securities, net of related tax effect - - - - 450,048 450,048 --------- ---------- ----------- -------- ------------ ----------- Balance at December 31, 1997 200,000 270,464 19,758,353 (321,088) 525,906 20,433,635 ISSUANCE OF 62,710 SHARES OF COMMON STOCK IN ACQUISITION (NOTE 2) 62,710 5,894,740 - - - 5,957,450 NET INCOME - - 2,036,625 - - 2,036,625 CASH DIVIDENDS DECLARED ($ 2.95 PER SHARE) - - (644,234) - - (644,234) UNREALIZED GAINS (LOSSES) ON AVAILABLE-FOR-SALE SECURITIES, NET OF RELATED TAX EFFECT - - - - (29,353) (29,353) --------- ---------- ----------- -------- ------------ ----------- BALANCE AT DECEMBER 31, 1998 $ 262,710 6,165,204 21,150,744 (321,088) 496,553 27,754,123 --------- ---------- ----------- -------- ------------ ----------- --------- ---------- ----------- -------- ------------ -----------
See accompanying notes to consolidated financial statements. 42 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997, and 1996
1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net income $ 2,036,625 1,850,678 1,916,751 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 818,783 698,448 227,718 Provision for possible loan losses 335,000 170,000 -- Deferred income tax expense (benefit) 10,541 95,506 (65,443) Decrease (increase) in accrued interest receivable (375,323) 25,395 (178,059) Net gains on security sales and calls (313,506) (193,173) (15,447) Increase (decrease) in accrued interest payable 200,885 (32,413) (47,358) Mortgage loans originated for secondary market (17,779,706) (9,509,943) -- Mortgage loans sold in secondary market 16,532,494 9,357,493 -- Other operating activities, net 147,022 (47,495) (68,269) ------------ ----------- ----------- Net cash provided by operating activities 1,612,815 2,414,496 1,769,893 ------------ ----------- ----------- Cash flows from investing activities: Net cash and cash equivalents received from acquisitions 9,335,663 5,575,404 22,030,144 Proceeds from calls and maturities of and principal payments on debt securities: Available-for-sale 27,160,061 12,078,173 4,592,174 Held-to-maturity 6,272,229 5,154,969 5,990,750 Proceeds from sale of securities 705,000 2,508,366 -- Purchases of debt and equity securities: Available-for-sale (39,418,130) (20,355,046) (25,881,923) Held-to-maturity (278,454) (1,128,714) (6,824,035) Net increase in loans (7,849,584) (10,728,469) (328,730) Purchases of bank premises and equipment, net (796,785) (184,759) (260,386) Proceeds from sale of other real estate owned 244,247 22,000 -- Purchase of life insurance contracts in connection with Company benefit plans -- (910,000) -- ------------ ----------- ----------- Net cash used in investing activities (4,625,753) (7,968,076) (682,006) ------------ ----------- ----------- Cash flows from financing activities: Net increase (decrease) in deposits 20,847,893 6,855,340 (2,125,730) Net increase (decrease) in short-term borrowings (3,833,464) 4,255,289 (3,338,313) Proceeds from note payable 400,000 1,750,000 -- Principal payments made on notes payable (607,000) (1,750,000) -- Sale of treasury stock -- 60,000 -- Dividends paid (644,234) (512,870) (473,539) ------------ ----------- ----------- Net cash provided by (used in) financing activities 16,163,195 10,657,759 (5,937,582) ------------ ----------- ----------- Net increase (decrease) in cash and cash equivalents 13,150,257 5,104,179 (4,849,695) Cash and cash equivalents at beginning of year 13,232,829 8,128,650 12,978,345 ------------ ----------- ----------- Cash and cash equivalents at end of year $ 26,383,086 13,232,829 8,128,650 ------------ ----------- ----------- ------------ ----------- ----------- Supplemental information: Cash paid for: Interest $ 8,367,144 7,182,394 4,625,236 Federal income taxes 877,500 850,991 771,541 Noncash transactions: Transfers to other real estate in settlement of loans 108,800 207,611 -- Loans made to facilitate the sale of other real estate -- 39,170 -- ------------ ----------- ----------- ------------ ----------- -----------
See accompanying notes to consolidated financial statements. 43 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Carlinville National Bank Shares, Inc. (the Company) provides a full range of banking services to individual and corporate customers throughout Macoupin, Montgomery, Christian, and Sangamon counties of central Illinois, through the seven locations of its wholly-owned subsidiary banks, Carlinville National Bank (the Carlinville Bank), Palmer Bank, and Citizens State Bank (Citizens Bank), collectively referred to as the Banks. The Company and Banks are subject to competition from other financial and nonfinancial institutions providing financial products throughout the central Illinois area. Additionally, the Company and Banks are subject to the regulations of certain Federal and state agencies and undergo periodic examinations by those regulatory agencies. The Company also maintains a nonbanking subsidiary which operates a tax return preparation service. The operations of the nonbanking subsidiary are not material to the Company's consolidated results of operations. The accounting and reporting policies of the Company conform to generally accepted accounting principles within the banking industry. In compiling the consolidated financial statements, management is required to make estimates and assumptions, including the determination of the reserve for possible loan losses and valuation of other real estate owned, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Following is a description of the more significant of the Company's accounting policies: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. BASIS OF ACCOUNTING The Company and its subsidiaries utilize the accrual basis of accounting for major items, except for certain trust and fiduciary activities which are reported on the cash basis. Results of these activities on the cash basis do not differ materially from those which would be reported using the accrual basis. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (FAS 130). FAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in financial statements. FAS 130 defines comprehensive income as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources, including all changes in equity during a period, except those resulting from investments by and distributions to owners. FAS 130 requires that all items that are required to be recognized as comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. FAS 130 also requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial 44 statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid in capital in the equity section of the consolidated balance sheet. 45 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements FAS 130 is effective for fiscal years beginning after December 15, 1997, with reclassification of financial statements of earlier periods required for comparative purposes. The accompanying consolidated balance sheets as of December 31, 1998 and 1997, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998 have been prepared in accordance with FAS 130. CASH FLOW INFORMATION For purposes of the consolidated statements of cash flows, cash equivalents include due from banks (including interest-earning deposits in financial institutions) and Federal funds sold. NET INCOME PER COMMON SHARE Net income per common share is based on the weighted average number of common shares outstanding during each year. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE (FAS 128) which amends existing accounting requirements and establishes standards for computing and presenting earnings per share for entities with publicly-held common stock or potential common stock. FAS 128 simplifies the standards for computing earnings per share, replacing the presentation of primary earnings per share with basic earnings per share, which excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. FAS 128 also requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures, and requires a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shares in the earnings of the entity. FAS 128 is effective for financial statements issued for periods ending after December 15, 1997, and requires restatement of all prior period earnings per share information presented. For each of the years in the three-year period ended December 31, 1998, the Company did not maintain a complex capital structure as defined by FAS 128. INVESTMENTS IN DEBT AND EQUITY SECURITIES The Company classifies its debt securities into one of three categories at the time of purchase: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near-term. Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. All other debt securities not included in trading or held-to-maturity, and all equity securities, are classified as available-for-sale. 46 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization of premiums or accretion of discounts. Unrealized holding gains and losses on trading securities (for which no securities were so designated at December 31, 1998 and 1997) would be included in earnings. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and reported as a component of other comprehensive income in stockholders' equity until realized. Transfers of securities between categories would be recorded at fair value at the date of transfer. Unrealized holding gains and losses would be recognized in earnings for any transfers into the trading category. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security. For securities in the available-to-sale and held-to-maturity categories, premiums and discounts are amortized or accreted over the lives of the respective securities, with consideration of historical and estimated prepayment rates, as an adjustment to yield using the interest method. Dividend and interest income are recognized when earned. Realized gains and losses from the sale of any securities classified as available-for-sale are included in earnings and are derived using the specific identification method for determining the cost of securities sold. LOANS Interest on commercial, real estate and certain installment loans and direct financing leases is credited to income based on the principal amount outstanding. Interest on the remaining installment loans and direct financing leases is credited to income using a method which approximates the interest method. The recognition of interest income is discontinued when, in management's judgment, the interest will not be collectible in the normal course of business. Subsequent payments received on such loans are applied to principal if any doubt exists as to the collectibility of such principal; otherwise, such receipts are recorded as interest income. Loans are returned to accrual status when management believes full collectibility of principal and interest is expected. The Company considers a loan impaired when all amounts due - both principal and interest - will not be collected in accordance with the contractual terms of the loan agreement. When measuring impairment for such loans, the expected future cash flows of an impaired loan are discounted at the loan's effective interest rate. Alternatively, impairment is measured by reference to an observable market price, if one exists, or the fair value of the collateral for a collateral-dependent loan; however, the Company measures impairment based on the fair value of the collateral, if foreclosure is probable. Loan origination fees and related expenses are recognized when received and when incurred, respectively, the results of which do not differ materially from generally accepted accounting principles. Initial direct processing fees on direct financing leases are deferred and amortized over the lives of the related leases, using a method which approximates the interest method. The reserve for possible loan losses is available to absorb loan charge-offs. The reserve is increased by provisions charged to operations and is reduced by loan charge-offs less recoveries. The provision charged to operations each year is that amount which management believes is sufficient to bring the balance of the reserve to a level adequate to absorb potential loan losses, based on their knowledge and evaluation of past losses, the current loan portfolio, and the current economic environment in which the borrowers of the Company's banking subsidiaries operate. 