EXHIBIT 99.3
OFFERING MEMORANDUM CONFIDENTIAL
$25,000,000
COAL CITY CAPITAL TRUST I
Floating Rate Capital Securities
(Liquidation Amount $1,000 per Capital Security)
full and unconditionally guaranteed, to the extent described herein, by
COAL CITY CORPORATION
The Floating Rate Capital Securities (the "Capital Securities") offered
hereby will represent preferred beneficial interests in Coal City Capital Trust
I, a trust created under the laws of the State of Delaware (the "Trust"). Coal
City Corporation, an Illinois corporation (the "Corporation"), will be the owner
of all of the beneficial interests represented by common securities of the Trust
(the "Common Securities," and, together with the Capital Securities, the "Trust
Securities"). LaSalle National Bank is the Property Trustee of the Trust. The
Trust exists for the exclusive purpose of issuing the Trust Securities and
investing the proceeds thereof in the Floating Rate Junior Subordinated
Deferrable Interest Debentures (the "Junior Subordinated Debentures") to be
issued by the Corporation, and certain other limited activities described
herein. The Junior Subordinated Debentures are scheduled to mature on September
1, 2028 (the "Stated Maturity Date"). The Capital Securities will have a
preference over the Common Securities under certain circumstances with respect
to cash distributions and amounts payable on liquidation, redemption or
otherwise. See "Description of Capital Securities--Subordination of Common
Securities." (Continued on page 3)
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN EVALUATING AN INVESTMENT
IN THE CAPITAL SECURITIES.
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THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY
OTHER GOVERNMENTAL AGENCY.
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THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND,
UNLESS SO REGISTERED, MAY NOT BE OFFERED OR SOLD, EXCEPT PURSUANT TO AN
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS.
ACCORDINGLY, THE CAPITAL SECURITIES ARE BEING OFFERED AND SOLD ONLY TO (I)
"QUALIFIED INSTITUTIONAL BUYERS" (AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT) IN COMPLIANCE WITH RULE 144A, AND (II) INSTITUTIONAL "ACCREDITED INVESTORS"
(AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT), AND
ARE SUBJECT TO TRANSFER RESTRICTIONS. SEE "NOTICE TO INVESTORS."
======================================= ============================ ===================== ===========================
Price to Investors (1) Commission (2) Proceeds to Trust (3)(4)
Per Capital Security......................... $1,000 (4) $1,000
Total...........................................$25,000,000 (4) $25,000,000
======================================= ============================ ===================== ===========================
(1) Plus accumulated Distributions, if any, from July 24, 1998.
(2) The Corporation and the Trust have agreed to indemnify the Initial
Purchaser (as defined below) against certain liabilities, including certain
liabilities under the Securities Act. See "Plan of Distribution."
(3) Estimated expenses of $280,000 are payable by the Corporation.
(4) In view of the fact that the proceeds of the sale of the Capital Securities
will be invested in the Junior Subordinated Debentures, the Corporation, as
issuer of the Junior Subordinated Debentures, has agreed to pay the Initial
Purchaser, as compensation, $27.50 per Capital Security (or $687,500 in the
aggregate). See "Plan of Distribution."
The Capital Securities are offered by Sandler O'Neill & Partners, L.P. (the
"Initial Purchaser"), subject to prior sale, when, as and if issued to and
accepted by the Initial Purchaser and subject to approval of certain legal
matters by counsel for the Initial Purchaser and to certain other conditions.
The Initial Purchaser reserves the right to withdraw, cancel or modify such
offer in whole or in part. It is expected that delivery of the Capital
Securities will be made through the facilities of The Depository Trust Company
("DTC") and, in certain circumstances, in certificated form in New York, New
York, on or about July 24, 1998 against payment therefor in immediately
available funds.
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SANDLER O'NEILL & PARTNERS, L.P.
------------------------------------
The date of this Offering Memorandum is July 21, 1998
(Continued from cover page)
Except as provided below, the Capital Securities will be represented by a
global Capital Security in fully registered form, deposited with a custodian for
and registered in the name of a nominee of DTC. Beneficial interests in such
Capital Securities will be shown on, and transfers thereof will be effected
through, records maintained by DTC and its participants. Beneficial interests in
such Capital Securities will trade in DTC's Same-Day Funds Settlement System and
secondary market trading activity in such interests will therefore settle in
immediately available funds. Any Capital Securities sold other than in reliance
on Rule 144A will be issued in certificated form. The Capital Securities are
expected to be eligible for quotation on the Private Offerings, Resales and
Trading through Automated Linkages ("PORTAL") System of the National Association
of Securities Dealers, Inc. at the time of issuance thereof. The Capital
Securities will be issued and may be transferred only in blocks having a
Liquidation Amount (as defined herein) of not less than $100,000 (100 Capital
Securities) and multiples of $1,000 in excess thereof. See "Description of
Capital Securities--Restrictions on Transfer" and "Notice to Investors."
Holders of the Trust Securities will be entitled to receive cumulative cash
distributions ("Distributions") arising from the payment of interest on the
Junior Subordinated Debentures, accruing from the date of original issuance and
payable quarterly in arrears on March 1, June 1, September 1 and December 1 of
each year, commencing December 1, 1998, at a rate per annum, reset quarterly,
equal to 3-month LIBOR (as defined herein) plus 180 basis points (the
"Distribution Rate"). The amount of each Distribution with respect to the Trust
Securities will include amounts accrued to, but excluding, the date the
Distribution is due. So long as no Debenture Event of Default (as defined
herein) has occurred and is continuing, the Corporation will have the right to
defer payments of interest on the Junior Subordinated Debentures, at any time
and from time to time, for a period not exceeding 20 consecutive quarterly
periods with respect to each deferral period (each, an "Extension Period"),
provided that an Extension Period must end on an Interest Payment Date (as
defined herein) and may not extend beyond the Stated Maturity Date. Upon the
termination of any such Extension Period and the payment of all amounts then
due, the Corporation may elect to begin a new Extension Period, subject to the
requirements set forth herein. If and for so long as interest payments on the
Junior Subordinated Debentures are so deferred, Distributions on the Trust
Securities also will be deferred and the Corporation will not be permitted,
subject to certain exceptions described herein, to declare or pay any cash
distributions with respect to the Corporation's capital stock, to make any
payment with respect to debt securities of the Corporation that rank pari passu
with or junior to the Junior Subordinated Debentures, or make any guarantee
payments with respect to any guarantees by the Corporation of debt securities of
any subsidiary of the Corporation that rank pari passu with or junior to the
Junior Subordinated Debentures. During an Extension Period, interest on the
Junior Subordinated Debentures will continue to accrue (and the amount of
Distributions to which holders of the Trust Securities are entitled will
continue to accumulate) at the applicable periodic Distribution Rate compounded
quarterly from the relevant payment date for such interest, and holders of Trust
Securities will be required to accrue such deferred interest income for United
States federal income tax purposes prior to the receipt of the cash attributable
to such income. See "Description of Junior Subordinated Debentures--Option to
Extend Interest Payment Date" and "Certain Federal Income Tax
Consequences--Original Issue Discount."
The Corporation will, through the Guarantee, the Common Guarantee, the
Trust Agreement, the Junior Subordinated Debentures and the Indenture (each as
defined herein), taken together, guarantee all of the Trust's obligations under
the Trust Securities. See "Relationship Among the Capital Securities, the Junior
Subordinated Debentures and the Guarantee--Guarantee." The Guarantee and the
Common Guarantee will guarantee payments of Distributions and payments upon
liquidation of the Trust or redemption of the Trust Securities, but in each case
only to the extent that the Trust holds funds on hand legally available therefor
and has failed to make such payments, as described herein. See "Description of
Guarantee." If the Corporation fails to make a required payment on the Junior
Subordinated Debentures, the Trust will not have sufficient funds to make the
related payments, including Distributions, on the Trust Securities. The
Guarantee and the Common Guarantee will not cover any such payment when the
Trust does not have sufficient funds on hand legally available therefor. In such
event, a holder of Capital Securities may institute a legal proceeding directly
against the Corporation to enforce such holder's rights with respect to such
payment. See "Description of Junior Subordinated Debentures--Enforcement of
Certain Rights by Holders of Capital Securities." The obligations of the
Corporation under the Guarantee, the Common Guarantee and the Junior
Subordinated Debentures will be unsecured and will rank subordinate and junior
in right of payment to all Senior Indebtedness (as defined in "Description of
Junior Subordinated Debentures--Subordination"). See "Risk Factors--Ranking of
Subordinated Obligations under the Guarantee and the Junior Subordinated
Debentures." In addition, because the Corporation is a holding company, the
Junior Subordinated Debentures and the Guarantee effectively will be
subordinated to all existing and future liabilities, including deposits, of the
Corporation's subsidiaries.
3
The Trust Securities will be subject to mandatory redemption in a Like
Amount (as defined herein) (i) in whole but not in part, on the Stated Maturity
Date upon repayment of the Junior Subordinated Debentures; (ii) in whole but not
in part, at any time prior to September 1, 2008 (the "Initial Optional
Redemption Date"), contemporaneously with the optional prepayment of the Junior
Subordinated Debentures by the Corporation upon the occurrence and continuation
of a Special Event (as defined herein); and (iii) in whole or in part, on or
after the Initial Optional Redemption Date, contemporaneously with the optional
prepayment by the Corporation of all or part of the Junior Subordinated
Debentures, in each case at a redemption price equal to 100% of the
corresponding principal amount of Junior Subordinated Debentures so repaid or
prepaid, as the case may be, plus accrued and unpaid interest thereon to the
date of redemption (the "Redemption Price"). See "Description of Capital
Securities--Redemption."
Subject to the Corporation having received any required regulatory
approval, the Junior Subordinated Debentures will be prepayable prior to the
Stated Maturity Date at the option of the Corporation (i) on or after the
Initial Optional Redemption Date, in whole or in part; or (ii) at any time prior
to the Initial Optional Redemption Date, in whole but not in part, upon the
occurrence and continuation of a Special Event, in either case at a prepayment
price equal to 100% of the principal amount of the Junior Subordinated
Debentures so prepaid, plus accrued and unpaid interest thereon to the date of
prepayment (the "Prepayment Price"). See "Description of Junior Subordinated
Debentures--Optional Prepayment" and "--Special Event Prepayment."
The Corporation will have the right at any time, including, without
limitation, upon the occurrence of a Tax Event (as defined herein), to dissolve
the Trust and, after satisfaction of liabilities of creditors of the Trust as
required by applicable law, to cause a Like Amount of the Junior Subordinated
Debentures to be distributed to the holders of the Trust Securities in
liquidation of the Trust, subject to (i) the Corporation having received an
opinion of counsel to the effect that such distribution will not be a taxable
event to holders of Capital Securities; and (ii) the receipt of any required
regulatory approval. Unless the Junior Subordinated Debentures are distributed
to the holders of the Trust Securities, in the event of a dissolution of the
Trust as described herein, after satisfaction of liabilities to creditors of the
Trust as required by applicable law, the holders of the Trust Securities
generally will be entitled to receive a liquidation amount of $1,000 per Trust
Security ("Liquidation Amount") plus accumulated and unpaid Distributions
thereon to the date of payment. See "Description of Capital
Securities--Liquidation of the Trust and Distribution of Junior Subordinated
Debentures."
THIS OFFERING MEMORANDUM IS FURNISHED BY THE CORPORATION AND THE TRUST ON A
CONFIDENTIAL BASIS IN CONNECTION WITH AN OFFERING EXEMPT FROM REGISTRATION UNDER
THE SECURITIES ACT SOLELY FOR THE PURPOSE OF ENABLING A PROSPECTIVE INVESTOR TO
CONSIDER THE PURCHASE OF THE PARTICULAR SECURITIES DESCRIBED HEREIN. THE
INFORMATION CONTAINED IN THIS OFFERING MEMORANDUM HAS BEEN PROVIDED BY THE
CORPORATION AND THE TRUST AND OTHER SOURCES IDENTIFIED HEREIN. NO REPRESENTATION
OR WARRANTY, EXPRESSED OR IMPLIED, IS MADE BY THE INITIAL PURCHASER AS TO THE
ACCURACY OR COMPLETENESS OF SUCH INFORMATION, AND NOTHING CONTAINED IN THIS
OFFERING MEMORANDUM IS, OR SHALL BE RELIED UPON AS, A PROMISE OR REPRESENTATION
BY THE INITIAL PURCHASER AS TO THE PAST OR THE FUTURE.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OR ANY STATE SECURITIES LAWS AND, UNLESS SO REGISTERED, MAY NOT BE OFFERED
OR SOLD, EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT
TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS. AS A RESULT, THIS OFFERING IS BEING MADE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT FOR AN OFFER AND SALE OF
SECURITIES WHICH DOES NOT INVOLVE A PUBLIC OFFERING. ACCORDINGLY, EACH PURCHASER
OF CAPITAL SECURITIES, IN MAKING ITS PURCHASE, WILL BE DEEMED TO HAVE MADE
CERTAIN ACKNOWLEDGMENTS, REPRESENTATIONS AND AGREEMENTS RELATING TO TRANSFER
RESTRICTIONS, AS SET FORTH UNDER "NOTICE TO INVESTORS." INVESTORS SHOULD BE
AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THEIR INVESTMENT
FOR AN INDEFINITE PERIOD OF TIME.
NO EMPLOYEE BENEFIT OR OTHER PLAN SUBJECT TO TITLE I OF THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF
THE
4
INTERNAL REVENUE CODE OF 1986, AS AMENDED ("CODE") (EACH, A "PLAN"), NO ENTITY
WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT
IN THE ENTITY (A "PLAN ASSET ENTITY") AND NO PERSON INVESTING "PLAN ASSETS" OF
ANY PLAN MAY ACQUIRE OR HOLD THE CAPITAL SECURITIES OR ANY INTEREST THEREIN,
UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE
UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION ("PTCE")
96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS
PURCHASE AND HOLDING OF CAPITAL SECURITIES IS NOT PROHIBITED BY SECTION 406 OF
ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY
PURCHASER OR HOLDER OF THE CAPITAL SECURITIES OR ANY INTEREST THEREIN WILL BE
DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER: (A)
IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA,
OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER
PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON
OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH
PURCHASE, OR (B) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER
SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO
APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.
THIS OFFERING MEMORANDUM IS SUBMITTED ON A CONFIDENTIAL BASIS TO A LIMITED
NUMBER OF INSTITUTIONAL INVESTORS FOR INFORMATIONAL USE SOLELY IN CONNECTION
WITH THE CONSIDERATION OF THE PURCHASE OF THE CAPITAL SECURITIES. ITS USE FOR
ANY OTHER PURPOSE IS NOT AUTHORIZED. IT MAY NOT BE COPIED OR REPRODUCED, IN
WHOLE OR IN PART, NOR MAY IT BE DISTRIBUTED OR ANY OF ITS CONTENTS DISCLOSED TO
ANYONE OTHER THAN THE PROSPECTIVE INVESTORS TO WHOM IT IS SUBMITTED.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE CORPORATION AND THE TRUST AND THE TERMS OF THIS OFFERING,
INCLUDING THE MERITS AND RISKS INVOLVED. THIS OFFERING IS BEING MADE ON THE
BASIS OF THIS OFFERING MEMORANDUM AND ANY DECISION TO PURCHASE THE CAPITAL
SECURITIES IN THIS OFFERING MUST BE BASED ON THE INFORMATION CONTAINED HEREIN.
NO REPRESENTATION IS MADE TO ANY OFFEREE OR PURCHASER OF THE CAPITAL SECURITIES
REGARDING THE LEGALITY OF AN INVESTMENT THEREIN BY SUCH OFFEREE OR PURCHASER
UNDER ANY APPLICABLE LEGAL INVESTMENT OR SIMILAR LAWS OR REGULATIONS. THE
CONTENTS OF THIS OFFERING MEMORANDUM ARE NOT TO BE CONSTRUED AS LEGAL, BUSINESS
OR TAX ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN ATTORNEY AND
BUSINESS AND TAX ADVISORS AS TO LEGAL, BUSINESS AND TAX ADVICE.
PROSPECTIVE INVESTORS ARE HEREBY OFFERED THE OPPORTUNITY, PRIOR TO
PURCHASING ANY CAPITAL SECURITIES, TO ASK QUESTIONS AND RECEIVE ANSWERS
CONCERNING THE TERMS AND CONDITIONS OF THE OFFERING OF THE CAPITAL SECURITIES
AND TO OBTAIN FROM THE CORPORATION AND THE TRUST ADDITIONAL INFORMATION, TO THE
EXTENT THAT THEY POSSESS SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE
EFFORT OR EXPENSE, THAT IS NECESSARY TO VERIFY THE ACCURACY OF THE INFORMATION
CONTAINED HEREIN OR PROVIDED PURSUANT HERETO.
THE CAPITAL SECURITIES DESCRIBED HEREIN HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY
STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT REVIEWED THIS OFFERING MEMORANDUM NOR CONFIRMED THE
ACCURACY OR DETERMINED THE ADEQUACY OF THIS OFFERING MEMORANDUM. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
5
THE CORPORATION, THE TRUST AND THE INITIAL PURCHASER RESERVE THE RIGHT TO
REJECT ANY OFFER TO PURCHASE, IN WHOLE OR IN PART, FOR ANY REASON, OR TO SELL
LESS THAN OR MORE THAN THE FULL AMOUNT OF, THE CAPITAL SECURITIES OFFERED
HEREBY.
THIS OFFERING MEMORANDUM IS PERSONAL TO THE OFFEREE AND HAS BEEN PREPARED
SOLELY FOR USE IN CONNECTION WITH THE PLACEMENT OF THE CAPITAL SECURITIES AND
DOES NOT CONSTITUTE AN OFFER TO ANY OTHER PERSON OR TO THE PUBLIC GENERALLY TO
SUBSCRIBE FOR OR OTHERWISE ACQUIRE THE CAPITAL SECURITIES. DISTRIBUTION OF THIS
OFFERING MEMORANDUM TO ANY PERSON OTHER THAN THE OFFEREE AND THOSE PERSONS, IF
ANY, RETAINED TO ADVISE SUCH OFFEREE WITH RESPECT TO THE OFFER AND SALE OF THE
CAPITAL SECURITIES IS NOT AUTHORIZED, AND ANY DISCLOSURE OF ANY OF ITS CONTENTS
IS PROHIBITED. EACH OFFEREE, BY ACCEPTING DELIVERY OF THIS OFFERING MEMORANDUM,
AGREES TO THE FOREGOING AND TO MAKE NO COPIES OF THIS OFFERING MEMORANDUM, AND,
IF THE OFFEREE DOES NOT PURCHASE THE CAPITAL SECURITIES OR THE OFFERING IS
TERMINATED, TO RETURN THIS OFFERING MEMORANDUM TO: SANDLER O'NEILL & PARTNERS,
L.P., TWO WORLD TRADE CENTER, 104TH FLOOR, NEW YORK, NEW YORK 10048, ATTENTION:
SYNDICATE DEPARTMENT.
THE CAPITAL SECURITIES WILL BE ISSUED, AND MAY BE TRANSFERRED, ONLY IN
BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $100,000 (100 CAPITAL
SECURITIES) AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF
CAPITAL SECURITIES IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000
SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED
TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF SUCH CAPITAL SECURITIES FOR
ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON SUCH
CAPITAL SECURITIES, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO
INTEREST WHATSOEVER IN SUCH CAPITAL SECURITIES.
THE OFFER MADE HEREBY CAN BE WITHDRAWN AT ANY TIME BEFORE THE CLOSING OF
THE SALE OF THE CAPITAL SECURITIES AND IS SPECIFICALLY MADE SUBJECT TO THE TERMS
DESCRIBED IN THIS OFFERING MEMORANDUM AND IN THE PURCHASE AGREEMENT DESCRIBED
HEREIN. SEE "PLAN OF DISTRIBUTION."
IN CONNECTION WITH THE OFFERING MADE HEREBY, THE INITIAL PURCHASER MAY
ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET
PRICE OF THE CAPITAL SECURITIES OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE
STABILIZING AND THE PURCHASE OF CAPITAL SECURITIES TO COVER SHORT POSITIONS. ANY
OF THE FOREGOING TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION."
FOR NEW HAMPSHIRE RESIDENTS:
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A
SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW
HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT
ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER
ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A
SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY
WAY UPON THE MERITS OF QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO,
ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE
MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT, ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
6
AVAILABLE INFORMATION
The Corporation submits quarterly to the Board of Governors of the Federal
Reserve System ("FRB") certain reports called "Consolidated Financial Statements
for Bank Holding Companies FR Y-9C" ("Call Reports"). The Call Reports are
publicly available at the Federal Reserve Bank of Chicago, 230 South LaSalle
Street, Chicago, Illinois 60603. Each Call Report consists of a Balance Sheet,
Income Statement, Changes in Equity Capital and other supporting schedules as of
and for the period to which the report relates. The Call Reports are prepared in
accordance with regulatory instructions issued by the Federal Financial
Institutions Examination Council ("FFIEC"). Because of the special supervisory,
regulatory and economic policy needs served by these Call Reports, those
regulatory instructions do not in all cases follow generally accepted accounting
principles. While the Call Reports are supervisory and regulatory documents, not
primarily accounting documents, and do not provide a complete range of financial
disclosure about the Corporation, the reports nevertheless provide important
information concerning the Corporation.
The Corporation has agreed that it will furnish to holders, beneficial
owners and prospective purchasers of the Capital Securities the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act
(or any successor statute) to permit compliance with Rule 144A in connection
with resales of the Capital Securities.
The Corporation will furnish to such holders, beneficial owners and
prospective purchasers, without charge, annual financial statements of the
Corporation audited by independent public accountants, and will furnish the Call
Reports to such holders, beneficial owners and prospective purchasers, upon
written request to the Secretary of the Corporation, 1200 North Ashland Avenue,
Chicago, Illinois 60622.
No separate financial statements of the Trust have been included herein and
no separate financial statements will be prepared in the future. The Corporation
and the Trust do not consider that such financial statements would be material
to holders of the securities offered hereby because (i) all of the Common
Securities of the Trust will be owned by the Corporation, (ii) the Trust has no
independent operations and exists for the sole purpose of issuing securities
representing undivided beneficial interests in the assets of the Trust and
investing the proceeds thereof in the Junior Subordinated Debentures issued by
the Corporation, and (iii) the obligations of the Trust under its Capital
Securities are fully and unconditionally guaranteed by the Corporation to the
extent the Trust has funds available to meet such obligations.
FORWARD-LOOKING STATEMENTS
Information contained in this Offering Memorandum includes forward-looking
statements which can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should," "projected,"
"contemplates," "anticipates," or the negative thereof, or other variations
thereon or comparable terminology. No assurance can be given that the future
results covered by the forward-looking statements will be achieved. Such
information also includes cautionary statements identifying important factors
with respect to such forward-looking statements, including certain risks and
uncertainties that could cause actual results to vary materially from the future
results covered in such forward-looking statements. Other factors, such as the
general state of the economy, could also cause actual results to vary materially
from the future results covered in such forward-looking statements.
7
SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information, including "Risk Factors,"
appearing elsewhere in this Offering Memorandum. As used herein (i) the
"Indenture" means the Indenture, to be dated as of July 24, 1998, as amended and
supplemented from time to time, between the Corporation and LaSalle National
Bank, as trustee (the "Debenture Trustee"), relating to the Junior Subordinated
Debentures; (ii) the "Trust Agreement" means the Amended and Restated
Declaration of Trust relating to the Trust, among the Corporation, as Sponsor,
LaSalle National Bank, as Property Trustee (the "Property Trustee"), Wilmington
Trust Company, as Delaware Trustee (the "Delaware Trustee"), the Administrative
Trustees named therein (collectively, with the Property Trustee and Delaware
Trustee, the "Issuer Trustees") and the holders, from time to time, of undivided
beneficial interests in the assets of the Trust; (iii) the "Guarantee" means the
Capital Securities Guarantee Agreement relating to the Capital Securities, by
and between the Corporation and LaSalle National Bank, as Guarantee Trustee (the
"Guarantee Trustee"); and (iv) the "Common Guarantee" means the Common
Securities Guarantee Agreement relating to the Common Securities.
COAL CITY CORPORATION
GENERAL. The Corporation was incorporated in Illinois in 1986 and is a bank
holding company registered under the Federal Bank Holding Company Act of 1956,
as amended ("BCA"), and the Illinois Bank Holding Company Act of 1957, as
amended ("Illinois BCA"). The Corporation conducts a commercial banking business
through Manufacturers Bank, an Illinois banking corporation ("Manufacturers
Bank," or the "Bank"), which is wholly-owned by Manufacturers National
Corporation, an Illinois corporation ("MNC"), 96.5% of whose issued and
outstanding shares of common stock and all of whose issued and outstanding
shares of Class A Preferred Stock are owned by the Corporation.
On May 7, 1997, the Corporation acquired U.S. Bancorp, Inc. ("U.S.
Bancorp"), an Illinois corporation and the holding company for U.S. Bank, an
Illinois banking corporation ("U.S. Bank"), through the merger of a subsidiary
of MNC with and into U.S. Bancorp. On January 28, 1998, the Corporation
completed the sale of Coal City National Bank ("Coal City Bank"), a wholly-owned
subsidiary of the Corporation, to Kankakee Bancorp, Inc. In the transaction, the
Corporation received $7.8 million in cash and recorded a $4.1 million gain on
sale. See "Business--History and Development."
Manufacturers Bank has four distinct banking groups: Business Banking,
Convenient Retail Banking, Lease Banking and Korean Banking. The Business
Banking Group focuses on serving privately-owned companies, including
manufacturers, wholesalers, distributors, home developers, long-term health care
operators, real estate operators and investors, and selected types of service
companies. Manufacturers Bank provides these companies with credit, deposit,
cash management and investment products and services. The Convenient Retail
Banking Group targets consumers who live or work near the Bank's offices.
Manufacturers Bank offers consumer products to these individuals, including
checking accounts, savings accounts, money market accounts, time deposit
accounts, secured and unsecured consumer loans, residential mortgage loans, and
a variety of fee for service products, such as money orders and travelers
checks. The Lease Banking Group serves small and medium size equipment leasing
companies located throughout the United States. Manufacturers Bank provides full
banking services for these leasing companies, including financing the debt
portion of leveraged leases, providing short-term and long-term equity
financing, making working capital and bridge loans, and investing directly in
leased equipment. The Korean Banking Group focuses on the expanding Korean
community, providing complete banking services using the Korean language to
Korean consumers and Korean-owned businesses in the Chicago area. See "Business
- -- Business Areas."
At March 31, 1998, the Corporation had total assets, deposits and
stockholders' equity of approximately $762.7 million, $634.4 million and $54.8
million, respectively. See "Business" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes thereto included elsewhere herein.
The principal business offices of the Corporation are located at the main
banking premises of Manufacturers Bank, 1200 North Ashland Avenue, Chicago,
Illinois 60622 ("Main Banking Premises"). The telephone number of the
8
Main Banking Premises is 773/278-4040. Manufacturers Bank also has seven other
offices, located on the far north side and the far south side of Chicago and in
the Chicago suburbs of Lansing, South Holland and Tinley Park, Illinois.
RECENT DEVELOPMENTS. Historically, the Corporation has maintained high
asset quality by utilizing strict loan underwriting standards and collection
efforts and by generally limiting its origination of mortgage loans to its
delineated lending area. The ratio of non-performing loans to total loans at
December 31, 1993, 1994, 1995 and 1996 was 0.17%, 0.26%, 0.34% and 0.35%,
respectively, and the ratio of non-performing assets to total assets at such
dates was 0.10%, 0.21%, 0.24% and 0.23%, respectively.
On May 7, 1997, the Corporation acquired $17.8 million in potential problem
loans and assets as part of the acquisition of U.S. Bancorp, which had been
identified as possible problem loans or assets during the due diligence
performed by the Corporation prior to the acquisition. Upon such acquisition,
these potential problem loans and assets constituted 3.60% of the Bank's total
loans. As a result of the U.S. Bancorp acquisition, the ratio of non-performing
loans to total loans and the ratio of non-performing assets to total assets at
December 31, 1997, was 1.87% and 1.70%, respectively.
As a result of the efforts of the Corporation to further reduce the amount
of non-performing assets, at March 31, 1998, the ratio of non-performing loans
to total loans and the ratio of non-performing assets to total assets were 1.78%
and 1.74%, respectively, and at June 30, 1998, these ratios had declined to
0.66% and 0.45%, respectively. From March 31, 1998 to June 30, 1998, the
Corporation lowered non-performing loans by $5.9 million, had net charge-offs of
$924,000, sold $3.4 million of OREO, and added $187,000 to its allowance for
loan losses. See "Recent Developments."
COAL CITY CAPITAL TRUST I
The Trust is a statutory business trust that was organized by the
Corporation under Delaware law on July 2, 1998 by the filing of a Certificate of
Trust with the Delaware Secretary of State. The Trust's business and affairs are
conducted by the Issuer Trustees, consisting of the Property Trustee, the
Delaware Trustee and the three individual Administrative Trustees (all of whom
are officers of the Corporation or the Bank). The Trust exists for the exclusive
purposes of (i) issuing and selling the Trust Securities; (ii) using the
proceeds from the sale of the Trust Securities to acquire the Junior
Subordinated Debentures issued by the Corporation; and (iii) engaging in only
those other activities necessary, advisable or incidental thereto. Accordingly,
the Junior Subordinated Debentures will be the sole assets of the Trust and
payments under the Junior Subordinated Debentures will be the sole revenue of
the Trust. All of the Common Securities will be owned by the Corporation.
THE OFFERING
Securities Offered..................... $25.0 million aggregate Liquidation
Amount of Floating Rate Capital
Securities (Liquidation Amount $1,000
per Capital Security).
Offering Price......................... $1,000 per Capital Security plus
accumulated Distributions, if any, from
July 24, 1998.
Distributions.......................... Distributions on each Capital Security
will be payable at a rate per annum,
reset quarterly, equal to 3-month LIBOR
(as defined herein) plus 180 basis
points, will be cumulative, will accrue
from and including the date of issuance
of the Capital Securities and will be
payable quarterly in arrears on March
1, June 1, September 1 and December 1
of each year commencing on December 1,
1998. The amount of each Distribution
due with respect to the Capital
Securities will include amounts accrued
to but excluding the date the
Distribution is due.
Extension Periods...................... So long as no Debenture Event of
Default (as defined herein) has
occurred and is continuing,
Distributions on Capital Securities
will be deferred for the duration of
any Extension Period elected by the
Corporation with respect to the payment
of interest on the Junior Subordinated
Debentures. No Extension Period will
exceed 20 consecutive quarterly
periods, end on a date other than
9
an Interest Payment Date or extend
beyond the Stated Maturity Date. During
an Extension Period, interest on the
Junior Subordinated Debentures will
continue to accrue (and the amount of
Distributions to which holders of the
Capital Securities are entitled will
continue to accumulate) at the
applicable periodic Distribution Rate
compounded quarterly. The holders of
the Capital Securities will be required
to accrue deferred interest income for
United States federal income tax
purposes prior to receipt of cash
attributable to such income. See
"Description of Junior Subordinated
Debentures--Option to Extend Interest
Payment Date" and "Certain Federal
Income Tax Consequences--Original Issue
Discount."
Ranking................................ The Capital Securities will rank pari
passu, and payments thereon will be
made pro rata, with the Common
Securities, except as described under
"Description of Capital
Securities--Subordination of Common
Securities." The Junior Subordinated
Debentures will rank pari passu with
all other junior subordinated
debentures, if any, issued by the
Corporation (the "Other Debentures"),
which are issued and sold, if at all,
to other trusts established by the
Corporation, if any, in each case
similar to the Trust ("Other Trusts"),
and will constitute unsecured
obligations of the Corporation and will
rank subordinate and junior in right of
payment to all Senior Indebtedness, to
the extent and in the manner set forth
in the Indenture. See "Description of
Junior Subordinated Debentures." The
Guarantee will rank pari passu with all
other guarantees, if any, issued by the
Corporation with respect to capital
securities, if any, issued by Other
Trusts ("Other Guarantees") and will
constitute an unsecured obligation of
the Corporation and will rank
subordinate and junior in right of
payment to all Senior Indebtedness, to
the extent and in the manner set forth
in the Guarantee Agreement. See
"Description of Guarantee." In
addition, because the Corporation is a
bank holding company, the Junior
Subordinated Debentures and the
Guarantee will be effectively
subordinated to all existing and future
liabilities of the Corporation's
subsidiaries, including deposit
liabilities of Manufacturers Bank. See
"Description of Junior Subordinated
Debentures--Subordination."
Distribution of Junior Subordinated
Debentures............................ The Corporation has the right at any
time to dissolve the Trust and cause
the Junior Subordinated Debentures to
be distributed to holders of Capital
Securities in liquidation of the Trust,
subject to the Corporation having
received prior approval of the FRB to
do so if then required under applicable
capital guidelines or policies of the
FRB. See "Description of Capital
Securities--Liquidation of Trust and
Distribution of Junior Subordinated
Debentures."
Redemption............................. The Trust Securities will be subject to
mandatory redemption in a Like Amount
(i) in whole but not in part, on the
Stated Maturity Date upon repayment of
the Junior Subordinated Debentures;
(ii) in whole, but not in part, at any
time prior to September 1, 2008,
contemporaneously with the optional
prepayment of the Junior Subordinated
Debentures by the Corporation upon the
occurrence and continuation of a
Special Event; and (iii) in whole or in
part, on or after September 1, 2008,
contemporaneously with the optional
prepayment by the Corporation of all or
part of the Junior Subordinated
Debentures, in each case at the
Redemption Price and, in the case of
(ii) and (iii) above, subject to
receiving prior approval of the FRB.
See "Description of Capital
Securities--Redemption" and
"Description of Junior Subordinated
Debentures--Special Event Prepayment."
10
Transfer Restrictions.................. The Capital Securities have not been
registered under the Securities Act and
may not be offered, sold, pledged or
otherwise transferred, except as
described under "Notice to Investors."
The Capital Securities will be issued,
and may be transferred, only in blocks
having a Liquidation Amount of not less
than $100,000 (100 Capital Securities)
and multiples of $1,000 in excess
thereof. See "Description of Capital
Securities--Restrictions on Transfer."
Any such transfer of Capital Securities
in a block having a Liquidation Amount
of less than $100,000 shall be deemed
to be void and of no legal effect
whatsoever.
Absence of Market for the
Capital Securities.................... The Capital Securities will be a new
issue of securities for which there
currently is no market. Although the
Initial Purchaser has informed the
Trust and the Corporation that it
currently intends to make a market in
the Capital Securities, the Initial
Purchaser is not obligated to do so,
and any such market making may be
discontinued at any time without
notice. Accordingly, there can be no
assurance as to the development or
liquidity of any market for the Capital
Securities. The Trust and the
Corporation do not intend to apply for
listing of the Capital Securities on
any securities exchange or for
quotation through the Nasdaq Stock
Market. The Capital Securities are
expected to be eligible for quotation
on PORTAL. See "Plan of Distribution."
Use of Proceeds........................ All of the net proceeds to the Trust
from the sale of the Capital Securities
will be invested by the Trust in the
Junior Subordinated Debentures. The
Corporation intends to use the net
proceeds from the sale of Junior
Subordinated Debentures to (i) cause
Coal City Capital Trust 1997-A, a
Delaware business trust organized by
the Corporation in 1997 (the "1997
Trust"), to retire the $10.0 million of
trust preferred securities of the 1997
Trust (the "1997 Trust Preferred
Securities") that are currently issued
and outstanding; (ii) redeem the Class
B Preferred Stock of the Corporation
issued in connection with the U.S.
Bancorp acquisition; and (iii) repay a
portion of the Corporation's
outstanding indebtedness to LaSalle
National Bank. Any proceeds not so used
will be used for general corporate
purposes. Initially, the net proceeds
may be used to make short-term
investments. See "Use of Proceeds."
ERISA Considerations................... For a discussion of certain prohibited
transactions and fiduciary duty issues
pertaining to purchases by or on behalf
of an employee benefit plan, see "ERISA
Considerations" and "Notice to
Investors."
Voting Rights.......................... The holders of the Capital Securities
will have no voting rights, except in
limited circumstances. See "Description
of Capital Securities--Voting Rights;
Amendment of the Trust Agreement."
Risk Factors........................... For a discussion of considerations
relevant to an investment in the
Capital Securities which should be
carefully considered by prospective
investors, see "Risk Factors."
Available Information.................. The Corporation will provide holders of
the Capital Securities with annual
financial statements of the Corporation
audited by the Corporation's
independent public accountants and will
provide such holders with quarterly
Call Reports of the Corporation and its
subsidiaries, free of charge, upon
written request made to the Secretary
of the Corporation.
11
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth selected consolidated financial and other
data of the Corporation. The selected statement of income and balance sheet
data, insofar as they relate to the five years and the five-year period ended
December 31, 1997, have been derived from the Corporation's audited consolidated
financial statements. The Consolidated Financial Statements and Notes thereto
for each of the three years in the period ended December 31, 1997 and as of
December 31, 1997 and December 31, 1996 are included elsewhere herein. The
selected financial data for the three month periods ended March 31, 1998 and
March 31, 1997 and as of March 31, 1998 and March 31, 1997 are derived from the
Corporation's unaudited interim financial statements. Such unaudited interim
financial statements include all adjustments (consisting only of normal,
recurring accruals) that the Corporation considers necessary for a fair
presentation of the financial position and the results of operation as of the
dates and for the periods indicated. Information for any interim period is not
necessarily indicative of results that may be anticipated for the full year. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere
herein.
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT COMMON SHARE DATA)
STATEMENT OF INCOME DATA:
Interest income ............................. $ 13,890 $ 10,074 $ 51,686 $ 39,530 $ 36,572 $ 21,860 $ 21,606
Interest expense ............................ 6,887 4,760 25,172 18,180 16,836 8,392 7,826
-------- -------- -------- -------- -------- -------- --------
Net interest income ..................... 7,003 5,314 26,514 21,350 19,736 13,468 13,780
Provision for loan losses ................... 188 171 971 572 240 90 400
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision
for loan losses ..................... 6,815 5,143 25,543 20,778 19,496 13,378 13,380
Other income (1) ............................ 5,500 820 4,935 2,939 1,899 688 2,545
Other expense ............................... 6,840 4,182 24,195 16,868 17,010 11,014 11,230
-------- -------- -------- -------- -------- -------- --------
Income before income taxes and
minority interest ................... 5,475 1,781 6,283 6,849 4,385 3,052 4,695
Applicable income taxes ..................... 1,885 737 2,402 2,576 1,504 457 1,500
-------- -------- -------- -------- -------- -------- --------
Income before minority interest ......... 3,590 1,044 3,881 4,273 2,881 2,595 3,195
Minority interest ........................... (32) (152) (432) (636) (444) (517) (1,123)
-------- -------- -------- -------- -------- -------- --------
Net income .............................. 3,558 892 3,449 3,637 2,437 2,078 2,072
Preferred stock dividend .................... 434 -- 276 -- 267 -- --
-------- -------- -------- -------- -------- -------- --------
Net income available to common
stockholders ........................ $ 3,124 $ 892 $ 3,173 $ 3,637 $ 2,170 $ 2,078 $ 2,072
-------- -------- -------- -------- -------- -------- --------
COMMON SHARE DATA:
Basic earnings per common share.............. $ 63.48 $ 17.92 $ 63.83 $ 73.28 $ 43.27 $ 41.94 $ 41.82
Book value per common share ................. $ 912 $ 797 $ 852 $ 786 $ 726 $ 637 $ 624
Weighted average common shares
outstanding .............................. 49,215 49,787 49,713 49,628 50,150 49,549 49,549
(footnotes on following page)
12
AT OR FOR THE
THREE MONTHS
ENDED MARCH 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------- -----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and due from banks .................. $ 36,318 $ 28,611 $ 36,302 $ 31,465 $ 27,013 $ 23,962 $ 29,856
Investments securities ................... 141,894 112,851 141,927 109,981 171,118 101,189 115,670
Federal funds sold ....................... -- 17,250 37,400 20,800 11,199 20,800 13,000
Loans, gross ............................. 526,914 397,778 527,321 388,302 339,326 222,211 227,902
Allowance for loan losses ................ 7,751 4,860 7,922 4,692 4,134 2,646 2,707
Total assets ............................. 762,675 595,185 802,696 587,798 579,946 382,603 395,323
Deposits ................................. 634,448 510,955 684,060 509,717 513,470 335,866 347,273
Long-term and short-term
borrowings ............................ 49,902 20,147 40,428 25,399 17,000 7,545 7,652
Corporation obligated mandatorily
redeemable preferred securities....... 10,000 10,000 10,000 -- -- -- --
Stockholders' equity ..................... 54,844 39,670 52,526 39,126 36,626 31,572 30,904
PERFORMANCE RATIOS:
Return on average assets ................. 1.83% 0.73% 0.54% 0.75% 0.55% 0.70% 0.86%
Return on average equity ................. 27.05% 9.22% 7.08% 9.74% 6.49% 6.72% 6.94%
Net interest margin ...................... 4.01% 4.21% 4.12% 4.23% 4.22% 3.97% 3.96%
Loans to deposits ........................ 83.05% 77.85% 77.09% 76.18% 66.08% 66.16% 65.63%
ASSETS QUALITY RATIOS:
Non-performing loans to total
loans ................................ 1.78% 0.11% 1.87% 0.35% 0.34% 0.26% 0.17%
Non-performing assets to total
assets ............................... 1.74% 0.09% 1.70% 0.23% 0.24% 0.21% 0.10%
Allowance for loan losses to total
loans ................................ 1.47% 1.22% 1.50% 1.21% 1.22% 1.19% 1.19%
Non-performing loans to allowance
for loan losses ...................... 120.81% 8.70% 124.73% 28.92% 27.75% 22.07% 14.22%
Net loan charge-offs to average
loans ................................ (0.03)% 0.00% 0.07% 0.00% 0.02% 0.07% 0.00%
CAPITAL RATIOS (2):
Tier 1 capital (to risk-weighted
assets) .............................. 7.40% 10.32% 7.09% 8.00% 7.84% 11.67% 12.87%
Total capital (to risk-weighted
assets) .............................. 9.58% 11.53% 10.00% 10.14% 10.02% 12.74% 13.99%
Tier 1 capital (to average assets) ....... 5.44% 8.18% 5.15% 6.16% 5.19% 7.78% 8.12%
OTHER:
Banking facilities ....................... 8 6 11 6 5 3 3
Full-time equivalent employees ........... 260 199 287 199 191 132 139
- ----------
(1) For the three months ended March 31, 1998 other income includes a $4.1
million gain on the sale of Coal City Bank.
(2) Ratios presented are for the Corporation on a consolidated basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources."
13
RISK FACTORS
Prospective purchasers of Capital Securities should carefully review the
information contained elsewhere in this Offering Memorandum and should
particularly consider the following factors, which do not necessarily appear in
the order of their importance. Investors should consider all of these factors to
be important. Because holders of Capital Securities may receive Junior
Subordinated Debentures in exchange therefor upon liquidation of the Trust,
prospective purchasers of Capital Securities are also making an investment
decision with regard to the Junior Subordinated Debentures and should carefully
review all the information regarding the Junior Subordinated Debentures
contained herein.
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTEE AND THE JUNIOR
SUBORDINATED DEBENTURES; LIMITATIONS ON SOURCE OF FUNDS
The obligations of the Corporation under the Guarantee, as well as under
the Junior Subordinated Debentures, will be unsecured and will rank subordinate
and junior in right of payment to all Senior Indebtedness to the extent and in
the manner set forth in the Guarantee and the Indenture, respectively. No
payment may be made of the principal of or interest on the Junior Subordinated
Debentures, or with respect to any redemption, retirement, purchase or other
acquisition of any of the Junior Subordinated Debentures, at any time when (i)
there shall have occurred and be continuing a default in any payment with
respect to any Senior Indebtedness, or there has been an acceleration of the
maturity thereof because of a default; or (ii) in the event of the acceleration
of the maturity of the Junior Subordinated Debentures, until payment has been
made on all Senior Indebtedness. At March 31, 1998, the Corporation had $6.0
million of Senior Indebtedness outstanding. Because the Corporation is a bank
holding company, the right of the Corporation to participate in any distribution
of assets of any subsidiary upon such subsidiary's liquidation or reorganization
or otherwise (and thus the ability of holders of the Capital Securities to
benefit indirectly from such distribution) is subject to the prior claims of
creditors of that subsidiary, including depositors, in the case of Manufacturers
Bank, except to the extent that the Corporation may itself be recognized as a
creditor of that subsidiary. At March 31, 1998, the subsidiaries of the
Corporation had total liabilities, excluding liabilities owed to the
Corporation, of $689.9 million.
Accordingly, the Junior Subordinated Debentures effectively will be
subordinated to all existing and future liabilities of the Corporation's
subsidiaries, including the deposit liabilities of Manufacturers Bank which
aggregated $635.3 million at March 31, 1998, and holders of Junior Subordinated
Debentures should look only to the assets of the Corporation for payments on the
Junior Subordinated Debentures. The Guarantee will constitute an unsecured
obligation of the Corporation and will rank subordinate and junior in right of
payment to all Senior Indebtedness in the same manner as the Junior Subordinated
Debentures. None of the Indenture, the Guarantee or the Trust Agreement places
any limitation on the amount of secured or unsecured debt, including Senior
Indebtedness, that may be incurred by the Corporation or any of its
subsidiaries. See "Description of Guarantee--Status of the Guarantee" and
"Description of Junior Subordinated Debentures--General" and "--Subordination."
The ability of the Trust to pay amounts due on the Capital Securities is
solely dependent upon the Corporation making payments on the Junior Subordinated
Debentures as and when required.
The Corporation is a bank holding company regulated by the FRB, and almost
all of the operating assets of the Corporation are owned by its second tier
subsidiary, Manufacturers Bank. The Corporation relies primarily on preferred
stock dividends from MNC, which in turn relies on common stock dividends from
Manufacturers Bank, to meet its obligations for payment of principal and
interest on its outstanding debt obligations and corporate expenses. There are
regulatory limitations (discussed in more detail below) on the payment of
dividends to the Corporation from MNC and to MNC from Manufacturers Bank. In
addition to restrictions on the payment of dividends, the Bank is subject to
certain restrictions imposed by federal law on any extensions of credit to, and
certain other transactions with, the Corporation and MNC and certain other
affiliates, and on investments in stock or other securities thereof. Such
restrictions prevent the Corporation and MNC and such other affiliates from
borrowing from Manufacturers Bank, unless the loans are secured by certain types
of collateral. Furthermore, such secured loans, other transactions and
investments by Manufacturers Bank are generally limited in amount as to each of
the Corporation, MNC and such other affiliates to 10% of Manufacturers Bank's
capital and surplus, and as to all of the Corporation, MNC and such other
affiliates to an
14
aggregate of 20% of Manufacturers Bank's capital and surplus. As of March 31,
1998, approximately $12.1 million of credit was available to the Corporation
from the Bank under this limitation.
Manufacturers Bank is a state non-member bank of the Federal Reserve System
and is regulated by the FDIC and the Office of Banks and Real Estate of the
State of Illinois (the "Commissioner"). There are various regulatory limitations
applicable to the payment of dividends by MNC and Manufacturers Bank as well as
the payment of dividends by the Corporation to its shareholders. Under the laws
of Illinois, a state-chartered bank is permitted to declare and pay dividends in
amounts up to the amount of its accumulated net profits, provided that it shall
retain in its surplus at least one-tenth of its net profits since the date of
the declaration of its most recent previous dividend until said additions to
surplus, in the aggregate, equal at least the paid-in-capital of such bank. In
no event, therefore, may Manufacturers Bank, while it continues its banking
business, pay dividends in excess of its net profits then on hand (after
deduction for losses and bad debts). Under existing supervisory practices at
March 31, 1998, Manufacturers Bank could have paid additional dividends of up to
$1.5 million without regulatory approval and MNC could have paid $7.8 million of
dividends and complied with the minimum regulatory capital requirements
applicable to it. Bank regulatory agencies have authority to prohibit MNC,
Manufacturers Bank or the Corporation from engaging in an unsafe or unsound
practice in conducting their business. The payment of dividends, depending upon
the financial condition of Manufacturers Bank, MNC or the Corporation, could be
deemed to constitute such an unsafe or unsound practice. The FRB has stated
that, as a matter of prudent banking, a bank or bank holding company should not
maintain its existing rate of cash dividends on common stock unless (i) the
organization's net income available to common shareholders over the past year
has been sufficient to fund fully the dividends; and (ii) the prospective rate
of earnings retention appears consistent with the organization's capital needs,
asset quality, and overall financial condition.
Under the Federal Deposit Insurance Act ("FDIA"), insured depository
institutions such as Manufacturers Bank are prohibited from making capital
distributions, including the payment of dividends, if, after making any such
distributions, the institution would become "undercapitalized" (as such term is
used in the FDIA). Based on Manufacturers Bank's current financial condition,
the Corporation does not expect that this provision will have any impact on the
Bank's ability to pay dividends to MNC, or MNC's ability to pay dividends to the
Corporation.
The Corporation has two lines of credit with LaSalle National Bank, a $15.0
million line secured by the stock of MNC owned by the Corporation and a $4.5
million unsecured line. The borrowings under the two lines may not in the
aggregate exceed $15.0 million. If the Corporation were to default under the
secured line, its ability to rely on dividends from MNC to meet its obligations
for payment of principal and interest on its outstanding debt obligations and
corporate expenses would be adversely affected.
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES; MARKET PRICE
CONSEQUENCES
So long as no Debenture Event of Default has occurred and is continuing,
the Corporation will have the right under the Indenture to defer payments of
interest on the Junior Subordinated Debentures at any time and from time to time
for a period not exceeding 20 consecutive quarterly periods with respect to each
Extension Period, provided that an Extension Period must end on an Interest
Payment Date and may not extend beyond the Stated Maturity Date. As a
consequence of any such deferral, quarterly Distributions on the Trust
Securities by the Trust will be deferred (and the amount of Distributions to
which holders of the Trust Securities are entitled will accumulate additional
Distributions thereon at the applicable periodic Distribution Rate, compounded
quarterly, but not exceeding the interest rate then accruing on the Junior
Subordinated Debentures) from the relevant payment date for such Distributions
during any such Extension Period. During the pendency of any Extension Period,
the Corporation generally will be prohibited from declaring or paying dividends
on the Corporation's capital stock. See "Description of Capital
Securities--Distributions."
Prior to the termination of any such Extension Period, the Corporation may
further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed 20 consecutive quarterly periods, end on a
date other than an Interest Payment Date or to extend beyond the Stated Maturity
Date. Upon the termination of any such Extension Period and the payment of all
interest then accrued and unpaid on the Junior Subordinated Debentures (together
with interest thereon at the applicable periodic Distribution Rate, compounded
quarterly, from the Interest Payment Date for such interest, to the extent
permitted by applicable law), the Corporation may elect to begin a new Extension
Period, subject to the above requirements. There is no limitation on the number
of times that the Corporation may elect to begin
15
an Extension Period. See "Description of Capital Securities--Distributions" and
"Description of Junior Subordinated Debentures--Option to Extend Interest
Payment Date."
The Corporation has no current plan to exercise its right to defer payments
of interest on the Junior Subordinated Debentures. However, because the
Corporation has the right to defer payments of interest on the Junior
Subordinated Debentures, each holder of Trust Securities will recognize income
in the form of original issue discount ("OID") for United States federal income
tax purposes in advance of the receipt of cash and may not receive the cash
related to such income from the Trust if the holder disposes of the Capital
Securities prior to the record date for the payment of deferred Distributions
thereafter. See "Certain Federal Income Tax Consequences--Original Issue
Discount" and "--Sales of Capital Securities."
Should the Corporation elect to exercise its right to defer payments of
interest on the Junior Subordinated Debentures in the future, the market price
of the Capital Securities is likely to be affected. A holder that disposes of
its Capital Securities during an Extension Period, therefore, might not receive
the same return on its investment as a holder that continues to hold its Capital
Securities. In addition, the mere existence of the Corporation's right to defer
payments of interest on the Junior Subordinated Debentures may cause the market
price of the Capital Securities to be more volatile than the market prices of
other similar securities that are not subject to such deferrals.
SPECIAL EVENT REDEMPTION
Upon the occurrence and continuation of a Special Event, including an
Investment Company Event, a Regulatory Capital Event or a Tax Event (in each
case as defined under "Description of Junior Subordinated Debentures--Special
Event Prepayment"), prior to the Initial Optional Redemption Date, the
Corporation will have the right to prepay the Junior Subordinated Debentures, in
whole but not in part, at the Prepayment Price within 90 days following the
occurrence of such Special Event and therefore cause a mandatory redemption of
the Trust Securities at the Redemption Price. The exercise of such right is
subject to the Corporation having received any required regulatory approval. See
"Description of Capital Securities--Redemption."
Prospective investors should be aware that Enron Corporation ("Enron") has
filed a petition in the United States Tax Court challenging the proposed
disallowance by the Internal Revenue Service ("IRS") of the deduction of
interest expense on securities issued by Enron in 1993 and 1994 that are similar
to, although different in a number of respects from, the Junior Subordinated
Debentures. A decision of the Tax Court in the Enron case upholding the position
of the IRS would not necessarily affect the tax treatment of interest paid on
the Junior Subordinated Debentures because such a decision may be based on
factors that differ from those pertaining to the Junior Subordinated Debentures,
the Trust or the Corporation. However, it is possible that such a decision would
result in the receipt by the Corporation or the Trust of an opinion of counsel
that there is a more than insubstantial risk that interest payable on the Junior
Subordinated Debentures is not or will not be deductible. The receipt of such an
opinion would constitute a Tax Event, which would permit the Corporation to
cause a redemption of the Capital Securities. See "Description of the Capital
Securities--Redemption."
LIQUIDATION DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES
The Corporation will have the right at any time to dissolve the Trust and,
after satisfaction of liabilities to creditors of the Trust as required by
applicable law, to cause the Junior Subordinated Debentures to be distributed to
the holders of the Trust Securities in liquidation of the Trust. Such right is
subject to (i) the Corporation having received an opinion of counsel to the
effect that such distribution will not be a taxable event to the holders of
Capital Securities; and (ii) receipt of any required regulatory approval. Under
current United States federal income tax law, a distribution of Junior
Subordinated Debentures upon the dissolution of the Trust would not be a taxable
event to holders of the Capital Securities. Upon the occurrence of a Special
Event, a dissolution of the Trust in which holders of the Capital Securities
receive cash would be a taxable event to such holders. See "Certain Federal
Income Tax Considerations--Receipt of Junior Subordinated Debentures or Cash
Upon Liquidation of the Trust."
16
POSSIBLE ADVERSE EFFECT ON MARKET PRICES
There can be no assurance as to the market prices for Capital Securities or
the Junior Subordinated Debentures that may be distributed in exchange for
Capital Securities if a dissolution of the Trust were to occur. Accordingly, the
Capital Securities or the Junior Subordinated Debentures may trade at a discount
from the price that the investor paid to purchase the Capital Securities offered
hereby. Because holders of Capital Securities may receive Junior Subordinated
Debentures in liquidation of the Trust and because Distributions are otherwise
limited to payments on the Junior Subordinated Debentures, prospective
purchasers of Capital Securities are also making an investment decision with
regard to the Junior Subordinated Debentures and should carefully review all the
information regarding the Junior Subordinated Debentures contained herein. See
"Description of Junior Subordinated Debentures."
RIGHTS UNDER THE GUARANTEE
The Guarantee will guarantee to the holders of the Capital Securities the
following payments, to the extent not paid by or on behalf of the Trust (i) any
accumulated and unpaid Distributions required to be paid on the Capital
Securities, to the extent that the Trust has funds on hand legally available
therefor at such time; (ii) the Redemption Price with respect to the Capital
Securities called for redemption, to the extent that the Trust has funds on hand
legally available therefor at such time; and (iii) upon a voluntary or
involuntary dissolution, winding up or liquidation of the Trust (unless the
Junior Subordinated Debentures are distributed to holders of the Capital
Securities), the lesser of (a) the aggregate of the Liquidation Amount and all
accumulated and unpaid Distributions to the date of payment, to the extent that
the Trust has funds on hand legally available therefor at such time, and (b) the
amount of assets of the Trust remaining available for distribution to holders of
the Capital Securities at such time, after the satisfaction of liabilities to
creditors of the Trust as provided by applicable law.
The holders of a majority in Liquidation Amount of the Capital Securities
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee with respect to the
Guarantee or to direct the exercise of any trust power conferred upon the
Guarantee Trustee under the Guarantee. Any holder of the Capital Securities may
institute a legal proceeding directly against the Corporation to enforce its
rights under the Guarantee without first instituting a legal proceeding against
the Trust, the Guarantee Trustee or any other person or entity. If the
Corporation defaults on its obligation to pay amounts payable under the Junior
Subordinated Debentures, the Trust will not have sufficient funds for the
payment of Distributions or amounts payable on redemption of the Capital
Securities or otherwise, and, in such event, holders of the Capital Securities
will not be able to rely upon the Guarantee for payment of such amounts.
Instead, in the event a Debenture Event of Default shall have occurred and be
continuing and such event is attributable to the failure of the Corporation to
pay the principal of or interest (including Additional Sums and Compounded
Interest, each as defined herein, if any) on the Junior Subordinated Debentures
on the payment date on which such payment is due and payable, then a holder of
Capital Securities may institute a legal proceeding directly against the
Corporation for enforcement of payment to such holder of the principal of or
interest (including Additional Sums and Compounded Interest, if any) on such
Junior Subordinated Debentures having a principal amount equal to the
Liquidation Amount of the Capital Securities of such holder (a "Direct Action").
Notwithstanding any payments made to a holder of Capital Securities by the
Corporation in connection with a Direct Action, the Corporation shall remain
obligated to pay the principal of and interest (including Additional Sums and
Compounded Interest, if any) on the Junior Subordinated Debentures, and the
Corporation shall be subrogated to the rights of the holder of such Capital
Securities with respect to payments on the Capital Securities to the extent of
any payments made by the Corporation to such holder in any Direct Action. Except
as described herein, holders of Capital Securities will not be able to exercise
directly any other remedy available to the holders of the Junior Subordinated
Debentures or to assert directly any other rights in respect of the Junior
Subordinated Debentures. See "Description of Junior Subordinated
Debentures--Enforcement of Certain Rights by Holders of Capital Securities,"
"--Debenture Events of Default" and "Description of Guarantee." The Trust
Agreement will provide that each holder of Capital Securities by acceptance
thereof agrees to the provisions of the Indenture. LaSalle National Bank will
act as Guarantee Trustee and will hold the Guarantee for the benefit of the
holders of the Capital Securities. LaSalle National Bank will also act as
Property Trustee under the Trust Agreement and as Debenture Trustee under the
Indenture. Wilmington Trust Company will act as Delaware Trustee under the Trust
Agreement.
17
LIMITED VOTING RIGHTS
Holders of Capital Securities generally will have no voting rights other
than with respect to the modification of the Capital Securities and the exercise
of the Trust's rights as holder of Junior Subordinated Debentures. Holders of
Capital Securities will not be entitled to vote to appoint, remove or replace,
or to increase or decrease the number of, the Issuer Trustees, which voting
rights are vested exclusively in the holder of the Common Securities, except
upon the occurrence of certain events described herein. The Property Trustee,
the Administrative Trustees and the Corporation may amend the Trust Agreement
without the consent of holders of Capital Securities to ensure that the Trust
will be classified for United States federal income tax purposes as a grantor
trust or to ensure that the Trust will not be required to register as an
"investment company" under the Investment Company Act of 1940, as amended
("Investment Company Act"), even if such action adversely affects the interests
of such holders. Holders of Capital Securities will have no voting rights with
respect to any matters submitted to a vote of the Corporation's stockholders.
See "Description of Capital Securities--Removal of Issuer Trustees" and
"--Voting Rights; Amendment of the Trust Agreement."
TRADING CHARACTERISTICS OF THE CAPITAL SECURITIES
The Capital Securities may trade at a price that does not fully reflect the
value of accrued but unpaid interest with respect to the underlying Junior
Subordinated Debentures. A holder who uses the accrual method of accounting for
tax purposes (and a cash method holder, if the Junior Subordinated Debentures
are deemed to have been issued with OID) and who disposes of its Capital
Securities between record dates for payments of distributions thereon will be
required to include accrued but unpaid interest on the Junior Subordinated
Debentures through the date of disposition in income as ordinary income (i.e.,
interest or, possibly, OID), and to add such amount to its adjusted tax basis in
its share of the underlying Junior Subordinated Debentures deemed disposed of.
To the extent the selling price is less than the holder's adjusted tax basis
(which will include all accrued but unpaid interest), a holder will recognize a
capital loss. Subject to certain limited exceptions, capital losses cannot be
applied to offset ordinary income for United States federal income tax purposes.
See "Certain Federal Income Tax Considerations--Interest Income and Original
Issue Discount" and "--Sales of Capital Securities."
ABSENCE OF PUBLIC REPORTING
Neither the Corporation nor Manufacturers Bank is subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), and none of the Corporation, Manufacturers Bank or the Trust will become
subject to such reporting requirements as a result of the offer and sale of the
Capital Securities or the Junior Subordinated Debentures as provided herein.
Therefore, holders of the Capital Securities or the Junior Subordinated
Debentures will not have access to the type and amount of financial or other
information required to be filed with the Commission by companies with publicly
traded securities outstanding. Although the Corporation has agreed to make
available to holders of the Capital Securities or the Junior Subordinated
Debentures material satisfying the information requirements of Rule 144A as
applicable to companies that are not subject to the reporting requirements of
the Exchange Act, audited financial statements and, upon request, quarterly Call
Reports, such information is substantially less in scope, detail and frequency
than the information required to be provided by companies with publicly traded
securities outstanding. The information requirements of Rule 144A require only
that the issuer provide, upon request; (i) a brief statement of the nature of
the business of the issuer and the products and services it offers; and (ii) the
issuer's balance sheets, profit and loss statements and retained earnings for
the two preceding fiscal years. Accordingly, the information concerning the
Corporation available to holders or potential holders of the Capital Securities
or the Junior Subordinated Debentures will be significantly less detailed than
the information contained in this Offering Memorandum.
ABSENCE OF RATINGS AND PUBLIC MARKET; TRANSFER RESTRICTIONS
The Capital Securities have not been rated by any rating agency.
Furthermore, the Capital Securities have not been registered under the
Securities Act and will be subject to transfer restrictions, including a
limitation on transfer to only blocks having a Liquidation Amount of not less
than $100,000 (100 Capital Securities) and multiples of $1,000 in excess
thereof. See "Notice to Investors." There is no existing market for the Capital
Securities and there can be no assurance as to the liquidity of any markets that
may develop for the Capital Securities, the ability of the holders to sell their
Capital Securities, or at what price holders of the Capital Securities will be
able to sell their Capital Securities. Future trading prices of the
18
Capital Securities will depend on many factors including, among other things,
prevailing interest rates, the Corporation's operating results and the market
for similar securities. The Initial Purchaser has informed the Trust and the
Corporation that it intends to make a market in the Capital Securities. However,
the Initial Purchaser is not obligated to do so and any such market making
activity may be terminated at any time without notice to the holders of the
Capital Securities. In addition, such market making activity will be subject to
the limits of the Securities Act.
LENDING
There are risks inherent in making any loan, including risks with respect
to the period of time over which the loan may be repaid, risks resulting from
changes in economic and industry conditions, such as those in the local market
areas served by Manufacturers Bank, risks inherent in dealing with individual
borrowers and risks resulting from uncertainties as to the future value of
collateral. Manufacturers Bank's allowance for loan losses is established by
Management of the Bank at levels considered adequate to absorb anticipated loan
losses. The amount of future losses is susceptible to changes in economic,
operating and other conditions, including changes in interest rates, that may be
beyond the Bank's control, and such losses may exceed current estimates. There
is no assurance that the Bank's allowance for loan losses will prove sufficient
to cover actual losses in the future.
IMPACT OF THE ECONOMY ON OPERATIONS
Declines in the local economy, national economy or real estate market could
adversely affect the financial condition and results of operations of the
Corporation due to decreased demand for loans, increased competition for good
loans and increased non-performing loans and loan losses, resulting in
additional provisions for loan losses and losses on real estate owned by the
Bank. Although Management believes that the allowance for loan losses is
adequate in light of current economic conditions, many factors may require
unanticipated future additions to the allowance for loan losses, which would
adversely affect the Corporation's financial condition and results of operation.
These factors include (i) adverse changes in economic conditions and interest
rates that may affect the ability of borrowers to make payments on loans; (ii)
changes in the financial capability of individual borrowers; (iii) changes in
the local real estate market and the value of the Bank's loan collateral; and
(iv) future review and evaluation of the Bank's loan portfolio, internally or by
regulators. The amount of the allowance for loan losses at any time represents
estimates made by Management that are susceptible to significant changes due to
changes in values of collateral, national and regional economic conditions,
prevailing interest rates and other factors. Future adjustments to the allowance
also may be necessary if economic or other conditions differ substantially from
those underlying the assumptions used in making such estimates.
COMPETITION
Manufacturers Bank faces intense and increasing competition both in making
loans and in attracting savings deposits. The market area of Manufacturers Bank
has a high density of financial institutions, many of which have greater
financial resources, name recognition and market presence than Manufacturers
Bank, and all of which are competitors of Manufacturers Bank to varying degrees.
Particularly intense competition exists for savings deposits and the origination
of loan products. Manufacturers Bank's competition for loans comes principally
from commercial banks, savings banks, savings and loan associations, mortgage
banking companies, finance companies and credit unions. Manufacturers Bank's
competition for deposits comes principally from commercial banks, savings banks,
savings and loan associations and credit unions. In addition, Manufacturers Bank
faces increasing competition for savings deposits from non-bank institutions
such as brokerage firms, insurance companies, money market mutual funds, mutual
funds (such as corporate and government securities funds) and annuities. Trends
toward the consolidation of the banking industry and the lifting of interstate
banking and branching restrictions may make it more difficult for smaller
institutions, such as Manufacturers Bank, to compete effectively with large
national and regional banking institutions. See "Business."
INTEREST RATE RISK
The Corporation's operating results depend to a large extent on its net
interest income, which is the difference between the interest income earned on
interest earning assets and the interest expense incurred in connection with its
interest bearing liabilities. Changes in the general level of interest rates can
affect the Corporation's net interest income by affecting the spread between the
Corporation's interest earning assets and interest bearing liabilities. This may
be due to the disparate
19
maturities or period to repricing of the Corporation's interest earning assets
and interest bearing liabilities. In addition to its effect on the Corporation's
interest rate spread, changes in the general level of interest rates also
affect, among other things, the ability of the Corporation to originate loans;
the value of the Corporation's interest earning assets and its ability to
realize gains from the sale of such assets; the average life of the
Corporation's interest earning assets; and the Corporation's ability to obtain
deposits in competition with other available investment alternatives. Interest
rates are highly sensitive to many factors, including governmental monetary
policies, domestic and international economic and political conditions and other
factors beyond the control of the Corporation. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Asset Liability
Management."
YEAR 2000 PROBLEM
The "Year 2000 Problem" centers on the inability of computer systems to
recognize the year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, the Corporation and the Bank may be
significantly affected by the Year 2000 Problem due to the nature of financial
information. Software, hardware and equipment, both within and outside the
direct control of the Corporation and the Bank, and with whom the Corporation
and the Bank electronically or operationally interface (e.g., third party
vendors providing data processing, information system management, maintenance of
computer systems and credit bureau information), are likely to be affected.
Furthermore, if computer systems are not adequately changed to identify the year
2000, many computer applications could fail or create erroneous results. As a
result, many calculations that rely on the date field information, such as
interest payment due dates and other operating functions, may generate results
that could be significantly misstated, and the Corporation could experience a
temporary inability to process transactions, send invoices or engage in similar
normal business activities. In addition, under certain circumstances, failure to
adequately address the Year 2000 Problem could adversely affect the
creditworthiness of the Bank's borrowers. Thus, if not adequately addressed, the
Year 2000 Problem could result in a significant adverse impact on the products,
services and competitive condition of the Corporation and the Bank.
On March 20, 1998, the Examination Parity and Year 2000 Readiness for
Financial Institutions Act, P.L. 105-164, became law. In that statute, Congress
emphasized the seriousness with which the financial services industry and its
regulators must view the Year 2000 Problem by requiring the regulators to
conduct seminars for, and otherwise provide information and model approaches
concerning common problems to, the nation's financial institutions concerning
this problem. The regulators, acting through the FFIEC, have been compiling and
disseminating such information through industry-wide pronouncements which
emphasize that safety and soundness examinations would focus, among other
things, on the institutions' awareness and preparations with respect to the Year
2000 Problem. Failure to appropriately address the Year 2000 Problem may result
in supervisory actions, denials of regulatory applications and civil money
penalties.
In response to the foregoing regulatory guidance and pronouncements, the
Corporation and the Bank have been reviewing the Bank's operating procedures for
exposure to potential issues that the Year 2000 Problem might have on its
computer systems and programs. At the direction of the Bank's Board of
Directors, the Year 2000 Problem committee was established and has identified
major issues related to computer hardware, software and operating systems to
ensure that they will be capable of properly recognizing January 1, 2000 and
beyond. In addition, selected business customers have been contacted and
procedures have been put in place to survey these business customers to
understand their progress in regard to dealing with the Year 2000 Problem. The
Year 2000 Problem committee reports periodically to the Bank's Board of
Directors.
The Corporation and the Bank believe that due to their up-to-date computer
hardware and software systems, there will be no material costs to the
Corporation or any of its subsidiaries relating to their becoming compliant with
all necessary procedures for dealing with the Year 2000 Problem.
20
COAL CITY CORPORATION
The Corporation was incorporated in Illinois in 1986 and is a bank holding
company registered under the BCA and the Illinois BCA. The Corporation conducts
a commercial banking business through Manufacturers Bank, which is wholly-owned
by MNC, 96.5% of whose issued and outstanding shares of common stock and all of
whose issued and outstanding shares of Class A Preferred Stock are owned by the
Corporation. Manufacturers Bank provides a complete range of banking services to
individuals and small and medium-sized businesses. These services include
checking and savings accounts, interest bearing deposit instruments, business
loans, personal loans, home and condominium mortgage loans, and other
consumer-oriented financial services, including night depository facilities. In
addition, customers are provided 24-hour banking services by means of automatic
teller machines that are part of Cash Station, Inc., a regional, shared ATM
network.
On May 7, 1997, the Corporation acquired U.S. Bancorp, the holding company
for U.S. Bank, through the merger of a subsidiary of MNC with and into U.S.
Bancorp. In connection with said merger, the former shareholders of U.S. Bancorp
received (i) $30.0 million in cash; and (ii) shares of Class B Preferred Stock
of the Corporation having an aggregate par value of $10.2 million. A portion of
the proceeds of this offering will be used to redeem the currently issued and
outstanding shares of Class B Preferred Stock of the Corporation. See "Use of
Proceeds."
On January 28, 1998, the Corporation completed the sale of Coal City Bank,
a wholly-owned subsidiary, to Kankakee Bancorp, Inc. In the transaction, the
Corporation received $7.8 million in cash and recorded a $4.1 million gain on
sale. See "Business--History and Development."
Manufacturers Bank has four distinct banking groups: Business Banking,
Convenient Retail Banking, Lease Banking and Korean Banking. The Business
Banking Group focuses on serving privately-owned companies, including
manufacturers, wholesalers, distributors, home developers, long-term health care
operators, real estate operators and investors, and selected types of service
companies. Manufacturers Bank provides these companies with credit, deposit,
cash management and investment products and services. The Convenient Retail
Banking Group targets consumers who live or work near the Bank's offices.
Manufacturers Bank offers consumer products to these individuals, including
checking accounts, savings accounts, money market accounts, time deposit
accounts, secured and unsecured consumer loans, residential mortgage loans, and
a variety of fee for service products, such as money orders and travelers
checks. The Lease Banking Group serves small and medium size equipment leasing
companies located throughout the United States. Manufacturers Bank provides full
banking services for these leasing companies, including financing the debt
portion of leveraged leases, providing short-term and long-term equity
financing, making working capital and bridge loans, and investing directly in
leased equipment. The Korean Banking Group focuses on the expanding Korean
community, providing complete banking services using the Korean language to
Korean consumers and Korean-owned businesses in the Chicago area. See "Business
- -- Business Areas."
At March 31, 1998, the Corporation had total assets, deposits and
stockholders' equity of $762.7 million, $634.4 million and $54.8 million
respectively. See "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes thereto included elsewhere herein.
The principal business offices of the Corporation are located at the Main
Banking Premises. Manufacturers Bank also has offices on the far north side and
the far south side of Chicago and in the Chicago suburbs of Lansing, South
Holland and Tinley Park, Illinois.
21
RECENT DEVELOPMENTS
Historically, the Corporation has maintained high asset quality by
utilizing strict loan underwriting standards and collection efforts and by
generally limiting its origination of mortgage loans to its delineated lending
area. The ratio of non-performing loans to total loans at December 31, 1993,
1994, 1995 and 1996 was 0.17%, 0.26%, 0.34% and 0.35%, respectively, and the
ratio of non-performing assets to total assets at such dates was 0.10%, 0.21%,
0.24% and 0.23%, respectively.
On May 7, 1997, the Corporation acquired $17.8 million in potential problem
loans and assets as part of the acquisition of U.S. Bancorp, which had been
identified as possible problem loans or assets during the due diligence
performed by the Corporation prior to the acquisition. Upon such acquisition,
these potential problem loans and assets constituted 3.60% of the Bank's total
loans. As a result of the U.S. Bancorp acquisition, the ratio of non-performing
loans to total loans and the ratio of non-performing assets to total assets at
December 31, 1997, was 1.87% and 1.70%, respectively.