47 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Management believes the reserve for possible loan losses is adequate to absorb losses in the loan portfolio. While management uses available information to recognize losses on loans, future additions to the reserve may be necessary based on changes in economic conditions. Additionally, various regulatory agencies, as an integral part of the examination process, periodically review the Banks' reserve for possible loan losses. Such agencies may require the Banks to add to the reserve for possible loan losses based on their judgments and interpretations about information available to them at the time of their examinations. BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization of premises and equipment are computed over the expected lives of the assets, or the related lease term for leasehold improvements, using both straight-line and accelerated methods. Estimated useful lives are 15 to 39 years for premises and three to seven years for leasehold improvements, furniture, fixtures, and equipment. Expenditures for major renewals and improvements of bank premises and equipment are capitalized, and those for maintenance and repairs are expensed as incurred. The Company adopted the provisions of Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (FAS 121) on January 1, 1996. FAS 121 requires that long-lived assets, such as bank premises and equipment, and certain identifiable intangible assets, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less estimated selling costs. The Company's adoption of FAS 121 in 1996 had no impact on the Company's financial position, results of operations, or liquidity. OTHER REAL ESTATE OWNED Other real estate owned represents property acquired through foreclosure, or deeded to the Company's banking subsidiaries in lieu of foreclosure, for loans on which the borrowers have defaulted as to payment of principal and interest. Properties acquired are initially recorded at the lower of the Company's carrying amount or fair value (less estimated selling costs), and carried in other assets in the consolidated balance sheets. Valuations are periodically performed by management, and an allowance for losses is established by means of a charge to noninterest expense if the carrying value of a property exceeds its fair value, less estimated selling costs. Subsequent increases in the fair value less estimated selling costs are recorded through a reversal of the allowance, but not below zero. Costs related to development and improvement of property are capitalized, while costs relating to holding the property are expensed. INTANGIBLE ASSETS The core deposit intangible relating to the Carlinville Bank's purchase of certain assets and assumption of certain liabilities of a branch location in Hillsboro, Illinois on December 13, 1996, is being amortized into noninterest expense on an straight-line basis over 15 years. 48 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The excess of the Company's consideration given in each subsidiary acquisition transaction over the fair value of the net assets acquired is recorded as goodwill, an intangible asset on the consolidated balance sheets. This amount is amortized into noninterest expense on a straight-line basis over 15 years. The Company assesses the recoverability of intangible assets by determining whether the amortization of the intangible assets over their remaining lives can be recovered through undiscounted future operating cash flows of the acquired operations or deposits. The amount of impairment, if any, is measured based on projected discounted future operating cash flows, using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of intangible assets will be impacted if estimated future operating cash flows are not achieved. INCOME TAXES The Company and its subsidiaries file consolidated Federal income tax returns. Applicable income taxes are computed based on reported income and expenses, adjusted for permanent differences between reported and taxable income. The Company uses the asset and liability method of accounting for income taxes, in which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period which includes the enactment date. MORTGAGE BANKING OPERATIONS The Company maintains mortgage banking operations at each of its banking subsidiaries, which originate long-term, fixed rate residential mortgage loans for sale (without recourse) to the secondary market. Upon receipt of an application for a residential real estate loan, the Company locks in an interest rate with the applicable investor and, at the same time, locks into an interest rate with the customer. This practice minimizes the Company's exposure to risk resulting from interest rate fluctuations. Upon disbursement of the loan proceeds to the customer, the loan is delivered to the applicable investor. Sales proceeds are generally received within two to seven days later. Therefore, no loans held for sale are included in the Company's loan portfolio at any point in time, except those loans for which the sale proceeds have not yet been received. Such loans are maintained at the lower of cost or market value, based on the outstanding commitment from the applicable investors for such loans. Loan origination fees are recognized upon the sale of the related loans and included in the consolidated statements of income as noninterest income from mortgage banking operations. Additionally, loan administration fees, representing income earned from servicing certain loans sold in the secondary market, are calculated on the outstanding principal balances of the loans serviced and recorded as noninterest income as earned. 49 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements For certain loans sold in the secondary market, the Company retains the rights to service such loans. Accordingly, the Company has recognized as separate assets the rights to service mortgage loans for others at the origination date of the loan. These capitalized mortgage servicing rights are included in intangible assets in the consolidated financial statements and are reviewed on a quarterly basis for impairment, based on the current fair value of those rights. The value of mortgage servicing rights is determined based on the present value of estimated future cash flows, using assumptions as to current market discount rate, prepayment speeds and servicing costs per loan. Mortgage servicing rights are amortized in proportion to, and over the period of estimated net servicing income as an other noninterest expense. At December 31, 1998, the Company serviced loans totaling $8,716,613, and the net unamortized balances of mortgage servicing rights was $75,465. The Company did not service any such loans prior to 1998. No valuation reserve was required on the mortgage servicing rights at December 31, 1998, in that the fair values thereof, determined by comparison to the fair value of loan portfolios with similar characteristics, exceeded the carrying amount included in intangible assets in the Company's consolidated balance sheets. FINANCIAL INSTRUMENTS For purposes of information included in note 14 regarding disclosures about financial instruments, financial instruments are defined as cash, evidence of an ownership interest in an entity, or a contract that both: (a) imposes on one entity a contractual obligation to deliver cash or another financial instrument to a second entity or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (b) conveys to that second entity a contractual right to receive cash or another financial instrument from the first entity or to exchange other financial instruments on potentially favorable terms with the first entity. The Company adopted the provisions of Statement of Financial Accounting Standards No. 125, TRANSFER AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES (FAS 125), on January 1, 1997. FAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial components approach that focuses on control. FAS 125 distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Adoption of FAS 125 did not have a material impact on the Company's financial position, results of operations, or liquidity. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (FAS 133), which establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. FAS 133 defines a derivative instrument as a financial instrument or other contract with all three of the following characteristics: 50 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements a. It has (1) one or more underlyings and (2) one or more notional amounts or payment provisions or both. These terms determine the amount of the settlement or settlements and, in some cases, whether or not a settlement is required. An underlying is a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable. An underlying may be a price or rate of an asset or liability but is not the asset or liability itself. A notional amount is a number of currency units specified in the contract. The settlement of a derivative instrument with a notional amount is determined by interaction of that notional amount with the underlying. A payment provision specifies a fixed or determinable settlement to be made if the underlying behaves in a specified manner. b. It requires no initial net investment or an initial net investment than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. c. Its terms require or permit net settlement, it can readily be settled by a means outside the contract, or it provides for delivery of an asset that puts the recipient in a position not substantially different than net settlement. FAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, the gains and losses) depends on the intended use of the derivative and the resulting designation. The Company and Banks have not engaged in any hedging activities during the three-year period ended December 31, 1998. For a derivative not designated as a hedging instrument, the gain or loss is recognized in earnings in the period of change. FAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Company management believes the implementation of FAS 133 will not have a material impact on the Company's consolidated financial position, results of operations, or liquidity. At December 31, 1998, the only financial instruments meeting the above definition of a derivative instrument are fixed rate loan commitments and standby letters of credit. The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments, and the present credit worthiness of such counterparties. The Company believes such commitments have been made on terms which are competitive in the markets in which it operates and are relatively short-term in nature; however, no premium or discount is offered thereon and, accordingly, the Company has not assigned a value to such instruments. RECLASSIFICATIONS Certain reclassifications have been made to the 1996 and 1997 consolidated financial statement amounts to conform to the 1998 presentation. 51 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 2 - MERGERS AND ACQUISITIONS Effective December 13, 1996, the Carlinville Bank entered into a purchase and assumption agreement to acquire certain assets and assume certain liabilities of the Hillsboro, Illinois branch location of an unaffiliated financial institution (the Hillsboro Branch). The fair value of the assets acquired and liabilities assumed in this transaction is shown below. The net difference between the assets acquired from and core deposit premium paid to the unaffiliated financial institution, and the liabilities assumed, was settled by a cash payment from the unaffiliated financial institution on December 13, 1996. This purchase and assumption transaction was accounted for as a purchase and, accordingly, the consolidated financial statements include the financial position and results of operations of the Hillsboro Branch for the period subsequent to the acquisition date. The assets acquired and liabilities assumed were recorded at their fair values at the acquisition date. The resulting discounts and premiums are being amortized over the expected economic lives of the related assets and liabilities. Assets acquired: Loans $ 317,958 Leasehold improvements, furniture and fixtures 67,814 Accrued interest and other assets 99,636 ------------ Total assets acquired $ 485,408 ------------ ------------ Liabilities assumed: Deposits $ 24,379,392 Accrued interest and other liabilities 186,525 ------------ Total liabilities assumed $ 24,565,917 ------------ ------------ Core deposit premium paid $ 2,051,456 ------------ ------------
Effective January 24, 1997, the Company purchased 100% of the outstanding capital stock of Lincoln Trail Bancshares, Inc. (Lincoln Trail), which owned 100% of the outstanding common stock of Palmer Bank in Taylorville, Illinois, in exchange for cash of $3,045,984. The acquisition was accounted for as a purchase transaction and, accordingly, the consolidated operations of Lincoln Trail from January 24, 1997 forward are included in the consolidated results of operations of the Company. The excess of cost over the fair value of net assets acquired, which amounted to $2,048,407, is being amortized on a straight line basis over 15 years. The fair value of the consolidated net assets acquired from Lincoln Trail at January 24, 1997 were as follows: Cash and due from banks $ 983,388 Federal funds sold 7,638,000 Investment securities 3,477,228 Loans, net 21,659,223 Premises and equipment 1,055,763 Other assets 560,849 ------------ Total assets 35,374,451 ------------ Deposits 33,920,247 Other liabilities 456,627 ------------ Total liabilities 34,376,874 Net assets acquired 997,577 Cost of acquisition 3,045,984 ------------ Excess of cost over fair value of net assets acquired $ 2,048,407 ------------ ------------
52 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Effective October 1, 1998, the Company acquired 100% of the outstanding capital stock of Shipman Bancorp, Inc. (Shipman), which owned 100% of the outstanding common stock of the Citizens Bank in Shipman, Illinois, in exchange for 62,710 shares of Company common stock and cash of $287,926. The acquisition was accounted for as a purchase transaction and, accordingly, the consolidated operations of Shipman from October 1, 1998 to December 31, 1998 are included in the Company's consolidated results of operations for the year ended December 31, 1998. The excess of cost over the fair value of net assets acquired, which amounted to $1,224,712, is being amortized on a straight line basis over 15 years. The fair value of the consolidated net assets acquired from Shipman at October 1, 1998 were as follows: Cash and due from banks $ 5,644,590 Federal funds sold 3,979,000 Investment securities 5,223,185 Loans, net 31,567,601 Premises and equipment 963,630 Other assets 1,969,711 ------------ Total assets 49,347,717 ------------ Deposits 41,463,171 Other liabilities 2,863,882 ------------ Total liabilities 44,327,053 Net assets acquired 5,020,664 Cost of acquisition 6,245,376 ------------ Excess of cost over fair value of net assets acquired $ 1,224,712 ------------ ------------
At December 31, 1998, the expected annual decrease of future income resulting from the amortization and accretion of the purchase adjustments for the acquisitions of the Hillsboro Branch, Lincoln Trail, and Shipman for each of the next five years is as follows:
Years ending December 31: 1999 $ 339,882 2000 319,112 2001 301,193 2002 288,971 2003 266,250 ------------- -------------
53 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Following is an unaudited pro forma summary of the consolidated results of operations for the years ended December 31, 1998, 1997, and 1996, assuming the purchase and assumption of the Hillsboro Branch had occurred on January 1, 1995, the acquisition of Lincoln Trail had occurred on January 1, 1996, and the acquisition of Shipman had occurred on January 1, 1997:
1998 1997 1996 -------- -------- -------- (in thousands of dollars, except for per share data) Interest income $ 18,316 17,389 13,652 Interest expense 9,924 9,486 7,563 -------- ------- ------- Net interest income 8,392 7,903 6,089 Provision for possible loan losses 335 170 - Noninterest income 1,918 1,557 831 Noninterest expense 6,738 6,683 4,515 -------- ------- ------- Net income before taxes 3,237 2,607 2,405 Income tax expense 961 620 556 -------- ------- ------- Net income $ 2,276 1,987 1,849 -------- ------- ------- -------- ------- ------- Net income per share $ 9.13 7.98 9.95 -------- ------- ------- -------- ------- -------
NOTE 3 - CASH AND DUE FROM BANKS The Company's banking subsidiaries are required to maintain certain daily reserve balances on hand in accordance with regulatory requirements. The reserve balances maintained in accordance with such requirements at December 31, 1998 and 1997 were approximately $988,000 and $244,000, respectively. NOTE 4 - INVESTMENTS IN DEBT AND EQUITY SECURITIES The amortized cost, gross unrealized gains and losses, and estimated fair values of debt and equity securities classified as available-for-sale at December 31, 1998 and 1997 are as follows:
GROSS GROSS UNREAL- UNREAL- ESTIMATED AMORTIZED IZED IZED FAIR 1998 COST GAINS LOSSES VALUE ---- ------------ ------- -------- ---------- U.S. TREASURY ISSUES AND OBLIGATIONS OF U.S. GOVERNMENT AGENCIES AND CORPORATIONS $ 35,073,679 159,747 (56,099) 35,177,327 OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS 7,922,188 218,173 (13,795) 8,126,566 OTHER DEBT SECURITIES 1,528,312 32,824 - 1,561,136 MORTGAGE-BACKED SECURITIES 13,604,540 81,436 (47,074) 13,638,902 EQUITY SECURITIES 2,556,048 320,502 - 2,876,550 ------------ ------- -------- ----------- $ 60,684,767 812,682 (116,968) 61,380,481 ------------ ------- -------- ----------- ------------ ------- -------- -----------
54 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
Gross Gross unreal- unreal- Estimated Amortized ized ized fair 1997 cost gains losses value ---- ---- ----- ------ ----- U.S. Treasury issues and obligations of U.S. Government agencies and corporations $ 32,924,621 71,278 (43,220) 32,952,679 Obligations of states and political subdivisions 4,946,354 144,659 (6,306) 5,084,707 Other debt securities 250,000 312 - 250,312 Mortgage-backed securities 2,478,757 6,008 (15,650) 2,469,115 Equity securities 2,745,870 639,733 - 3,385,603 ------------ ------- ------- ----------- $ 43,345,602 861,990 (65,176) 44,142,416 ------------ ------- ------- ----------- ------------ ------- ------- -----------
The amortized cost and estimated fair value of debt and equity securities classified as available-for-sale at December 31, 1998, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without prepayment penalties.
ESTIMATED AMORTIZED FAIR COST VALUE ------------- ----------- DUE ONE YEAR OR LESS $ 9,204,660 9,241,295 DUE ONE YEAR THROUGH FIVE YEARS 23,864,826 24,023,526 DUE FIVE YEARS THROUGH TEN YEARS 9,856,849 9,959,417 DUE AFTER TEN YEARS 1,597,844 1,640,791 MORTGAGE-BACKED SECURITIES 13,604,540 13,638,902 EQUITY SECURITIES 2,556,048 2,876,550 ------------ ----------- $ 60,684,767 61,380,481 ------------ ----------- ------------ -----------
Citizens Bank's equity securities include common stock of the Federal Home Loan Bank of Chicago, which is administered by the Federal Housing Finance Board. As a member of the Federal Home Loan Bank System, Citizens Bank is required to maintain an investment in the capital stock of the Federal Home Loan Bank of Chicago in an amount equal to the greater of 1% of the aggregate outstanding balance of loans secured by dwelling units at the beginning of each year or 0.3% of the total assets of Citizens Bank. The stock is recorded at cost, which represents redemption value. 55 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The amortized cost, gross unrealized gains and losses, and estimated fair values of the Company's debt securities classified as held-to-maturity at December 31, 1998 and 1997 are as follows:
GROSS GROSS UNREAL- UNREAL- ESTIMATED AMORTIZED IZED IZED FAIR 1998 COST GAINS LOSSES VALUE ---- ---- ----- ------ ----- U.S. TREASURY ISSUES AND OBLIGATIONS OF U.S. GOVERNMENT AGENCIES AND CORPORATIONS $ 1,904,670 28,650 - 1,933,320 OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS 7,606,458 316,034 (5,673) 7,916,819 OTHER DEBT SECURITIES 199,987 37 - 200,024 MORTGAGE-BACKED SECURITIES 2,894,631 31,001 (10,353) 2,915,279 ------------ -------- ------ ----------- $ 12,605,746 375,722 (16,026) 12,965,442 ------------ -------- ------ ----------- ------------ -------- ------ ----------- Gross Gross unreal- unreal- Estimated Amortized ized ized fair 1997 cost gains losses value ---- ---- ----- ------ ----- U.S. Treasury issues and obligations of U.S. Government agencies and corporations $ 5,049,439 14,085 - 5,063,524 Obligations of states and political subdivisions 9,299,904 320,492 (2,702) 9,617,694 Other debt securities 400,958 726 (684) 401,000 Mortgage-backed securities 4,125,020 41,990 (10,778) 4,156,232 ------------ -------- ------ ----------- $ 18,875,321 377,293 (14,164) 19,238,450 ------------ -------- ------ ----------- ------------ -------- ------ -----------
The amortized cost and estimated fair value of debt securities classified as held-to-maturity at December 31, 1998, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without prepayment penalties.