As a result of the efforts of the Corporation to further reduce the amount
of non-performing assets, at March 31, 1998, the ratio of non-performing loans
to total loans and the ratio of non-performing assets to total assets were 1.78%
and 1.74%, respectively, and at June 30, 1998, these ratios had declined to
0.66% and 0.45%, respectively. From March 31, 1998 to June 30, 1998, the
Corporation lowered non-performing loans by $5.9 million, had net charge-offs of
$924,000, sold $3.4 million of OREO, and added $187,000 to its allowance for
loan losses. As a result, the allowance for loan losses as of June 30, 1998, was
$7.0 million and non-performing loans and non-performing assets changed as
follows.
AT AT
JUNE 30, MARCH 31, DOLLAR PERCENT
1998 1998 CHANGE CHANGE
----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Non-performing loans.......... $ 3,474 $ 9,364 $ (5,890) (62.9)%
Other real estate owned....... 430 3,879 (3,449) (88.9)%
---------- ---------- ---------- ---------
Total non-performing
assets...................... $ 3,904 $ 13,243 $ (9,339) (70.5)%
========== ========== ========== =========
Non-performing loans
to total loans.............. 0.66% 1.78%
Non-performing loans
to allowance for loan
losses...................... 49.53% 120.81%
Allowance for loan
losses to total loans....... 1.32% 1.47%
All of the charged-off loans were identified as of March 31, 1998 as
non-performing or potential problem loans by the Bank's internal classification
system, and substantially all of the loans charged-off and all of the OREO sold
since March 31, 1998 were acquired as part of the acquisition of U.S. Bancorp.
The Bank's potential problem loans declined from $6.5 million as of March
31, 1998 to $5.5 million as of June 30, 1998.
22
USE OF PROCEEDS
The proceeds to the Trust from the offering of the Capital Securities will
be $25.0 million. All of the proceeds from the sale of the Capital Securities
and the Common Securities will be invested by the Trust in the Junior
Subordinated Debentures. As described below, the Corporation intends to use the
net proceeds from the sale of the Junior Subordinated Debentures to (i) cause
the 1997 Trust to retire the $10.0 million of 1997 Trust Preferred Securities,
(ii) redeem the Class B Preferred Stock of the Corporation issued in connection
with the U.S. Bancorp acquisition, and (iii) repay some or all of the
Corporation's indebtedness to LaSalle National Bank. Any proceeds not so used
will be used for general corporate purposes. Initially, the net proceeds may be
used to purchase short-term investment securities.
The Corporation owns all of the issued and outstanding trust common
securities (the "1997 Trust Common Securities") of the 1997 Trust. All of the
issued and outstanding 1997 Trust Preferred Securities (together with the 1997
Trust Common Securities, the "1997 Trust Securities") are owned by Coal City
Investors ("CCI"), an Illinois general partnership consisting of the members of
the Board of Directors of the Corporation. The 1997 Trust exists for the purpose
of issuing the 1997 Trust Securities and investing the proceeds thereof in
subordinated deferrable interest debentures (the "1997 Debentures") issued by
the Corporation. The 1997 Trust currently holds a 1997 Debenture in the
principal amount of $10.3 million. The annual net interest expense on the 1997
Debenture is $925,000. The principal of and accrued interest on the outstanding
1997 Debenture will be paid with a portion of the proceeds of this offering and,
thereafter, the 1997 Trust Securities will be retired by the 1997 Trust, and the
1997 Trust will be dissolved. As of June 30, 1998, there were approximately
$37,000 in unamortized costs associated with this transaction.
Simultaneously with the issuance and sale of the 1997 Trust Preferred
Securities to CCI by the 1997 Trust, the Corporation issued to CCI, at no
additional cost, the Corporation's warrant (the "1997 Warrant") for the purchase
of up to $10.0 million of common stock, without par value, of the Corporation at
certain predetermined prices set forth therein. Although the 1997 Warrant is not
scheduled to expire until February 5, 2007, CCI has agreed, in consideration of
the purchase of the 1997 Trust Preferred Securities by the Corporation for $10.0
million, to also return the 1997 Warrant to the Corporation, at no cost, at
which time the 1997 Warrant will be canceled by the Corporation.
The Class B Preferred Stock of the Corporation was issued in connection
with the acquisition of U.S. Bancorp. See "Business -- History and Development."
The Class B Preferred Stock has an annual dividend rate of 8.5%, or an aggregate
annual dividend of $867,000. Subsequent to the closing of this offering, the
Corporation will issue a notice of redemption of all of the outstanding Class B
Preferred Stock, with the date of redemption being 30 days after the date of
such notice. A holder of such Class B Preferred Stock may elect to convert such
stock into shares of common stock of the Corporation up to three days prior to
the date of redemption. If all of the Class B Preferred Stock is redeemed, the
aggregate redemption price will be $10.2 million, plus accrued dividends. If all
of the Class B Preferred Stock were to be converted into common stock of the
Corporation, the Corporation would be required to issue approximately 5,500
shares of its common stock in exchange for the converted shares of Class B
Preferred Stock. The Corporation is unable to predict what percentage of the
holders of its Class B Preferred Stock will elect to have their shares redeemed
for cash and what percentage of such holders will elect to convert to common
stock.
23
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
The following table sets forth the ratio of earnings to combined fixed
charges of the Corporation on a consolidated basis for the periods indicated.
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES:
Excluding interest on deposits..... 10.11x 5.87x 3.69x 7.90x 4.77x -- (1) -- (1)
Including interest on deposits..... 1.79x 1.37x 1.25x 1.38x 1.26x 1.36x 1.60x
- ----------
(1) There were no fixed charges excluding interest on deposits.
For purposes of computing the ratio of earnings to combined fixed charges,
earnings represent net income before applicable income taxes, minority interest
and fixed charges. Fixed charges, excluding interest on deposits, include gross
interest expense (other than on deposits) and the portion deemed representative
of the interest factor of rent expense, net of income from subleases. Fixed
charges, including interest on deposits, include all interest expense and the
portion deemed representative of the interest factor of rent expense, net of
income from subleases.
ACCOUNTING TREATMENT
For financial reporting purposes, the Trust will be treated as a subsidiary
of the Corporation and, accordingly, the accounts of the Trust will be included
in the consolidated financial statements of the Corporation. The Capital
Securities will be presented as a separate line item in the consolidated balance
sheets of the Corporation, entitled "Corporation Obligated Mandatorily
Redeemable Capital Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures," and appropriate disclosures about the Capital
Securities, the Guarantee and the Junior Subordinated Debentures will be
included in the notes to the consolidated financial statements of the
Corporation. For financial reporting purposes, the Corporation will record
Distributions payable on the Capital Securities as interest expense in its
consolidated statements of income.
24
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Corporation at March 31, 1998, and as adjusted to give effect to (i) the
consummation of the offering of the Capital Securities offered hereby, and (ii)
the use of the proceeds. The following data should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included elsewhere
herein.
AT MARCH 31, 1998
-------------------------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
Long-term Borrowings (1) ........................................ $20,537 $15,737
Minority Interest in Subsidiary ................................. 1,544 1,544
Corporation Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust Holding Solely
Junior Subordinated Debentures (2) ........................ 10,000 --
Corporation Obligated Mandatorily Redeemable Capital
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures (3) ............................... -- 25,000
Stockholders' Equity:
Preferred stock, Class B (4) .............................. 10,200 --
Common stock .............................................. 490 490
Additional paid-in capital ................................ 23,779 23,779
Retained earnings ......................................... 20,186 20,186
Accumulated other comprehensive income .................... 189 189
------- -------
Total stockholders' equity .............................. 54,844 44,644
------- -------
Total long-term liabilities and stockholders' equity .... $86,925 $86,925
------- -------
- ----------
(1) Long-term borrowings include borrowings under the Corporation's two lines
of credit with LaSalle National Bank, a $15.0 million line secured by the
stock of MNC owned by the Corporation and a $4.5 million unsecured line.
The borrowings under the two lines may not in the aggregate exceed $15.0
million.
(2) The 1997 Trust Preferred Securities issued by the 1997 Trust will be
retired with a portion of the proceeds of this offering. See "Use of
Proceeds."
(3) As described herein, the sole assets of the Trust will be $25.8 million
aggregate principal amount of the Junior Subordinated Debentures issued in
connection with this offering.
(4) Reflects the redemption of all the Corporation's Class B Preferred Stock
for cash. Stockholders may elect to convert some or all of their shares
into common stock of the Corporation. See "Use of Proceeds."
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to review the significant
factors affecting the financial condition and results of operations of the
Corporation for the three months ended March 31, 1998 and for the two-year
period ended December 31, 1997. On May 7, 1997, the Corporation acquired U.S.
Bancorp, the holding company for U.S. Bank, through a merger. On January 28,
1998, the Corporation sold Coal City Bank, its wholly owned subsidiary, to
Kankakee Bancorp, Inc. for $7.8 million in cash. These transactions
significantly affect the comparative information discussed below. This
discussion should be read in conjunction with the "Selected Consolidated
Financial and Other Data", "Business" and the Consolidated Financial Statements
and Notes thereto included elsewhere herein.
GENERAL
The profitability of the Corporation's operations depends primarily on its
net interest income, which is the difference between total interest earned on
interest earning assets and total interest paid on interest bearing liabilities.
The Corporation's net income is affected by its provision for loan losses as
well as other income and other expenses. The provision for loan losses reflects
the amount thought to be adequate to cover estimated losses in the loan
portfolio. Noninterest income or other income consists of service fees on
deposit accounts, lease financing income, net gains (losses) on the sale of
securities available for sale, and other operating income. Other expenses
include salaries and employee benefits along with occupancy and equipment
expenses, amortization expense and other operating expenses.
The amount of net interest income is affected by changes in the volume and
mix of earning assets, the level of interest rates earned on those assets, the
volume and mix of interest bearing liabilities, and the level of interest rates
paid on those interest bearing liabilities. The provision for loan losses is
dependent on changes in the loan portfolio and Management's assessment of the
collectibility of the loan portfolio, as well as economic and market conditions.
Other income and other expenses are impacted by growth of operations and growth
in the number of accounts through both acquisitions and core banking business
growth. Growth in operations affects other expenses as a result of additional
employees, branch facilities and promotional marketing expenses. Growth in the
number of accounts affects other income including service fees as well as other
expenses such as computer services, supplies, postage, telephone and other
miscellaneous expenses.
ANALYSIS OF NET INTEREST INCOME
INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES. The following
tables set forth the average daily balances, income from interest earning
assets, expenses of interest bearing liabilities, their associated yield or
interest rate and net interest income, interest rate spread and net yield on
interest earning assets for the periods presented.
26
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------
1998 1997
------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- ------------ ------- -------- --------- -------
(DOLLARS IN THOUSANDS)
INTEREST EARNING ASSETS:
Loans (1) (2) ..................................... $524,452 $ 11,159 8.63% $394,642 $ 8,202 8.43%
Taxable investment securities ..................... 174,822 2,531 5.87% 105,694 1,625 6.24%
Investment securities exempt from federal
income taxes (3) ............................ 4,182 124 12.03% 7,656 189 10.01%
Federal funds sold ................................ 8,748 118 5.47% 9,908 122 4.99%
-------- -------- -------- -------
Total interest earning assets ................ 712,204 13,932 7.93% 517,900 10,138 7.94%
-------- -------
Non-interest earning assets .................. 85,096 61,440
-------- --------
Total assets ................................. $797,300 $579,340
======== ========
INTEREST BEARING LIABILITIES:
Deposits:
NOW and money market deposit
accounts ................................. $146,342 1,179 3.27% $134,446 1,091 3.29%
Savings deposits ............................. 88,586 540 2.47% 61,894 368 2.41%
Time deposits ................................ 283,439 3,874 5.54% 213,918 2,849 5.40%
Long-term borrowings (4) .......................... 28,871 563 7.91% 17,544 367 8.48%
Short-term borrowings ............................. 57,564 731 5.15% 6,281 85 5.49%
-------- -------- -------- -------
Total interest bearing liabilities ........... 604,802 6,887 4.62% 434,083 4,760 4.45%
-------- ------- ----
Demand deposits - non-interest bearing ............ 123,400 91,215
Other non-interest bearing liabilities ............ 13,263 8,475
Minority interest in subsidiary ................... 2,482 6,345
Stockholders' equity .............................. 53,353 39,222
-------- --------
Total liabilities and stockholders'
equity ................................. $797,300 $579,340
======== ========
Net interest income/interest rate
spread (5) ............................... $ 7,045 3.31% $ 5,378 3.49%
======= ==== ======= ====
Net interest margin (6) ...................... 4.01% 4.21%
==== ====
- ----------
(1) Non-accrual loans are included in average loans.
(2) Interest income includes loan origination fees of $251,000 and $99,000 for
the three months ended March 31, 1998 and 1997, respectively.
(3) Non-taxable investment income is presented on a fully tax equivalent basis
assuming a 34% tax rate.
(4) Long-term borrowings include corporation obligated mandatorily redeemable
preferred securities.
(5) Interest rate spread represents the difference between the average yield on
interest earning assets and the average cost of interest bearing
liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest earning assets.
27
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
INTEREST EARNING ASSETS:
Loans (1) (2) ................. $ 482,049 $ 41,313 8.57% $355,486 $ 30,107 8.47% $298,416 $ 26,271 8.80%
Taxable investment
securities ................ 138,037 8,527 6.18% 128,517 7,941 6.18% 137,091 7,719 5.63%
Investment securities exempt
from federal income
taxes (3) ................. 7,720 656 8.50% 11,937 1,020 8.54% 12,091 1,238 0.24%
Federal funds sold ............ 21,299 1,413 6.63% 17,228 809 4.70% 30,027 1,760 5.86%
Other ......................... -- -- -- -- -- -- 51 5 9.80%
------- ------ ------- ------ ------- -----
Total interest earning
assets ............. 649,105 51,909 8.00% 513,168 39,877 7.77% 477,676 36,993 7.74%
--------
Non-interest earning
assets .............. 75,979 55,396 49,640
-------- -------- --------
Total assets ........... $725,084 $568,564 $527,316
======== ======== ========
INTEREST BEARING LIABILITIES:
Deposits:
NOW and money market
deposit accounts ... $151,544 4,873 3.22% $130,972 4,115 3.14% $123,987 3,822 3.08%
Saving deposits ........ 86,445 2,187 2.53% 65,306 1,578 2.42% 65,620 1,665 2.54%
Time deposits .......... 265,477 14,557 5.48% 206,357 10,836 5.25% 176,403 9,733 5.52%
Long-term borrowings .......... 23,632 2,202 9.32% 13,653 982 7.19% 12,453 1,153 9.26%
Short-term borrowings ......... 20,066 1,353 6.74% 10,012 669 6.68% 7,256 463 6.38%
------- ------ ------- ------ ------- -----
Total interest bearing
liabilities ........ 547,164 25,172 4.60% 426,300 18,180 4.26% 385,719 16,836 4.36%
--------
Demand deposits - non-interest
bearing .................. 113,355 91,380 92,822
Other non-interest bearing
liabilities ............... 10,965 7,312 5,569
Minority interest in
subsidiary ................ 4,890 6,216 5,663
Stockholders' equity .......... 48,710 37,354 37,543
--------
Total liabilities and
stockholders' equity .. $725,084 $568,564 $527,316
======== ======== ========
Net interest
income/interest rate
spread (5) ......... $ 26,737 3.40% $ 21,697 3.51% $ 20,157 3.38%
======== ==== ======== ==== ======== ====
Net interest margin (6) 4.12% 4.23% 4.22%
==== ==== ====
- ----------
(1) Non-accrual loans are included in average loans.
(2) Interest income includes loan origination fees of $1.0 million, $505,000
and $469,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
(3) Non-taxable investment income is presented on a fully tax equivalent basis
assuming a 34% tax rate.
(4) Long-term borrowings include corporation obligated mandatorily redeemable
preferred securities.
(5) Interest rate spread represents the difference between the average yield on
interest earning assets and the average cost of interest bearing
liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest earning assets.
28
RATE VOLUME ANALYSIS. The following tables set forth the extent to which
changes in interest rates and changes in volumes of interest earning assets and
interest bearing liabilities have historically affected the Corporation's
interest income and interest expense for the periods presented. Information is
provided on changes in each category attributable to (i) changes due to volume
(changes in volume multiplied by prior period rate); (ii) changes due to rate
(changes in rate multiplied by current period volume); and (iii) total changes.
THREE MONTHS ENDED MARCH 31, 1998
COMPARED TO MARCH 31, 1997
------------------------------------------------
CHANGE CHANGE
DUE TO DUE TO TOTAL
VOLUME RATE CHANGE
------------------------------------------------
(IN THOUSANDS)
INTEREST EARNING ASSETS:
Loans ........................................................ $ 2,698 $ 259 $ 2,957
Taxable investment securities ................................ 1,065 (159) 906
Investment securities exempt from federal income taxes (1) ... (86) 21 (65)
Federal funds sold ........................................... (14) 10 (4)
------- ------- -------
Total increase in interest income .................. 3,663 131 3,794
------- ------- -------
INTEREST BEARING LIABILITIES:
NOW and money market deposit accounts ........................ 96 (8) 88
Savings deposits ............................................. 159 13 172
Time deposits ................................................ 927 98 1,025
Long-term borrowings (2) ..................................... 237 (41) 196
Short-term borrowings ........................................ 694 (48) 646
------- ------- -------
Total increase in interest expense ................. 2,113 14 2,127
------- ------- -------
Increase in net interest income .................... $ 1,550 $ 117 $ 1,667
------- ------- -------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1997 COMPARED TO 1996 1996 COMPARED TO 1995
-----------------------------------------------------------------------------------------
CHANGE CHANGE CHANGE CHANGE
DUE TO DUE TO TOTAL DUE TO DUE TO TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
-----------------------------------------------------------------------------------------
(IN THOUSANDS)
INTEREST EARNING ASSETS:
Loans ................................ $ 10,718 $ 488 $ 11,206 $ 5,023 $ (1,187) $ 3,836
Taxable investment securities ........ 586 -- 586 (483) 705 222
Investment securities exempt from
federal income taxes (1) ......... (361) (3) (364) (16) (202) (218)
Federal funds sold ................... 192 412 604 (750) (201) (951)
Other ................................ -- -- -- (5) -- (5)
-------- -------- -------- -------- -------- --------
Total increase (decrease) in
interest income ............ 11,135 897 12,032 3,769 (885) 2,884
-------- -------- -------- -------- -------- --------
INTEREST BEARING LIABILITIES:
NOW and money market deposit
accounts ........................ 646 112 758 215 78 293
Savings deposits ..................... 511 98 609 (8) (79) (87)
Time deposits ........................ 3,104 617 3,721 1,653 (550) 1,103
Long-term borrowings (2) ............. 718 502 1,220 111 (282) (171)
Short-term borrowings ................ 672 12 684 176 30 (206)
-------- -------- -------- -------- -------- --------
Total increase (decrease) in
interest expense ............ 5,651 1,341 6,992 2,147 (803) 1,344
-------- -------- -------- -------- -------- --------
Increase (decrease) in net
interest income ............. $ 5,484 $ (444) $ 5,040 $ 1,622 $ (82) $ 1,540
-------- -------- -------- -------- -------- --------
- ----------
(1) Non-taxable investment income is presented on a fully tax equivalent tax
basis utilizing a 34% rate.
(2) Long-term borrowings include corporation obligated mandatorily redeemable
preferred securities.
29
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND MARCH 31, 1997
GENERAL. The Corporation's net income was $3.6 million for the three months
ended March 31, 1998, compared to net income of $892,000 for the three months
ended March 31, 1997, an increase of $2.7 million. The increase in net income
for the three months ended March 31,1998 as compared with the prior year period
resulted primarily from the sale of the Corporation's subsidiary, Coal City
Bank, and the gain associated with the sale.
NET INTEREST INCOME. Net interest income increased $1.7 million, or 31.8%,
to $7.0 million for the three months ended March 31, 1998 from $5.3 million for
the comparable period of 1997. This increase in net interest income resulted
from a $3.8 million, or 37.9%, increase in interest income, partially offset by
a $2.1 million, or 44.7%, increase in interest expense. Interest income
increased due to a $194.3 million, or 37.5%, increase in average interest
earning assets while interest expense rose as a result of an increase of $170.7
million, or 39.3%, in average interest bearing liabilities. Overall, total loans
increased $129.1 million, or 32.5%, to $526.9 million at March 31, 1998 from
$397.8 million at March 31, 1997. Total deposits increased $123.5 million, or
24.2%, to $634.4 million at March 31, 1998 from $511.0 million at March 31,
1997. The increases in total loans and total deposits were primarily due to the
U.S. Bancorp acquisition in May 1997, and overall growth in the Corporation's
core banking business along with increases in other borrowings. The
Corporation's net interest margin of 4.01% for the three months ended March 31,
1998 decreased from 4.21% for the comparable period in 1997 due to an increase
of $9.0 million in non-accrual loans directly attributable to the U.S. Bancorp
acquisition, an issuance of $10.0 million in corporation obligated mandatorily
redeemable preferred securities utilized to obtain funds for the U.S. Bancorp
acquisition and an increase of $51.3 million in the average amount of short-term
borrowings outstanding.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased to
$188,000 for the three months ended March 31, 1998 from $171,000 for the three
months ended March 31, 1997. The increase in the provision for loan losses is
the result of Management's intention to maintain the allowance at a sufficient
level given continued growth in the loan portfolio. The allowance for loan
losses represented 1.47% of total loans at March 31, 1998 compared to 1.50% of
total loans at December 31, 1997. Management believed the allowance for loan
losses was adequate to cover potential losses in the loan portfolio.
OTHER INCOME. Other income increased $4.7 million to $5.5 million for the
three months ended March 31, 1998, compared to $820,000 for the three months
ended March 31, 1997. The increase was primarily due to a $4.1 million gain on
the sale of Coal City Bank, a $274,000 increase in service fees directly
attributable to the U.S. Bancorp acquisition, a $200,000 gain on the sale of a
trust business acquired with the U.S. Bancorp acquisition and a $74,000 increase
in automatic teller machine fees charged.
OTHER EXPENSES. Other expenses increased $2.7 million, or 63.6%, to $6.8
million for the three months ended March 31, 1998 from $4.2 million for the
three months ended March 31, 1997. Salaries and employee benefits expense
increased $1.4 million, or 61.6%, amortization expense increased $402,000, or
98.3%, while occupancy and equipment expense increased $465,000, or 96.7%, from
the prior period in 1997. These increases were primarily due to the U.S. Bancorp
acquisition.
INCOME TAXES. The Corporation recorded an income tax expense of $1.9
million for the three months ended March 31, 1998 compared to $737,000 for the
comparable period in 1997, reflecting the increase in the Corporation's income
before taxes in 1998. The effective tax rate was 34.4% for the three months
ended March 31, 1998 compared to 41.4% for the three months ended March 31,
1997. The decrease in 1998 is due to the Corporation's higher investment in U.S.
Treasury and agency securities which reduces state income taxes.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
GENERAL. The Corporation's net income was $3.4 million for the year ended
December 31, 1997, compared to net income of $3.6 million for the year ended
December 31, 1996, a decrease of $188,000 or 5.2%. The decrease in net income in
1997 resulted from the increase in amortization expense as a result of the U.S.
Bancorp acquisition in May 1997.
30
NET INTEREST INCOME. Net interest income increased $5.2 million, or 24.2%,
to $26.5 million in 1997 from $21.4 million in 1996. This increase in net
interest income resulted from a $12.2 million, or 30.8%, increase in interest
income, partially offset by a $7.0 million, or 38.5%, increase in interest
expense. Interest income increased due to a $135.9 million, or 26.5%, increase
in average interest earning assets while interest expense rose as a result of an
increase of $120.9 million, or 28.4%, in average interest bearing liabilities.
Overall, total loans increased $139.0 million, or 35.8%, to $527.3 million at
December 31, 1997 from $388.3 million at December 31, 1996 primarily due to the
acquisition of U.S. Bancorp, which had total loans of $126.8 million as of the
acquisition date. Total deposits increased $174.3 million, or 34.2%, to $684.1
million at December 31, 1997 from $509.7 million at December 31, 1996 primarily
due to the acquisition of U.S. Bancorp, which had deposits of $169.4 million as
of the acquisition date. Increases in interest income and interest expense were
caused to a lesser extent by an overall growth in the Corporation's core banking
business along with increases in other borrowings. The Corporation's net
interest margin of 4.12% in 1997 decreased from 4.23% in 1996 due to increased
market rates on higher yielding deposit accounts, an increase of $9.9 million in
non-accrual loans directly attributable to the purchase of U.S. Bancorp, an
issuance of $10.0 million in corporation obligated mandatorily redeemable
preferred securities and a $5.8 million increase in long-term borrowings
primarily attributable to the purchase of U.S. Bancorp.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased to
$971,000 for the year ended December 31, 1997 from $572,000 for the year ended
December 31, 1996. The increase in the provision for loan losses was the result
of an increase in total loans and Management's intention to maintain the
allowance at a sufficient level based upon continued growth in the portfolio.
The allowance for loan losses represented 1.50% of total loans at December 31,
1997 compared to 1.21% of total loans at December 31, 1996. Management believed
the allowance for loan losses was adequate to cover potential losses in the loan
portfolio.
OTHER INCOME. Other income increased $2.0 million, or 67.9 %, to $4.9
million in 1997, compared to $2.9 million in 1996. Service fees increased $1.0
million, or 48.6%, to $3.1 million in 1997 as compared to $2.1 million in 1996.
The increase in service fees is directly attributable to the increase in
deposits due to the acquisition of U.S. Bancorp, which had total deposits of
$169.4 million as of the acquisition date. Net lease financing income increased
$777,000 to $1.2 million in 1997 from $395,000 in 1996. Net lease financing
income represents income on equipment owned by the Corporation and leased to
others. At December 31, 1997, the Corporation had $22.9 million in leased
equipment, up $4.3 million from $18.6 million at December 31, 1996.
OTHER EXPENSES. Other expenses increased $7.3 million, or 43.4%, to $24.2
million in 1997 from $16.9 million in 1996 primarily due to the acquisition of
U.S. Bancorp. Salaries and employee benefits expense increased $2.9 million, or
33.3%, amortization expense increased $1.3 million, or 64.3%, while occupancy
and equipment expense increased $767,000, or 35.4% from 1996. Additional
increases in other operating expenses included a $370,000 increase in computer
services due to improvements made to the Corporation's computer systems and a
$302,000 increase in marketing expense resulting from costs associated with the
mergers of the U.S. Bancorp, U.S. Bank, Peterson Bank and Manufacturers Bank
subsidiaries.
INCOME TAXES. The Corporation recorded an income tax expense of $2.4
million for 1997 compared to $2.6 million for 1996 reflecting the decrease in
the Corporation's income before taxes in 1997. The effective tax rate was 38.2%
in 1997 compared to 37.6% in 1996.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
GENERAL. The Corporation's net income increased $1.2 million, or 49.2%, to
$3.6 million for the year ended December 31, 1996, from $2.4 million for the
year ended December 31,1995. The increase in net income in 1996 was primarily
attributable to an increase in net interest income and other income in addition
to a decrease in other expenses.
NET INTEREST INCOME. Net interest income increased $1.6 million, or 8.2%,
to $21.3 million for the year ended December 31, 1996 from $19.7 million for the
year ended December 31, 1995. This increase in net interest income resulted from
a $2.9 million, or 8.1%, increase in interest income, partially offset by a $1.3
million, or 8.0%, increase in interest expense in 1996. Average interest earning
assets increased $35.5 million, or 7.4%, to $513.2 million in 1996
31
from $477.7 million in 1995 as the Corporation experienced strong loan demand
and shifted lower-yielding investment securities and federal funds sold to
higher yielding loans. In addition, average interest earning assets increased
from year to year as Peterson Bank was purchased on February 28, 1995, and 1995
included only ten months of Peterson Bank averages. Average interest bearing
liabilities increased $40.6 million, or 10.5%, due to growth in time deposits.
Overall the net interest margin increased to 4.23% in 1996 from 4.22% in 1995 as
loan growth more than offset the increase in higher yielding deposits.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased to
$572,000 for the year ended December 31, 1996 from $240,000 for the year ended
December 31, 1995, primarily due to the Corporation's desire to maintain its
allowance for loan losses at a sufficient level relative to the strong loan
demand. Total loans increased $49.0 million, or 14.4%, to $388.3 million at
December 31, 1996 from $339.3 million at December 31, 1995. The allowance for
loan losses represented 1.21% of total loans at December 31, 1996, compared to
1.22% of total loans at December 31, 1995. Management believed the allowance for
loan losses was adequate to cover potential losses in the loan portfolio.
OTHER INCOME. Other income increased $1.0 million, or 54.8%, to $2.9
million in 1996 from $1.9 million in 1995. Service fees increased $448,000, or
27.5%, to $2.1 million in 1996 from $1.6 million in 1995. Service fees increased
due to higher product fees and better fee collection practices. In addition, net
gains (losses) on the sale of securities increased $633,000 to $75,000 in 1996
from ($558,000) in 1995 due to the sale of lower yielding securities to fund
higher yielding loan demand.
OTHER EXPENSES. Other expenses decreased $142,000, or 0.8%, to $16.9
million in 1996 from $17.0 million in 1995. FDIC fees, which are included in
other operating expenses, decreased $520,000 due to nationwide rate reductions.
Other expenses also decreased due to a $146,000 or 6.7% decrease in amortization
expense to $2.0 million in 1996 from $2.2 million in 1995 as the amortization
costs related to the purchase of MNC in 1992 were lower in 1996 than in 1995.
The Corporation utilizes an accelerated amortization method which amortizes more
of the purchase premium in early years than in later years. See "--Core Deposit
Intangibles and Goodwill." Decreases in other expenses were offset by a $250,000
increase in occupancy and equipment expense, a $149,000 increase in operating
losses, due to a loss on the sale of OREO property, which are included in other
operating expenses, and a $66,000 increase in salaries and employee benefits.
INCOME TAXES. The Corporation recorded income tax expense of $2.6 million
for 1996 compared to $1.5 million for 1995 reflecting the increase in the
Corporation's income before income taxes in 1996. The effective tax rate was
37.6% in 1996 compared to 34.3% in 1995.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 TO DECEMBER 31, 1997
Total assets decreased $40.0 million, or 5.0% from $802.7 million at
December 31, 1997 to $762.7 million at March 31, 1998. This decrease was due to
the sale of Coal City Bank on January 28, 1998. Coal City Bank's total assets as
of the date of sale were $56.0 million. Offsetting the decrease in total assets
was growth in the loan portfolio and an increase in securities. Total loans were
$527.3 million at December 31, 1997 and $526.9 million at March 31, 1998. Total
securities were $141.9 million at December 31, 1997 and March 31, 1998. At
December 31, 1997 approximately $18.0 million in loans and $15.5 million in
securities were attributable to Coal City Bank. New loans were funded by the
sale of federal funds sold and also by the increase in short term borrowings
which increased by $11.4 million in the same time period. The decrease in
deposits of $49.6 million was due primarily to the sale of Coal City Bank, which
had total deposits of $52.1 million at the date of sale.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 TO DECEMBER 31, 1996
Total assets increased by $214.9 million from $587.8 million at December
31, 1996 to $802.7 million at December 31, 1997 primarily due to the acquisition
of U.S. Bancorp, which had total assets of $205.0 million at the date of
acquisition. The acquisition cost was $40.2 million which was funded by the
issuance of the Class B Preferred Stock of the Corporation of $10.2 million,
cash held by the Corporation of $15.8 million and cash held by U.S. Bancorp of
$14.2 million. The excess
32
cost over the fair value of net assets acquired (goodwill) was $8.6 million.
Approximately $5.7 million of the purchase price was allocated to the fair value
of the core deposit intangible asset.
CORE DEPOSIT INTANGIBLES AND GOODWILL
In acquiring its subsidiary banks, the Corporation recorded a portion of
the purchase price as core deposit intangibles, which represented value assigned
to the existing deposit base for which the annual interest and servicing costs
are below market rates. In addition, the excess cost over fair value of net
assets acquired is recorded as goodwill.
The following table sets forth the core deposit intangible and goodwill
amortization expense for each acquisition for the last five years and the
expected expense for 1998 to 2002.
PLANNED AMORTIZATION FOR THE YEAR ENDING DECEMBER 31,
------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
Coal City National Bank (1984) .................. $ -- $ -- $ -- $ -- $ --
Manufacturers National Corporation (1992) ....... 248 248 248 302 367
Peterson Bank (1995) ............................ 531 730 770 970 1,025
U.S. Bancorp, Inc. (1997) ...................... 724 827 1,042 1,378 1,902
--- --- ----- ----- -----
Total intangible amortization expense ... $1,503 $1,805 $2,060 $2,650 $3,294
====== ===== ===== ===== =====
ACTUAL AMORTIZATION FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
Coal City National Bank (1984) ................. $ 9 $ 9 $ 9 $ 9 $ 9
Manufacturers National Corporation (1992) ...... 382 497 562 627 691
Peterson Bank (1995) ........................... 1,196 1,515 1,596 -- --
U.S. Bancorp, Inc. (1997) ..................... 1,734 -- -- -- --
------ ------ ------ ------ ------
Total intangible amortization expense ... $3,321 $2,021 $2,167 $ 636 $ 700
====== ====== ====== ====== ======
The table demonstrates that in each of the years immediately following an
acquisition, the Corporation amortizes more of the purchase premium than in
later years. This has the effect of increasing other expense (decreasing net
income) in early years and decreasing other expense (increasing net income) in
later years. Amortization of purchase intangibles is a non-cash expense.
CASH EARNINGS
The purchase method of accounting has been used to record each of the
Corporation's acquisitions. As a result, the recorded basis of the net assets of
the acquired entities has been adjusted to fair value. Adjustments included
recording core deposit intangibles to reflect the difference between the fair
value and underlying basis of deposits purchased and recording goodwill for the
excess of the acquisition cost over the fair value of net assets acquired. Core
deposit intangibles and goodwill are being amortized as a non-cash expense over
periods of up to 8 and 20 years, respectively. Other fair value adjustments made
to assets such as investment securities, loans, and buildings are also being
amortized or depreciated over varying periods, ranging from 8 to 35 years.
Amortization/depreciation expense reduces net income during the amortization
periods.
If the Corporation's acquisitions had met certain accounting rules, the
pooling of interest method of accounting may have been used to account for the
Corporation's acquisitions. Under this method of accounting, no goodwill or core
deposit intangibles would have been recorded or other fair value adjustments
made. Consequently net income is not reduced for the amortization of core
deposit intangibles, goodwill or other fair value adjustments. Since application
of the two methods can result in dramatically different net income, Management,
certain analysts, and certain peer financial institutions have been computing
cash earnings in order to compare results. At present, cash earnings is not a
defined term or concept under generally accepted accounting principles.
33
The following table sets forth the Corporation's cash earnings, which
is defined by Management as net income, excluding amortization of purchase
accounting non-cash items and the related deferred income tax effect.
THREE MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, -----------------------------------------
1998 1997 1996 1995
---------------------------------------------------------
(DOLLARS IN THOUSANDS)
Net income ........................................................ $ 3,558 $ 3,449 $ 3,637 $ 2,437
Goodwill amortization ............................................. 235 801 570 515
Core deposit intangibles amortization (net of deferred tax) ....... 380 1,663 958 1,090
Other fair value adjustment amortization (net of deferred tax) .... 3 (29) (62) (68)
------- ------- ------- -------
Cash earnings ..................................................... 4,176 5,884 5,103 3,974
Preferred dividends ............................................... (434) (276) -- (267)
------- ------- ------- -------
Cash earnings to common stockholders .............................. $ 3,742 $ 5,608 $ 5,103 $ 3,707
======= ======= ======= =======
Cash earnings per share:
Basic .......................................................... $ 76.03 $112.81 $102.83 $ 73.92
Diluted ........................................................ $ 76.03 $112.81 $102.83 $ 73.92
Performance ratios:
Cash return on average tangible assets (1) ..................... 2.20% 0.90% 1.03% 0.86%
Cash return on average tangible equity (1) ..................... 71.01% 24.95% 20.78% 16.82%
- ----------
(1) Cash return on average tangible assets and equity have been annualized for
the quarter ended March 31, 1998 and include the $4.1 million gain on sale
of Coal City Bank. Cash return on average tangible assets and equity,
excluding the gain on sale of Coal City Bank, would have been 0.79% and
19.68%, respectively.
ASSET QUALITY
GENERAL. The Corporation manages asset quality through various control,
monitoring and review procedures. Asset quality is important in two areas: the
credit quality of securities in the Bank's investment portfolio and the credit
quality of loans in the Bank's loan portfolio. With regard to the Bank's
investment portfolio, it is the Bank's policy to only invest in securities of
the U.S. Treasury and agencies of, and corporations sponsored by, the U.S.
Government, corporate and municipal securities rated in one of the top four
grading categories by Standard & Poors, or Moody's, or local municipal non-rated
securities for which the Bank has sufficient credit information to render an
informed credit decision. Consequently, the Bank maintains a very high quality
investment portfolio that has no nonaccruing or past due securities. The quality
of loans in the Bank's loan portfolio is evidenced by the level of
non-performing loans and assets as well as potential problem loans, which are
discussed below.