ESTIMATED AMORTIZED FAIR COST VALUE ------------ ----------- DUE ONE YEAR OR LESS $ 2,652,303 2,677,785 DUE ONE YEAR THROUGH FIVE YEARS 3,822,282 3,962,041 DUE AFTER FIVE YEARS THROUGH TEN YEARS 2,811,530 2,968,915 DUE AFTER TEN YEARS 425,000 441,422 MORTGAGE-BACKED SECURITIES 2,894,631 2,915,279 ------------ ----------- $ 12,605,746 12,965,442 ------------ ----------- ------------ -----------
56 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The carrying value of debt securities pledged to secure public funds, securities sold under repurchase agreements, long-term borrowings, and for other purposes amounted to approximately $25,368,000 and $20,636,000 at December 31, 1998 and 1997, respectively. During 1998 and 1997, certain available-for-sale debt securities were sold for proceeds totaling $705,000 and $2,508,366, resulting in gross gains of $304,032 and $191,213. Additionally, for the years ended December 31, 1998, 1997, and 1996, the Company realized gains of $9,474, $1,960, and $15,447, respectively, on securities which were called before maturity. NOTE 5 - LOANS The composition of the loan portfolio at December 31, 1998 and 1997 is as follows:
1998 1997 ---- ---- Commercial: Real estate $ 13,331,656 8,314,650 Agricultural production 27,164,525 19,358,620 Other 29,315,652 24,258,850 Real estate: Construction 8,017,578 4,757,992 Residential 29,468,706 24,241,201 Farmland 21,814,972 16,064,619 Loans held for sale 2,110,409 152,450 Consumer 16,606,858 12,822,806 Direct financing leases 5,349,713 1,954,021 ------------- ------------ $ 153,180,069 111,925,209 ------------- ------------ ------------- ------------
The Banks grant commercial, industrial, residential, agricultural and consumer loans and direct financing leases throughout Macoupin, Montgomery, Christian, and Sangamon counties in central Illinois. With the exception of agricultural credits, the Company does not have any particular concentration of credit in any one economic sector; however, a substantial portion of the portfolio is concentrated in and secured by real estate in the four-county area. The ability of the Company's borrowers to honor their contractual obligations is dependent upon the local economies and their effect on the real estate market. At December 31, 1998 and 1997, the Company had loans outstanding to the agricultural sector of $48,979,497 and $35,423,239, respectively, which comprise 32.0% and 31.6%, respectively, of the Company's total loan portfolio. Additionally, the Company's direct financing leases involve agricultural equipment, which is being leased to local area farmers. The Company's agricultural credits are concentrated in the four-county area in central Illinois and are generally fully-secured with either growing crops, farmland, livestock, and/or machinery and equipment. Such loans are subject to the overall national effects of the agricultural economy, as well as the local effects relating to their central Illinois location. The aggregate amount of loans to executive officers and directors and loans made for the benefit of executive officers and directors was $1,426,328 and $709,657 at December 31, 1998 and 1997, respectively. Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other persons, and did not involve more than the normal risk of collectibility. 57 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements A summary of activity for loans to executive officers and directors for the year ended December 31, 1998 is as follows: Balance, December 31, 1997 $ 709,657 New loans made 826,722 Payments received (809,170) Other changes 699,119 ----------- Balance, December 31, 1998 $ 1,426,328 ----------- -----------
Other changes represent changes in officer or director status in 1998. A summary of impaired loans, which include nonaccrual loans, at December 31, 1998 and 1997, follows:
1998 1997 ------------ -------- Nonaccrual loans $ 1,315,786 865,299 Impaired loans continuing to accrue interest - - ------------ ------- Total impaired loans $ 1,315,786 865,299 ------------ ------- ------------ ------- Reserve for possible loan losses on impaired loans $ 132,791 448,334 ------------ ------- ------------ ------- Impaired loans with no related reserve for possible loan losses $ 1,182,995 416,965 ------------ ------- ------------ -------
The average balances of impaired loans in 1998, 1997, and 1996 were $804,279, $888,379, and $537,280, respectively. A summary of interest income on impaired loans for the years ended December 31, 1998, 1997 and 1996 follows:
1998 1997 1996 ---------- -------- -------- Income recognized: Nonaccrual loans $ 20,495 35,279 28,373 Impaired loans continuing to accrue interest - - - ---------- ------ ------ $ 20,495 35,279 28,373 ---------- ------ ------ ---------- ------ ------ Income which would have been recognized if interest had been accrued: Nonaccrual loans $ 90,966 80,563 37,000 Impaired loans continuing to accrue interest - - - ---------- ------ ------ $ 90,966 80,563 37,000 ---------- ------ ------ ---------- ------ ------
58 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Transactions in the reserve for possible loan losses for the years ended December 31, 1998, 1997, and 1996 are summarized as follows:
1998 1997 1996 ------------ ---------- --------- Balance, January 1 $ 1,098,038 800,418 1,016,287 Balance of acquired subsidiary 661,986 1,183,535 - Provision charged to expense 335,000 170,000 - Loans charged off (593,388) (1,241,921) (319,622) Recoveries of loans previously charged off 139,576 186,006 103,753 ------------ ---------- --------- Net loans charged off (453,812) (1,055,915) (215,869) ------------ --------- --------- Balance, December 31 $ 1,641,212 1,098,038 800,418 ------------ --------- --------- ------------ --------- ---------
NOTE 6 - BANK PREMISES AND EQUIPMENT A summary of bank premises and equipment at December 31, 1998 and 1997 is as follows:
1998 1997 ----------- ----------- Land $ 403,037 317,114 Buildings and improvements 4,264,275 3,013,240 Furniture, fixtures, and equipment 3,807,996 2,297,550 Leasehold improvements 32,491 32,491 ----------- ----------- 8,507,799 5,660,395 Less accumulated depreciation and amortization 4,725,399 3,239,037 ----------- ----------- $ 3,782,400 2,421,358 ----------- ----------- ----------- -----------
Amounts charged to noninterest expense for depreciation and amortization aggregated $399,373, $327,854, and $193,092 for the years ended December 31, 1998, 1997, and 1996, respectively. The Company leases certain premises and equipment under noncancelable operating lease agreements which expire at various dates through 2003. Minimum rental commitments under these noncancelable operating lease agreements at December 31, 1998, for each of the next five years and in the aggregate, are as follows:
Year ending December 31: 1999 $ 35,818 2000 32,087 2001 30,414 2002 12,914 2003 1,087 ---------- Total minimum payments required $ 112,320 ---------- ----------
The Company also leases certain equipment under agreements which are cancelable with 30 to 90 days notice. Total rent expense for 1998, 1997 and 1996 was $57,984, $62,678, and $1,019, respectively. 59 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 7 - INTEREST-BEARING DEPOSITS A summary of interest-bearing deposits at December 31, 1998 and 1997 is as follows:
1998 1997 ---- ---- Interest-bearing transaction accounts $ 35,466,436 24,580,816 Savings 31,446,281 20,419,256 Other time deposits: Less than $100,000 116,302,102 89,393,788 $100,000 and over 21,772,337 16,778,750 ------------- ------------ $ 204,987,156 151,172,610 ------------- ------------ ------------- ------------
Interest expense on deposits for the years ended December 31, 1998, 1997, and 1996 is summarized as follows:
1998 1997 1996 ---- ---- ---- Interest-bearing transaction accounts $ 711,710 673,268 445,720 Savings 809,494 623,524 419,767 Other time deposits: Less than $100,000 5,495,846 4,897,465 2,905,731 $100,000 and over 1,114,729 783,464 659,333 ------------ ---------- ---------- $ 8,131,779 6,977,721 4,430,551 ------------ ---------- ---------- ------------ ---------- ----------
Following are the maturities of time deposits for each of the next five years and in the aggregate at December 31, 1998:
Year ending December 31: 1999 $ 92,776,498 2000 37,881,675 2001 3,724,712 2002 1,848,272 2003 1,820,386 After 2003 22,896 --------------- $ 138,074,439 --------------- ---------------
NOTE 8 - INCOME TAXES The components of income tax expense (benefit) for the years ended December 31, 1998, 1997, and 1996 are as follows:
1998 1997 1996 ---- ---- ---- Current: Federal $ 692,733 416,926 695,323 State 62,206 12,046 126,316 Deferred 10,541 95,506 (65,443) ---------- -------- -------- $ 765,480 524,478 756,196 ---------- -------- -------- ---------- -------- --------
60 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements A reconciliation of expected income tax expense computed by applying the Federal statutory rate of 34% to income before applicable income taxes, for the years ended December 31, 1998, 1997, and 1996, is as follows:
1998 1997 1996 ---- ---- ---- Expected statutory Federal income tax $ 952,716 807,553 908,802 Tax-exempt interest and dividend income (268,081) (292,993) (224,493) State tax, net of related Federal benefit 41,056 7,950 83,368 Other, net 39,789 1,968 (11,481) ---------- --------- -------- $ 765,480 524,478 756,196 ---------- --------- -------- ---------- --------- --------
The tax effects of temporary differences which give rise to significant portions of deferred tax assets and liabilities at December 31, 1998 and 1997 are presented below:
1998 1997 ---- ---- Deferred tax assets: Reserve for possible loan losses $ 23,028 22,125 Deferred compensation 148,959 - ----------- --------- Total deferred tax assets 171,987 22,125 ----------- --------- Deferred tax liabilities: Bank premises and equipment (41,467) (26,394) Available for sale securities, net (236,543) (270,917) Direct financing leases, net (124,813) (5,970) Purchase adjustments (218,210) - Other, net (38,031) (4,424) ----------- --------- Total deferred tax liabilities (659,064) (307,705) ----------- --------- Net deferred tax liabilities $ (487,077) (285,580) ----------- --------- ----------- ---------