NON-PERFORMING LOANS AND NON-PERFORMING ASSETS. Non-performing loans
include (i) loans accounted for on a non-accrual basis, (ii) accruing loans
contractually past due 90 days or more as to interest and principal; and (iii)
loans whose terms have been renegotiated to provide reduction or deferral of
interest or principal because of a deterioration in the financial position of
the borrower. Management reviews the loan portfolio for problem loans on an
ongoing basis. During the ordinary course of business, Management becomes aware
of borrowers that may not be able to meet the contractual requirements of loan
agreements. Such loans are placed under close supervision with consideration
given to placing the loan on a non-accrual status, increasing the allowance for
loan losses, and (if appropriate) partial or full charge-off. Those loans with
respect to which Management does not expect to collect interest in the normal
course of business are placed on a non-accrual status. After a loan is placed on
non-accrual status, any current year interest previously accrued but not yet
collected is reversed against current income. If interest payments are received
on non-accrual loans, such payments will be applied
34
to principal and not taken into income. Loans will not be placed back on accrual
status unless all back interest and principal payments are made. If interest on
non-accrual loans had been accrued, such income would have amounted to $158,700,
$383,700 and $34,600 for the three months ended March 31, 1998, and the years
ended December 31, 1997 and 1996, respectively.
Non-performing assets consist of OREO, which represents properties acquired
through foreclosure or other proceedings and is recorded at the lower of cost or
fair value less the estimated cost of disposal. OREO is evaluated regularly to
ensure that the recorded amount is supported by its current fair value.
Valuation allowances to reduce the carrying amount to fair value less estimated
costs of disposal are recorded as necessary. Revenues and expenses from the
operations of OREO and changes in the valuation are included in other income and
other expenses on the income statement.
The following table sets forth the amounts of non-performing loans and
non-performing assets at the dates indicated.
AT AT DECEMBER 31,
MARCH 31, ---------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Non-performing loans:
Non-accrual loans ............................ $9,364 $9,879 $ 454 $ 173 $ 31 $ 138
Loans 90 days or more past due, still
accruing interest ....................... -- 2 903 974 553 247
Restructured loans ........................... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total ......................................... 9,364 9,881 1,357 1,147 584 385
Other real estate owned ............................ 3,879 3,726 -- 216 217 --
------ ------ ------ ------ ------ ------
Total non-performing assets .................. $3,243 $3,607 $1,357 $1,363 $ 801 $ 385
====== ====== ====== ====== ====== ======
Non-performing loans to total loans ................ 1.78% 1.87% 0.35% 0.34% 0.26% 0.17%
Non-performing loans to allowance for loan losses .. 120.81% 124.73% 28.92% 27.75% 22.07% 14.22%
Non-performing assets to total assets .............. 1.74% 1.70% 0.23% 0.24% 0.21% 0.10%
The increase in non-accrual loans of $9.4 million from December 31, 1996 to
December 31, 1997 is directly attributable to the acquisition of U.S. Bancorp.
As of March 31, 1998, $7.9 million, or 84.0%, of non-accruing loans represented
loans that were acquired with U.S. Bancorp. Non-accrual loans consisted of 22
loans totaling $9.4 million. Of these loans, $8.3 million are secured by a first
lien on real estate, $146,000 are secured by a mix of collateral, and $864,000
are secured by leases. Management is aggressively pursuing collection efforts
with respect to these non-performing loans.
As of March 31, 1998, all OREO, totaling $3.9 million, was attributable to
the acquisition of U.S. Bancorp. At that date, OREO consisted of seven
properties with recently appraised values totaling $5.1 million. Of these
properties, the largest was a $2.9 million residential development property.
This property was sold in June 1998. Three other properties, totaling $502,000,
are occupied commercial properties paying rent to the Bank, while one of the
remaining properties is an unoccupied commercial building valued at $385,000.
The other two properties, totaling $114,000, are residential. Management is
aggressively seeking the sale of the OREO properties.
There were no loans identified as impaired as of March 31, 1998 or during
the years ended December 31, 1997 and 1996. A loan is classified as impaired
when it is probable that the Bank will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In contrast, a loan is
classified as non-accrual when Management does not expect to collect interest in
the normal course of business.
POTENTIAL PROBLEM LOANS. The Bank utilizes an internal asset classification
system as a means of reporting problem and potential problem assets. At each
scheduled Board of Directors meeting, a watch list is presented, showing all
loans listed as "Special Mention," "Substandard," "Doubtful" and "Loss." An
asset is classified Substandard if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. Substandard assets include those characterized by the distinct possibility
that the Bank will sustain some loss if the deficiencies are not corrected.
Assets classified as Doubtful have all the weaknesses inherent in those
classified Substandard with the added
35
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as Loss are those considered
uncollectible and viewed as non-bankable assets, worthy of charge-off. Assets
which do not currently expose the Bank to sufficient risk to warrant
classification in one of the aforementioned categories, but possess weaknesses
which may or may not be out of the control of the customer, are deemed to be
Special Mention.
When the Bank classifies one or more assets, or portions thereof, as
Substandard or Doubtful, it establishes a general valuation allowance for loan
losses ("General Valuation Allowance") in an amount deemed prudent by
Management. General Valuation Allowance is a term which represents loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to specific problem assets. When the Bank classifies one or more
assets, or portions thereof, as Loss, it either establishes a specific allowance
for losses equal to 100% of the amount of the asset so classified or charges-off
such amount.
The Bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the Bank's primary
regulators, which can order the establishment of additional general or specific
loss allowances. The FDIC, in conjunction with the other federal banking
agencies, has adopted an interagency policy statement on the allowance for loan
and lease losses. The policy statement provides guidance for financial
institutions on both the responsibilities of Management for the assessment and
establishment of adequate allowances and guidance for banking agency examiners
to use in determining the adequacy of general valuation guidelines. Generally,
the policy statement recommends that (i) institutions have effective systems and
controls to identify, monitor and address asset quality problems; (ii)
Management has analyzed all significant factors that affect the collectibility
of the portfolio in a reasonable manner; and (iii) Management has established
acceptable allowance evaluation processes that meet the objectives set forth in
the policy statement. Management believes it has established an adequate
allowance for possible loan losses. The Bank analyzes its process regularly,
with modifications made if needed, and reports those results four times per year
at Board of Directors meetings. However, there can be no assurance that the
regulators, in reviewing the Bank's loan portfolio, will not request the Bank to
materially increase its allowance for loan losses at the time. Although
Management believes that adequate specific and general loan loss allowances have
been established, actual losses are dependent upon future events and, as such,
further additions to the level of specific and general loan loss allowances may
become necessary.
The aggregate principal amounts of potential problem loans rated
Substandard, Doubtful, or Loss, excluding non-performing loans, as of March 31,
1998 and December 31, 1997 were approximately $6.5 million and $7.7 million,
respectively. All loans classified as loss have been charged-off. Loans in this
category generally include loans that were classified for regulatory purposes.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is an amount that
Management believes will be adequate to absorb estimated losses on existing
loans, based on an evaluation of the collectibility of loans and prior loss
experience. This evaluation also takes into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrower's ability to pay. While Management uses the best
information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses,
and may require the Bank to make additions to the allowance based on their
judgment about information available to them at the time of their examinations.
36
The following table presents an analysis of the allowance for loan losses
for the periods presented.
THREE
MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, ------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------- ---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Allowance at beginning of period ........... $ 7,922 $ 4,692 $ 4,134 $ 2,646 $ 2,707 $ 2,305
Additions resulting from acquisitions ...... -- 2,574 -- 1,317 -- --
Decreases resulting from sale of
subsidiary ............................. (399) -- -- -- -- --
Charge-offs:
Commercial ......................... -- 178 -- 70 145 --
Commercial loans collateralized by
assignment of lease payments .. -- -- -- -- -- --
Real estate - construction ......... -- -- -- -- -- --
Real estate - mortgage ............. 4 97 -- -- -- --
Installment ........................ -- 68 29 4 6 2
------- ------- ------- ------- ------- -------
Total charge-offs .......................... 4 343 29 74 151 2
------- ------- ------- ------- ------- -------
Recoveries:
Commercial ......................... -- -- 15 5 -- --
Commercial loans collateralized by
assignment of lease payments .. -- -- -- -- -- --
Real estate - construction ......... -- 10 -- -- -- --
Real estate - mortgage ............. 31 -- -- -- -- --
Installment ........................ 13 18 -- -- -- 4
------- ------- ------- ------- ------- -------
Total recoveries ........................... 44 28 15 5 -- 4
------- ------- ------- ------- ------- -------
Net charge-offs (recoveries) ............... (40) 315 14 69 151 (2)
Provision for loan losses .................. 188 971 572 240 90 400
------- ------- ------- ------- ------- -------
Allowance at end of period ................. $ 7,751 $ 7,922 $ 4,692 $ 4,134 $ 2,646 $ 2,707
------- ------- ------- ------- ------- -------
Allowance to total loans ................... 1.47% 1.50% 1.21% 1.22% 1.19% 1.19%
Net charge-offs to average loans ........... (0.03)% 0.07% 0.00% 0.02% 0.07% 0.00%
The following table sets forth the allocation of the allowance for loan
losses for the periods presented and the percentage of loans in each category to
total loans. An allocation for a loan classification is only for internal
analysis of the adequacy of the allowance and is not an indication of expected
or anticipated losses. The allowance is available for all loan losses.
AT DECEMBER 31,
AT MARCH 31, ---------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------------- ---------------- --------------- --------------- --------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------------- ---------------- ---------------- ---------------- --------------- ----------------
(DOLLARS IN THOUSANDS)
Commercial ........... $1,204 19.56% $1,430 21.24% $1,030 24.22% $ 537 20.71% $1,230 33.30% $ 913 33.43%
Commercial loans
collateralized by
assignment of
lease payments .. 220 16.85% 215 16.25% 285 29.35% 271 31.89% 323 32.64% 420 36.98%
Real estate .......... 4,217 50.99% 2,695 48.75% 554 40.89% 193 43.62% 64 30.63% 502 27.27%
Real estate
construction ..... -- 6.81% -- 7.03% -- 1.82% -- 2.03% -- 1.67% -- 0.34%
Installment .......... 92 5.79% 73 6.73% 55 3.72% 38 1.75% 27 1.76% 33 1.98%
Unallocated .......... 2,018 -- 3,509 -- 2,768 -- 3,095 -- 1,002 -- 839 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total ........... $7,751 100.00% $7,922 100.00% $4,692 100.00% $4,134 100.00% $2,646 100.00% $2,707 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
37
The Bank's loan quality is continually monitored by Management and is
reviewed by the Board of Directors and the loan committee of the Bank on a
monthly basis. In addition, independent external review of the loan portfolio is
conducted by regulatory authorities and by independent public accountants in
conjunction with their annual audit. The amount of additions to the allowance
for loan losses which are charged to earnings through the provision for loan
losses is determined based on a variety of factors, including actual charge-offs
and anticipated charge-offs, delinquent loans, historical loss experience and
economic conditions in the Bank's market area. Although Management believes the
allowance for loan losses is sufficient to cover potential losses, there can be
no assurance that the allowance will prove sufficient to cover actual loan
losses in the future.
At December 31, 1997, the allowance for loan losses was $7.9 million,
representing an increase of $3.2 million from December 31, 1996. The increase
was primarily due to the acquisition of U.S. Bancorp, which had an allowance for
loan losses of $2.6 million at the date of acquisition.
ASSET LIABILITY MANAGEMENT
The Corporation's net interest income is subject to "interest rate risk" to
the extent that it can vary based on changes in the general level of interest
rates. It is the Corporation's policy to maintain an acceptable level of
interest rate risk over a range of possible changes in interest rates while
remaining responsive to market demand for loan and deposit products. The
strategy employed by the Bank to manage its interest rate risk is to measure its
risk using an asset/liability simulation model and adjust the maturity of
securities in its investment portfolio to manage that risk. Also, to limit risk,
the Bank generally does not make fixed rate loans or accept fixed rate deposits
with terms of more than five years.
Based on simulation modeling as of December 31, 1997 and March 31, 1998,
respectively, the Corporation's net interest income would change over a one-year
time period due to changes in interest rates as follows:
CHANGE IN CHANGE IN
NET INTEREST INCOME NET INTEREST INCOME
OVER ONE-YEAR HORIZON OVER ONE-YEAR HORIZON
AS OF DECEMBER 31, 1997 AS OF MARCH 31, 1998
CHANGES IN ------------------------------------- ---------------------------------------
LEVEL OF DOLLAR PERCENTAGE DOLLAR PERCENTAGE
INTEREST RATES CHANGE CHANGE CHANGE CHANGE
- ------------------- ------------------- --------------- ---------------- -------------------
+2.00% $ 237,000 0.90% $ 141,000 0.52%
+1.00% $ 102,000 0.39% $ 80,000 0.30%
(1.00)% $(133,000) (0.50)% $ (66,000) (0.24)%
(2.00)% $(232,000) (0.88)% $(124,000) (0.46)%
Simulations used by the Corporation assume the following:
o Changes in interest rates are immediate.
o With the exception of NOW, money market and savings accounts, all
interest rates change by the same amount at the same time.
o NOW, money market and savings accounts rates change by 0.25% for every
1.00% change in interest rates and by 0.50% for every 2.00% change in
interest rates. Management believes, and experience has shown, that
these deposit accounts take longer to change rates when economic
conditions change and do not change rates as much as other general
interest rates, such as prime or federal funds.
It is the Bank's policy that interest rate exposure due to a 2.00% interest
rate rise or fall be limited to 7.50% of the Bank's annual net interest income
as forecasted by the simulation model. As demonstrated by the table above, the
Bank's interest rate risk exposure was within this policy at December 31, 1997
and March 31, 1998.
38
Interest rate risk can also be measured by analyzing the extent to which
the repricing of assets and liabilities are mismatched to create an interest
sensitivity "gap." An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within that time
period. The interest rate sensitivity gap is defined as the difference between
the amount of interest earning assets maturing or repricing within a specific
time period and the amount of interest bearing liabilities maturing or repricing
within that same time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, therefore, a negative gap would tend
to adversely affect net interest income. Conversely, during a period of falling
interest rates, a negative gap position would tend to result in an increase in
net interest income.
The following table sets forth the amounts of interest earning assets and
interest bearing liabilities outstanding at March 31, 1998, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods shown. Except as stated below, the amount of
assets and liabilities shown which reprice or mature during a particular period
were determined based on the earlier of the term to repricing or the term to
repayment of the asset or liability. The table is intended to provide an
approximation of the projected repricing of assets and liabilities at March 31,
1998 on the basis of contractual maturities and scheduled rate adjustments
within a three-month period and subsequent selected time intervals. The loan
amounts in the table reflect principal balances expected to be reinvested and/or
repriced as a result of contractual amortization and rate adjustments on
adjustable-rate loans. Loan and investment security prepayments are not
considered significant and therefore contractual maturities or repricing is not
adjusted for possible prepayments. While NOW, money market and savings deposit
accounts have adjustable rates, it is assumed that the interest rates on these
accounts will not adjust immediately to changes in other interest rates.
Therefore, the table is calculated assuming that these accounts will reprice as
follows: 25% in the first three months, 25% in the next nine months, and 50%
after one year.
TIME TO MATURITY OR REPRICING
-----------------------------------------------------------------------------
0-90 91-365 1-5 OVER 5
DAYS DAYS YEARS YEARS TOTAL
----------- ------------ ----------- ------------ -----------
(DOLLARS IN THOUSANDS)
INTEREST EARNING ASSETS:
Net loans (1) .......................... $260,706 $ 70,112 $177,311 $ 1,670 $509,799
Investment securities .................. 5,175 83,640 51,009 2,070 141,894
-------- -------- -------- -------- --------
Total interest earning assets ....... $265,881 $153,752 $228,320 $ 3,740 $651,693
======== ======== ======== ======== ========
INTEREST BEARING LIABILITIES:
NOW and money market deposit
accounts ........................... $ 34,910 $ 34,910 $ 69,820 $ -- $139,640
Savings deposits ....................... 21,364 21,363 42,726 -- 85,453
Time deposits .......................... 164,432 98,273 16,319 -- 279,024
Long-term borrowings (2) ............... -- -- -- 30,537 30,537
Short-term borrowings .................. 29,365 -- -- -- 29,365
-------- -------- -------- -------- --------
Total interest bearing liabilities .. $250,071 $154,546 $128,865 $ 30,537 $564,019
======== ======== ======== ======== ========
Rate sensitive assets (RSA) ............ $265,881 $419,633 $647,953 $651,693 $651,693
Rate sensitive liabilities (RSL) ....... 250,071 404,617 533,482 564,019 564,019
Cumulative GAP ......................... 15,810 15,016 114,471 87,674 87,674
(GAP = RSA - RSL)
RSA/Total assets ....................... 34.86% 55.02% 84.96% 85.45% 85.45%
RSL/Total assets ....................... 32.79% 53.05% 69.95% 73.95% 73.95%
GAP/Total assets ....................... 2.07% 1.97% 15.01% 11.50% 11.50%
GAP/RSA ................................ 5.95% 3.58% 17.67% 13.45% 13.45%
- ----------
(1) Less non-accrual loans totaling $9.4 million.
(2) Includes corporation obligated mandatorily redeemable preferred securities.
39
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types of assets may lag behind
changes in market rates. Additionally, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. Therefore, the Corporation does not
rely solely on a gap analysis to manage its interest rate risk, but rather it
uses what it believes to be the more reliable simulation model relating to
changes in net interest income presented earlier.
LIQUIDITY
BANK LIQUIDITY. The Bank's primary sources of funds are retail and
commercial deposits, short term and long term borrowings, and funds generated
from operations. Funds from operations include principal and interest payments
received on loans and securities and proceeds from the sale of securities and
loans. While maturities and scheduled amortization of loans and securities
provide an indication of the timing of the receipt of funds, changes in interest
rates, economic conditions, and competition strongly influence mortgage
prepayment rates and deposit flows, reducing the predictability of the timing on
sources of funds.
The Bank has no required regulatory liquidity ratios to maintain; however,
it adheres to a Liquidity Policy, approved by its Board of Directors, which sets
certain guidelines for liquidity purposes. This policy requires that the Bank
maintain the following liquidity ratios:
o Liquidity ratio (defined as cash, short-term investments, marketable
securities, and investment grade scheduled lease loan payments due in
one year or less divided by deposits plus short-term liabilities)
greater than 20%
o Loans to deposit ratio less than 85%
o Loans to deposits minus public funds ratio less than 80%
At March 31, 1998, the Bank was in substantial compliance with the foregoing
policy. Generally, when the Bank's loan to deposit ratios become higher than
policy guidelines, the Bank sells Lease Loans to reduce the volume of total
loans and provide a source of funds. In 1997, the Bank sold approximately $30
million of Lease Loans to remain in compliance with the Liquidity Policy.
Management expects to continue to sell Lease Loans in the future as the need
arises to remain in compliance with the Liquidity Policy. Liquidity management
is monitored by the Asset/Liability Committee of the Bank, which takes into
account the marketability of assets, the sources and stability of funding and
the level of unfunded commitments.
At March 31, 1998, the Bank had outstanding origination loan commitments
and unused commercial and retail lines of credit of $87.4 million. The amount of
loan commitments and unused lines of credit has remained approximately the same
for the last several years. The Bank anticipates that it will have sufficient
funds available to meet its current origination and other lending commitments.
Certificates of deposit that are scheduled to mature within one year totaled
$262.7 million at March 31, 1998. The Bank expects a substantial majority of
these certificates of deposit to remain with the Bank.
In the event that additional short-term liquidity is needed, the Bank has
established relationships with several large regional banks to provide
short-term borrowings in the form of federal funds purchases. While there are no
firm lending commitments in place, the Bank has borrowed, and Management
believes that the Bank could again borrow, more than $30.0 million for a short
time from these banks on a collective basis. Additionally, the Bank is a member
of the Federal Home Loan Bank of Chicago ("FHLB") and has the ability to borrow
approximately $13.0 million on a short- or long-term basis without collateral.
The Bank could borrow an additional $29.0 million from the FHLB by providing
collateral in the form of U.S. Treasury or agency securities or certain whole
loans.
CORPORATION LIQUIDITY. The Corporation's main sources of liquidity at the
holding company level are dividends from the Bank passed on to the Corporation
through MNC and lines of credit maintained with a large regional correspondent
40
bank in the amount of $15.0 million. As of March 31, 1998, the Corporation had
$9.0 million undrawn and available under its lines of credit.
The Bank is subject to various regulatory capital requirements administered
by federal and state banking agencies, which affect the Bank's ability to pay
dividends to the Corporation. Failure to meet minimum capital requirements can
initiate certain mandatory and discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Corporation's financial
statements. Additionally, Bank policy requires that dividends cannot be declared
in an amount that would cause the Bank's capital to fall below the minimum
amount required for the Bank to be considered "well capitalized" for regulatory
purposes. At March 31, 1998, the Bank could pay $14.6 million of dividends and
comply with such minimum regulatory capital requirements, and MNC could pay $7.8
million of dividends and comply with the minimum regulatory capital
requirements.
CAPITAL RESOURCES
The Bank is subject to the risk based capital guidelines administered by
the banking regulatory agencies. The risk based capital guidelines are designed
to make regulatory capital requirements more sensitive to differences in risk
profiles among banks to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Under the guidelines, assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk weighted assets and off-balance sheet items. The
guidelines currently require all banks to maintain a minimum ratio of total risk
based capital to total risk weighted assets of 8%, including a minimum ratio of
Tier 1 capital to total risk weighted assets of 4% and a Tier 1 capital to
average adjusted assets of 4%. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators, that, if undertaken, could have a direct material effect on the
Bank's financial statements. As of March 31, 1998, the most recent notification
from the federal banking regulators categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. Under the capital
adequacy guidelines, a well capitalized institution must maintain a minimum
total risk based capital to total risk weighted assets ratio of at least 10%, a
minimum Tier 1 capital to total risk weighted assets ratio of at least 6%, a
minimum leverage ratio of at least 5% and is not subject to any written order,
agreement or directive. There are no conditions or events since that
notification that Management believes have changed the Bank's capital
classification.
The Corporation and the Bank were in full compliance with all capital
adequacy requirements to which they are subject as of December 31, 1997 and
March 31, 1998, respectively. The required and actual amounts and ratios for the
Corporation and Bank as of March 31, 1998 (unaudited) are presented below.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- --------- ----------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
Total capital (to risk-weighted assets):
Consolidated ........................... $54,861 9.58% $45,831 8.00% N/A N/A
Manufacturers Bank ..................... 60,523 10.55% 45,881 8.00% $57,352 10.00%
Tier 1 capital (to risk-weighted assets):
Consolidated ........................... 42,379 7.40% 22,916 4.00% N/A N/A
Manufacturers Bank ..................... 53,400 9.31% 22,941 4.00% 34,411 6.00%
Tier 1 capital (to average assets):
Consolidated ........................... 42,379 5.44% 31,186 4.00% N/A N/A
Manufacturers Bank ..................... 53,400 7.05% 30,295 4.00% 37,869 5.00%
STATEMENTS OF CASH FLOWS
The Bank's cash flows are composed of three classifications: cash flows
from operating activities, cash flows from investing activities, and cash flows
from financing activities. Net cash provided by operating activities, consisting
primarily
41
of earnings, was $13.2 million for the year ended December 31, 1997, $13.5
million for the year ended December 31, 1996 and $9.7 million for the year ended
December 31, 1995. Net cash provided by operating activities increased $3.8
million from 1995 to 1996 primarily due to an increase in the non-cash
adjustment for depreciation for lease investments. Net cash used in investing
activities, consisting primarily of loan and investment funding, was $37.9
million, $13.1 million and $39.0 million for the years ended December 31, 1997,
1996 and 1995, respectively. Net cash provided by financing activities,
consisting principally of deposit growth and other borrowings, was $29.6
million, $4.1 million and $32.4 million for the years ended December 31, 1997,
1996 and 1995, respectively.
YEAR 2000
For a discussion of costs associated with the Year 2000 Problem see, "Risk
Factors -- Year 2000 Problem" and "Supervision and Regulation -- Year 2000
Problem."
EFFECTS OF INFLATION
The Consolidated Financial Statements and the Notes thereto and the related
financial data concerning the Corporation have been prepared in accordance with
generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. Inflation can have a significant effect on the operating results of
all businesses, however the effects of inflation in the local economy and on the
Corporation's operating results have been minimal for the past several years,
although there can be no assurance that this will continue in the future. Since
the majority of the Corporation's assets and liabilities are monetary in nature,
such as cash, securities, loans and deposits, their values are less sensitive to
the effects of inflation than to changing interest rates, which do not
necessarily change in accordance with inflation rates.
The most significant impact of inflation on the Corporation would be
reflected in increased operating costs. Increases in interest rates affect the
ability of the Corporation's borrowers to repay their debt. Furthermore,
inflation can directly affect the value of loan collateral in general, and real
estate collateral in particular. These factors are taken into account as loans
are approved. The Corporation believes that it has systems in place to continue
to manage the rates, liquidity and interest rate sensitivity of the
Corporation's assets and liabilities. See "--Asset Liability Management."
BUSINESS
GENERAL
The Corporation was incorporated in Illinois in 1986 and is registered as a
bank holding company under the BCA and the Illinois BCA, and has its principal
business offices at the Main Banking Premises.
The Corporation owns 96.5% of the issued and outstanding shares of common
stock and all of the issued and outstanding shares of Class A Preferred Stock of
MNC, which is also registered as a bank holding company under the BCA and the
Illinois BCA. MNC owns all of the issued and outstanding shares of common stock
of Manufacturers Bank.
Manufacturers Bank owns all of the issued and outstanding shares of common
stock of three special purpose Illinois corporations, Ashland Management Agency,
Inc. ("Ashland"), MB1200 Corporation ("MB1200"), and Manufacturers Deferred
Exchange Corporation ("MDEC"), all of which have their principal business
offices at the Main Banking Premises. The principal purpose of Ashland is to act
as manager of certain real estate owned by Manufacturers Bank; the principal
purpose of MB1200 is to hold title to any real estate that Manufacturers Bank
may receive pursuant to a foreclosure or other resolution of a non-performing
loan; and the principal purpose of MDEC is to hold escrowed funds relating to
certain tax advantaged real estate exchanges entered into by the customers of
Manufacturers Bank. The Corporation also owns all of the issued and outstanding
1997 Trust Common Securities, making the 1997 Trust a subsidiary of the
Corporation for financial reporting purposes. See "Use of Proceeds."
42
HISTORY AND DEVELOPMENT
The Corporation was originally established as a one-bank holding company
for Coal City Bank by Messrs. Thomas Carey, Alfred Feiger, Lawrence Gilford,
Richard Gilford, David Husman, Clarence Mann and the late Marvin Neland, who, as
a group, constituted the Corporation's initial Board of Directors (collectively,
the "Director Group"). For many years prior to the establishment of the
Corporation, these individuals (all of whom, except the late Mr. Neland, are
still on the Corporation's Board of Directors), had been active in the Chicago
banking community establishing and acquiring a series of independent banks that
were eventually brought together under a single bank holding company known as
Affiliated Banc Group, Inc. ("Affiliated"). In 1987, by which time Affiliated
had seven banking subsidiaries with total assets of approximately $750 million,
Affiliated was sold to Manufacturers National Corporation, a multi-bank holding
company headquartered in Detroit, Michigan (which is unrelated to MNC).
The Director Group had made Affiliated an attractive acquisition target by
positioning its subsidiary banks as important players in the small and middle
market business segment in the Chicago area, serving mainly privately owned
entrepreneur-operated companies with annual sales in the range of $1.0 million
to $10.0 million. Targeted customers for Affiliated were manufacturers,
wholesalers, distributers, commercial real estate companies and selected service
providers. When the Director Group left Affiliated three years after the time of
its sale, they left behind a financial institution that had strong earnings, a
high quality loan portfolio and a premier base of small and middle market
customers. The success of the Director Group at Affiliated had also been based
upon several other key factors, such as the ability to make rapid decisions,
flexible loan underwriting, knowledge of the Chicago area business community and
providing customer access to senior management of the subsidiary banks.
In 1992, the Director Group decided to re-enter the marketplace of
mid-sized banks serving small and middle market businesses in Chicago, because
it believed that most of the mid-sized banks serving the Chicago market were, at
the time, being absorbed by larger financial institutions, leaving a noticeable
gap in the banking community. Accordingly, the Corporation acquired an 80.1%
interest in MNC, which owned Manufacturers Bank. In addition to servicing the
special needs of the manufacturing, wholesaling and distributing industries,
Manufacturers Bank also had specific expertise, and niche business, in the field
of servicing equipment leasing companies throughout the country. Burton Field,
who was at that time the President and a long-time employee of Manufacturers
Bank, continued in that position after the acquisition and joined the
Corporation's Board of Directors, where he remains to this date. At the same
time, Mitchell Feiger, an Executive Vice President of Affiliated, joined the
Corporation as its President and a member of the Board of Directors, where he,
too, remains to this date.
The Corporation, through additional stock purchases, increased its
ownership of MNC's outstanding common stock to 96.5% as of June 30, 1998. The
Corporation also owns all of MNC's outstanding Class A Preferred Stock. It is
possible that the Corporation may acquire the outstanding 3.5% of MNC that it
does not currently own through the exercise by the other MNC stockholders of
their right to put their MNC common stock to the Corporation, which right
expires on October 31, 1998. The number of shares of MNC common stock that could
be tendered under these put rights is 79,912, and the price that the Corporation
would be required to pay for such stock, if tendered, is $11.66 per share (or
$931,774 in the aggregate if all of such shares are tendered).
In February 1995, the Corporation and MNC acquired a controlling interest
in Peterson Bank, located on Chicago's far north side, and by December 31, 1995
owned 100% of Peterson Bank. In 1997 MNC acquired the Corporation's interest in
Peterson Bank, making Peterson Bank a wholly-owned subsidiary of MNC. At the
date of acquisition, Peterson Bank had assets of $172.1 million and operated out
of a main office and a single branch facility. Peterson Bank specialized in
serving the banking needs of real estate investors and operators, long-term
health care companies and Chicago's Korean community.
In May 1997, MNC acquired 100% of U.S. Bancorp, the single-bank holding
company for U.S. Bank. At the time of this acquisition, U.S. Bancorp had assets
of $205.0 million and operated out of a main office and four branch facilities,
all located either on Chicago's south side or in the southern Chicago suburbs of
Tinley Park, Lansing and South Holland, Illinois. U.S. Bank specialized in
serving home developers whose projects were located throughout the Chicago
metropolitan area and northwest Indiana.
43
In 1997, the Corporation caused Peterson Bank to be merged into
Manufacturers Bank, and Manufacturers Bank to be merged into U.S. Bank, with the
latter entity changing its name to "Manufacturers Bank." The Corporation also
caused U.S. Bancorp, which was then a mid-tier bank holding company wholly owned
by MNC, to be merged into Manufacturers Bank in order to eliminate the costs
associated with an unnecessary third holding company layer.
In January, 1998, the Corporation sold 100% of the outstanding common stock
of Coal City Bank to Kankakee Bancorp, Inc., the parent holding company of
Kankakee Federal Savings Bank, which is headquartered in Kankakee, Illinois.
Coal City Bank is located in Coal City, Illinois, more than 50 miles from
downtown Chicago, in a community where Management believed business lending
opportunities are limited. Management decided that the Corporation could no
longer benefit from a presence in the Coal City marketplace, and that continued
ownership of Coal City Bank, although then profitable, would divert the
Corporation, its Management and staff from their principal focus of growing the
business of Manufacturers Bank. It was also decided that the capital required to
operate Coal City Bank would be better utilized in the operation of
Manufacturers Bank.
The Corporation, through MNC, currently owns a single bank, Manufacturers
Bank, which, in turn, owns three single purpose corporate subsidiaries: Ashland,
MB 1200 and MDEC. Manufacturers Bank at March 31, 1998 had $762.7 million in
assets and operated from a total of eight offices, including the Main Banking
Premises.
BUSINESS AREAS
Manufacturers Bank concentrates its business efforts on serving small and
middle market businesses, such as manufacturers, wholesalers, distributors,
long-term health care operators, real estate operators and investors, and home
developers located throughout the entire Chicago metropolitan area. The
Corporation, through its acquisition program and through careful selection of
officers and employees, has moved to position Manufacturers Bank to take a
leading role in filling this attractive niche in the market. In order to further
the ability of Manufacturers Bank to play such a leading role, Management has
also caused Manufacturers Bank to divide its business into four distinctly
recognizable areas, referred to as Business Banking, Convenient Retail Banking,
Lease Banking and Korean Banking.
BUSINESS BANKING. The Business Banking Group focuses on serving
privately-owned companies run by entrepreneurs. The kinds of companies served
are manufacturers, wholesalers, distributors, home developers, long-term health
care operators, real estate operators and investors, and selected types of
service companies. Manufacturers Bank provides a full set of credit, deposit,
cash management and investment products to these companies. These products are
specifically designed for companies with sales of between $1 million and $25
million, with marketing principally aimed at companies with sales between $3
million and $25 million. The products developed for this target market include:
Credit products:
o Working capital loans and lines of credit, including accounts
receivable and inventory financing
o Equipment loans and leasing
o Business acquisition loans
o Owner occupied real estate loans
o Financial, performance and commercial letters of credit
Deposit and cash management products:
o Corporate InterConnect - a PC banking product for businesses
o Zero balance accounts
o Automated tax payments
o ATM access
o Merchant credit card program
o Telephone banking
o Lockbox services
o Direct deposit (ACH)
o Account reconciliation
44
o Controlled disbursement
o Detail and general information reporting
o Wire transfers
o A variety of international banking services
For real estate operators and investors, Manufacturers Bank also offers a full
set of products, including, in addition to those listed above, the following:
o Commercial mortgages
o Residential, commercial, retail and industrial construction loans
o Land acquisition and development loans
The Bank's strategy is to provide rapid service, customer access to
decision makers, flexible loan underwriting, modern, technologically advanced
banking products, and talented, experienced lending officers. The goal of
Manufacturers Bank in this area is to build a high quality, controlled risk loan
portfolio that consistently grows in excess of average market growth.
Manufacturers Bank currently has more than 1,000 Business Banking customers with
more than $300 million of commercial loans, and over $300 million of commercial
deposits.
CONVENIENT RETAIL BANKING. The target market for the Convenient Retail
Banking group consists of consumers who live or work near Manufacturers Bank's
offices. Manufacturers Bank offers a full set of consumer products to these
individuals, including checking accounts, savings accounts, money market
accounts, time deposit accounts, secured and unsecured consumer loans,
residential mortgage loans, and a variety of fee for service products, such as
money orders and travelers checks. Manufacturers Bank refers to this area of its
business as "Convenient Retail Banking," because it targets only those consumers
for whom Manufacturers Bank's offices are a convenient place to perform the
customers' financial transactions.
The Chicago retail banking market is very large with correspondingly high
advertising and marketing costs. Several banks have in excess of 100 branches in
the Chicago metropolitan area. Furthermore, these banks have the resources to
advertise and market on a large scale and can afford to target consumers located
throughout the entire area. Manufacturers Bank is far smaller, has only eight
offices and, consequently, cannot compete directly with the large banks for
consumers on a mass basis. Moreover, seven of the eight offices of Manufacturers
Bank are located in low growth markets - five in Chicago, one in Lansing,
Illinois and one in South Holland, Illinois. The eighth office is located in
rapidly growing Tinley Park, Illinois. Manufacturers Bank faces considerable
retail banking competition from other local banks and thrifts, large regional
banks that have local offices, and brokerage and mutual fund companies that
market their products through mass media and direct mail. Therefore,
Manufacturers Bank has chosen a strategy that leverages one of the most
important reasons that consumers choose a bank--convenience. By targeting
consumers who live or work in the trade area immediately surrounding each
banking office, Manufacturers Bank hopes to attract consumers who want this
convenience for their banking transactions. Manufacturers Bank wins business by
keeping deposit rates above most competitors' rates, and loan rates at the
market rate, offering a complete selection of consumer products, and providing
superior, personal service on a price competitive basis. Manufacturers Bank
currently has over $300 million of deposits and $18 million of loans
attributable to its Convenient Retail Banking group.
LEASE BANKING. The target market for the Lease Banking group consists of
small and medium size equipment leasing companies located throughout the United
States. Manufacturers Bank has provided Lease Banking services to these
companies for more than 20 years. Competition in servicing this equipment
leasing market generally comes from large banks, financing companies, large
industrial companies and some community banks in certain segments of the
business. Manufacturers Bank provides rapid service and decision making, and
flexible financial solutions, to meet its customers' needs in this market. The
Bank provides full banking services for these leasing companies by financing the
debt portion of leveraged leases ("Lease Loans"), providing short-term and
long-term equity financing, making working capital and bridge loans, and
investing directly in leased equipment. The volume of Lease Loans is closely
managed, in order to control the Bank's level of total risk adjusted assets.
45
Assets generated by the Lease Banking group fall into three categories:
Lease Loans, working capital loans to leasing companies and investments in
leased equipment. A Lease Loan arises when a leasing company discounts the
equipment rental revenue stream owed to the leasing company by a lessee.
Generally, Manufacturers Bank receives repayment of its loan directly from the
lessee in the form of lease rental payments. Loan yields and returns on equity
for this type of lending tend to be low. Thus, Manufacturers Bank views this
kind of lending as an adjunct to its investment portfolio. Generally, such a
loan is made only when the lessee has a public debt rating in one of the top
four rating categories of Moody's or Standard & Poors. If the lessee does not
have a public debt rating, then Manufacturers Bank will lend when its own
analysis indicates that if the lessee did have a debt rating it would be in one
of those top four categories. Since these loans are very high quality,
short-term, and made to companies with well known names, they are easily sold to
other banks. During 1997, Manufacturers Bank sold approximately $30 million of
Lease Loans to large and small banks in the Chicago area (retaining the
servicing rights, however). As of the end of the past several years,
Manufacturers Bank has carried between $72.5 million and $114.0 million of Lease
Loans, varying the amount as needed to manage its risk adjusted asset totals.
Working capital loans made to leasing companies are made in a manner
similar to the loans made by the Business Banking group. In addition to loans
made to support the day-to-day operating needs of the leasing company, loans are
made to facilitate the purchase and sale of equipment. Manufacturers Bank tends
to have between $5 million and $20 million of these kinds of loans to leasing
companies outstanding at any one time.
Manufacturers Bank also invests in equipment leased to other companies. In
this case, the Bank owns the equipment that is leased to the user. The credit
quality of the lessee generally must be in one of the top four rating categories
of Moody's or Standard & Poors. Over the last four years, the Bank has increased
its investment in leased equipment from virtually nothing to $21.8 million at
March 31, 1998. In most cases, during the early years of a lease, Manufacturers
Bank recognizes a loss on its investment, and in later years a gain.
Consequently, as Manufacturers Bank has built its leased equipment portfolio,
current earnings have been reduced. Gains, if any, on leased equipment result
when a lessee renews a lease or purchases the equipment at the end of a lease.
Individual lease transactions can, however, result in a loss. This generally
happens when, at the end of a lease, the lessee does not renew the lease or
purchase the equipment. To mitigate this risk of loss, Manufacturers Bank limits
individual leased equipment investments to approximately $500,000 per
transaction, and seeks to diversify both the type of equipment leased and the
industries in which the lessees to whom such equipment is leased participate.
KOREAN BANKING. The Korean Banking group focuses on the expanding Korean
community located principally on the north side of Chicago and in Chicago's
northwestern suburbs. Manufacturers Bank serves ethnic Korean consumers and
Korean-owned businesses by providing complete banking services using the Korean
language. Korean commercial customers tend to be small owner-operated, cash
businesses, such as dry cleaners, gift shops and restaurants. While continuing
to serve these customers, Manufacturers Bank is also targeting those
Korean-owned businesses with annual sales between $2 million and $20 million.
Personnel in the Korean Banking group, as well as a number of other individuals
in key service positions at the Bank speak Korean. The Bank's automated
telephone account access services are provided in the Korean language as well.
Competition in this growing market segment is quite limited because of the need
to provide all banking services in Korean. Currently, Manufacturers Bank has
approximately $44 million of loans and $25 million of deposits attributable to
the Korean Banking group.
LENDING ACTIVITIES
As of March 31, 1998, Manufacturers Bank's outstanding loans, net of loan
loss allowance, totaled $519.2 million, representing 68.1% of total assets of
the Corporation. Manufacturers Bank is primarily a business lender and the loan
portfolio consists almost entirely of loans to businesses or for business
purposes. Of the total loans outstanding on March 31, 1998, only $30.5 million
represented installment loans. Lease Loans comprised 16.9% of total loans
outstanding as of March 31, 1998. Also, of the $304.6 million of real estate
loans outstanding on that date, 71.0% were secured by commercial properties,
many of which were owner occupied. Virtually all commercial, real estate, real
estate construction and installment loans were made to companies located in the
Chicago metropolitan area. Lease Loans, on the other hand, are distributed
around the country.
46
Manufacturers Bank's underwriting philosophy is to lend money on a secured
basis to companies or individuals who have a record of success in their business
or job, as demonstrated by sufficient cash flow on an historical basis to fully
service their loans. Additionally, borrowers generally have a secondary source
of repayment without having to liquidate loan collateral. Also, loans to
businesses are almost always guaranteed by the owners of the business.
The primary source of income for Manufacturers Bank (and thus, the
Corporation) comes from interest on loans. Net loans as a percentage of total
assets increased to 64.7% at December 31, 1997 from 57.0% at December 31, 1993.
Total loans increased $299.4 million during this period. The majority of the
increase from 1994 to 1995 was due to the acquisition of Peterson Bank, which
had total loans of $90.3 million at the acquisition date. The majority of the
increase from 1996 to 1997 was due to the acquisition of U.S. Bancorp, which had
total loans of $126.8 million at the acquisition date.
The following table sets forth the composition of the Bank's loan portfolio
in dollars and as a percentage of the portfolio at the dates indicated.
AT AT DECEMBER 31,
MARCH 31, ---------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------------- ---------------- --------------- ---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
Commercial......... $103,055 19.56% $112,010 21.24% $ 94,066 24.22% $ 70,255 20.71% $ 73,998 33.30% $ 76,178 33.43%
Commercial loans
collateralized by
assignment of lease
payments....... 88,793 16.85% 85,658 16.25% 113,960 29.35% 108,223 31.89% 72,529 32.64% 84,280 36.98%
Real estate........ 268,683 50.99% 257,074 48.75% 158,792 40.89% 148,010 43.62% 68,055 30.63% 62,157 27.27%
Real estate
construction... 35,902 6.81% 37,079 7.03% 7,057 1.82% 6,890 2.03% 3,709 1.67% 783 0.34%
Installment........ 30,481 5.79% 32,500 6.73% 14,427 3.72% 5,948 1.75% 3,920 1.76% 4,504 1.98%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans.. 526,914 100.00% 527,321 100.00% 388,302 100.00% 339,326 100.00% 222,211 100.00% 277,902 100.00%
====== ====== ====== ====== ====== ======
Allowance for
loan losses... (7,751) (7,922) (4,692) (4,134) (2,646) (2,707)
-------- -------- -------- -------- -------- --------
Net loans... $519,163 $519,399 $383,610 $335,192 $219,565 $225,195
======== ======== ======== ======== ======== -------
COMMERCIAL LENDING. The Bank makes commercial loans to small and middle
market businesses. The borrowers tend to be privately-owned and are generally
manufacturers, wholesalers, distributors, long-term health care operators, and
selected types of service providers. The loan products offered are primarily
working capital loans and lines of credit. These general product classifications
include accounts receivable and inventory financing, equipment loans and
business acquisition loans. The Bank also offers financial, performance and
commercial letters of credit. Most commercial loans are short-term in nature,
being one year or less, although the maximum allowable term is five years.
The Bank's lines of credit are typically secured, established for one
year, and are subject to renewal upon satisfactory review of the borrower's
financial statements and credit history. Secured short-term commercial business
loans are usually collateralized by accounts receivable, equipment or real
estate. Such loans are typically guaranteed by the owners of the business.
Interest rates tend to be at or above the prime rate, although there has been
considerable recent market pressure to make loans at a spread above LIBOR.
Commercial loans have grown from $70.3 million at December 31, 1995 to
$103.1 million at March 31, 1998, an annual growth rate of 18.4%. This increase
is partially related to the purchase of U.S. Bancorp as well as to internal loan
growth. Commercial loans represented 19.6% of the total loan portfolio at March
31, 1998, as compared to 24.2% of the total loan portfolio at December 31, 1996.
47
COMMERCIAL REAL ESTATE LENDING. Manufacturers Bank originates
commercial real estate mortgage loans that are generally secured by one or more
of the following kinds of properties: multi-unit residential property, owner and
nonowner occupied commercial and industrial property, and residential property
for development. Loans are also made to acquire and develop land. Manufacturers
Bank's loan policy and underwriting procedures provide that commercial real
estate loans may be made in amounts up to the lesser of (i) 80% of the appraised
value of multi-family properties; (ii) 75% of the appraised value of commercial
and non-residential construction property; (iii) 70% of the appraised value of
commercial land development property (generally held for subdivision or
industrial park land development); and (iv) 60% of the appraised value of
undeveloped land. In addition to restrictions on the amount of loan to value,
Manufacturers Bank's underwriting procedures provide that commercial real estate
loans may be made in amounts up to Manufacturers Bank's current legal lending
limit. Regarding the properties described in (iii) and (iv) above, Manufacturers
Bank usually engages in this type of lending only with experienced local
developers operating in Manufacturer Bank's primary market. Such loans are
typically offered for the construction of residential properties that are
pre-sold or for commercial or retail properties where end financing is readily
available. As of March 31, 1998, Manufacturers Bank had approximately $50
million in a variety of acquisition, development and construction ("ADC") loans
in its commercial real estate lending area. Manufacturers Bank's policy is not
to make construction loans for purposes of speculation. While the number and
volume of this type of specialized lending is presently limited, it should be
noted that Manufacturers Bank intends to continue to emphasize its commercial
real estate, including ADC loan activity.
Manufacturers Bank's commercial mortgage loans are generally made at
fixed rates, although some float with prime. Terms of up to 10 years are
permissible, but most loans mature in 5 years and have a 15 to 25 year
amortization schedule. In reaching a decision as to whether or not to make a
commercial real estate loan, Manufacturers Bank considers the qualifications of
the borrower as well as the underlying property. Some of the factors considered
are: the net operating income of the mortgaged premises before debt service and
depreciation, the debt service ratio (i.e., the ratio of the property's net cash
flow to debt service requirements), which must be a minimum of 1.20, the ratio
of loan amount to appraised value and the creditworthiness of the borrower.
Real estate and real estate construction loans have increased from
$154.9 million at December 31, 1995, to $304.6 million at March 31, 1998, an
increase of $149.7 million. This increase is primarily attributable to the
acquisition of U.S. Bancorp, which had total real estate and real estate
construction loans of $116.4 million at the acquisition date.
LEASE LOANS. Manufacturers Bank lends money to small and mid-sized
leasing company customers to finance the debt portion of leveraged leases (i.e.,
Lease Loans). A Lease Loan arises when a leasing company discounts with
Manufacturers Bank the equipment rental revenue stream owed to the leasing
company by a lessee. Lease Loans are generally non-recourse to the leasing
company, and, consequently, Manufacturers Bank underwrites Lease Loans by
examining the creditworthiness of the lessee rather than the lessor. Lease Loans
are secured by the equipment being leased. The lessee acknowledges Manufacturers
Bank's security interest in the leased equipment and agrees to make lease
payments to Manufacturers Bank. Lessees tend to be Fortune 500 or Fortune 1000
companies and must have a public debt rating in one of the top four rating
categories by Moody's or Standard & Poors. If the lessee does not have a public
debt rating, then Manufacturers Bank lends when its own credit analysis
indicates that if the lessee did have a debt rating it would be in one of the
top four categories. Lease Loans are fully amortizing, with maturities ranging
from two to five years. Loan rates are fixed at a spread of 1% to 2% over the
U.S. Treasury curve.
Manufacturers Bank uses Lease Loans to manage its risk adjusted asset
totals. Since these loans are very high quality and made to well-known public
companies, the loans are marketable. Manufacturers Bank regularly sells loans to
correspondents that range from a large regional bank to several small community
banks. During 1997, Manufacturers Bank sold approximately $30 million of Lease
Loans. As commercial loans and commercial real estate loans outstanding
increase, Manufacturers Bank expects to sell more and more Lease Loans, creating
a significant stream of revenue from servicing Lease Loans sold. As a result,
Lease Loans outstanding (identified as "Commercial loans collateralized by
assignment of lease payments" in the table above) have fluctuated, having
outstanding balances as high as $114.0 million, and as low as $85.7 million,
over the last two and one-quarter years. From December 31, 1996 to December 31,
1997, Lease Loans decreased $28.3 million, or 24.8%.
48
LOAN APPROVAL POLICY. Generally, each lending officer may approve a
loan within a specified limit, the maximum of which is $1.0 million, with the
exception of investment grade Lease Loans up to $4.0 million, which may be
approved by the President or Executive Vice-President of the Bank. Loans (which
are not investment grade Lease Loans) in excess of $1.0 million but less than
$6.0 million, and Lease Loans in excess of $4.0 million but less than $6.0
million, must be approved by the Executive Loan Committee of the Bank (comprised
primarily of members of the Board of Directors), and loans in excess of $6.0
million must be approved by the Bank's Board of Directors.
LOAN MATURITIES. The following table sets forth the maturities of
commercial and real estate construction loans outstanding at March 31, 1998.
Also set forth are amounts of such loans classified according to sensitivity to
changes in interest rates.
DUE IN ONE
YEAR OR DUE AFTER ONE YEAR DUE AFTER
LESS THROUGH FIVE YEARS FIVE YEARS
-------------------- ------------------ ---------------------
FLOATING FLOATING FLOATING
FIXED RATE FIXED RATE FIXED RATE TOTAL
---------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
Commercial loans, commercial loans
collateralized by assignment of
lease payments and real estate
construction loans...................... $ 51,872 $ 117,754 $ 58,124 $ -- $ -- $ -- $ 227,750
========= ========= ======== ======== ========= ======== ==========
INVESTMENT SECURITIES
Manufacturers Bank maintains an investment portfolio consisting
primarily of securities of the U.S. Treasury and agencies of, and corporations
sponsored by, the U.S. Government. Because the Bank maintains a relatively high
loan-to-deposit ratio, in order to maintain a prudent amount of liquidity, the
Bank has found it necessary to keep the duration and average maturity of its
investment portfolio short. The primary purpose of the investment portfolio is
to provide a source of earnings for liquidity management purposes, and control
interest rate risk. In managing the portfolio, the Bank seeks to obtain the
objectives of safety of principal, liquidity, diversification and maximized
return on funds. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations," --Asset Liability Management" and
"--Liquidity."
The following table sets forth the amortized cost and fair value of the
Corporation's securities by accounting classification category and by type of
security as indicated.
AT DECEMBER 31,
AT MARCH 31, ---------------------------------------------------------------------
1998 1997 1996 1995
------------------------ ---------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
-------------- -------- --------- ----------- --------- -------- --------- ---------
(IN THOUSANDS)
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securitie $ 97,179 $ 97,328 $ 119,160 $ 119,380 $ 76,919 $ 76,936 $ 35,769 $ 35,975
U.S. government agencies
and corporations.... 33,680 33,691 9,971 10,116 10,844 11,118 101,493 102,457
Mortgage-backed
securities.......... 5,513 5,651 7,022 7,189 12,132 12,416 17,753 18,231
--------- --------- --------- --------- --------- --------- --------- ---------
Total securities.. $ 136,372 $ 136,670 $ 136,153 $ 136,685 $ 99,895 $ 100,470 $ 155,015 $ 156,663
========= ========= ========= ========= ========= ========= ========= =========
SECURITIES HELD TO MATURITY:
States and political
subdivisions......... $ 4,256 $ 4,669 $ 4,423 $ 4,860 $ 8,192 $ 8,678 $ 13,320 $ 13,935
Other securities........ 968 969 819 819 1,319 1,317 1,135 1,134
--------- --------- --------- --------- --------- --------- --------- ---------
Total securities.. $ 5,224 $ 5,638 $ 5,242 $ 5,679 $ 9,511 $ 9,995 $ 14,455 $ 15,069
========= ========= ========= ========= ========= ========= ========= =========
49
U.S. Treasury securities and securities of U.S. Government agencies and
corporations generally consist of fixed rate securities with maturities of three
months to three years. State and political subdivision investment securities
consist of investment grade and local non-rated issues with maturities of less
than six years. The average term of mortgage-backed securities generally ranges
between two and six years.
There are no securities of any single issuer, other than the U.S.
Treasury or U.S. Government agencies and corporations, which had a book value in
excess of 10% of the Corporation's stockholders' equity at March 31, 1998.
The following table sets forth certain information regarding
contractual maturities and the weighted average yields of the Bank's securities
portfolio at March 31, 1998.
DUE AFTER ONE DUE AFTER FIVE
DUE IN ONE YEAR THROUGH YEARS THROUGH DUE AFTER
YEAR OR LESS FIVE YEARS TEN YEARS TEN YEARS
-----------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD BALANCE YIELD BALANCE YIELD BALANCE YIELD
------- -------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury (1)......... $ 57,951 6.37% $ 39,377 6.22% $ -- -- $ -- --
U.S. Government agencies and
corporations (1)..... 26,700 6.59% 6,991 5.99% -- -- -- --
Mortgage-backed (2)....... 1,466 8.23% 3,581 8.40% 354 8.75% 250 10.20%
--------- --------- ------- -------
Total... $ 86,117 $ 49,949 $ 354 $ 250
========= ========== ======= =======
SECURITIES HELD TO MATURITY:
States and political
subdivisions (3)...... $ 871 9.66% $ 3,216 11.35% $ 169 7.76% $ -- --
Other securities.......... 5 5.50% 303 7.50% 660 6.26% -- --
--------- ---------- ------- -------
Total... $ 876 $ 3,519 $ 829 $ --
========= ========== ======= ========
- ----------------------
(1) Yields on U.S. Treasury and certain U.S. Government agency and corporation
securities are reflected to include the state tax benefit.
(2) These securities are presented based upon contractual maturities.
(3) Yield is reflected on a fully tax equivalent basis utilizing a 34% tax
rate.
SOURCES OF FUNDS
GENERAL. Deposits, long-term and short-term borrowings, loan and
investment security repayments and prepayments, proceeds from sales of
securities, and cash flows generated from operations are the primary sources of
the Bank's funds for lending, investing, leasing and other general purposes.
Loan repayments are a relatively predictable source of funds except during
periods of significant interest rate declines, while deposit flows tend to
fluctuate with prevailing interest rates, money market conditions, general
economic conditions and competition.
DEPOSITS. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's core deposits consist of regular (passbook)
savings accounts, statement savings accounts, checking accounts, NOW accounts,
money market accounts, and non-public certificates of deposit. These deposits,
along with public fund deposits and long-term and short-term borrowings are used
to support the Bank's asset base. The Bank's deposits are obtained predominantly
from the geographic trade areas surrounding each of the Bank's office locations.
The Bank relies primarily on customer service and long-standing relationships
with customers to attract and retain deposits; however, market interest rates
and rates offered by competing financial institutions significantly affect the
Bank's ability to attract and retain deposits.
The Bank also has deposits of $41.0 million from a single public entity
located in Illinois. These deposits have been with the Bank for more than 13
years and while the Bank does not consider these deposits to be core deposits,
it does believe that they are stable. Management of the Bank is careful to
consider the impact of the possible withdrawal of these deposits on the Bank's
liquidity and overall funding needs.
50
BORROWINGS. The Corporation has access to a variety of borrowing
sources and uses short-term and long-term borrowings to support its asset base.
Short-term borrowings include federal funds purchased, securities sold under
agreements to repurchase, and U.S. Treasury demand notes. From time to time, the
Bank enters into short-term low-risk arbitrage transactions pursuant to which it
purchases U.S. Treasury securities and a few days later permanently funds the
purchase by entering into a reverse repurchase agreement with a securities
dealer. These transactions have the effect of inflating short-term borrowings.
The Bank also offers a deposit account that sweeps balances in excess of an
agreed upon target amount into overnight repurchase agreements. As business
customers have grown more sophisticated in managing their daily cash position,
demand for the sweep product has increased, thus increasing short-term
borrowings on the Bank's balance sheet. As a result, short-term borrowings
increased from $9.4 million at December 31, 1996, to $18.0 million at December
31, 1997, to $29.4 million at March 31, 1998. Management expects short-term
borrowings to continue to increase.
Long-term borrowings include notes payable to other banks to support a
portfolio of equipment that the Bank owns and leases to other companies as well
as general debt incurred to fund recent corporate acquisitions. Long-term
borrowings increased to $22.4 million at December 31, 1997 from $16.0 million at
December 31, 1996 due to funding the acquisition of U.S. Bancorp. From December
31, 1997 through March 31, 1998 long-term borrowings declined by $1.9 million,
to $20.5 million, as a result of increased debt used to support the Bank's
leased equipment portfolio which was more than offset by the repayment of part
of the Corporation's acquisition debt. The repayment of the acquisition debt was
funded with the proceeds from the sale of Coal City Bank.
The following table sets forth the distribution of the Bank's average
deposit accounts and average borrowings for the periods indicated:
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED -------------------------------------------------------------------
MARCH 31, 1998 1997 1996 1995
--------------------------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------ --------- ----------- --------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
NOW and money market
deposit accounts....... $ 146,342 20.10% $ 151,544 22.94% $ 130,972 25.30% $ 123,987 25.91%
Savings deposits........... 88,586 12.16% 86,445 13.09% 65,306 12.62% 65,620 13.71%
Time deposits.............. 283,439 38.92% 265,477 40.19% 206,357 39.86% 176,403 36.86%
Demand deposits - non-
interest bearing....... 123,400 16.95% 113,355 17.16% 91,380 17.65% 92,822 19.40%
----------- -------- ---------- --------- --------- ------- --------- --------
Total deposits..... 641,767 88.13% 616,821 93.38% 494,015 95.43% 458,832 95.88%
Long-term borrowings (1)... 28,871 3.96% 23,632 3.58% 13,653 2.64% 12,453 2.60%
Short-term borrowings...... 57,564 7.91% 20,066 3.04% 10,012 1.93% 7,256 1.52%
----------- -------- ---------- -------- --------- ------- --------- --------
Total deposits and
borrowings............. $ 728,202 100.00% $ 660,519 100.00% $ 517,680 100.00% $ 478,541 100.00%
=========== ======== ========== ======== ========= ======= ========= ========
- ----------------------
(1) Long-term borrowings include corporation obligated mandatorily redeemable
preferred stock.
51
The following table sets forth the maturities of certificates of
deposits and other time deposits at March 31, 1998 and December 31, 1997.
AT AT
MARCH 31, DECEMBER 31,
1998 1997
-------------- -------------
(IN THOUSANDS)
Maturing within three months............... $ 164,432 $ 151,010
After three but within six months.......... 45,535 62,637
After six but within twelve months......... 52,738 54,072
After twelve months........................ 16,319 22,621
----------- ------------
Total................................ $ 279,024 $ 290,340
=========== ===========
PROPERTIES
At March 31, 1998, the net book value of the Corporation's total
investments in premises and equipment was $11.1 million. The Bank owns the Main
Banking Premises at 1200 North Ashland Avenue, in Chicago, and five of its
branch facilities. The Lansing facility is leased for a remaining term of three
years and the motor bank on the far north side of Chicago for a remaining term
of five years. The Bank also owns a residence within walking distance of its
facility on the far north side of Chicago which it leases to a third party. The
Corporation believes that all of its properties and equipment are well
maintained, in good operating condition and adequate for all present and
anticipated needs of the Corporation and its subsidiaries.
COMPETITION
Vigorous competition exists in the major market areas in which
Manufacturers Bank is presently engaged in business. Competition includes not
only commercial banks but also other financial institutions, including savings
and loan associations, money market and other mutual funds, mortgage companies,
leasing and finance companies and a variety of financial services and advisory
companies. Manufacturers Bank competes by providing quality of services to its
customers, ease of access to facilities and competitive pricing of services
(including interest rates paid on deposits, interest rates charged on loans and
fees charged for other non-loan or non-deposit services).
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the
Corporation or any of its subsidiaries is a party.
PERSONNEL
As of March 31, 1998, the Corporation had 223 full time employees and
105 part-time employees. The employees are not represented by a collective
bargaining unit, and the Corporation considers its relationship with its
employees to be good.
52
MANAGEMENT
The following table sets forth certain information regarding the
directors and executive officers of the Corporation as of the date hereof.
PRINCIPAL OCCUPATION; POSITION
------------------------------
NAME AGE WITH THE CORPORATION
- ---- --- --------------------
Thomas Carey 65 President and General Manager of
Hawthorne Race Track (Maywood,
Illinois); Director of the
Corporation
Alfred Feiger 73 Chairman of the Board, Chief
Executive Officer and Director of
the Corporation
Mitchell Feiger 40 President and Director of the
Corporation
Burton Field 63 President of Manufacturers Bank;
Senior Executive Vice President
and Director of the Corporation
Lawrence Gilford 75 Private Investor; Director of the
Corporation
Richard Gilford 74 Private Investor; Director of the
Corporation
David Husman 64 Private Investor; Director of the
Corporation
Clarence Mann 73 Private Investor; Director of the
Corporation
Thomas Carey has served as a Director of Manufacturers Bank since
January 1997. Mr. Carey previously served as a Director of each of the seven
banks that were owned by Affiliated. Mr. Carey is also an attorney and is
currently the President of Hawthorne Race Track in Maywood, Illinois.
Alfred Feiger, Lawrence Gilford, Richard Gilford, David Husman and
Clarence Mann each has over 45 years of banking experience, having served in
various executive capacities during such period. Each gentleman also served as a
director of the seven banks that were owned by Affiliated. In addition, each of
these gentleman has served as a Director of Manufacturers Bank since its
acquisition by the Corporation in 1992, with Mr. Feiger also serving as the
Chairman of the Board of the Bank.
Mitchell Feiger began his career as an Associate Consultant with Touche
Ross & Company in 1982, and then joined Affiliated in 1984 where he worked in
various capacities until eventually becoming Executive Vice President. Mr.
Feiger became President and a Director of the Corporation, and a Director of the
Bank, in 1992.
Burton Field has served as President of Manufacturers Bank since 1983,
and as a Director of the Bank since 1977. Mr. Field has over 40 years of banking
and finance experience, mainly in the areas of commercial lending and leasing.
Mr. Field began his career in 1958 at Investors Commercial Corporation, where he
worked until 1966 in various capacities,
53
including Commercial and Consumer Loan Officer and Corporation Treasurer. From
1966 through 1969, Mr. Field was employed by Mercantile Leasing as a Commercial
Leasing Officer. Mr. Field was also employed by LaSalle National Bank for a
short period as a Commercial Lending Officer until he joined Manufacturers Bank
in 1970 as Executive Vice President in charge of commercial lending.
Alfred Feiger is Mitchell Feiger's father. Lawrence Gilford and Richard
Gilford are cousins.
SUPERVISION AND REGULATION
GENERAL
Banks and their holding companies are regulated under both federal and
state laws. Consequently, the Corporation, MNC and Manufacturers Bank
(collectively, the "Regulated Companies") may be materially affected by
applicable statutes, regulations and policies promulgated by regulatory agencies
with jurisdiction over the Regulated Companies, such as the FRB, the FDIC and
the Commissioner. The effects of such statutes, regulations and policies may be
significant and are often unpredictable because they change from time to time.
Furthermore, such statutes, regulations and policies are intended to protect
bank depositors and the FDIC's deposit insurance fund, not the stockholders of
any of the Regulated Companies.
Banks and their holding companies are subject to enforcement actions by
their regulators for violations of the applicable regulatory statutes,
regulations and policies. In addition to compliance with regulatory limitations
concerning financial and operating matters, the Regulated Companies must file
periodic and other reports and information with their regulators and are subject
to examination by each of their regulators.
The statutory requirements applicable to the regulatory supervision of
bank holding companies and banks have increased significantly and undergone
substantial change in recent years. To a great extent, these changes are
embodied in the Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA"), enacted in August 1989, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), enacted in December 1991, and the
regulations promulgated under FIRREA and FDICIA.
Adequately capitalized and managed bank holding companies are
permitted, subject to regulatory approval and certain other limitations, to
acquire control of a bank in any state. In addition, interstate branching
legislation permits banks to merge across state lines, thereby creating a bank
chartered in one state with branches in one or more other states. Approval of
interstate bank mergers will be subject to certain conditions: adequate
capitalization; adequate management; Community Reinvestment Act ("CRA")
compliance; deposit concentration limits; and compliance with federal and state
antitrust laws. An interstate merger transaction may involve the acquisition of
a branch without the acquisition of the bank only if the law of the state in
which the branch is located permits out-of-state banks to acquire a branch of a
bank in that state without acquiring the bank. Following the consummation of an
interstate transaction, the resulting bank may establish additional branches at
any location where any bank involved in the transaction could have established a
branch under applicable federal or state law if such bank had not been a party
to the merger transaction. The interstate branching by merger provisions became
effective on June 1, 1997.
The effects on the Regulated Companies of such recent changes in
interstate banking law cannot be accurately predicted, but it is likely that
there will be increased competition from national and regional banking firms
headquartered outside of Illinois that may have greater resources than the
Regulated Companies.
REGULATION OF BANK HOLDING COMPANIES
Each of the Corporation and MNC is a registered bank holding company
within the meaning of the BCA. As such, the Corporation and MNC are subject to
regulation, supervision and examination by the FRB. The Corporation and MNC are
also subject to the limitations and requirements of the Illinois BCA. The
business and affairs of the Corporation and MNC are therefore regulated in a
variety of ways, including limitations on acquiring control of other banks and
bank holding companies, on activities and investments, on interstate
acquisitions, on regulatory capital requirements and on payment of
54
dividends. Also, the FRB could require the Corporation and MNC to commit
resources to support their respective banking subsidiaries in circumstances in
which they might not otherwise do so.
ACQUISITION OF BANKS AND BANK HOLDING COMPANIES. Under the BCA, a bank
holding company generally may not (i) acquire, directly or indirectly, more than
5% of the outstanding shares of any class of voting securities of a bank or bank
holding company; (ii) acquire control of a bank or another bank holding company;
(iii) acquire all or substantially all the assets of a bank; or (iv) merge or
consolidate with another bank holding company, without first obtaining FRB
approval. In addition, both the Change in Bank Control Act of 1978 and the
Illinois Banking Act ("IBA") would require regulatory approval before any one or
more individuals or other entities may acquire control of the Corporation, MNC
or Manufacturers Bank.
The BCA generally imposes certain limitations on extensions of credit
and other transactions by and between banks that are members of the Federal
Reserve System and other banks and non-bank companies in the same holding
company. Under the BCA and the FRB's regulations, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.
PERMITTED NON-BANKING ACTIVITIES. The BCA generally prohibits a bank
holding company from engaging in activities or acquiring or controlling,
directly or indirectly, the voting securities or assets of any company engaged
in any activity other than banking, managing or controlling banks and bank
subsidiaries or another activity that the FRB has determined, by regulation or
otherwise, to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. Subject to certain exceptions, before making
any such acquisition or engaging in any such activity, a bank holding company
must obtain the approval of the FRB as provided in applicable regulations.
On May 13, 1998, the U.S. House of Representatives adopted, by a narrow
margin, a bill known as H.R.10, The Financial Services Act of 1998 ("H.R.10").
The principal purpose of H.R.10 is to enhance competition in the financial
services industry, in order to foster innovation and efficiency. It is also
aimed at reducing or eliminating many of the restrictions placed on U.S. banks
by the so-called Glass-Steagall Act of 1933. Among the restrictions that would
no longer apply or would be liberalized if H.R.10 were to be similarly adopted
by the U.S. Senate and signed into law by the President, would be those
statutory provisions and regulations separating commercial banking and
investment banking activities, as well as restrictions that currently limit the
securities underwriting and insurance marketing activities of banks and their
holding companies. H.R. 10 would also create financial holding companies which
may engage in any activity, and acquire and retain the shares of any company
engaged in any activity, which the FRB has determined to be financial in nature
or incidental to such financial activity. H.R.10 also would create a new type of
entity called a wholesale financial institution ("WFI"), which could be
chartered at the state or national level, which would not be insured, and which
could not take retail deposits or any deposits of less than $100,000. WFI's
would be subject to regulation as if they were bank holding companies. H.R.10
would also shift a significant amount of regulatory authority over
newly-hybridized institutions to the FRB, although the FRB would be required to
take into account the rules, regulations and pronouncements of other traditional
regulators, such as the Commission and state insurance regulators, although
other provisions of H.R.10 make clear that federal preemption in this area would
keep state authorities from blocking Congress' intent to liberalize the
financial services industry so that it can better compete in a globalized
economic environment. It is currently unknown whether H.R.10 will be adopted by
the U.S. Senate either in its present, or some other, form (the Senate is
currently debating its own version of a bill that would have much the same
effect), or whether the President would sign such a bill even if passed by
Congress. Accordingly, it is impossible to predict what effect H.R.10, or a bill
like it, would have on the Corporation or Manufacturers Bank, except that any
such law, if enacted, would be bound to increase the pressure on all financial
institutions to become involved, to some extent, in economic activities that may
be non-traditional for them in order to remain competitive.
CAPITAL REQUIREMENTS. Regulatory capital requirements applicable to all
regulated financial institutions, including bank holding companies and banks,
have increased significantly in recent years and further increases are possible
in future periods. The FRB has adopted risk-based capital standards for bank
holding companies. The articulated objectives of Congress and the FRB in
establishing a risk-based method of measuring capital adequacy are (i) to make
regulatory capital requirements applicable to bank holding companies more
sensitive to differences in risk profiles among bank holding companies, (ii) to
factor off-balance sheet liabilities into the assessment of capital adequacy,
(iii) to reduce disincentives for
55
bank holding companies to hold liquid, low risk assets, and (iv) to achieve
greater consistency in the evaluation of capital adequacy of major banking
organizations throughout the world by conforming to the framework developed
jointly by supervisory authorities from countries that are parties to the
so-called "Basle Accord" adopted by such supervisory authorities in July 1988.
The FRB requires bank holding companies to maintain a minimum ratio of
risk-weighted capital to total risk- adjusted assets. Banking organizations,
however, generally are expected to operate well above the minimum risk-based
ratios, without significant reliance on intangibles. Risk-adjusted assets
include a "credit equivalent amount" of off-balance sheet items, determined in
accordance with conversion formulae set forth in the FRB's regulations. Each
asset and off- balance sheet item, after certain adjustments, is assigned to one
of four risk-weighing categories, 0%, 20%, 50% or 100%, and the risk-adjusted
values then are added together to determine risk-weighted assets.
The failure of a bank holding company to meet its risk-weighted capital
ratios may result in supervisory action, as well as inability to obtain approval
of any regulatory applications and, potentially, increased frequency of
examination.
The FRB also requires bank holding companies, such as the Corporation
and MNC, to maintain a minimum leverage capital requirement of not less than
3.0% Tier 1 capital to total assets for banks in the strongest financial and
managerial condition, with a CAMEL Rating of 1 (the highest examination rating
of the FDIC for banks). For all other banks, the minimum leverage capital
requirement is 3.0% plus an additional cushion of at least 100 to 200 basis
points. Tier 1 capital is comprised of the sum of common stockholders' equity,
non-cumulative perpetual preferred stock (including any related surplus) and
minority interests in consolidated subsidiaries, minus all intangible assets
(other than qualifying servicing rights). The FRB and the federal regulators of
depository institutions have each proposed amendments to their minimum capital
regulations to provide that the minimum leverage capital ratio for a bank
holding company or a depository institution, as the case may be, that has been
assigned the highest composite rating of 1 under the Uniform Financial
Institutions Rating System will be 3.0% and that the minimum leverage capital
ratio for any other depository institution will be 4.0%, unless a higher
leverage capital ratio is warranted by the particular circumstances or risk
profile of the depository institution.
The Regulated Companies are currently in compliance with the above
minimum capital requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Capital Resources" and the
Consolidated Financial Statements and Notes thereto.
Risk-based capital ratios focus principally on broad categories of
credit risk and do not incorporate factors that might affect the financial
condition of the Regulated Companies, such as overall interest rate risk
exposure, liquidity, funding and market risks, the quality and level of
earnings, investment or loan portfolio concentrations, the quality of loans and
investments, the effectiveness of loan and investment policies and Management's
ability to monitor and control financial and operating risks. For this reason,
the overall financial health of the Regulated Companies and the assessment of
the Regulated Companies by various regulatory agencies may differ from
conclusions that might be drawn solely from the level of the risk-based and
leverage capital ratios of the Regulated Companies.
DIVIDENDS. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies. In the policy statement, the FRB expressed
its view that a bank holding company experiencing earnings weaknesses should not
pay cash dividends which exceed its net income or which could only be funded in
ways that would weaken its financial health, such as by borrowing. The FRB also
may impose limitations on the payment of dividends as a condition to its
approval of certain applications, including applications for approval of mergers
and acquisitions.
REGULATION OF BANKS
Manufacturers Bank, as an Illinois banking corporation, is subject to
the rules, regulations, supervision and examination of the Commissioner. The
deposit accounts of Manufacturers Bank are insured up to the applicable limits
by the FDIC's Bank Insurance Fund ("BIF"). Thus, Manufacturers Bank is subject
to regulation, supervision and examination by the FDIC. Such regulations apply
to, among other things, insurance of deposit accounts, a bank's capital ratios,
payment of dividends, liquidity requirements, the nature and amount of the
investments that a bank may make, transactions with
56
affiliates, community and consumer lending laws, internal policies and controls,
reporting by and examination of a bank and changes in control of a bank.