The Company is required to provide a valuation reserve on deferred tax assets when it is more likely than not that some portion of the assets will not be realized. The Company has not established a valuation reserve at December 31, 1998 and 1997, due to management's belief that all criteria for recognition have been met, including the existence of a history of taxes paid sufficient to support the realization of deferred tax assets. NOTE 9 - SHORT-TERM BORROWINGS Following is a summary of short-term borrowings at December 31, 1998 and 1997:
1998 1997 ---- ---- Securities sold under repurchase agreements $ 3,793,237 7,173,408 Short-term note payable to an unaffiliated financial institution 400,000 - Treasury, tax and loan note option 306,180 759,473 $ 4,499,417 7,932,881 ------------ --------- ------------ ---------
61 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The average balances, maximum month-end amounts outstanding, and average rates at each year end for securities sold under repurchase agreements and total short-term borrowings as of and for the years ended December 31, 1998 and 1997 are as follows:
1998 1997 ---- ---- Securities sold under repurchase agreements: Average balance $ 7,623,702 8,179,403 Maximum amount outstanding at any month-end 16,824,469 10,574,492 Average rate at end of year 4.28% 4.97% Total short-term borrowings: Average balance $ 8,359,147 9,159,475 Maximum amount outstanding at any month-end 18,722,014 12,059,012 Average rate at end of year 4.53% 5.02%
The weighted average interest rate paid for securities sold under repurchase agreements and for total short-term borrowings for the years ended December 31, 1998, 1997, and 1996 was 4.84%, 4.80%, and 4.84%, respectively, and 4.96%, 4.98%, and 4.85%, respectively. Effective October 1, 1998, the Company obtained an unsecured short-term line of credit of $2,500,000 with an unaffiliated financial institution. The line of credit bears interest at a rate equal to the London Inter-bank Offered Rate plus 1.85%, with interest payable quarterly, and any unpaid principal due at maturity on September 30, 1999. At December 31, 1998, the Company had available $2,100,000 of additional funds on the line of credit. The weighted average interest rate paid on the line of credit in 1998 was 7.17%. The Carlinville Bank participates in the Federal Reserve Bank Seasonal Borrowing Privilege program, in which the Federal Reserve Bank of St. Louis has approved a $4,100,000 line of credit facility, which the Carlinville Bank could utilize throughout the year to assist in meeting the requirements of the community. The Seasonal Borrowing Privilege program is generally extended to smaller institutions which experience fluctuations in deposits and loans and may not have access to national money markets. A flexible interest rate applies on all outstanding seasonal loans and is set biweekly based on the moving average of the Federal funds interest rate and the secondary market interest rate on 90-day large certificates of deposits. The Carlinville Bank has pledged approximately $5,200,000 of real estate loans as security on this line of credit. The approved seasonal line of credit may be significantly reduced or revoked should the Carlinville Bank at any time become classified as undercapitalized by a Federal banking agency. At December 31, 1998, the seasonal line of credit facility remained unused. NOTE 10 - LONG-TERM BORROWINGS Long-term borrowings at December 31, 1998 consist of term notes payable to the Federal Home Loan Bank of Chicago under Citizens Bank's line of credit. These term notes mature at various dates through 2008 at rates ranging from 5.91% to 6.95%. The weighted average interest rate of Citizens Bank's outstanding borrowings with the Federal Home Loan Bank of Chicago at December 31, 1998 was 6.43%. The weighted average interest rate paid on this debt was 6.48% for the year ended December 31, 1998. The notes payable with the Federal Home Loan Bank of Chicago are fully-collateralized by debt securities. 62 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Following are the maturities of the Company's long-term borrowings for each of the next five years and in the aggregate at December 31, 1998: Year ending December 31: 1999 $ 62,000 2000 66,000 2001 71,000 2002 76,000 2003 82,000 After 2003 895,000 ---------- $ 1,252,000 ---------- ---------- NOTE 11 - EMPLOYEE BENEFIT PLANS The Carlinville Bank maintains two defined contribution plans to provide retirement benefits to substantially all of its employees - a Money Purchase Plan and 401(k) Plan. Under the Money Purchase Plan, the Carlinville Bank is required to contribute a minimum of 5% of eligible employee compensation. Under the 401(k) Plan, the Carlinville Bank may make discretionary matching contributions to the plan, up to the amount of employee contributions, subject to certain limitations. Citizens Bank sponsors a contributory 401(k) profit sharing and stock ownership plan with provision for Citizens Bank matching contributions. All employees meeting certain age and service requirements are eligible to participate in the plan. Citizens Bank will match an employee's contribution up to a 6% maximum contribution for any one employee. Prior to the Company's acquisition of Shipman, Citizens Bank matching contributions to the plan were used to purchase Shipman common stock for the plan. As a result, at December 31, 1998, the employee stock ownership plan held 967 shares of Company common stock. Total contributions made by the Company under these plans were $196,389, $184,316, and $160,115 for the years ended December 31, 1998, 1997 and 1996, respectively. The Carlinville Bank and Citizens Bank each maintain an Incentive Deferral Plan for certain of their directors, allowing such directors to defer their current compensation earned as directors, with the respective banks agreeing to pay to such directors, or their designated beneficiaries or survivors, the total amount of deferred compensation plus accumulated interest at or following retirement. Under the plans, interest is added to the accumulated deferred compensation at a periodic compound rate equal to the respective bank's return on equity before such interest charges. The directors are expected to continue to render their normal service as directors to the respective banks from the date of the plan's inception until retirement. The incentive deferral plans stipulate that, upon disability, termination, or death prior to retirement, the affected director (or his/her designated beneficiaries or survivors) would be vested in the total deferred compensation accumulated to that date, plus compound interest. Payments under the plan may be made in a lump sum or periodically over a specified time period, with interest. To fund the individual agreements with each director covered under the incentive deferral plans, the respective banks have purchased flexible premium universal life insurance policies on the lives of such directors, (payable upon death to the respective banks), with the Carlinville Bank paying a single one-time premium at the inception of the policies totaling $910,000, and Citizens Bank paying premiums for such policies over the first. 63 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements five years of the plan with no further premiums or other payments due thereafter. Each life insurance policy has a cash surrender value feature which allows the respective banks to receive an amount in cash upon cancellation or lapse of the policy. The cash surrender value of the policies, which is included in other assets in the consolidated balance sheets, increases monthly, based upon an interest factor, net of mortality, administration and early termination costs that are inherent in the contracts. The respective banks recognize annual compensation expense equal to the sum of the compensation deferred under the incentive deferral plans by the affected directors, plus interest applied to the accumulated balance of the deferred compensation. An amount is included in other liabilities in the consolidated balance sheets equal to the sum of all deferrals and interest additions accumulated to date. Prior to the Company's acquisition of Shipman, Citizens Bank had also maintained a non-qualified Executive Salary Continuation Plan for certain key officers which provided for the payment of fixed annual retirement benefits to such officers, or their designated beneficiaries or survivors, for 15 years following their attainment of the normal retirement age of 65. The Executive Salary Continuation Plan also provided for benefits in the event of the executive's termination, early retirement, death or disability. As an unfunded plan, no assets were specifically set aside or held in trust for the payment of benefits under the Executive Salary Continuation Plan. Participants in the plan had no rights beyond those of an unsecured creditor of Citizens Bank. To fund the individual agreements with each officer under the Executive Salary Continuation Plan, Citizens Bank had purchased flexible premium universal life insurance policies on the lives of such officers (payable upon death to Citizens Bank). Each life insurance policy has a cash surrender value feature which allows Citizens Bank to receive an amount of cash upon cancellation or lapse of the policy. The cash surrender value of the policies, which is included in other assets in the consolidated balance sheets, increases monthly, based on an interest factor, net of mortality, administration and early termination costs that are inherent in the contracts. Prior to the Company's acquisition of Shipman, benefit expenses under the Executive Salary Continuation Plan were recognized on an annual basis in an amount sufficient, as computed using the interest method, to fully accrue the net present value of future benefit payments to be made to each participant by the normal retirement dates of such participants. Citizens Bank terminated the Executive Salary Continuation Plan prior to the Company's acquisition of Shipman. While certain of the officers were distributed their amounts owed under the plan in lump sum payments, certain other officers have elected to leave the amounts owed thereto with Citizens Bank and receive a deferred retirement benefit. A liability of $281,170 is included in other liabilities in the Company's consolidated balance sheet at December 31, 1998 for the remaining amounts owed under this plan. NOTE 12 - LITIGATION During the normal course of business, various legal claims have arisen which, in the opinion of management, will not result in any material liability to the Company. 64 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 13 - PARENT COMPANY FINANCIAL INFORMATION Subsidiary bank dividends are the principal source of funds for the payment of dividends by the Company to its stockholders and for debt servicing. The Company's banking subsidiaries are subject to regulations by regulatory authorities which require the maintenance of minimum capital requirements. Additionally, as a national bank, the Carlinville Bank is limited to the earnings of the current year and two previous years for the payment of dividends, without obtaining the prior approval of the Office of the Comptroller of the Currency. As Illinois state chartered banks, Palmer Bank and Citizens Bank have no regulatory restrictions, other than the maintenance of minimum capital standards, as to the amount of dividends which may be paid. As of December 31, 1998, under the existing regulatory restrictions, the Carlinville Bank had an additional $482,521 available for dividends in 1999. 65 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Following are condensed balance sheets as of December 31, 1998 and 1997 and the related condensed schedules of income and cash flows for each of the years in the three-year period ended December 31, 1998 of the Company (parent company only):