DEPOSIT INSURANCE. As an FDIC-insured institution, Manufacturers Bank
is required to pay deposit insurance premiums to the FDIC. Under FDICIA and the
FDIC regulations thereunder, Manufacturers Bank is required to pay deposit
insurance premiums based on the risk it poses to the BIF. The FDIC has authority
to raise or lower assessment rates on insured deposits in order to achieve
certain designated reserve ratios in the BIF and to impose special additional
assessments. The current assessment rate schedule provides for an assessment
range of zero to .27% of deposits, depending on capital and supervisory factors.
Each depository institution is assigned to one of three capital groups: "well
capitalized," "adequately capitalized" or "under capitalized." Within each
capital group, institutions are assigned to one of three supervisory subgroups:
Subgroup A, Subgroup B or Subgroup C. Subgroup A consists of financially sound
institutions with only a few, minor weaknesses. Subgroup B consists of
institutions that demonstrate weaknesses which, if not corrected, could result
in significant deterioration of the institution and increased risk of loss to
the BIF. Subgroup C consists of institutions that pose a substantial probability
of loss to the BIF unless effective corrective action is taken. Accordingly,
there are nine combinations of capital groups and supervisory subgroups to which
varying assessment rates would be applicable. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after hearing, that the institution has
engaged or is engaging in unsafe or unsound banking practices, is in a condition
that is unsafe or unsound for the continuation of operations or otherwise has
violated any applicable law, regulation or order, or any condition imposed in
writing by or in a written agreement with the FDIC. The FDIC also may suspend
deposit insurance temporarily during the pendency of a proceeding to terminate
insurance if the institution has no tangible capital.
On December 20, 1996, the FDIC adopted the updated Uniform Financial
Institutions Rating System ("UFIRS") as a policy statement of the FDIC. Under
the UFIRS, each financial institution is assigned a composite rating based on an
evaluation and rating of six essential components of an institution's financial
condition and operations. These component factors address the adequacy of
capital, the quality of assets, the capability of Management, the quality and
level of earnings, the adequacy of liquidity, and the sensitivity to market
risk. The UFIRS is intended to promote and complement efficient examination
processes and also serves as a useful vehicle for identifying problem or
deteriorating financial institutions, as well as for categorizing institutions
with deficiencies in particular component areas. Further, UFIRS assists Congress
in following safety and soundness of the financial industry.
DIVIDENDS. Under the IBA, a bank, such as Manufacturers Bank, is
permitted to declare and pay dividends in amounts up to the amount of its
accumulated net profits, provided that it shall retain in its surplus at least
one-tenth of its net profits since the date of the declaration of its most
recent previous dividend until said additions to surplus, in the aggregate,
equal at least the paid-in-capital of such bank. In no event may such bank,
while it continues its banking business, pay dividends in excess of its net
profits then on hand (after deductions for losses and bad debts).
INSIDER AND AFFILIATE TRANSACTIONS. Manufacturers Bank is subject to
certain restrictions imposed by the Federal Reserve Act (the "FRA") and, the IBA
(and, respectively, the regulations adopted under each), on, among other
transactions, any extensions of credit to the Corporation and its other
subsidiaries, investments in the stock or other securities of the Corporation
and its other subsidiaries and the acceptance of the stock or other securities
of the Corporation or its other subsidiaries as collateral for loans made by
Manufacturers Bank. Certain limitations and reporting requirements are also
placed on extensions of credit by Manufacturers Bank to principal stockholders
of the Corporation and its other subsidiaries, and to directors and certain
executive officers of the Corporation and its other subsidiaries, and to
"related interests" of such principal stockholders, directors and officers.
COMMUNITY INVESTMENT AND CONSUMER PROTECTION LAWS. In connection with
its lending activities, Manufacturers Bank is subject to a variety of federal
laws designed to protect borrowers and promote lending to various sectors of the
economy and population. Included among these are the Federal Home Mortgage
Disclosure Act, the Real Estate Settlement Procedures Act, the Truth-in-Lending
Act, the Equal Credit Opportunity Act ("ECOA"), the Fair Credit Reporting Act
and
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the CRA. Manufacturers Bank is also subject to similar Illinois laws applicable
to, among other things, usury, credit discrimination and general business
practices.
Under the CRA, a financial institution has a continuing and affirmative
obligation, consistent with the safe and sound operation of such institution, to
help meet the credit needs of its entire community, including low- and moderate-
income neighborhoods. The CRA does not establish specific lending requirements
or programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires each federal banking regulatory agency, in connection with its
examination of a financial institution, to assess and assign one of four ratings
to the institution's record of meeting the credit needs of its community and to
take such record into account in its evaluation of certain applications by the
institution, including applications for charters, branches and other deposit
facilities, relocations, mergers, consolidations, acquisitions of assets or
assumptions of liabilities, and savings and loan holding company acquisitions.
The CRA also requires that all institutions make public disclosure of their CRA
ratings.
The federal banking regulatory agencies will take into account the CRA
ratings of combining organizations and their level of compliance with ECOA in
connection with acquisitions involving the change or control of a financial
institution and, if any of the combining institutions have CRA ratings of "needs
improvement" or "unsatisfactory," the agency in question may deny the
application on CRA grounds or require corrective action as a condition of its
approval. The current CRA rating for Manufacturers Bank is "satisfactory."
In April 1995, the FRB and other federal banking regulatory agencies
adopted amendments revising their CRA regulations. Among other things, the
amended CRA regulations establish a new evaluation system that rates an
institution based on its actual performance in meeting community needs. In
particular, the system focuses on three tests (i) a lending test, to evaluate
the institution's record of making loans in its assessment areas; (ii) an
investment test, to evaluate the institution's record of investing in community
development projects, affordable housing, and programs benefitting low or
moderate income individuals and business; and (iii) a service test, to evaluate
the institution's delivery of services through its branches, ATMs and other
offices. The amended CRA regulations also clarify how an institution's CRA
performance should be considered in the application process.
FDICIA RULES. Certain rules pursuant to FDICIA include: (i) real estate
lending standards for banks, which provide guidelines concerning loan-to-value
ratios for various types of real estate loans; (ii) revisions to the risk-based
capital rules to account for interest rate risk, concentration of credit risk
and the risks posed by "non-traditional activities;" (iii) rules requiring
depository institutions to develop and implement internal procedures to evaluate
and control credit and settlement exposure to their correspondent banks; (iv)
rules implementing the FDICIA provision prohibiting, with certain exceptions,
state member banks from making equity investments of types and in amounts not
permissible for national banks; and (v) rules addressing various "safety and
soundness" issues, including operations and managerial standards, standards for
asset quality, earnings and stock valuations, and compensation standards for the
officers, directors, employees and principal stockholders of the depository
institution.
CHANGE IN CONTROL. As an Illinois banking corporation controlled by a
bank holding company, Manufacturers Bank is not only subject to the rules
regarding change of control contained in the FRA and the FDIA and the
regulations promulgated thereunder by the FRB, but it is also subject to the
rules regarding change in control of Illinois banks contained in the IBA. The
Corporation and MNC are also subject to these rules by virtue of their control
of Manufacturers Bank. Generally, the IBA provides that no person or entity or
group of affiliated persons or entities may, without the Commissioner's consent,
directly or indirectly, acquire control of an Illinois bank. Such control is
presumed if any person owns or controls 20% or more of the outstanding stock of
an Illinois bank or such lesser amount as would enable the holder or holders, by
applying cumulative voting, to elect one director of the bank. In evaluating an
application for acquisition of control of an Illinois bank or bank holding
company, in addition to the Commissioner's consideration of other factors deemed
relevant, the Commissioner must find that the character of the proposed
management of the bank after the change in control will assure reasonable
promise of successful, safe and sound operation; the future earnings prospects
of the bank after the proposed change in control are favorable; and any prior
involvement that the proposed controlling persons or the
58
proposed management of the institution after the change in control have had with
any other financial institution has been conducted in a safe and sound manner.
YEAR 2000 PROBLEM
On March 20, 1998, the Examination Parity and Year 2000 Readiness for
Financial Institutions Act, P.L. 105-164, became law. In that statute, Congress
emphasized the seriousness with which the financial services industry and its
regulators must view the Year 2000 Problem by requiring the regulators to
conduct seminars for, and otherwise provide information and model approaches
concerning common problems to, the nation's financial institutions concerning
this problem. The regulators, acting through the FFIEC, had already begun
compiling and disseminating such information through industry-wide
pronouncements which emphasized that safety and soundness examinations would
focus on the institutions' awareness and preparations with respect to the Year
2000 Problem.
After passage of P.L. 105-164, the efforts of the FFIEC, as well as the
individual regulatory agencies, in regard to the Year 2000 Problem began
increasing and numerous Financial Institution Letters and other bulletins were
issued mandating various actions that financial institutions must take in order
to avoid possible sanctions. In FIL-51-98, issued on May 13, 1998, the FFIEC
discussed the position of the FDIC in regard to contingency planning for the
Year 2000 Problem, stating that it is imperative for the Board of Directors and
senior management of each FDIC-insured institution to adopt a proactive role in
developing and supervising the contingency planning process. Furthermore,
according to the FDIC, an institution's failure to appropriately address the
Year 2000 Problem may result in supervisory actions, including formal and
informal enforcement actions, denials of applications filed pursuant to the
FDIA, civil money penalties and reductions in the institution's management
component of composite ratings. It was also recommended that the institution's
readiness plan should focus, among other things, on the key issues of business
risk and testing, with the goal being to provide assurance that mission-critical
functions will continue even if one or more systems fail. The readiness plan for
the Year 2000 Problem must also be viewed as an evolving, and not static,
document, and must be reviewed, updated and validated on a continuous basis.
Each financial institution is also required to provide forthright and honest
responses to questions and concerns raised by customers and business partners
about the institution's readiness for the Year 2000 Problem. See "Risk
Factors--Year 2000 Problem."
COAL CITY CAPITAL TRUST I
The Trust is a statutory business trust that was organized by the
Corporation under Delaware law on July 2, 1998, by the filing of a Certificate
of Trust with the Delaware Secretary of State. The Trust exists for the
exclusive purposes of (i) issuing and selling the Trust Securities; (ii) using
the proceeds from the sale of the Trust Securities to acquire the Junior
Subordinated Debentures; and (iii) engaging in only those other activities
necessary, advisable or incidental thereto. The Junior Subordinated Debentures
will be the sole assets of the Trust, and, accordingly, payments under the
Junior Subordinated Debentures will be the sole revenue of the Trust. All of the
Common Securities will be owned by the Corporation. The Corporation will acquire
Common Securities in a Liquidation Amount equal to at least 3% of the total
capital of the Trust. The Common Securities will rank pari passu, and payments
will be made thereon pro rata, with the Capital Securities, except that upon the
occurrence and continuance of an event of default under the Trust Agreement
resulting from a Debenture Event of Default, the rights of the Corporation as
holder of the Common Securities to payments in respect of Distributions and
payments upon liquidation, redemption or otherwise will be subordinated to the
rights of the holders of the Capital Securities. See "Description of Capital
Securities--Subordination of Common Securities." The Trust has a term of
approximately 35 years, but may dissolve earlier as provided in the Trust
Agreement. The Trust's business and affairs are conducted by the Issuer
Trustees, each appointed by the Corporation as holder of the Common Securities.
The Issuer Trustees for the Trust will be LaSalle National Bank, as the Property
Trustee, Wilmington Trust Company, as the Delaware Trustee, and three
Administrative Trustees who are officers of the Corporation or the Bank. LaSalle
National Bank will also act as trustee under the Indenture and under the
Guarantee. See "Description of Junior Subordinated Debentures" and "Description
of Guarantee." The holder of the Common Securities of the Trust or, if an Event
of Default under the Trust Agreement has occurred and is continuing, the holders
of not less than a majority in Liquidation Amount of the Capital Securities will
be entitled to appoint, remove or replace the Property Trustee and/or the
Delaware Trustee. In no event will
59
the holders of the Capital Securities have the right to vote to appoint, remove
or replace the Administrative Trustees; such rights will be vested exclusively
in the holder of the Common Securities. The duties and obligations of each
Issuer Trustee are governed by the Trust Agreement. The Corporation, as issuer
of the Junior Subordinated Debentures, will pay all fees, expenses, debts and
obligations (other than the payment of principal or interest on the Trust
Securities) related to the Trust and the offering of the Capital Securities and
will pay, directly or indirectly, all ongoing costs, expenses and liabilities of
the Trust. The principal executive office of the Trust is located at the Main
Banking Premises.
DESCRIPTION OF CAPITAL SECURITIES
The Capital Securities will represent preferred beneficial interests in
the Trust, and the holders thereof will be entitled to a preference over the
Common Securities in certain circumstances with respect to Distributions and
amounts payable on redemption of the Trust Securities or liquidation of the
Trust. See "--Subordination of Common Securities." The Trust Agreement will not
be qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). By its terms, however, the Trust Agreement will incorporate
certain provisions of the Trust Indenture Act. This summary of certain
provisions of the Capital Securities, the Common Securities and the Trust
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all of the provisions of the Trust Agreement,
including the definitions therein of certain terms.
GENERAL
The Capital Securities will be limited to $25.0 million aggregate
Liquidation Amount at any one time outstanding. The Capital Securities will rank
pari passu, and payments will be made thereon pro rata, with the Common
Securities, except as described under "--Subordination of Common Securities."
Legal title to the Junior Subordinated Debentures will be held by the Property
Trustee in trust for the benefit of the holders of the Trust Securities. The
Guarantee will not guarantee payment of Distributions or amounts payable on
redemption of the Capital Securities or liquidation of the Trust when the Trust
does not have funds on hand legally available for such payments. See
"Description of Guarantee."
DISTRIBUTIONS
Distributions on the Capital Securities will be cumulative, will
accumulate from July 24, 1998, and will be payable quarterly in arrears on March
1, June 1, September 1 and December 1 of each year, commencing December 1, 1998,
at a rate per annum, reset quarterly, to equal 3-month LIBOR (as defined below)
plus 180 basis points to the holders of the Capital Securities on the relevant
record dates. The record dates will be the 15th day of the month immediately
preceding the month in which the relevant payment occurs. The amount of
Distributions payable for any period will be computed on the basis of the actual
number of days elapsed in such period and a 360-day year. In the event that any
date on which Distributions are payable on the Capital Securities is not a
Business Day (as defined below), payment of the Distribution payable on such
date will be made on the next succeeding day that is a Business Day (and without
any interest or other payment in respect to any such delay), except that if such
next succeeding Business Day falls in the next succeeding calendar month, such
payment shall be made on the immediately preceding Business Day, in each case
with the same force and effect as if made on such date (each date on which
Distributions are payable in accordance with the foregoing, a "Distribution
Date"). A "Business Day" shall mean any day other than a Saturday or a Sunday or
a legal holiday on which banking institutions in New York, New York or Chicago,
Illinois are open for business. The revenue of the Trust available for
distribution to holders of the Capital Securities will be limited to payments
under the Junior Subordinated Debentures in which the Trust will invest the
proceeds from the issuance and sale of the Trust Securities. See "Description of
Junior Subordinated Debentures--General." If the Corporation does not make
interest payments on the Junior Subordinated Debentures, the Property Trustee
will not have funds available to pay Distributions on the Capital Securities.
The payment of Distributions (if and to the extent the Trust has funds on hand
legally available for the payment of such Distributions) will be guaranteed by
the Corporation on a limited basis as set forth herein under "Description of
Guarantee."
The Distribution Rate on the Capital Securities for each quarter or
other period for which interest is payable will be determined on the
Determination Date (as defined below) for such quarter or other period for which
interest is payable
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and will be a per annum rate, reset quarterly, to 3-month LIBOR (determined as
set forth below), plus 180 basis points, and will be effective as of the first
day of such quarter or other period for which interest is payable.
DETERMINATION OF 3-MONTH LIBOR
The Calculation Agent will calculate the interest rate for each
interest period based on 3-month LIBOR commencing on the second London Banking
Day immediately following the Determination Date for such period. "3-month
LIBOR" means, with respect to an interest period relating to a Distribution
Date, the London interbank offered rate for three-month, Eurodollar deposits
determined in the following order of priority:
(a) the rate (expressed as a percentage per annum) for
Eurodollar deposits having a three-month maturity that appears on
Telerate Page 3750 as of 11:00 a.m. (London time) on the related
Determination Date;
(b) if such rate does not appear on Telerate Page 3750 as of
11:00 a.m. (London time) on the related Determination Date, 3-month
LIBOR will be the arithmetic mean of the rates (expressed as
percentages per annum) for Eurodollar deposits having a three-month
maturity that appear on Reuters Monitor Money Rates Page LIBO ("Reuters
Page LIBO") as of 11:00 a.m. (London time) on such Determination Date;
(c) if such rate does not appear on Reuters Page LIBO as of
11:00 a.m. (London time) on the related Determination Date, the
Calculation Agent will request the principal London offices of four
leading banks in the London interbank market to provide such banks'
offered quotations (expressed as percentages per annum) to prime banks
in the London interbank market for Eurodollar deposits having a
three-month maturity as of 11:00 a.m. (London time) on such
Determination Date. If at least two quotations are provided, 3-month
LIBOR will be the arithmetic mean of such quotations;
(d) if fewer than two such quotations are provided as
requested in clause (c) above, the Calculation Agent will request four
major New York City banks to provide such banks' offered quotations
(expressed as percentages per annum) to leading European banks for
loans in Eurodollars as of 11:00 a.m. (London time) on such
Determination Date. If at least two such quotations are provided,
3-month LIBOR will be the arithmetic mean of such quotations; and
(e) if fewer than two such quotations are provided as
requested in clause (d) above, 3-month LIBOR will be 3-month LIBOR
determined with respect to the interest period immediately preceding
such current interest period.
If the rate for Eurodollar deposits having a three-month maturity that
initially appears on Telerate Page 3750 or Reuters Page LIBO, as the case may
be, as of 11:00 a.m. (London time) on the related Determination Date is
superseded on Telerate Page 3750 or Reuters Page LIBO, as the case may be, by a
corrected rate before 12:00 noon (London time) on the London Banking Day
immediately following such Determination Date, the corrected rate as so
substituted on the applicable page will be the applicable 3-month LIBOR for such
Determination Date.
As used herein:
"Calculation Agent" means Wilmington Trust Company, Wilmington,
Delaware.
"Determination Date" means the date that is two London Banking Days
preceding the first day of any period for which a Distribution will be payable.
"London Banking Day" means a day on which dealings in deposits in U.S.
dollars are transacted in the London interbank market.
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"Telerate Page 3750" means the display designated as "Page 3750" on the
Dow Jones Telerate Service (or such other page as may replace Page 3750 on that
service or such other service or services as may be nominated by the British
Bankers' Association as the information vendor for the purpose of displaying
London interbank offered rates for U.S. dollar deposits).
All percentages resulting from any calculations on the Capital
Securities will be rounded, if necessary, to the nearest one hundred-thousandth
of a percentage point, with five one-millionths of a percentage point rounded
upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)),
and all dollar amounts used in or resulting from such calculation will be
rounded to the nearest cent (with one-half cent being rounded upward).
On the Determination Date, the Calculation Agent shall notify the
Corporation and the Paying Agent of the applicable Distribution Rate in effect
for the related Distribution Period. The Calculation Agent shall, upon the
request of the holder of any Capital Securities, provide the Distribution Rate
then in effect. All calculations made by the Calculation Agent in the absence of
manifest error shall be conclusive for all purposes and binding on the
Corporation and the holders of the Capital Securities.
OPTION TO DEFER INTEREST PAYMENTS
So long as no Debenture Event of Default shall have occurred and be
continuing, the Corporation will have the right under the Indenture to elect to
defer the payment of interest on the Junior Subordinated Debentures, at any time
or from time to time, for a period not exceeding 20 consecutive quarterly
periods with respect to each Extension Period, provided that no Extension Period
shall end on a date other than an Interest Payment Date, or extend beyond the
Stated Maturity Date. Upon any such election, quarterly Distributions on the
Capital Securities will be deferred by the Trust during such Extension Period.
Distributions to which holders of the Capital Securities are entitled during any
such Extension Period will accumulate additional Distributions thereon at the
applicable periodic Distribution Rate, compounded quarterly from the relevant
Distribution Date, but not exceeding the interest rate then accruing on the
Junior Subordinated Debentures. The term "Distributions," as used herein, shall
include any such additional Distributions.
Prior to the termination of any such Extension Period, the Corporation
may further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed 20 consecutive quarterly periods, to end
on a date other than an Interest Payment Date or to extend beyond the Stated
Maturity Date. Upon the termination of any such Extension Period and the payment
of all amounts then due on any Interest Payment Date, the Corporation may elect
to begin a new Extension Period, subject to the above requirements. No interest
shall be due and payable during an Extension Period, except at the end thereof.
The Corporation must give the Property Trustee, the Administrative Trustees and
the Debenture Trustee notice of its election of any such Extension Period (or an
extension thereof) at least five Business Days prior to the earlier of (i) the
date the Distributions on the Capital Securities would have been payable except
for the election to begin such Extension Period; and (ii) the date the
Administrative Trustees are required to give notice to any securities exchange
or automated quotation system or to holders of such Capital Securities of the
record date or the date such Distributions are payable, but in any event not
less than five Business Days prior to such record date. There is no limitation
on the number of times that the Corporation may elect to begin an Extension
Period. See "Description of Junior Subordinated Debentures--Option to Extend
Interest Payment Date" and "Certain Federal Income Tax Consequences-- Original
Issue Discount."
During any such Extension Period, the Corporation may not (i) declare
or pay any dividends or distributions on, or redeem, purchase, acquire, or make
a liquidation payment with respect to, any of the Corporation's capital stock;
(ii) make any payment of principal of, or premium, if any, on or repay,
repurchase or redeem any debt securities of the Corporation (including any Other
Debentures) that rank pari passu with or junior in right of payment to the
Junior Subordinated Debentures; or (iii) make any guarantee payments with
respect to any guarantee by the Corporation of the debt securities of any
subsidiary of the Corporation (including Other Guarantees) if such guarantee
ranks pari passu with or junior in right of payment to the Junior Subordinated
Debentures (other than (a) dividends or distributions in shares of, or options,
warrants or rights to subscribe for or purchase shares of, common stock of the
Corporation, (b) any declaration of a dividend in connection with the
implementation of a stockholders' rights plan, or the issuance of stock under
any such plan in the future, or the redemption or repurchase of any such rights
pursuant thereto, (c) payments under the Guarantee, (d) as a result of a
62
reclassification of the Corporation's capital stock or the exchange or
conversion of one class or series of the Corporation's capital stock for another
class or series of the Corporation's capital stock, (e) the purchase of
fractional interests in shares of the Corporation's capital stock pursuant to
the conversion or exchange provisions of such capital stock or the security
being converted or exchanged, and (f) purchases of common stock related to the
issuance of common stock or rights under any of the Corporation's benefit plans
for its directors, officers or employees). The Corporation has no current
intention to exercise its option to defer payments of interest on the Junior
Subordinated Debentures.
REDEMPTION
Upon the repayment on the Stated Maturity Date or prepayment, in whole
or in part, prior to the Stated Maturity Date of the Junior Subordinated
Debentures (other than following the distribution of the Junior Subordinated
Debentures to the holders of the Trust Securities), the proceeds from such
repayment or prepayment shall be applied by the Property Trustee to redeem a
Like Amount (as defined below) of the Trust Securities, upon not less than 30
nor more than 60 days' notice of a date of redemption (the "Redemption Date"),
at the Redemption Price, which shall be equal to the principal of, and accrued
and unpaid interest on, the Junior Subordinated Debentures being redeemed. See
"Description of Junior Subordinated Debentures--Optional Prepayment" and
"--Special Event Prepayment." If less than all of the Junior Subordinated
Debentures are to be prepaid on a Redemption Date, then the proceeds of such
prepayment shall be allocated pro rata to the Trust Securities. Upon the entry
of an order for the dissolution of the Trust by a court of competent
jurisdiction, the Debentures thereafter will be subject to optional prepayment,
in whole, but not in part, on or after the Initial Optional Redemption Date.
"Like Amount" means (i) with respect to a redemption of the Trust
Securities, Trust Securities having a Liquidation Amount equal to the principal
amount of Junior Subordinated Debentures to be paid in accordance with their
terms; and (ii) with respect to a distribution of Junior Subordinated Debentures
upon the liquidation of the Trust, Junior Subordinated Debentures having a
principal amount equal to the Liquidation Amount of the Trust Securities of the
holder to whom such Junior Subordinated Debentures are distributed.
The Corporation will have the option to prepay the Junior Subordinated
Debentures (i) in whole or in part, on or after the Initial Optional Redemption
Date; and (ii) in whole but not in part, at any time prior to the Initial
Optional Redemption Date, upon the occurrence of a Special Event, in each case,
at the Prepayment Price and subject to the receipt of any required regulatory
approval. See "Description of Junior Subordinated Debentures--Optional
Prepayment" and "--Special Event Prepayment."
LIQUIDATION OF THE TRUST AND DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES
The Corporation will have the right at any time to dissolve the Trust
and, after satisfaction of liabilities to creditors of the Trust as required by
applicable law, to cause the Junior Subordinated Debentures to be distributed to
the holders of the Trust Securities in liquidation of the Trust. Such right is
subject to (i) the Corporation having received an opinion of counsel to the
effect that such distribution will not be a taxable event to holders of Capital
Securities; and (ii) receipt of any required regulatory approval.
The Trust shall automatically dissolve upon the first to occur of (i)
certain events of bankruptcy, dissolution or liquidation of the Corporation;
(ii) the distribution of a Like Amount of the Junior Subordinated Debentures to
the holders of the Trust Securities, if the Corporation, as Sponsor, has given
written direction to the Property Trustee to dissolve the Trust (which direction
is optional and, except as described above, wholly within the discretion of the
Corporation, as Sponsor); (iii) redemption of all of the Trust Securities as
described under "--Redemption;" (iv) expiration of the term of the Trust; and
(v) the entry of an order for the dissolution of the Trust by a court of
competent jurisdiction.
If a dissolution occurs as described in clause (i), (ii), (iv), or (v)
above, the Trust shall be liquidated by the Issuer Trustees as expeditiously as
the Issuer Trustees determine to be possible by distributing, after satisfaction
of liabilities to creditors of the Trust as provided by applicable law, to the
holders of the Trust Securities a Like Amount of the Junior Subordinated
Debentures, unless such distribution is determined by the Property Trustee not
to be practicable, in which event
63
such holders will be entitled to receive out of the assets of the Trust legally
available for distribution to holders, after satisfaction of liabilities to
creditors of the Trust as provided by applicable law, an amount equal to the
aggregate of the Liquidation Amount plus accumulated and unpaid Distributions
thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because the Trust has insufficient assets on hand legally available to pay in
full the aggregate Liquidation Distribution, then the amounts payable directly
by the Trust on the Trust Securities shall be paid on a pro rata basis, except
that if a Debenture Event of Default has occurred and is continuing, the Capital
Securities shall have a priority over the Common Securities. See
"--Subordination of Common Securities."
If the Corporation elects not to prepay the Junior Subordinated
Debentures prior to maturity in accordance with their terms and either elects
not to or is unable to liquidate the Trust and distribute the Junior
Subordinated Debentures to holders of the Trust Securities, the Trust Securities
will remain outstanding until the repayment of the Junior Subordinated
Debentures on the Stated Maturity Date.
After the liquidation date is fixed for any distribution of Junior
Subordinated Debentures to holders of the Trust Securities (i) the Trust
Securities will no longer be deemed to be outstanding; (ii) DTC or its nominee
will receive, in respect of each registered global certificate, if any,
representing Trust Securities and held by it, a registered global certificate or
certificates representing the Junior Subordinated Debentures to be delivered
upon such distribution; and (iii) any certificates representing Trust Securities
not held by DTC or its nominee will be deemed to represent Junior Subordinated
Debentures having a principal amount equal to the Liquidation Amount of such
Trust Securities, and bearing accrued and unpaid interest in an amount equal to
the accumulated and unpaid Distributions on such Trust Securities until such
certificates are presented to the Administrative Trustees or their agent for
cancellation, whereupon the Corporation will issue to such holder, and the
Debenture Trustee will authenticate, a certificate representing such Junior
Subordinated Debentures.
There can be no assurance as to the market prices for the Capital
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for the Trust Securities if a dissolution and liquidation of the Trust
were to occur. Accordingly, the Capital Securities that an investor may
purchase, or the Junior Subordinated Debentures that the investor may receive on
dissolution and liquidation of the Trust, may trade at a discount to the price
that the investor paid to purchase the Capital Securities offered hereby.
REDEMPTION PROCEDURES
If applicable, Trust Securities shall be redeemed at the applicable
Redemption Price with the proceeds from the contemporaneous repayment or
prepayment of the Junior Subordinated Debentures. Any redemption of Trust
Securities shall be made, and the applicable Redemption Price shall be payable,
on the Redemption Date only to the extent that the Trust has funds legally
available for the payment of such applicable Redemption Price. See also
"--Subordination of Common Securities."
If the Trust gives a notice of redemption in respect of the Capital
Securities, then, by 12:00 noon, Chicago time, on the Redemption Date, to the
extent funds are legally available, with respect to the Capital Securities held
by DTC or its nominees, the Property Trustee will deposit or cause the Paying
Agent (as defined herein) to deposit irrevocably with DTC funds sufficient to
pay the applicable Redemption Price. See "--Form, Denomination, Book Entry
Procedures and Transfer." With respect to the Capital Securities held in
certificated form, the Property Trustee, to the extent funds are legally
available, will irrevocably deposit with the Paying Agent for the Capital
Securities funds sufficient to pay the applicable Redemption Price and will give
such Paying Agent irrevocable instructions and authority to pay the applicable
Redemption Price to the holders thereof upon surrender of their certificates
evidencing the Capital Securities. See "--Payment and Paying Agency."
Notwithstanding the foregoing, Distributions payable on or prior to the
Redemption Date shall be payable to the holders of such Capital Securities on
the relevant record dates for the related Distribution Dates. If notice of
redemption shall have been given and funds deposited as required, then upon the
date of such deposit, all rights of the holders of the Capital Securities called
for redemption will cease, except the right of the holders of such Capital
Securities to receive the applicable Redemption Price, but without interest on
such Redemption Price, and such Capital Securities will cease to be outstanding.
In the event that any Redemption Date of Capital Securities is not a Business
Day, then the applicable Redemption Price
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payable on such date will be paid on the next succeeding day that is a Business
Day (and without any interest or other payment in respect of any such delay),
except that, if such next succeeding Business Day falls in the next calendar
month, such payment shall be made on the immediately preceding Business Day. In
the event that payment of the applicable Redemption Price is improperly withheld
or refused and not paid either by the Trust or by the Corporation pursuant to
the Guarantee as described under "Description of Guarantee" (i) Distributions on
Capital Securities will continue to accumulate at the then applicable rate, from
the Redemption Date originally established by the Trust to the date such
applicable Redemption Price is actually paid; and (ii) the actual payment date
will be the Redemption Date for purposes of calculating the applicable
Redemption Price.
Notice of any redemption will be mailed at least 30 days but not more
than 60 days prior to the Redemption Date to each holder of Trust Securities at
its registered address. Unless the Corporation defaults in payment of the
applicable Redemption Price on, or in the repayment of, the Junior Subordinated
Debentures, on and after the Redemption Date Distributions will cease to accrue
on the Trust Securities called for redemption.
Subject to applicable law (including, without limitation, United States
federal securities law), the Corporation or its subsidiaries may at any time and
from time to time purchase outstanding Capital Securities by tender, in the open
market or by private agreement.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Trust
Securities, as applicable, shall be made pro rata based on the Liquidation
Amount of the Trust Securities; provided, however, that if on any Distribution
Date or Redemption Date a Debenture Event of Default shall have occurred and be
continuing, no payment of any Distribution on, or applicable Redemption Price
of, any of the Common Securities, and no other payment on account of the
redemption, liquidation or other acquisition of the Common Securities, shall be
made unless payment in full in cash of all accumulated and unpaid Distributions
on all of the outstanding Capital Securities for all Distribution periods
terminating on or prior thereto, or in the case of payment of the applicable
Redemption Price the full amount of such Redemption Price, shall have been made
or provided for, and all funds available to the Property Trustee shall first be
applied to the payment in full in cash of all Distributions on, or Redemption
Price of, the Capital Securities then due and payable.
In the case of any Event of Default, the Corporation as holder of the
Common Securities will be deemed to have waived any right to act with respect to
such Event of Default until the effect of such Event of Default shall have been
cured, waived or otherwise eliminated. Until any such Event of Default has been
so cured, waived or otherwise eliminated, the Property Trustee shall act solely
on behalf of the holders of the Capital Securities and not on behalf of the
Corporation as holder of the Common Securities, and only the holders of the
Capital Securities will have the right to direct the Property Trustee to act on
their behalf.
EVENTS OF DEFAULT; NOTICE
The occurrence of a Debenture Event of Default constitutes an "Event of
Default" under the Trust Agreement. See "Description of Junior Subordinated
Debentures--Debenture Events of Default."
Within 10 Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee shall transmit
notice of such Event of Default to the holders of the Capital Securities, the
Administrative Trustees and the Corporation, as Sponsor, unless such Event of
Default shall have been cured or waived. The Corporation, as Sponsor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the
Capital Securities shall have a preference over the Common Securities as
described under "--Liquidation of the Trust and Distribution of Junior
Subordinated Debentures" and "--Subordination of Common Securities."
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REMOVAL OF ISSUER TRUSTEES
Unless a Debenture Event of Default shall have occurred and be
continuing, any Issuer Trustee may be removed at any time by the holder of the
Common Securities. If a Debenture Event of Default has occurred and is
continuing, the Property Trustee and the Delaware Trustee may be removed at such
time by the holders of a majority in Liquidation Amount of the outstanding
Capital Securities. In no event will the holders of the Capital Securities have
the right to vote to appoint, remove or replace the Administrative Trustees,
which voting rights are vested exclusively in the Corporation as the holder of
the Common Securities. No resignation or removal of an Issuer Trustee and no
appointment of a successor trustee shall be effective until the acceptance of
appointment by the successor trustee in accordance with the provisions of the
Trust Agreement.
MERGER OR CONSOLIDATION OF ISSUER TRUSTEES
Any Person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Issuer Trustee shall be a party, or
any Person succeeding to all or substantially all of the corporate trust
business of such Issuer Trustee, shall be the successor of such Issuer Trustee
under the Trust Agreement, provided such Person shall be otherwise qualified and
eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to any corporation or other Person,
except as described below or as otherwise described under "--Liquidation of the
Trust and Distribution of Junior Subordinated Debentures." The Trust may, at the
request of the Corporation, as Sponsor, with the consent of the Administrative
Trustees but without the consent of the holders of the Capital Securities, merge
with or into, consolidate, amalgamate, or be replaced by or convey, transfer or
lease its properties and assets as an entirety or substantially as an entirety
to a trust organized as such under the laws of any State, provided, that (i)
such successor entity either (a) expressly assumes all of the obligations of the
Trust with respect to the Trust Securities, or (b) substitutes for the Trust
Securities other securities having substantially the same terms as the Trust
Securities (the "Successor Securities") so long as the Successor Securities rank
the same as the Trust Securities rank in priority with respect to distributions
and payments upon liquidation, redemption and otherwise; (ii) the Corporation
expressly appoints a trustee of such successor entity possessing the same powers
and duties as the Property Trustee with respect to the Junior Subordinated
Debentures; (iii) the Successor Securities are listed, or any Successor
Securities will be listed upon notification of issuance, on any national
securities exchange or other organization on which the Trust Securities are then
listed or quoted, if any; (iv) if the Capital Securities (including any
Successor Securities) are rated by any nationally recognized statistical rating
organization prior to such transaction, such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not cause the
Capital Securities (including any Successor Securities) or, if the Junior
Subordinated Debentures are so rated, the Junior Subordinated Debentures, to be
downgraded by any such nationally recognized statistical rating organization;
(v) such merger, consolidation, amalgamation, replacement, conveyance, transfer
or lease does not adversely affect the rights, preferences and privileges of the
holders of the Trust Securities (including any Successor Securities) in any
material respect; (vi) such successor entity has a purpose identical to that of
the Trust; (vii) prior to such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, the Corporation has received an opinion from
independent counsel to the Trust experienced in such matters to the effect that
(a) such merger, consolidation, amalgamation, replacement, conveyance, transfer
or lease does not adversely affect the rights, preferences and privileges of the
holders of the Trust Securities (including any Successor Securities) in any
material respect (other than any dilution of such holders' interests in the new
entity), and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the Trust nor such successor
entity will be required to register as an investment company under the
Investment Company Act of 1940, as amended (the "Investment Company Act"); and
(viii) the Corporation or any permitted successor or assignee owns all of the
common securities of such successor entity and guarantees the obligations of
such successor entity under the Successor Securities at least to the extent
provided by the Guarantee and the Common Guarantee. Notwithstanding the
foregoing, the Trust shall not, except with the consent of holders of 100% in
Liquidation Amount of the Trust Securities, consolidate, amalgamate, merge with
or into, or be replaced
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by or convey, transfer or lease its properties and assets as an entirety or
substantially as an entirety to, any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or lease
would cause the Trust or the successor entity not to be classified as a grantor
trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided below and under "--Mergers, Consolidations,
Amalgamations or Replacements of the Trust" and "Description of
Guarantee--Amendments and Assignment" and as otherwise required by law and the
Trust Agreement, the holders of the Capital Securities will have no voting
rights.
The Trust Agreement may be amended from time to time by the
Corporation, the Property Trustee and the Administrative Trustees, without the
consent of the holders of the Trust Securities (i) to cure any ambiguity,
correct or supplement any provisions in the Trust Agreement that may be
inconsistent with any other provision, or to make any other provisions with
respect to matters or questions arising under the Trust Agreement, which shall
not be inconsistent with the other provisions of the Trust Agreement; or (ii) to
modify, eliminate or add to any provisions of the Trust Agreement to such extent
as shall be necessary to ensure that the Trust will be classified for United
States federal income tax purposes as a grantor trust at all times that any
Trust Securities are outstanding or to ensure that the Trust will not be
required to register as an "investment company" under the Investment Company
Act; provided, however, that in the case of clause (i), such action shall not
adversely affect in any material respect the interests of the holders of the
Trust Securities. Any amendments of the Trust Agreement pursuant to the
foregoing shall become effective when notice thereof is given to the holders of
the Trust Securities. The Trust Agreement may be amended by the Issuer Trustees
and the Corporation (i) with the consent of holders representing a majority
(based upon Liquidation Amount) of the outstanding Trust Securities; and (ii)
upon receipt by the Issuer Trustees of an opinion of counsel experienced in such
matters to the effect that such amendment or the exercise of any power granted
to the Issuer Trustees in accordance with such amendment will not affect the
Trust's status as a grantor trust for United States federal income tax purposes
or the Trust's exemption from status as an "investment company" under the
Investment Company Act, provided that, without the consent of each holder of
Trust Securities, the Trust Agreement may not be amended to (i) change the
amount or timing of any Distribution on the Trust Securities or otherwise
adversely affect the amount of any Distribution required to be made in respect
of the Trust Securities as of a specified date; or (ii) restrict the right of a
holder of Trust Securities to institute suit for the enforcement of any such
payment on or after such date.
So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Issuer Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
execute any trust or power conferred on the Debenture Trustee with respect to
the Junior Subordinated Debentures; (ii) waive certain past defaults under the
Indenture; (iii) exercise any right to rescind or annul a declaration of
acceleration of the maturity of the principal of the Junior Subordinated
Debentures; or (iv) consent to any amendment, modification or termination of the
Indenture or the Junior Subordinated Debentures, where such consent shall be
required, without, in each case, obtaining the prior approval of the holders of
a majority in Liquidation Amount of all outstanding Capital Securities;
provided, however, that where a consent under the Indenture would require the
consent of each holder of Junior Subordinated Debentures affected thereby, no
such consent shall be given by the Property Trustee without the prior approval
of each holder of the Capital Securities. The Issuer Trustees shall not revoke
any action previously authorized or approved by a vote of the holders of the
Capital Securities except by subsequent vote of such holders. The Property
Trustee shall notify each holder of Capital Securities of any notice of default
with respect to the Junior Subordinated Debentures. In addition to obtaining the
foregoing approvals of such holders of the Capital Securities, prior to taking
any of the foregoing actions, the Issuer Trustees shall obtain an opinion of
counsel experienced in such matters to the effect that the Trust will not be
classified as an association taxable as a corporation for United States federal
income tax purposes on account of such action.
Any required approval of holders of Capital Securities may be given at
a meeting of such holders convened for such purpose or pursuant to written
consent. The Property Trustee will cause a notice of any meeting at which
holders of Capital Securities are entitled to vote, or of any matter upon which
action by written consent of such holders has been taken, to be given to each
holder of record of Capital Securities in the manner set forth in the Trust
Agreement.
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No vote or consent of the holders of Capital Securities will be
required for the Trust to redeem and cancel the Capital Securities in accordance
with the Trust Agreement.
Notwithstanding that holders of the Capital Securities are entitled to
vote or consent under any of the circumstances described above, any of the
Capital Securities that are owned by the Corporation, the Issuer Trustees or any
affiliate of the Corporation or of any Issuer Trustee, shall, for purposes of
such vote or consent, be treated as if they were not outstanding.
FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER
The Capital Securities are being offered and sold to qualified
institutional buyers ("QIBs") in reliance on Rule 144A ("Rule 144A Capital
Securities"). Capital Securities also may be offered and sold to institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) ("Institutional Accredited Investors") in transactions exempt
from registration under the Securities Act not made in reliance on Rule 144A
("Other Capital Securities").
In the event that Capital Securities are issued in certificated form,
the Capital Securities will be issued in blocks having a Liquidation Amount of
not less than $100,000 (100 Capital Securities) and multiples of $1,000 in
excess thereof and may be transferred or exchanged only in such blocks in the
manner and at the offices described below.
Rule 144A Capital Securities initially will be represented by one or
more Capital Securities in registered, global form (collectively, the "Global
Capital Securities"). The Global Capital Securities will be deposited upon
issuance with the Property Trustee as custodian for DTC, in Chicago, Illinois,
and registered in the name of DTC or its nominee, in each case for credit to an
account of a direct or indirect participant in DTC as described below.
Except as set forth below, the Global Capital Securities may be
transferred, in whole and not in part, only to another nominee of DTC or to a
successor of DTC or its nominee and only in amounts that would not cause a
holder to own less than 100 Capital Securities. Beneficial interests in the
Global Capital Securities may not be exchanged for Capital Securities in
certificated form, except in the limited circumstances described below. See
"--Exchange of Book-Entry Capital Securities for Certificated Capital
Securities."
Other Capital Securities will be issued only in registered,
certificated (i.e., non-global) form. Other Capital Securities may not be
exchanged for beneficial interests in any Global Capital Securities, except in
the limited circumstances described below. See "--Exchange of Certificated
Capital Securities for Book-Entry Capital Securities."
Rule 144A Capital Securities and Other Capital Securities will be
subject to certain restrictions on transfer and will bear a restrictive legend
as described under "Notice to Investors." In addition, transfer of beneficial
interests in the Global Capital Securities will be subject to the applicable
rules and procedures of DTC and its direct or indirect participants, which may
change from time to time.
DEPOSITARY PROCEDURES
DTC has advised the Trust and the Corporation that DTC is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of its Participants, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers
(including the Initial Purchaser), banks, trust companies, clearing corporations
and certain other organizations. Indirect access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly (collectively, the "Indirect Participants").
Persons who are not Participants may beneficially own securities held by or on
behalf of DTC only through the Participants or the Indirect Participants. The
ownership interest and transfer of ownership
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interest of each actual purchaser of each security held by or on behalf of DTC
are recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Trust and the Corporation that, pursuant to
procedures established by it, (i) upon deposit of the Global Capital Securities,
DTC will credit the accounts of Participants designated by the Initial Purchaser
with portions of the Liquidation Amount of the Global Capital Securities, and
(ii) ownership of such interests in the Global Capital Securities will be shown
on, and the transfer of ownership thereof will be effected only through, records
maintained by DTC (with respect to the Participants) or by the Participants and
the Indirect Participants (with respect to other owners of beneficial interests
in the Global Capital Securities).
Investors in the Global Capital Securities may hold their interests
therein directly through DTC if they are Participants, or indirectly through
organizations that are Participants. All interests in a Global Capital Security
will be subject to the procedures and requirements of DTC. The laws of some
states require that certain persons take physical delivery in certificated form
of securities that they own. Consequently, the ability to transfer beneficial
interests in a Global Capital Security to such persons will be limited to that
extent. Because DTC can act only on behalf of Participants, which in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having beneficial interests in a Global Capital Security to pledge such
interests to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such interests, may be affected by the lack
of a physical certificate evidencing such interests. For certain other
restrictions on the transferability of the Capital Securities, see "--Exchange
of Book-Entry Capital Securities for Certificated Capital Securities" and
"--Exchange of Certificated Capital Securities for Book-Entry Capital
Securities."
Except as described below, owners of interests in the Global Capital
Securities will not have Capital Securities registered in their name, will not
receive physical delivery of Capital Securities in certificated form and will
not be considered the registered owners or holders thereof under the Trust
Agreement for any purpose.
Payments in respect of the Global Capital Security registered in the
name of DTC, or its nominee, will be payable by the Property Trustee to DTC in
its capacity as the registered holder under the Trust Agreement. Under the terms
of the Trust Agreement, the Property Trustee will treat the persons in whose
names the Capital Securities, including the Global Capital Securities, are
registered as the owners thereof for the purpose of receiving such payments and
for any and all other purposes whatsoever. Consequently, neither the Property
Trustee nor any agent thereof has or will have any responsibility or liability
for (i) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interests in the Global Capital Securities or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Capital Securities; or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants. DTC has
advised the Trust and the Corporation that its current practice, upon receipt of
any payment in respect of securities such as the Capital Securities, is to
credit the accounts of the relevant Participants with the payment on the payment
date, in amounts proportionate to their respective holdings in Liquidation
Amount of beneficial interests in the relevant security as shown on the records
of DTC unless DTC has reason to believe it will not receive payment on such
payment date. Payments by the Participants and the Indirect Participants to the
beneficial owners of Capital Securities will be governed by standing
instructions and customary practices and will be the responsibility of the
Participants or the Indirect Participants and will not be the responsibility of
DTC, the Property Trustee, the Trust or the Corporation. None of the Trust, the
Corporation or the Property Trustee will be liable for any delay by DTC or any
of its Participants or Indirect Participants in identifying the beneficial
owners of the Capital Securities, and the Trust, the Corporation and the
Property Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
Any secondary market trading activity in interests in the Global
Capital Securities will settle in immediately available funds, subject in all
cases to the rules and procedures of DTC and its Participants. Transfers between
Participants in DTC will be effected in accordance with DTC's procedures, and
will settle in same-day funds.
DTC has advised the Trust and the Corporation that it will take any
action permitted to be taken by a holder of Capital Securities (including,
without limitation, the presentation of Capital Securities for exchange as
described below) only
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at the direction of one or more Participants to whose account with DTC interests
in the Global Capital Securities are credited and only in respect of such
portion of the Liquidation Amount of the Capital Securities as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the Trust Agreement, DTC reserves the right to
exchange the Global Capital Securities for legended Capital Securities in
certificated form and to distribute such Capital Securities to its Participants.
The information in this section concerning DTC and its book-entry
system has been obtained from sources that the Trust and the Corporation believe
to be reliable, but neither the Trust nor the Corporation takes responsibility
for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate
transfers of interests in the Global Capital Securities among Participants in
DTC, it is under no obligation to perform or to continue to perform such
procedures, and such procedures may be discontinued at any time. None of the
Trust, the Corporation or the Property Trustee will have any responsibility for
the performance by DTC or its Participants or Indirect Participants of any of
their respective obligations under the rules and procedures governing their
operations.
EXCHANGE OF BOOK-ENTRY CAPITAL SECURITIES FOR CERTIFICATED CAPITAL SECURITIES
A Global Capital Security is exchangeable for Capital Securities in
registered certificated form if (i) DTC (a) notifies the Trust that it is
unwilling or unable to continue as Depositary for the Global Capital Security
and the Trust thereupon fails to appoint a successor Depositary within 90 days
of receipt of such notice, or (b) has ceased to be a clearing agency registered
under the Exchange Act and the Trust thereupon fails to appoint a successor
Depositary within 90 days of becoming aware of such condition; (ii) the
Corporation in its sole discretion elects to cause the issuance of the Capital
Securities in certificated form; or (iii) there shall have occurred and be
continuing an Event of Default or any event which after notice or lapse of time
or both would be an Event of Default under the Trust Agreement. In addition,
beneficial interests in a Global Capital Security may be exchanged by or on
behalf of DTC for certificated Capital Securities upon request by DTC, but only
upon at least 20 days prior written notice given to the Property Trustee in
accordance with DTC's customary procedures. In all cases, certificated Capital
Securities delivered in exchange for any Global Capital Security or beneficial
interests therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the Depositary (in accordance with
its customary procedures) and will bear the restrictive legend referred to in
"Notice to Investors," unless the Property Trustee determines otherwise in
compliance with applicable law.
EXCHANGE OF CERTIFICATED CAPITAL SECURITIES FOR BOOK-ENTRY CAPITAL SECURITIES
Other Capital Securities, which will be issued in certificated form,
may not be exchanged for beneficial interests in any Global Capital Security,
unless such exchange occurs in connection with a transfer of such Other Capital
Securities and the transferor first delivers to the Property Trustee a written
certificate (in the form provided in the Trust Agreement) to the effect that
such transfer will comply with the appropriate transfer restrictions applicable
to such Capital Securities.
PAYMENT AND PAYING AGENCY
Payments with respect to the Capital Securities held in global form
shall be made to the Depositary, which shall credit the relevant accounts at the
Depositary on the applicable Distribution Dates, or with respect to the Capital
Securities that are not held by the Depositary, such payments shall be made by
check mailed to the address of the holder entitled thereto as such address shall
appear on the register. The paying agent (the "Paying Agent") shall initially be
the Property Trustee and any co-paying agent chosen by the Property Trustee and
acceptable to the Administrative Trustees and the Corporation. The Paying Agent
shall be permitted to resign as Paying Agent upon 30 days notice to the Property
Trustee, the Administrative Trustees and the Corporation. In the event that the
Property Trustee shall no longer be the Paying Agent, the Administrative
Trustees shall appoint a successor (which shall be a bank or trust company
acceptable to the Administrative Trustees and the Corporation) to act as Paying
Agent.
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RESTRICTIONS ON TRANSFER
The Capital Securities will be issued, and may be transferred, only in
blocks having a Liquidation Amount of not less than $100,000 (100 Capital
Securities) and multiples of $1,000 in excess thereof. Any attempted sale,
transfer or other disposition of Capital Securities in a block having a
Liquidation Amount of less than $100,000 shall be deemed to be void and of no
legal effect whatsoever. Any such purported transferee shall be deemed not to be
the holder of such Capital Securities for any purpose, including but not limited
to the receipt of Distributions on such Capital Securities, and such purported
transferee shall be deemed to have no interest whatsoever in such Capital
Securities.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the
Capital Securities.
Registration of transfers of the Capital Securities will be effected
without charge by or on behalf of the Trust, but upon payment of any tax or
other governmental charges that may be imposed in connection with any transfer
or exchange. The Trust will not be required to register or cause to be
registered the transfer of the Capital Securities after they have been called
for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than during the occurrence and continuance
of an Event of Default, will undertake to perform only such duties as are
specifically set forth in the Trust Agreement and, during the existence of an
Event of Default, must exercise the same degree of care and skill as a prudent
person would exercise or use in the conduct of his or her own affairs. Subject
to this provision, the Property Trustee is under no obligation to exercise any
of the powers vested in it by the Trust Agreement at the request of any holder
of Trust Securities, unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby. If no Event of
Default has occurred and is continuing and the Property Trustee is required to
decide between alternative causes of action, construe ambiguous provisions in
the Trust Agreement or is unsure of the application of any provision of the
Trust Agreement, and the matter is not one on which holders of the Capital
Securities or the Common Securities are entitled under the Trust Agreement to
vote, then the Property Trustee shall take such action as is directed by the
Corporation and, if not so directed, shall take such action as it deems
advisable and in the best interests of the holders of the Trust Securities and
will have no liability, except for its own bad faith, negligence or willful
misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that (i) the Trust will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act; (ii) the Trust will be classified as a grantor trust for
United States federal income tax purposes; and (iii) the Junior Subordinated
Debentures will be treated as indebtedness of the Corporation for United States
federal income tax purposes. The Corporation and the Administrative Trustees are
authorized to take any action, not inconsistent with applicable law, the
certificate of trust of the Trust or the Trust Agreement, that the Corporation
and the Administrative Trustees determine in their discretion to be necessary or
desirable for such purposes, as long as such action does not materially
adversely affect the interests of the holders of the Trust Securities.
The Trust Agreement provides that (i) holders of the Trust Securities
have no preemptive or similar rights to subscribe for any additional Trust
Securities, and (ii) the issuance of Trust Securities is not subject to
preemptive rights.
The Trust may not borrow money, issue debt, execute mortgages or pledge
any of its assets.
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DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under the
Indenture, as supplemented from time to time. The Indenture will not be
qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). By its terms, however, the Indenture will incorporate certain
provisions of the Trust Indenture Act. This summary of certain terms and
provisions of the Junior Subordinated Debentures and the Indenture does not
purport to be complete, and where reference is made to particular provisions of
the Indenture, such provisions, including the definitions of certain terms, some
of which are not otherwise defined herein, are qualified in their entirety by
reference to all of the provisions of the Indenture and those terms made a part
of the Indenture by the Trust Indenture Act.
GENERAL
Concurrently with the issuance of the Capital Securities, the Trust
will invest the proceeds thereof, together with the consideration paid by the
Corporation for the Common Securities, in Junior Subordinated Debentures issued
by the Corporation. The Junior Subordinated Debentures will bear interest from
July 24 , 1998 at the rate per annum reset quarterly equal to 3-month LIBOR plus
180 basis points ("Interest Rate"), payable quarterly in arrears on March 1,
June 1, September 1 and December 1 of each year (each, an "Interest Payment
Date"), commencing December 1, 1998. It is anticipated that, until the
liquidation (if any) of the Trust, the Junior Subordinated Debentures will be
held in the name of the Property Trustee in trust for the benefit of the holders
of the Trust Securities. The amount of interest payable for any period will be
computed on the basis of the actual number of days elapsed in such period and a
360-day year. In the event that any date on which interest is payable on the
Junior Subordinated Debentures is not a Business Day, then payment of the
interest payable on such date will be made on the next succeeding day that is a
Business Day (and without any interest or other payment in respect of any such
delay), except that if such next succeeding Business Day falls in the next
succeeding calendar month, then such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date. To the extent permitted by applicable law, accrued interest that
is not paid on the applicable Interest Payment Date will bear interest thereon
at the applicable periodic Interest Rate, compounded quarterly for each
quarterly period ("Compounded Interest"). The term "interest," as used herein,
shall include quarterly interest payments, interest on quarterly interest
payments not paid on the applicable Interest Payment Date and Additional Sums
(as defined below), as applicable.
The Interest Rate and amount of interest payable will be calculated or
determined in the same manner as the Distribution Rate and amounts of
Distributions payable, respectively, as described under "Description of Capital
Securities--Distributions."
The Junior Subordinated Debentures will be issued in denominations of
$100,000 and multiples of $1,000 in excess thereof. The Junior Subordinated
Debentures will mature on September 1, 2028 (the "Stated Maturity Date").
The Junior Subordinated Debentures will rank pari passu with all Other
Debentures and will be unsecured and will rank subordinate and junior in right
of payment to all Senior Indebtedness to the extent and in the manner set forth
in the Indenture. See "--Subordination."
The Corporation is a bank holding company regulated by the FRB, and
almost all of the operating assets of the Corporation are owned by its second
tier subsidiary, Manufacturers Bank. The Corporation relies primarily on
preferred stock dividends from MNC, which in turn relies on common stock
dividends from Manufacturers Bank, to meet its obligations for payment of
principal and interest on its outstanding debt obligations and corporate
expenses. There are regulatory limitations (discussed in more detail below) on
the payment of dividends to the Corporation from MNC and to MNC from
Manufacturers Bank. In addition to restrictions on the payment of dividends, the
Bank is subject to certain restrictions imposed by federal law on any extensions
of credit to, and certain other transactions with, the Corporation and MNC and
certain other affiliates, and on investments in stock or other securities
thereof. Such restrictions prevent the Corporation and MNC and such other
affiliates from borrowing from Manufacturers Bank, unless the loans are secured
by certain types of collateral. Furthermore, such secured loans, other
transactions and investments by Manufacturers Bank are generally limited in
amount as to each of the Corporation, MNC and such other affiliates to 10% of
Manufacturers Bank's capital and surplus, and as to all of the Corporation, MNC
and such other affiliates to an aggregate of 20% of Manufacturers
72
Bank's capital and surplus. As of March 31, 1998, approximately $12.1 million of
credit was available to the Corporation from the Bank under this limitation.
Manufacturers Bank is a state non-member bank of the Federal Reserve
System and is regulated by the FDIC and the Commissioner. There are various
regulatory limitations applicable to the payment of dividends by MNC and
Manufacturers Bank as well as the payment of dividends by the Corporation to its
shareholders. Under the laws of Illinois, a state-chartered bank is permitted to
declare and pay dividends in amounts up to the amount of its accumulated net
profits, provided that it shall retain in its surplus at least one-tenth of its
net profits since the date of the declaration of its most recent previous
dividend until said additions to surplus, in the aggregate, equal at least the
paid-in-capital of such bank. In no event, therefore, may Manufacturers Bank,
while it continues its banking business, pay dividends in excess of its net
profits then on hand (after deduction for losses and bad debts). Under existing
supervisory practices at March 31, 1998, Manufacturers Bank could have paid
additional dividends of up to $1.5 million without regulatory approval and MNC
could have paid $7.8 million of dividends and complied with the minimum
regulatory capital requirements applicable to it. Bank regulatory agencies have
authority to prohibit MNC, Manufacturers Bank or the Corporation from engaging
in an unsafe or unsound practice in conducting their business. The payment of
dividends, depending upon the financial condition of Manufacturers Bank, MNC or
the Corporation, could be deemed to constitute such an unsafe or unsound
practice. The FRB has stated that, as a matter of prudent banking, a bank or
bank holding company should not maintain its existing rate of cash dividends on
common stock unless (i) the organization's net income available to common
shareholders over the past year has been sufficient to fund fully the dividends;
and (ii) the prospective rate of earnings retention appears consistent with the
organization's capital needs, asset quality, and overall financial condition.
FORM, REGISTRATION AND TRANSFER
If the Junior Subordinated Debentures are distributed to the holders of
the Trust Securities, the Junior Subordinated Debentures may be represented by
one or more global certificates registered in the name of Cede & Co., as the
nominee of DTC. The depositary arrangements for such Junior Subordinated
Debentures are expected to be substantially similar to those in effect for the
Capital Securities. For a description of DTC and the terms of the depositary
arrangements relating to payments, transfers, voting rights, redemptions and
other notices and other matters, see "Description of Capital Securities--Form,
Denomination, Book-Entry Procedures and Transfer."
PAYMENT AND PAYING AGENTS
Payment of principal of and interest on Junior Subordinated Debentures
will be made at the office of the Debenture Trustee in Chicago, Illinois or at
the office of such Paying Agent or Paying Agents as the Corporation may
designate from time to time, except that at the option of the Corporation
payment of any interest may be made, except in the case of Junior Subordinated
Debentures in global form (i) by check mailed to the address of the Person
entitled thereto as such address shall appear in the register for Junior
Subordinated Debentures; or (ii) by transfer to an account maintained by the
Person entitled thereto as specified in such register, provided that proper
transfer instructions have been received by the relevant record date. Payment of
any interest on any Junior Subordinated Debenture will be made to the Person in
whose name such Junior Subordinated Debenture is registered at the close of
business on the record date for such interest, except in the case of defaulted
interest. The Corporation may at any time designate additional Paying Agents or
rescind the designation of any Paying Agent; however, the Corporation will at
all times be required to maintain a Paying Agent in each place of payment for
the Junior Subordinated Debentures.
Any moneys deposited with the Debenture Trustee or any Paying Agent, or
then held by the Corporation in trust, for the payment of the principal of or
interest on any Junior Subordinated Debenture and remaining unclaimed for two
years after such principal or interest has become due and payable shall, at the
request of the Corporation, be repaid to the Corporation and the holder of such
Junior Subordinated Debenture shall thereafter look, as a general unsecured
creditor, only to the Corporation for payment thereof.
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OPTION TO EXTEND INTEREST PAYMENT DATE
So long as no Debenture Event of Default has occurred and is
continuing, the Corporation will have the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debentures, at any time and from
time to time, for a period not exceeding 20 consecutive quarterly periods with
respect to each Extension Period, provided that no Extension Period shall end on
a date other than an Interest Payment Date or extend beyond the Stated Maturity
Date. At the end of such Extension Period, the Corporation must pay all interest
then accrued and unpaid (together with interest thereon at the applicable
periodic Interest Rate, compounded quarterly, to the extent permitted by
applicable law). During an Extension Period, interest will continue to accrue
and, if the Junior Subordinated Debentures have been distributed to holders of
the Trust Securities, holders of Junior Subordinated Debentures (or holders of
the Trust Securities while Trust Securities are outstanding) will be required to
accrue such deferred interest income for United States federal income tax
purposes prior to the receipt of cash attributable to such income. See "Certain
Federal Income Tax Consequences--Original Issue Discount."
During any such Extension Period, the Corporation may not (i) declare
or pay any dividends or distributions on, or redeem, purchase, acquire, or make
a liquidation payment with respect to, any of the Corporation's capital stock;
(ii) make any payment of principal of, or interest or premium, if any, on or
repay, repurchase or redeem any debt securities of the Corporation (including
any Other Debentures) that rank pari passu with or junior in right of payment to
the Junior Subordinated Debentures; or (iii) make any guarantee payments with
respect to any guarantee by the Corporation of the debt securities of any
subsidiary of the Corporation (including any Other Guarantees) if such guarantee
ranks pari passu with or junior in right of payment to the Junior Subordinated
Debentures (other than (a) dividends or distributions in shares of, or options,
warrants or rights to subscribe for or purchase shares of, common stock of the
Corporation, (b) any declaration of a dividend in connection with the
implementation of a stockholders' rights plan, or the issuance of stock under
any such plan in the future, or the redemption or repurchase of any such rights
pursuant thereto, (c) payments under the Guarantee, (d) as a result of a
reclassification of the Corporation's capital stock or the exchange or
conversion of one class or series of the Corporation's capital stock for another
class or series of the Corporation's capital stock, (e) the purchase of
fractional interests in shares of the Corporation's capital stock pursuant to
the conversion or exchange provisions of such capital stock or the security
being converted or exchanged, and (f) purchases of common stock of the
Corporation related to the issuance of common stock or rights under any of the
Corporation's benefit plans for its directors, officers or employees or any of
the Corporation's dividend reinvestment plans). The Corporation has no current
intention to exercise its option to defer payments of interest on the Junior
Subordinated Debentures.
Prior to the termination of any such Extension Period, the Corporation
may further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed 20 consecutive quarterly periods, end on a
date other than an Interest Payment Date or extend beyond the Stated Maturity
Date. Upon the termination of any such Extension Period and the payment of all
amounts then due, the Corporation may elect to begin a new Extension Period,
subject to the requirements set forth herein. No interest shall be due and
payable during an Extension Period, except at the end thereof. The Corporation
must give the Property Trustee, the Administrative Trustees and the Debenture
Trustee notice of its election of any Extension Period (or an extension thereof)
at least five Business Days prior to the earlier of (i) the date the
Distributions on the Trust Securities would have been payable except for the
election to begin or extend such Extension Period; or (ii) the date the
Administrative Trustees are required to give notice to any securities exchange
or to holders of Capital Securities of the record date or the date such
Distributions are payable, but in any event not less than five Business Days
prior to such record date. The Debenture Trustee shall give notice of the
Corporation's election to begin or extend a new Extension Period to the holders
of the Capital Securities. There is no limitation on the number of times that
the Corporation may elect to begin an Extension Period.
OPTIONAL PREPAYMENT
The Junior Subordinated Debentures will be prepayable, in whole or in
part, at the option of the Corporation on or after September 1, 2008 (the
"Initial Optional Redemption Date"), subject to the Corporation having received
any required regulatory approval, at a price (the "Prepayment Price") equal to
100% of the principal amount of the Junior Subordinated Debentures so prepaid,
plus accrued and unpaid interest thereon to the date of prepayment.
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SPECIAL EVENT PREPAYMENT
Prior to the Initial Optional Redemption Date, if a Special Event has
occurred and is continuing, the Corporation may, at its option and subject to
receipt of any required regulatory approval, elect to prepay the Junior
Subordinated Debentures, in whole but not in part, which election shall be made
at any time within 90 days of the occurrence of such Special Event, at the
Prepayment Price. If, following the occurrence of a Special Event, the
Corporation exercises its option to prepay the Junior Subordinated Debentures,
then the proceeds of that prepayment must be applied to redeem a Like Amount of
Trust Securities at the Redemption Price. See "Description of Capital
Securities--Redemption."
A "Special Event" means an Investment Company Event, a Regulatory
Capital Event or a Tax Event, as the case may be.
An "Investment Company Event" means the receipt by the Corporation and
the Trust of an opinion of independent securities counsel experienced in such
matters to the effect that as a result of (a) any amendment to, or change
(including any announced prospective change) in, the laws or any regulation
thereunder of the United States or any rules, guidelines or policies of any
applicable regulatory authority for the Corporation, or (b) any official
administrative or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or which pronouncement or
decision is announced on or after the date of original issuance of the Trust
Securities, the Trust is, or within 90 days of the date of such opinion will be,
considered an Investment Company that is required to be registered under the
Investment Company Act.
A "Regulatory Capital Event" means the receipt by the Corporation of an
opinion of independent bank regulatory counsel experienced in such matters to
the effect that, as a result of (i) any amendment to, or change (including any
announced prospective change) in, the laws (or any regulations thereunder) of
the United States or any rules, guidelines or policies of an applicable
regulatory agency, or (ii) any official administrative pronouncement or judicial
decision interpreting or applying such laws or regulations, which amendment or
change is effective or which pronouncement or decision is announced on or after
the date of original issuance of the Trust Securities, the Capital Securities do
not constitute, or within 90 days of the date of such opinion, would not
constitute, Tier 1 Capital (or its then equivalent if the Corporation were
subject to such capital requirement).
A "Tax Event" means the receipt by the Corporation and the Trust of an
opinion of independent tax counsel experienced in such matters to the effect
that, as a result of any amendment to, or change (including any announced
prospective change) in, the laws or any regulations thereunder of the United
States or any political subdivision or taxing authority thereof or therein, or
as a result of any official administrative pronouncement or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or such pronouncement or decision is announced on or after the date of
original issuance of the Trust Securities, there is more than an insubstantial
risk that (i) the Trust is, or will be within 90 days of the date of such
opinion, subject to United States federal income tax with respect to income
received or accrued on the Junior Subordinated Debentures; (ii) interest payable
by the Corporation on the Junior Subordinated Debentures is not, or within 90
days of the date of such opinion will not be, deductible by the Corporation, in
whole or in part, for United States federal income tax purposes; or (iii) the
Trust is, or will be within 90 days of the date of such opinion, subject to more
than a de minimis amount of other taxes, duties or other governmental charges.
Notice of any prepayment will be mailed at least 30 days but not more
than 60 days before the prepayment date to each holder of Junior Subordinated
Debentures to be prepaid at its registered address. Unless the Corporation
defaults in payment of the prepayment price, on and after the prepayment date
interest shall cease to accrue on such Junior Subordinated Debentures called for
prepayment.
If the Trust is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, the Corporation will pay as
additional amounts on the Junior Subordinated Debentures such amounts as may be
necessary in order that the amount of Distributions then due and payable by the
Trust on the outstanding Trust Securities shall not be reduced as a result of
any additional taxes, duties or other governmental charges to which the Trust
has become subject as a result of a Tax Event ("Additional Sums").
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CERTAIN COVENANTS OF THE CORPORATION
The Corporation will also covenant that it will not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Corporation's capital stock;
(ii) make any payment of principal of, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Corporation (including any Other
Debentures) that rank pari passu with or junior in right of payment to the
Junior Subordinated Debentures; or (iii) make any guarantee payments with
respect to any guarantee by the Corporation of the debt securities of any
subsidiary of the Corporation (including any Other Guarantees) if such guarantee
ranks pari passu with or junior in right of payment to the Junior Subordinated
Debentures (other than (a) dividends or distributions in shares of, or options,
warrants or rights to subscribe for or purchase shares of, common stock of the
Corporation, (b) any declaration of a dividend in connection with the
implementation of a stockholders' rights plan, or the issuance of stock under
any such plan in the future, or the redemption or repurchase of any such rights
pursuant thereto, (c) payments under the Guarantee, (d) as a result of a
reclassification of the Corporation's capital stock or the exchange or
conversion of one class or series of the Corporation's capital stock for another
class or series of the Corporation's capital stock, (e) the purchase of
fractional interests in shares of the Corporation's capital stock pursuant to
the conversion or exchange provisions of such capital stock or the security
being converted or exchanged, and (f) purchases of common stock of the
Corporation related to the issuance of common stock or rights under any of the
Corporation's benefit plans for its directors, officers or employees or any of
the Corporation's dividend reinvestment plans), if at such time: (A) there shall
have occurred any event of which the Corporation has actual knowledge that (1)
is, or with the giving of notice or the lapse of time, or both, would be, a
Debenture Event of Default, and (2) with respect to which the Corporation shall
not have taken reasonable steps to cure; (B) the Corporation shall be in default
with respect to its payment of any obligations under the Guarantee; or (C) the
Corporation shall have given notice of its election to exercise its right to
commence an Extension Period as provided in the Indenture and such Extension
Period, or any extension thereof, shall have commenced and be continuing.
So long as the Trust Securities remain outstanding, the Corporation
also will covenant (i) to directly or indirectly maintain 100% direct or
indirect ownership of the Common Securities; provided, however, that any
permitted successor of the Corporation under the Indenture may succeed to the
Corporation's ownership of such Common Securities; (ii) to use its reasonable
efforts to cause the Trust (a) to remain a business trust, except in connection
with the distribution of Junior Subordinated Debentures to the holders of Trust
Securities in liquidation of the Trust, the redemption of all of the Trust
Securities, or certain mergers, consolidations or amalgamations, each as
permitted by the Trust Agreement, and (b) to otherwise continue to be classified
as a grantor trust and not an association taxable as a corporation for United
States federal income tax purposes; (iii) to use its reasonable efforts to cause
each holder of Trust Securities to be treated as owning an undivided beneficial
interest in the Junior Subordinated Debentures; and (iv) to not cause, as
sponsor of the Trust, or permit, as holder of the Common Securities, the
dissolution, winding up or liquidation of the Trust, except as provided in the
Trust Agreement.
MODIFICATION OF INDENTURE
From time to time the Corporation and the Debenture Trustee may,
without the consent of the holders of Junior Subordinated Debentures, amend the
Indenture for specified purposes, including, among other things, curing
ambiguities, defects or inconsistencies, provided that any such action does not
materially adversely affect the interest of the holders of Junior Subordinated
Debentures, and qualifying, or maintaining the qualification of, the Indenture
under the Trust Indenture Act. The Indenture contains provisions permitting the
Corporation and the Debenture Trustee, with the consent of the holders of a
majority in aggregate principal amount of Junior Subordinated Debentures, to
modify the Indenture in a manner affecting the rights of the holders of Junior
Subordinated Debentures; provided, however, that no such modification may,
without the consent of the holders of each outstanding Junior Subordinated
Debenture so affected, (i) change the Stated Maturity Date, (ii) reduce the
principal amount of the Junior Subordinated Debentures or reduce the amount
payable on prepayment thereof or reduce the rate or extend the time of payment
of interest thereon except pursuant to the Corporation's right under the
Indenture to defer the payment of interest as provided therein (see "--Option to
Extend Interest Payment Date"), (iii) make the principal of, or interest on, the
Junior Subordinated Debentures payable in any coin or currency other than that
provided in the Junior Subordinated Debentures, (iv) impair or affect the right
of any holder of Junior Subordinated Debentures to institute suit for the
payment thereof, or (v) reduce the percentage of principal amount of Junior
Subordinated Debentures, the holders of which are required to consent to any
such modification of the Indenture.
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DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures constitutes a
"Debenture Event of Default" (whatever the reason for such Debenture Event of
Default and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(i) failure for 30 days to pay any interest (including
Compounded Interest and Additional Sums, if any) on the Junior
Subordinated Debentures or any Other Debentures, when due (subject to
the deferral of any due date in the case of an Extension Period with
respect to the Junior Subordinated Debentures or Other Debentures, as
the case may be); or
(ii) failure to pay any principal or premium, if any, on the
Junior Subordinated Debentures or any Other Debentures when due whether
at maturity, upon prepayment, by declaration of acceleration of
maturity or otherwise; or
(iii) failure to observe or perform any other covenant
contained in the Indenture for 90 days after written notice to the
Corporation from the Debenture Trustee or to the Corporation and the
Debenture Trustee from the holders of at least 25% in aggregate
outstanding principal amount of Junior Subordinated Debentures; or
(iv) certain events related to bankruptcy, insolvency or
reorganization of the Corporation.