(in thousands of dollars) CONDENSED BALANCE SHEETS 1998 1997 ---- ---- Assets: Cash $ 120 133 Investment in subsidiaries 27,044 18,656 Available-for-sale equity securities 1,232 1,920 Property and equipment, net 17 19 Other assets 79 20 --------- --------- Total assets $ 28,492 20,748 --------- --------- --------- --------- Liabilities and stockholders' equity: Note payable $ 400 - Deferred taxes payable 109 218 Other liabilities 229 96 --------- --------- Total liabilities 738 314 Total stockholders' equity 27,754 20,434 --------- --------- Total liabilities and stockholders' equity $ 28,492 20,748 --------- --------- --------- --------- (in thousands of dollars) CONDENSED SCHEDULES OF INCOME 1998 1997 1996 ---- ---- ---- Revenue: Cash dividends from subsidiaries $ 650 2,364 3,642 Dividend and interest income 52 30 27 Net gains on mortgage banking activities 12 26 - Gain on sale of equity securities 304 182 - ------ ------ ----- Total revenue 1,018 2,602 3,669 ----- ----- ----- Expenses: Salaries and benefits 93 93 - Interest expense 5 36 - Depreciation 6 6 - Miscellaneous expenses 78 58 13 ------- ------- ------- Total expenses 182 193 13 ------ ------ ------- Income before income tax and equity in undistributed (excess dividends over) net income of subsidiaries 836 2,409 3,656 Income tax expense (benefit) 66 - (2) ------- ------ -------- 770 2,409 3,658 Equity in undistributed (excess dividends over) net income of subsidiaries 1,267 (558) (1,741) ------- ------ -------- Net income $ 2,037 1,851 1,917 ------- ------ -------- ------- ------ --------
66 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
(in thousands of dollars) CONDENSED SCHEDULES OF CASH FLOWS 1998 1997 1996 ------- ------ -------- Cash at beginning of year $ 133 5 13 ------- ------ -------- Cash flows from operating activities: Net income 2,037 1,851 1,917 ------- ------ -------- Adjustments to reconcile net income to net cash provided by operating activities: Excess dividends (undistributed earnings) of subsidiaries (1,267) 558 1,741 Dividends receivable from subsidiary - 2,340 (2,340) Depreciation 6 6 - Gain on sale of equity securities (304) (182) - Other, net 93 132 (74) ------- ------ -------- Total adjustments (1,472) 2,854 (673) ------- ------ -------- Cash provided by operating activities 565 4,705 1,244 ------- ------ -------- Cash flows from investing activities: Purchase of available-for-sale equity securities (52) (478) (778) Proceeds from sale of available- for-sale equity securities 705 576 - Cash paid in purchase of sub- sidiary (288) (3,046) - Additional capital injection into subsidiary (695) (1,150) - Purchase of property and equip- ment (4) (26) - ------- ------ -------- Cash used in investing activities (334) (4,124) (778) ------- ------ -------- Cash flows from financing activities: Dividends paid (644) (513) (474) Issuance of treasury stock - 60 - Proceeds from note payable 400 1,750 - Principal payments on note payable - (1,750) - ------- ------ -------- Cash used in financing activities (244) (453) (474) ------- ------ -------- Net increase (decrease) in cash (13) 128 (8) ------- ------ -------- Cash at end of year $ 120 133 5 ------- ------ -------- ------- ------ --------
67 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 14 - DISCLOSURES ABOUT FINANCIAL INSTRUMENTS The Company's banking subsidiaries issue financial instruments with off-balance-sheet risk in the normal course of the business of meeting the financing needs of their customers. These financial instruments include commitments to extend credit and standby letters of credit and may involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated balance sheets. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. 68 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company's banking subsidiaries use the same credit policies in making commitments and conditional obligations as they do for financial instruments included on the balance sheet. Following is a summary of the Company's off-balance-sheet financial instruments at December 31, 1998 and 1997: 1998 1997 ---- ---- Financial instruments for which contractual amounts represent: Commitments to extend credit $ 27,457,250 19,336,033 Standby letters of credit 926,475 412,286 ------------ ------------ $ 28,383,725 19,748,319 ------------ ------------ ------------ ------------ 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. Of the total commitments to extend credit at December 31, 1998, $4,677,226 represent fixed rate loan commitments. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company's banking subsidiaries evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Banks upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but is generally residential or income-producing commercial property or equipment. Standby letters of credit are conditional commitments issued by the Company's banking subsidiaries to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Following is a summary of the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1998 and 1997:
1998 ----------------------------- CARRYING ESTIMATED AMOUNT FAIR VALUE -------- ---------- BALANCE SHEET ASSETS: CASH AND DUE FROM BANKS $ 10,386,086 10,386,086 FEDERAL FUNDS SOLD 15,997,000 15,997,000 INVESTMENTS IN DEBT AND EQUITY SECURITIES 73,986,227 72,345,923 LOANS, NET 150,958,480 152,452,616 ACCRUED INTEREST RECEIVABLE 3,503,844 3,503,844 LIFE INSURANCE CONTRACTS 1,915,377 1,915,377 ----------- ------------ $ 256,747,014 256,600,846 ----------- ------------ ----------- ------------ BALANCE SHEET LIABILITIES: DEPOSITS 229,925,936 230,834,821 SHORT-TERM BORROWINGS 4,499,417 4,499,417 LONG-TERM BORROWINGS 1,252,000 1,252,000 ACCRUED INTEREST PAYABLE 1,404,827 1,404,827 ----------- ------------ $ 237,082,180 237,991,065 ----------- ------------ ----------- ------------
69 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
1998 ---------------------------- CARRYING ESTIMATED AMOUNT FAIR VALUE -------- ---------- BALANCE SHEET ASSETS: $ 4,803,829 4,803,829 CASH AND DUE FROM BANKS 8,429,000 8,429,000 FEDERAL FUNDS SOLD 63,017,737 63,380,866 INVESTMENTS IN DEBT AND 110,780,111 111,413,742 EQUITY SECURITIES 2,619,870 2,619,870 LOANS, NET 910,000 910,000 ACCRUED INTEREST RECEIVABLE ------------- ------------- LIFE INSURANCE CONTRACTS $ 190,560,547 191,557,307 ------------- ------------- ------------- ------------- BALANCE SHEET LIABILITIES: DEPOSITS 167,614,872 167,606,756 SHORT-TERM BORROWINGS 7,932,881 7,932,881 LONG-TERM BORROWINGS 966,818 966,818 ACCRUED INTEREST PAYABLE -------------- -------------- $ 176,514,571 176,506,455 ------------- ------------- ------------- -------------
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value: CASH AND OTHER SHORT-TERM INSTRUMENTS For cash and due from banks (including interest-earning deposits in other financial institutions), Federal funds sold, accrued interest receivable (payable), and short-term borrowings, the carrying amount is a reasonable estimate of fair value, as such instruments are due on demand and/or reprice in a short time period. INVESTMENTS IN DEBT AND EQUITY SECURITIES Fair values are based on quoted market prices or dealer quotes. LOANS For certain homogeneous categories of loans, such as residential mortgages and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types 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 with the same remaining maturities. INSURANCE CONTRACTS The fair value of insurance contracts is based on quotes of cash surrender values provided by the carriers. DEPOSITS The fair value of demand deposits, savings accounts, and interest-bearing transaction account deposits 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. LONG-TERM BORROWINGS Rates currently available to the Company with similar terms and remaining maturities are used to estimate the fair value of existing debt. 70 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT The fair value of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments, and the present creditworthiness of such counterparties. The Company believes such commitments have been made on terms which are competitive in the markets in which it operates. NOTE 15 - REGULATORY MATTERS The Company and its banking subsidiaries are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of the Company's and Banks' assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and Banks' capital amounts and classifications 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 subsidiaries 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 to average assets (as defined). Company management believes, as of December 31, 1998, that the Company and its banking subsidiaries meet all capital adequacy requirements to which they are subject. As of December 31, 1998, the most recent notification from applicable regulatory authorities categorized the Company and its banking subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and its banking subsidiaries must maintain minimum Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since those notifications that Company management believes have changed the respective categories of the Company and its banking subsidiaries. 71 CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The actual capital amounts and ratios for the Company on a consolidated basis, and for the Carlinville Bank, Palmer Bank and Citizens Bank on a stand-alone bank basis at December 31, 1998, and the amounts and ratios for the Company on a consolidated basis, and for the Carlinville Bank and Palmer Bank on a stand-alone bank basis at December 31, 1997, are presented in the following table:
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provision ------------------ ------------------- ------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- 1998 - ---- TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS) CONSOLIDATED $ 24,174,908 14.21% $ 13,606,080 =>8.0% $ 17,007,600 =>10.0% CARLINVILLE BANK 14,195,644 13.81% 8,220,560 =>8.0% 10,275,700 =>10.0% PALMER BANK 3,655,255 12.02% 2,431,840 =>8.0% 3,039,800 =>10.0% CITIZENS BANK 5,314,196 15.85% 2,682,160 =>8.0% 3,352,700 =>10.0% TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS) CONSOLIDATED $ 22,389,470 13.16% $ 6,803,040 =>4.0% $ 10,204,560 =>6.0% CARLINVILLE BANK 13,547,599 13.18% 4,110,280 =>4.0% 6,165,420 =>6.0% PALMER BANK 3,277,897 10.78% 1,215,920 =>4.0% 1,823,880 =>6.0% CITIZENS BANK 4,892,658 14.59% 1,341,080 =>4.0% 2,011,620 =>6.0% TIER 1 CAPITAL (TO AVERAGE ASSETS) CONSOLIDATED $ 22,389,470 8.61% $ 10,404,360 =>4.0% $ 13,005,450 =>5.0% CARLINVILLE BANK 13,547,599 8.20% 6,609,880 =>4.0% 8,262,350 =>5.0% PALMER BANK 3,277,897 7.23% 1,814,400 =>4.0% 2,268,000 =>5.0% CITIZENS BANK 4,892,658 9.86% 1,985,640 =>4.0% 2,482,050 =>5.0% 1997 Total capital (to risk-weighted assets) Consolidated $ 17,150,203 13.34% $ 10,282,813 =>8.0% $ 12,853,517 =>10.0% Carlinville Bank 13,066,455 13.44% 7,777,923 =>8.0% 9,722,404 =>10.0% Palmer Bank 2,562,051 11.04% 1,856,602 =>8.0% 2,320,753 =>10.0% Tier 1 capital (to risk-weighted assets) Consolidated $ 16,052,165 12.49% $ 5,141,407 =>4.0% $ 7,712,110 =>6.0% Carlinville Bank 12,408,855 12.76% 3,888,962 =>4.0% 5,833,443 =>6.0% Palmer Bank 2,270,101 9.78% 928,301 =>4.0% 1,392,452 =>6.0% Tier 1 capital (to average assets) Consolidated $ 16,052,165 8.48% $ 7,569,278 =>4.0% $ 9,461,597 =>5.0% Carlinville Bank 12,408,855 8.21% 6,046,187 =>4.0% 7,557,733 =>5.0% Palmer Bank 2,270,101 6.16% 1,473,843 =>4.0% 1,842,304 =>5.0%
72 ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There are no changes in or disagreements on accounting and financial disclosures. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information concerning the directors and executive officers of the Company. Each of these directors and officers has been engaged in the same principal occupation for the last five years.
POSITION WITH THE COMPANY AND ITS SUBSIDIARIES AND NAME AGE PRINCIPAL OCCUPATION ---- --- -------------------------------------------------- Fred Smith, Jr............ 68 Chairman of the Board of the Company and the Carlinville Bank; Director of Citizens Bank; Automobile Dealer, Carlinville, Illinois. James T. Ashworth......... 47 Director, President and Chief Executive Officer of the Company and the Carlinville Bank; President and Director of Lincoln Trail and President and Director of Palmer Bank; President and Director of Shipman and President and Director of Citizens Bank. Judith E. Baker........... 44 Director of the Company and the Carlinville Bank; Billing Finance, Carlinville Area Hospital, Carlinville, Illinois. Roger Capps............... 62 Director of the Company, the Carlinville Bank and Palmer Bank; Senior Vice President and Chief of Operations, Prairie Farms Dairy, Carlinville, Illinois. Shawn Davis............... 39 Director and Executive Vice President of the Company and the Carlinville Bank; Director of Citizens Bank; Chief Operations Officer of the Carlinville Bank. James H. Frank............ 65 Director of the Company and Shipman; Director and Chairman of the Board of Citizens Bank; Farmer. Joie L. Russell........... 78 Director of the Company and the Carlinville Bank; Homemaker. Nancy L. Ruyle............ 38 Director of the Company, the Carlinville Bank and Palmer Bank; Partner, Law Firm of Phelps, Kasten, Ruyle, Burns, Carmody & Sims. Richard C. Walden......... 47 Director of the Company, the Carlinville Bank and Palmer Bank; Owner, Richard C. Walden, CPA.
The Company's Board of Directors is comprised of nine members, with directors serving one year terms. Mr. James T. Ashworth is the nephew of Ms. Joie L. Russell. There are no other family relationships among any of the directors or executive officers of the Company or the Banks. Company directors do not receive separate compensation for their services on the Company board. Each Company director, with the exception of Mr. Frank, is also a director of the Carlinville Bank, and in such capacity received a monthly retainer of $250, and also receives $250 for each board meeting attended 73 and $100 for each committee meeting attended. Mr. Frank is paid $350 per month as the Chairman of the Board of Citizens Bank. 74 ITEM 11. EXECUTIVE COMPENSATION CASH COMPENSATION The table below shows the compensation earned for the last three completed fiscal years by the Company's Chief Executive Officer. No other officer of the Company received cash compensation exceeding $100,000 in any of the last three years:
- ------------------------------------------------------------------------------------------------------------------------ SUMMARY COMPENSATION TABLE - ------------------------------------------------------------------------------------------------------------------------ ANNUAL COMPENSATION - ------------------------------------------------------------------------------------------------------------------------ (A) (B) (C) (D) (I) ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY (1) BONUS COMPENSATION (2) - ------------------------------------------------------------------------------------------------------------------------ James T. Ashworth 1998 $ 111,000 $ 27,750 $ 18,629 President and Chief Executive Officer of the 1997 $ 105,630 $ 23,239 $ 12,622 Company and the Carlinville Bank 1996 $ 103,020 $ 25,265 $ 11,142 - ------------------------------------------------------------------------------------------------------------------------
(1) These amounts include officer contributions (on a pre-tax basis to the individual) under the Carlinville National Bank Profit Sharing Plan (the "CNB Profit Sharing Plan"). (2) These amounts represent aggregate employer contributions made under the CNB Profit Sharing Plan and the Carlinville Bank's Money Purchase Plan of $16,650 for 1998, $10,563 for 1997, and $10,302 for 1996, life insurance premiums of $872 for 1998, $872 for 1997, and $840 for 1996, and an automobile allowance of $1,107 and $1,187 for 1998 and 1997, respectively. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS The Company does not have a Compensation Committee or other board committee performing equivalent functions. Compensation decisions are determined by a committee of the whole Company Board. Each of the directors of the Company (with the exception of Mr. Frank) also serves as a director of the Carlinville Bank, and Messrs. Ashworth and Davis serve as the President and Chief Executive Officer and the Executive Vice President, respectively, of the Company and the Carlinville Bank. CNB PROFIT SHARING PLAN The CNB Profit Sharing Plan is a profit sharing plan established under Section 401(k) of the Code. Under the CNB Profit Sharing Plan, participants are permitted to make salary reduction contributions to the plan in an amount which does not exceed a specific dollar amount determined by the Internal Revenue Service. The Carlinville Bank has agreed to contribute for each participant a matching contribution equal to 100% of the participant's eligible contributions to a maximum of 5% of such participant's annual salary. In addition, the Carlinville Bank may make an annual discretionary contribution to each participant's account. DIRECTORS' INCENTIVE DEFERRAL PLAN Effective December 1997, the Carlinville Bank adopted an Incentive Deferral Plan (the "Carlinville Bank Deferral Plan") for certain of its directors, allowing such directors to defer their current compensation earned as directors, with the Carlinville Bank agreeing to pay to such directors, or their designated beneficiaries or survivors, the total amount of deferred compensation plus accumulated interest at or following retirement. Under the Carlinville Bank Deferral Plan, interest is added to the accumulated deferred compensation at a periodic compound rate equal to the Carlinville Bank's return on equity before such interest charges. The 75 directors are expected to continue to render their normal service as directors to the Carlinville Bank from the date of the Carlinville Bank Deferral Plan's inception until retirement. The Carlinville Bank Deferral Plan stipulates that, upon disability, termination, or death prior to retirement, the affected director (or his or her designated beneficiaries or survivors) would be vested in the total deferred compensation accumulated to that date, plus compound interest. Payments under the Carlinville Bank Deferral Plan may be made in a lump sum or periodically over a specified time period, with interest. To fund the individual agreements with each director covered under the Carlinville Bank Deferral Plan, the Carlinville Bank has purchased flexible premium universal life insurance policies on the lives of such directors, (payable upon death to the Carlinville Bank), and paid a single one-time premium at the inception of the policies totaling $910,000. No other payments or premiums are required of the Carlinville Bank. Each life insurance policy has a cash surrender value feature which allows the Carlinville Bank to receive an amount in cash upon cancellation or lapse of the policy. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of the Record Date, concerning the Company's Common Stock beneficially owned by: (i) each of the current directors of the Company; (ii) each executive officer of the Company named in the Summary Compensation Table; (iii) all directors and executive officers of the Company as a group; and (iv) each person known to the Company to beneficially owned more than 5% of the issued and outstanding Company Common Stock. Except as otherwise set forth in the notes to the table, each of the persons listed below has sole voting and investment power with respect to all shares shown as beneficially owned by such person. As of December 31, 1998, there were 249,208 shares of Company Common Stock issued and outstanding (excludes treasury shares).
SHARES PERCENT OF NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED (1) CLASS (2) - ---------------------------------------- ---------------------- --------- 5% STOCKHOLDERS DIRECTORS James T. Ashworth (3) 7,995 3.2% Carlinville National Bank Shares, Inc. West Side Square Carlinville, Illinois 62626 Judith E. Baker (4) 11,473 4.6% Carlinville National Bank Shares, Inc. West Side Square Carlinville, Illinois 62626 Roger Capps (5) 500 * Carlinville National Bank Shares, Inc. West Side Square Carlinville, Illinois 62626 Shawn Davis (6) 550 * Carlinville National Bank Shares, Inc. West Side Square Carlinville, Illinois 62626
76 James H. Frank (7) 10,236 4.1% Carlinville National Bank Shares, Inc. West Side Square Carlinville, Illinois 62626 Joie L. Russell (8) 11,859 4.8% Carlinville National Bank Shares, Inc. West Side Square Carlinville, Illinois 62626 Nancy L. Ruyle (9) 1,000 * Carlinville National Bank Shares, Inc. West Side Square Carlinville, Illinois 62626 Fred Smith, Jr. (10) 1,280 * Carlinville National Bank Shares, Inc. West Side Square Carlinville, Illinois 62626 Richard C. Walden (11) 1,620 * Carlinville National Bank Shares, Inc. West Side Square Carlinville, Illinois 62626 Directors and executive officers of the Company as a group (9 persons).... 44,731 18.0%
- --------------- * Less than 1% (1) The information contained in this column is based upon information furnished to the Company by the individuals named above and the members of the designated group. The nature of beneficial ownership for shares shown in this column is sole voting and investment power, except as set forth in the footnotes below. (2) Current percentages are calculated based upon the actual number of shares outstanding at December 31, 1998 of 249,208 shares of Common Stock. (3) Mr. Ashworth shares voting and investment power with his spouse over such shares. (4) Ms. Baker has shared voting and investment power over 10,746 of such shares as co-trustee of a trust. (5) Mr. Capps shares voting and investment power over such shares with his spouse. (6) Mr. Davis shares voting and investment power over such shares with his spouse. (7) Includes 5,092 shares held jointly by Mr. Frank with his spouse, over which shares Mr. Frank has shared voting and investment power, and also includes 1,226 shares owned solely by his spouse, over which shares Mr. Frank has no voting or investment power. (8) Ms. Russell shares voting and investment power over such shares with her spouse. (9) Ms. Ruyle shares voting and investment power over such shares with her spouse. (10) Mr. Smith shares voting and investment power over such shares with his spouse. (11) Mr. Walden shares voting and investment power over such shares with his spouse. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain of the directors and officers of the Company and Banks, and some of the corporations and firms with which these individuals are associated, are customers of the Banks or CTS in the ordinary course of business, or are indebted to one or more of the Banks for loans of $60,000 or more, and it is anticipated that they will continue to be customers of, and indebted to, one or more of the Banks in the future. The amount of indebtedness of the Company's directors and executive officers is equal to approximately 5.1% of 77 stockholders' equity at December 31, 1998. All such loans, however, were made in the ordinary course of business, did not involve more than the normal risk of collectibility or present other unfavorable features, and were made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable loans made by the Banks in transactions with unaffiliated persons. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Index to Financial Statement The Index to Financial Statements is on page 38 of this Form 10-K (a)(3) Schedule of Exhibits The Exhibit Index which immediately follows the signature pages to this Form 10-K is incorporated by reference. (b) Reports on Form 8-K The Company did not file any Current Reports on Form 8-K during the fourth quarter of 1998. (c) Exhibits The Exhibits required to be filed with this Form 10-K are included with this Form 10-K and are located immediately following the Exhibit Index to this Form 10-K. (d) Financial Data Schedule Exhibit 27.1 (Edgar Filing only) 78 SIGNATURES Pursuant to the requirements of Section 15(d) the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on March 29, 1999. CARLINVILLE NATIONAL BANK SHARES, INC. (Registrant) By: /S/ James T. Ashworth James T. Ashworth President and Principal Executive, Financial and Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf or the Registrant and in the capacities indicated on March 29, 1999.
SIGNATURE TITLE --------- ----- /S/ James T. Ashworth President and Chief Executive, ------------------------------- Financial and Accounting Officer James T. Ashworth /S/ Fred Smith, Jr. Chairman of the Board ------------------------------- Fred Smith, Jr. /S/ Judith E. Baker Director ------------------------------- Judith E. Baker /S/ Roger Capps Director ------------------------------- Roger Capps /S/ Shawn Davis Director and Executive ------------------------------- Vice President Shawn Davis /S/ James H. Frank Director ------------------------------- James H. Frank /S/ Joie L. Russell Director ------------------------------- Joie L. Russell /S/ Nancy L. Ruyle Director ------------------------------- Nancy L. Ruyle /S/ Richard C. Walden Director ------------------------------- Richard C. Walden
Date: March 28, 1999 79 EXHIBIT INDEX
EXHIBIT INCORPORATED HEREIN BY FILED SEQUENTIAL NO. DESCRIPTION REFERENCE TO HEREWITH PAGE NO. --- ----------- ------------ -------- -------- 2.1 Agreement and Plan of Merger, dated Incorporated by reference from March 27, 1998, between the Exhibit 2.1 to the Company, Shipman Acquisition Registrant's Registration Corporation and Shipman Statement on Form S-4 dated July 31, 1998 (File No. 333-57917) 3.1 Amended and Restated Certificate of Incorporated by reference from Incorporation of the Company Exhibit 3.1 to the Registrant's Registration Statement on Form S-4 dated July 31, 1998 (File No. 333-57917) 3.2 Bylaws of the Company Incorporated by reference from Exhibit 3.2 to the Registrants Registration Statement on Form S-4 dated July 31, 1998 (File No. 333-57917) 4.1 Specimen Stock Certificate of the Incorporated by reference from Company Exhibit 4.1 to the Registrant's Registration Statement on Form S-4 dated July 31, 1998 (File No. 333-57917) 10 [Material Contracts - i.e. Employment Agreements, Registration Statements, ESOPs, stock option plans] 21.1 Subsidiaries of the Registrant * 81 27.1 Financial Data Schedule (EDGAR * filing only)
80 EX-21 2 EXHIBIT 21 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Carlinville National Bank Carlinville Tax Service, Inc. Lincoln Trail Bancshares, Inc. Shipman Bancorp, Inc. Citizens State Bank Palmer Bank 81 EX-27 3 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF CARLINVILLE NATIONAL BANKSHARES, INC. AND SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 9,385,889 1,000,197 15,997,000 0 61,380,481 12,605,746 12,965,442 153,180,069 1,641,212 266,055,279 229,925,936 4,499,417 2,623,803 1,252,000 0 0 262,710 27,491,413 266,055,279 11,183,905 3,736,903 808,048 15,728,856 8,131,779 8,568,029 7,160,827 335,000 313,506 5,671,744 2,802,105 2,036,625 0 0 2,036,625 10.07 10.07 3.70 1,315,786 457,000 0 15,145,000 1,098,038 593,388 139,576 1,641,212 1,451,900 0 189,312
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