The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debentures have, subject to certain exceptions, the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Debenture Trustee. The Debenture Trustee or the holders
of not less than 25% in aggregate outstanding principal amount of the Junior
Subordinated Debentures may declare the principal due and payable immediately
upon a Debenture Event of Default. The holders of a majority in aggregate
outstanding principal amount of the Junior Subordinated Debentures may annul
such declaration and waive the default if the default (other than the
non-payment of the principal of the Junior Subordinated Debentures which has
become due solely by such acceleration) has been cured and a sum sufficient to
pay all matured installments of interest and principal due otherwise than by
acceleration has been deposited with the Debenture Trustee.
The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debentures affected thereby may, on behalf of the
holders of all the Junior Subordinated Debentures, waive any past default,
except a default in the payment of principal or interest (unless such default
has been cured and a sum sufficient to pay all matured installments of interest
and principal due otherwise than by acceleration has been deposited with the
Debenture Trustee) or a default in respect of a covenant or provision which
under the Indenture cannot be modified or amended without the consent of the
holder of each outstanding Junior Subordinated Debenture.
The Indenture requires the annual filing by the Corporation with the
Debenture Trustee of a certificate as to the absence of certain defaults under
the Indenture.
The Indenture provides that the Debenture Trustee may withhold notice
of a Debenture Event of Default from the holders of the Junior Subordinated
Debentures if the Debenture Trustee considers it in the interest of such holders
to do so.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF CAPITAL SECURITIES
If a Debenture Event of Default shall have occurred and be continuing
and shall be attributable to the failure of the Corporation to pay the principal
of or interest (including Compounded Interest and Additional Sums, if any) on
the Junior Subordinated Debentures on the due date, a holder of Capital
Securities may institute a Direct Action. The Corporation may not amend the
Indenture to remove the foregoing right to bring a Direct Action without the
prior written consent of the holders of all of the Capital Securities.
Notwithstanding any payments made to a holder of Capital Securities by the
Corporation in connection with a Direct Action, the Corporation shall remain
obligated to pay the principal of or interest (including, Compounded Interest
and Additional Sums, if any) on the Junior Subordinated Debentures, and the
Corporation
77
shall be subrogated to the rights of the holder of such Capital Securities with
respect to payments on the Capital Securities to the extent of any payments made
by the Corporation to such holder in any Direct Action.
The holders of the Capital Securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the Junior Subordinated Debentures, unless there
shall have been an Event of Default under the Trust Agreement. See "Description
of Capital Securities--Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Corporation shall not consolidate with
or merge into any other Person or convey, transfer or lease its properties as an
entirety or substantially as an entirety to any Person, and no Person shall
consolidate with or merge into the Corporation or convey, transfer or lease its
properties as an entirety or substantially as an entirety to the Corporation,
unless (i) in case the Corporation consolidates with or merges into another
Person or conveys or transfers its properties as an entirety or substantially as
an entirety to any Person, the successor Person is organized under the laws of
the United States or any State or the District of Columbia, and such successor
Person expressly assumes the Corporation's obligations under the Indenture with
respect to the Junior Subordinated Debentures; (ii) immediately after giving
effect thereto, no Debenture Event of Default, and no event which, after notice
or lapse of time or both, would become a Debenture Event of Default, shall have
occurred and be continuing; and (iii) certain other conditions as prescribed in
the Indenture are met.
The general provisions of the Indenture do not afford holders of the
Junior Subordinated Debentures protection in the event of a highly leveraged or
other transaction involving the Corporation that may adversely affect holders of
the Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all Junior
Subordinated Debentures not previously delivered to the Debenture Trustee for
cancellation (i) have become due and payable or (ii) will become due and payable
at maturity or called for prepayment within one year, and the Corporation
deposits or causes to be deposited with the Debenture Trustee funds, in trust,
for the purpose and in an amount sufficient to pay and discharge the entire
indebtedness on the Junior Subordinated Debentures not previously delivered to
the Debenture Trustee for cancellation, for the principal and interest
(including Compounded Interest and Additional Sums, if any) to the date of the
prepayment or to the Stated Maturity Date, as the case may be, then the
Indenture will cease to be of any further effect (except as to the Corporation's
obligations to pay all other sums due pursuant to the Indenture and to provide
the officers' certificates and opinions of counsel described therein), and the
Corporation will be deemed to have satisfied and discharged the Indenture.
SUBORDINATION
In the Indenture, the Corporation has covenanted and agreed that any
Junior Subordinated Debentures issued thereunder will be subordinate and junior
in right of payment to all Senior Indebtedness to the extent provided in the
Indenture. Upon any payment or distribution of assets to creditors upon any
liquidation, dissolution, winding up, reorganization, assignment for the benefit
of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Corporation, all Senior Indebtedness must be paid
in full before the holders of Junior Subordinated Debentures will be entitled to
receive or retain any payment in respect thereof.
In the event of the acceleration of the maturity of Junior Subordinated
Debentures, the holders of all Senior Indebtedness outstanding at the time of
such acceleration will first be entitled to receive payment in full of such
Senior Indebtedness before the holders of Junior Subordinated Debentures will be
entitled to receive or retain any payment with respect to the Junior
Subordinated Debentures.
No payments on account of principal or interest, if any, with respect
to the Junior Subordinated Debentures may be made if there shall have occurred
and be continuing a default in any payment with respect to Senior Indebtedness,
or an
78
event of default with respect to any Senior Indebtedness resulting in the
acceleration of the maturity thereof, or if any judicial proceeding, shall be
pending with respect to any such default.
"Indebtedness" shall mean (i) every obligation of the Corporation for
money borrowed; (ii) every obligation of the Corporation evidenced by bonds,
debentures, notes or other similar instruments, including obligations incurred
in connection with the acquisition of property, assets or businesses; (iii)
every reimbursement obligation of the Corporation with respect to letters of
credit, banker's acceptances or similar facilities issued for the account of the
Corporation; (iv) every obligation of the Corporation issued or assumed as the
deferred purchase price of property or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of business); (v)
every capital lease obligation of the Corporation; (vi) all indebtedness of the
Corporation, whether incurred on or prior to the date of the Indenture or
thereafter incurred, for claims in respect of derivative products, including
interest rate, foreign exchange rate and commodity forward contracts, options
and swaps and similar arrangements; and (vii) every obligation of the type
referred to in clauses (i) through (vi) of another Person and all dividends of
another Person the payment of which, in either case, the Corporation has
guaranteed or is responsible or liable for, directly or indirectly, as obligor
or otherwise.
"Indebtedness Ranking on a Parity with the Junior Subordinated
Debentures" shall mean (i) Indebtedness, whether outstanding on the date of
execution of the Indenture or thereafter created, assumed or incurred, to the
extent such Indebtedness by its terms ranks equally with and not prior to the
Junior Subordinated Debentures in right of payment upon the happening of the
dissolution, winding-up, liquidation or reorganization of the Corporation, and
(ii) all other debt securities, and guarantees with respect to those debt
securities, issued to any trust other than the Trust, or a trustee of such
trust, partnership or other entity affiliated with the Corporation that is a
financing vehicle of the Corporation (a "financing entity") in connection with
the issuance by such financing entity of equity securities or other securities
guaranteed by the Corporation pursuant to an instrument that ranks pari passu
with or junior in right of payment to the Guarantee. The securing of any
Indebtedness, otherwise constituting Indebtedness Ranking on a Parity with the
Junior Subordinated Debentures, shall not be deemed to prevent such Indebtedness
from constituting Indebtedness Ranking on a Parity with the Junior Subordinated
Debentures.
"Indebtedness Ranking Junior to the Junior Subordinated Debentures"
shall mean any Indebtedness, whether outstanding on the date of execution of the
Indenture or thereafter created, assumed or incurred, to the extent such
Indebtedness by its terms ranks junior to and not equally with or prior to the
Junior Subordinated Debentures (and any other Indebtedness Ranking on a Parity
with the Junior Subordinated Debentures) in right of payment upon the happening
of the dissolution, winding-up, liquidation or reorganization of the
Corporation. The securing of any Indebtedness, otherwise constituting
Indebtedness Ranking Junior to the Junior Subordinated Debentures, shall not be
deemed to prevent such Indebtedness from constituting Indebtedness Ranking
Junior to the Junior Subordinated Debentures.
"Senior Indebtedness" shall mean all Indebtedness, whether outstanding
on the date of execution of the Indenture or thereafter created, assumed or
incurred, except Indebtedness Ranking on a Parity with the Junior Subordinated
Debentures or Indebtedness Ranking Junior to the Junior Subordinated Debentures,
and any deferrals, renewals or extensions of such Senior Indebtedness.
RESTRICTIONS ON TRANSFER
The Junior Subordinated Debentures will be issued and may be
transferred only in blocks having an aggregate principal amount of not less than
$100,000 and multiples of $1,000 in excess thereof. Any such transfer of Junior
Subordinated Debentures in a block having an aggregate principal amount of less
than $100,000 shall be deemed to be void and of no legal effect whatsoever. Any
such purported transferee shall be deemed not to be the holder of such Junior
Subordinated Debentures for any purpose, including but not limited to the
receipt of payments on such Junior Subordinated Debentures, and such purported
transferee shall be deemed to have no interest whatsoever in such Junior
Subordinated Debentures.
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GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed
by and construed in accordance with the laws of the State of New York.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee is under no obligation to exercise any of the
powers vested in it by the Indenture at the request of any holder of Junior
Subordinated Debentures, unless offered reasonable indemnity by such holder
against the costs, expenses and liabilities which might be incurred thereby. The
Debenture Trustee is not required to expend or risk its own funds or otherwise
incur personal financial liability in the performance of its duties under the
Indenture.
DESCRIPTION OF GUARANTEE
The Guarantee will be executed and delivered by the Corporation
concurrently with the issuance by the Trust of the Capital Securities for the
benefit of the holders from time to time of the Capital Securities. LaSalle
National Bank will act as Guarantee Trustee under the Guarantee. The Guarantee
will not be qualified under the Trust Indenture Act. This summary of certain
provisions of the Guarantee does not purport to be complete and is subject to,
and qualified in its entirety by reference to, all of the provisions of the
Guarantee, including the definitions therein of certain terms, and the Trust
Indenture Act. The Guarantee Trustee will hold the Guarantee for the benefit of
the holders of the Capital Securities.
GENERAL
The Corporation will irrevocably agree to pay in full on a subordinated
basis, to the extent set forth herein, the Guarantee Payments (as defined below)
to the holders of the Capital Securities, as and when due, regardless of any
defense, right of set-off or counterclaim that the Trust may have or assert
other than the defense of payment. The following payments with respect to the
Capital Securities, to the extent not paid by or on behalf of the Trust (the
"Guarantee Payments"), will be subject to the Guarantee (i) any accumulated and
unpaid Distributions required to be paid on the Capital Securities, to the
extent that the Trust has funds on hand legally available therefor at such time;
(ii) the applicable Redemption Price with respect to the Capital Securities
called for redemption, to the extent that the Trust has funds on hand legally
available therefor at such time; and (iii) upon a voluntary or involuntary
dissolution, winding-up or liquidation of the Trust (other than in connection
with the distribution of the Junior Subordinated Debentures to holders of the
Capital Securities or the redemption of all Capital Securities), the lesser of
(a) the Liquidation Distribution, to the extent the Trust has funds legally
available therefor at the time, and (b) the amount of assets of the Trust
remaining available for distribution to holders of Capital Securities after
satisfaction of liabilities to creditors of the Trust as required by applicable
law. The Corporation's obligation to make a Guarantee Payment may be satisfied
by direct payment of the required amounts by the Corporation to the holders of
the Capital Securities or by causing the Trust to pay such amounts to such
holders.
The Guarantee will be an irrevocable guarantee on a subordinated basis
of the Trust's obligations under the Capital Securities, but will apply only to
the extent that the Trust has funds sufficient to make such payments. If the
Corporation does not make interest payments on the Junior Subordinated
Debentures held by the Trust, the Trust will not be able to pay the
Distributions on the Capital Securities and will not have funds legally
available therefor. See "Relationship Among the Capital Securities, the Junior
Subordinated Debentures and the Guarantee."
The Guarantee will rank subordinate and junior in right of payment to
all Senior Indebtedness to the extent provided therein. See "--Status of the
Guarantee." Because the Corporation is a holding company, the right of the
Corporation to participate in any distribution of assets of any subsidiary upon
such subsidiary's liquidation or reorganization or otherwise is subject to the
prior claims of creditors of that subsidiary (including creditors and
Manufacturers Bank), except to the extent the Corporation may itself be
recognized as a creditor of that subsidiary. Accordingly, the Corporation's
obligations under the Guarantee effectively will be subordinated to all existing
and future liabilities of the Corporation's subsidiaries, including
Manufacturers Bank's deposit liabilities, and all liabilities of any future
subsidiaries of the Corporation. Claimants should look only to the assets of the
Corporation for payments under the Guarantee. See "Description of the Junior
Subordinated
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Debentures--General." The Guarantee does not limit the incurrence or issuance of
other secured or unsecured debt of the Corporation, including Senior
Indebtedness, whether under the Indenture, any other indenture that the
Corporation may enter into in the future or otherwise.
The Corporation will, through the Guarantee, the Trust Agreement, the
Junior Subordinated Debentures and the Indenture, taken together, fully,
irrevocably and unconditionally guarantee all of the Trust's obligations under
the Capital Securities. No single document standing alone, or operating in
conjunction with fewer than all of the other documents, constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full, irrevocable and unconditional guarantee of the
Trust's obligations under the Capital Securities. See "Relationship Among the
Capital Securities, the Junior Subordinated Debentures and the Guarantee."
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the
Corporation and will rank subordinate and junior in right of payment to all
Senior Indebtedness in the same manner as the Junior Subordinated Debentures.
The Guarantee will rank pari passu with all Other Guarantees issued by
the Corporation after the Issue Date with respect to preferred beneficial
interests, if any, issued by Other Trusts. The Guarantee does not limit the
amount of secured or unsecured debt, including Senior Indebtedness, that may be
incurred by the Corporation or any of its subsidiaries. The Corporation expects
from time to time that it will incur additional indebtedness and that its
subsidiaries will also incur additional liabilities. The Guarantee will
constitute a guarantee of payment and not of collection (i.e., the guaranteed
party may institute a legal proceeding directly against the Corporation to
enforce its rights under the Guarantee without first instituting a legal
proceeding against any other person or entity). The Guarantee will be held for
the benefit of the holders of the Capital Securities. The Guarantee will not be
discharged except by payment of the Guarantee Payments in full to the extent not
paid by the Trust or upon distribution to the holders of the Capital Securities
of the Junior Subordinated Debentures. The Guarantee does not place a limitation
on the amount of additional Senior Indebtedness that may be incurred by the
Corporation.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of
the Corporation to perform any of its payment or other obligations thereunder;
provided, however, that except with respect to a default in payment of any
Guarantee Payment, the Corporation shall have received notice of default and
shall not have cured such default within 60 days after receipt of such notice.
The holders of not less than a majority in Liquidation Amount of the Capital
Securities will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
Any holder of the Capital Securities may institute a legal proceeding
directly against the Corporation to enforce its rights under the Guarantee
without first instituting a legal proceeding against the Trust, the Guarantee
Trustee or any other person or entity.
The Corporation, as guarantor, will be required to file annually with
the Guarantee Trustee a certificate as to whether or not the Corporation is in
compliance with all the conditions and covenants applicable to it under the
Guarantee.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely
affect the rights of holders of the Capital Securities (in which case no vote
will be required), the Guarantee may not be amended without the prior approval
of the holders of a majority of the Liquidation Amount of such outstanding
Capital Securities. The manner of obtaining any such approval will be as set
forth under "Description of Capital Securities--Voting Rights; Amendment of the
Trust Agreement."
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All guarantees and agreements contained in the Guarantee Agreement shall bind
the successors, assigns, receivers, trustees and representatives of the
Corporation and shall inure to the benefit of the holders of the Capital
Securities then outstanding.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force or effect upon
full payment of the applicable Redemption Price of all outstanding Capital
Securities, upon full payment of the Liquidation Amount payable upon liquidation
of the Trust or upon distribution of Junior Subordinated Debentures to the
holders of the Capital Securities. The Guarantee will continue to be effective
or will be reinstated, as the case may be, if at any time any holder of the
Capital Securities must restore payment of any sums paid under the Capital
Securities or the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance
of a default by the Corporation in performance of the Guarantee, will undertake
to perform only such duties as are specifically set forth in the Guarantee and,
in case a default with respect to the Guarantee has occurred, must exercise the
same degree of care and skill as a prudent person would exercise or use in the
conduct of his or her own affairs. Subject to this provision, the Guarantee
Trustee will be under no obligation to exercise any of the powers vested in it
by the Guarantee at the request of any holder of the Capital Securities unless
it is offered reasonable indemnity against the costs, expenses and liabilities
that might be incurred thereby.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the
laws of the State of New York.
RELATIONSHIP AMONG THE CAPITAL SECURITIES, THE
JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
GUARANTEE
Payments of Distributions and other amounts due on the Capital
Securities (to the extent the Trust has funds on hand legally available for the
payment of such Distributions) will be irrevocably guaranteed by the Corporation
as and to the extent set forth under "Description of Guarantee." Taken together,
the Corporation's obligations under the Junior Subordinated Debentures, the
Indenture, the Trust Agreement and the Guarantee will provide, in the aggregate,
an irrevocable guarantee of payments of Distributions and other amounts due on
the Capital Securities. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing an irrevocable guarantee of the Trust's obligations under
the Capital Securities. If and to the extent that the Corporation does not make
the required payments on the Junior Subordinated Debentures, the Trust will not
have sufficient funds to make the related payments, including Distributions, on
the Capital Securities. The Guarantee will not cover any such payment when the
Trust does not have sufficient funds on hand legally available therefor. In such
event, the remedy of a holder of Capital Securities is to institute a Direct
Action. The obligations of the Corporation under the Guarantee will be
subordinate and junior in right of payment to all Senior Indebtedness.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on
the Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Capital Securities, primarily
because (i) the aggregate principal amount or Prepayment Price of the Junior
Subordinated Debentures will be equal to the sum of the Liquidation Amount or
Redemption Price, as applicable, of the Trust Securities; (ii) the interest rate
and interest and other payment dates on the Junior Subordinated Debentures will
match the Distribution Rate and Distribution and other payment dates for the
Trust Securities; (iii) the Corporation, as Sponsor, shall pay for all and any
costs, expenses and liabilities of the
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Trust, except the Trust's obligations to holders of Trust Securities under such
Trust Securities; and (iv) the Trust Agreement will provide that the Trust is
not authorized to engage in any activity that is not consistent with the limited
purposes thereof.
ENFORCEMENT RIGHTS OF HOLDERS OF CAPITAL SECURITIES
A holder of any Capital Security may institute a legal proceeding
directly against the Corporation to enforce its rights under the Guarantee
without first instituting a legal proceeding against the Guarantee Trustee, the
Trust or any other person or entity.
A default or event of default under any Senior Indebtedness would not
constitute a default or Event of Default under the Trust Agreement. However, in
the event of payment defaults under, or acceleration of, Senior Indebtedness,
the subordination provisions of the Indenture will provide that no payments may
be made with respect to the Junior Subordinated Debentures until such Senior
Indebtedness has been paid in full or any payment default thereunder has been
cured or waived. Failure to make required payments on Junior Subordinated
Debentures would constitute an Event of Default under the Trust Agreement.
LIMITED PURPOSE OF THE TRUST
The Capital Securities will represent beneficial interests in the
Trust, and the Trust exists for the sole purpose of issuing and selling the
Trust Securities, using the proceeds from the sale of the Trust Securities to
acquire the Junior Subordinated Debentures and engaging in only those other
activities necessary, advisable or incidental thereto. A principal difference
between the rights of a holder of a Capital Security and a holder of a Junior
Subordinated Debenture is that a holder of a Junior Subordinated Debenture will
be entitled to receive from the Corporation the principal amount of and interest
on Junior Subordinated Debentures held, while a holder of Capital Securities is
entitled to receive Distributions from the Trust (or, in certain circumstances,
from the Corporation under the Guarantee) if and to the extent the Trust has
funds on hand legally available for the payment of such Distributions.
RIGHTS UPON DISSOLUTION
Unless the Junior Subordinated Debentures are distributed to holders of
the Trust Securities, upon any voluntary or involuntary dissolution, winding-up
or liquidation of the Trust, after satisfaction of the liabilities of creditors
of the Trust as required by applicable law, the holders of the Trust Securities
will be entitled to receive, out of assets held by the Trust, the Liquidation
Distribution in cash. See "Description of Capital Securities-Liquidation of the
Trust and Distribution of Junior Subordinated Debentures." Upon any voluntary or
involuntary liquidation or bankruptcy of the Corporation, the Property Trustee,
as holder of the Junior Subordinated Debentures, would be a subordinated
creditor of the Corporation, subordinated in right of payment to all Senior
Indebtedness as set forth in the Indenture, but entitled to receive payment in
full of principal and interest, before any stockholders of the Corporation
receive payments or distributions. Since the Corporation will be the guarantor
under the Guarantee and will agree to pay all costs, expenses and liabilities of
the Trust (other than the Trust's obligations to the holders of its Trust
Securities), the positions of a holder of Capital Securities and a holder of
Junior Subordinated Debentures relative to other creditors and to stockholders
of the Corporation in the event of liquidation or bankruptcy of the Corporation
are expected to be substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of certain of the material United States
federal income tax consequences of the purchase, ownership and disposition of
Capital Securities held as capital assets by a holder who purchases such Capital
Securities upon initial issuance. The statements of law and legal conclusions
set forth in the summary regarding the tax consequences to the beneficial owners
of the Capital Securities, represent the opinion of Schwartz, Cooper,
Greenberger & Krauss, Chartered, special federal income tax counsel to the
Corporation and the Trust ("Special Tax Counsel"). The
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summary does not deal with special classes of holders such as banks, thrifts,
real estate investment trusts, regulated investment companies, insurance
companies, dealers in securities or currencies, tax-exempt investors, United
States Alien Holders (as defined below) engaged in a U.S. trade or business or
persons that will hold the Capital Securities as a position in a "straddle," as
part of a "synthetic security" or "hedge," as part of a "conversion transaction"
or other integrated investment, or as other than a capital asset. This summary
also does not address the tax consequences to persons that have a functional
currency other than the U.S. dollar or the tax consequences to shareholders,
partners or beneficiaries of a holder of Capital Securities. Further, it does
not include any description of any alternative minimum tax consequences or the
tax laws of any state or local government or of any foreign government that may
be applicable to the Capital Securities. This summary is based on the Code,
Treasury regulations thereunder and the administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. An opinion of Special Tax Counsel is
not binding on the Internal Revenue Service ("IRS") or the courts. No rulings
have been or are expected to be sought from the IRS with respect to any of the
transactions described herein and no assurance can be given that the IRS will
not take contrary positions. Moreover, no assurance can be given that the
opinions expressed herein will not be challenged by the IRS or, if challenged,
that such a challenge would not be successful.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
The Corporation intends to take the position that the Junior
Subordinated Debentures will be classified for United States federal income tax
purposes as indebtedness of the Corporation. Special Tax Counsel will render its
opinion generally to the effect that, under then current law and based on the
representations, facts and assumptions set forth in this Offering Memorandum,
and assuming full compliance with the terms of the Indenture (and other relevant
documents), and based on certain assumptions and qualifications referenced in
the opinion, the Junior Subordinated Debentures will be characterized for United
States federal income tax purposes as debt of the Corporation. The Corporation,
the Trust and the holders of the Capital Securities (by acceptance of a
beneficial interest in a Capital Security) will agree to treat the Junior
Subordinated Debentures as indebtedness of the Corporation for all United States
federal income tax purposes. No assurance can be given, however, that such
position will not be challenged by the IRS or, if challenged, that such a
challenge will not be successful. The remainder of this discussion assumes that
the Junior Subordinated Debentures will be classified as indebtedness of the
Corporation for United States federal income tax purposes.
CLASSIFICATION OF THE TRUST
In connection with the issuance of the Capital Securities, Special Tax
Counsel will render its opinion generally to the effect that, under then current
law and assuming full compliance with the terms of the Trust Agreement and the
Indenture (and certain other documents), and based on certain facts and
assumptions contained in such opinion, the Trust will be classified for United
States federal income tax purposes as a grantor trust and not as an association
taxable as a corporation. Accordingly, for United States federal income tax
purposes, each holder of Capital Securities generally will be considered the
owner of an undivided interest in the Junior Subordinated Debentures, and each
holder will be required to include in its gross income any interest (or OID
accrued) with respect to its allocable share of those Junior Subordinated
Debentures.
ORIGINAL ISSUE DISCOUNT
Under the Indenture, the Corporation has the right to defer the payment
of interest on the Junior Subordinated Debentures at any time or from time to
time for a period not exceeding 20 consecutive quarterly periods with respect to
each Extension Period, provided that no Extension Period shall end on a date
other than an Interest Payment Date or extend beyond the Stated Maturity Date.
Under federal income tax regulations, all interest payable on the Junior
Subordinated Debentures will be treated as OID, unless the Indenture or Junior
Subordinated Debentures contain terms or conditions that make the exercise of
the deferral option remote. Because the Corporation does not have a policy of
paying dividends on its common stock and instead reinvests its earnings in its
business, and because the Corporation intends to redeem all of its Class B
Preferred Stock (see "Use of Proceeds"), the covenant in the Indenture
prohibiting the Corporation from paying dividends during an Extension Period
does not provide an effective deterrent to the Corporation's exercise of the
deferral option. As a result, Special Tax Counsel to the Corporation is unable
to conclude that the Indenture or the Junior Subordinated Debentures contain
terms or conditions that make the exercise of the deferral option remote.
Accordingly, a holder will
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recognize income (in the form of OID) on a daily basis over the term of the
Junior Subordinated Debentures (including any Extension Period, during which the
Corporation would not make actual cash payments), regardless of the receipt of
cash with respect to the period to which such income is attributable, and actual
distributions of stated interest would not be so includable. The amount of OID
that accrues in any quarterly period (other than an Extension Period) will equal
approximately the amount of the interest that accrues on the Junior Subordinated
Debentures in that quarterly period at the stated interest rate. In the event
that the interest payment period is extended, holders will include OID in gross
income in advance of the receipt of cash, and any holders who dispose of the
Capital Securities prior to the record date for the payment of Distributions
following such Extension Period will include OID in gross income but will not
receive any cash related thereto from the Corporation.
Because income on the Capital Securities will constitute OID, corporate
holders of the Capital Securities will not be entitled to a dividends-received
deduction with respect to any income recognized with respect to the Capital
Securities.
RECEIPT OF JUNIOR SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
The Corporation will have the right at any time to liquidate the Trust
and cause the Junior Subordinated Debentures to be distributed to the holders of
the Trust Securities. Under current law, such a distribution, for United States
federal income tax purposes, would be treated as a nontaxable event to each
holder, and each holder would receive an aggregate tax basis in the Junior
Subordinated Debentures equal to such holder's aggregate tax basis in its
Capital Securities. A holder's holding period in the Junior Subordinated
Debentures so received in liquidation of the Trust would include the period
during which the Capital Securities were held by such holder. A holder will
account for interest received or receivable from the Trust with respect to the
Junior Subordinated Debentures in the manner described above under "--Original
Issue Discount," including accrual of OID attributed to the Junior Subordinated
Debentures upon the distribution.
Under certain circumstances described herein (see "Description of
Capital Securities"), the Junior Subordinated Debentures may be prepaid for cash
and the proceeds of such prepayment distributed to holders in redemption of
their Capital Securities. Under current law, such a redemption would, for United
States federal income tax purposes, constitute a taxable disposition of the
redeemed Capital Securities, and a holder could recognize gain or loss as if it
sold such redeemed Capital Securities for cash. See "--Sales of Capital
Securities."
SALES OF CAPITAL SECURITIES
A holder that sells Capital Securities (including a redemption of the
Capital Securities by the Corporation for cash) will recognize gain or loss
equal to the difference between its adjusted tax basis in the Capital Securities
and the amount realized on the sale of such Capital Securities (other than with
respect to accrued and unpaid interest which has not yet been included in
income, which will be treated as ordinary income). A holder's adjusted tax basis
in the Capital Securities generally will be its initial purchase price increased
by OID previously includable in such holder's gross income to the date of
disposition and decreased by payments (if any) received on the Capital
Securities with respect to OID. Such gain or loss generally will be a capital
gain or loss. Pursuant to the Taxpayer Relief Act of 1997, Capital Securities
constituting a capital asset which are acquired by an individual after July 28,
1997, and held for more than 18 months are accorded a maximum United States
federal capital gains tax rate of 20% (or rate of 10%, if the individual
taxpayer is in the 15% tax bracket). Effective in 2001, the 20% rate drops to
18% (and the 10% drops to 8%) for capital assets acquired after the year 2000
and held more than five years; however, the requirement that the capital asset
be acquired after the year 2000 does not apply to the 8% rate. Capital
Securities held by an individual for more than one year, but not more than 18
months, are accorded a United States federal capital gains tax rate of 28%. If
pending legislation which has passed Congress is enacted in its current form,
such 18 month holding period would be reduced to 12 months for such sales of
Capital Securities occurring after December 31, 1997. However, there is no
certainty that such legislation will be enacted.
The Capital Securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest with respect to the underlying
Junior Subordinated Debentures. A holder who disposes of his Capital Securities
between record dates for payments of distributions thereon will be required to
include accrued but unpaid OID on the Junior Subordinated Debentures through the
date of disposition in income as ordinary income, and to add such amount to his
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adjusted tax basis in his pro rata share of the underlying Junior Subordinated
Debentures deemed disposed of. To the extent the selling price is less than the
holder's adjusted tax basis (which will include all accrued but unpaid OID) a
holder will recognize a capital loss. Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for United States
federal income tax purposes.
UNITED STATES ALIEN HOLDERS
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is not a U.S. Holder
for United States federal income tax purposes.
A "U.S. Holder" is a holder of Capital Securities who or which is a
citizen or individual resident (or is treated as a citizen or individual
resident) of the United States for federal income tax purposes, a corporation or
partnership (except to the extent provided in Regulations) created or organized
in or under the laws of the United States or any political subdivision thereof,
or estate the income of which is includable in its gross income for federal
income tax purposes without regard to its source, or a trust if, and only if,
(i) a court within the United States is able to exercise primary supervision
over the administration of the trust, and (ii) one or more United States
trustees have the authority to control all substantial decisions of the trust.
Under present United States federal income tax laws (i) payments by the
Trust or any of its paying agents to any holder of Capital Securities who or
which is a United States Alien Holder will not be subject to United States
federal withholding tax; provided that (a) the beneficial owner of the Capital
Securities does not actually or constructively own 10 percent or more of the
total combined voting power of all classes of stock of the Corporation entitled
to vote, (b) the beneficial owner of the Capital Securities is not a controlled
foreign corporation that is related to the Corporation through stock ownership,
and (c) either (A) the beneficial owner of the Capital Securities certifies to
the Trust or its agent, under penalties of perjury, that it is not a United
States holder and provides its name and address, or (B) a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "Financial
Institution"), and holds the Capital Securities in such capacity, certifies to
the Trust or its agent, under penalties of perjury, that such statement has been
received from the beneficial owner by it or by a Financial Institution between
it and the beneficial owner and furnishes the Trust or its agent with a copy
thereof; and (ii) a United States Alien Holder of Capital Securities will not be
subject to federal withholding tax on any gain realized upon the sale or other
disposition of Capital Securities. Final Treasury Regulations (the "Withholding
Regulations") would provide alternative methods for satisfying the certification
requirement described in clause (i)(c) above. The Withholding Regulations are to
be effective for certain payments made to United States Alien Holders after
December 31, 1999.
INFORMATION REPORTING TO HOLDERS
Generally, income on the Capital Securities will be reported to each
holder on a Form 1099, which form should be mailed to each holder of Capital
Securities by January 31 following each calendar year.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, the Capital Securities
may be subject to a "backup" withholding tax of 31% unless the holder complies
with certain identification requirements. Any withheld amounts will be allowed
as a credit against the holder's United States federal income tax, provided the
required information is provided to the IRS.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE CAPITAL SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN
UNITED STATES FEDERAL OR OTHER TAX LAWS.
86
ERISA CONSIDERATIONS
Each of the Corporation (the obligor with respect to the Junior
Subordinated Debentures held by the Trust), and its affiliates and the Property
Trustee may be considered a "party in interest" (within the meaning of ERISA) or
a "disqualified person" (within the meaning of Section 4975 of the Code) with
respect to many plans that are subject to ERISA and certain employee
benefit-related provisions of the Code. The purchase and/or holding of Capital
Securities by a plan that is subject to the fiduciary responsibility provisions
of ERISA or the prohibited transaction provisions of Section 4975 of the Code
(including individual retirement arrangements and other plans described in
Section 4975(e)(1) of the Code) and with respect to which the Corporation, the
Property Trustee or any affiliate is a service provider (or otherwise is a party
in interest or a disqualified person) may constitute or result in a prohibited
transaction under ERISA or Section 4975 of the Code, unless such Capital
Securities are acquired pursuant to and in accordance with an applicable
exemption, such as Prohibited Transaction Class Exemption ("PTCE") 84-14 (an
exemption for certain transactions determined by an independent qualified
professional asset manager), PTCE 91-38 (an exemption for certain transactions
involving banks' collective investment funds), PTCE 90-1 (an exemption for
certain transactions involving insurance company pooled separate accounts), PTCE
95-60 (an exemption for transactions involving certain insurance company general
accounts) or PTCE 96- 23 (an exemption for certain transactions determined by an
in-house asset manager). Accordingly, each purchaser of Capital Securities, by
its acceptance thereof, shall be deemed to have represented to the Corporation,
Trust and Initial Purchaser either (1) that it is not a Plan, a trustee or other
person acting on behalf of a plan or any other person or entity using the assets
of any plan to finance such purchase, or (2) that such purchase will not result
in a prohibited transaction under Section 406 of ERISA or Section 4975 of the
Code for which there is no applicable statutory or administrative exemption. In
addition, a plan fiduciary considering the purchase of Capital Securities should
be aware that the assets of the Trust may be considered "plan assets" for ERISA
purposes. In such event, any persons exercising discretion with respect to the
Junior Subordinated Debentures may become fiduciaries, parties in interest or
disqualified persons with respect to investing plans. Accordingly, each
investing plan, by purchasing the Capital Securities, will be deemed to have
directed the Trust to invest in the Junior Subordinated Debentures and to have
consented to the appointment of the Property Trustee. In this regard, it should
be noted that, in an Event of Default, the Corporation may not remove the
Property Trustee without the approval of a majority of the holders of the
Capital Securities.
A plan fiduciary should consider whether the purchase of Capital
Securities could result in a delegation of fiduciary authority to the Property
Trustee, and, if so, whether such a delegation of authority is consistent with
the terms of the plan's governing instrument or any investment management
agreement with the plan. Further, prior to an Event of Default with respect to
the Junior Subordinated Debentures, the Property Trustee will have only limited
custodial and ministerial authority with respect to Trust assets.
THE SALE OF INVESTMENTS TO PLANS IS IN NO RESPECT A REPRESENTATION BY
THE TRUST, THE CORPORATION, THE PROPERTY TRUSTEE, THE INITIAL PURCHASER OR ANY
OTHER PERSON ASSOCIATED WITH THE SALE OF THE CAPITAL SECURITIES THAT SUCH
SECURITIES MEET ALL RELEVANT LEGAL REQUIREMENTS WITH RESPECT TO INVESTMENTS BY
PLANS GENERALLY OR ANY PARTICULAR PLAN, OR THAT SUCH SECURITIES ARE OTHERWISE
APPROPRIATE FOR PLANS GENERALLY OR ANY PARTICULAR PLAN. ANY PURCHASER PROPOSING
TO ACQUIRE CAPITAL SECURITIES WITH ASSETS OF ANY PLAN SHOULD CONSULT WITH ITS
COUNSEL.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Purchase Agreement
(the "Purchase Agreement") by and among the Corporation, the Trust and Sandler
O'Neill & Partners, L.P. (the "Initial Purchaser"), the Corporation and the
Trust have agreed that the Trust will sell to the Initial Purchaser, and the
Initial Purchaser has agreed to purchase from the Trust, all of the Capital
Securities.
The Initial Purchaser proposes to offer the Capital Securities for
resale at the offering price set forth on the cover of this Offering Memorandum.
After the initial offering, the offering price and other selling terms may be
changed. Each
87
purchaser of the Capital Securities offered hereby in making its purchase will
be deemed to have made certain representations and agreements as set forth under
"Notice to Investors."
The Purchase Agreement provides that the obligation of the Initial
Purchaser to pay for and accept delivery of the Capital Securities is subject to
certain conditions, including delivery of certain legal opinions by counsel for
the Initial Purchaser. The nature of the Initial Purchaser's obligations under
the Purchase Agreement are such that it is required to purchase all of the
Capital Securities if it purchases any of the Capital Securities.
In view of the fact that the proceeds from the sale of the Capital
Securities will be used to purchase the Junior Subordinated Debentures issued by
the Corporation, the Purchase Agreement provides that the Corporation will pay
as compensation an amount of $27.50 per Capital Security for the account of the
Initial Purchaser.
The Capital Securities have not been registered under the Securities
Act and may not be offered or sold in the United States or to, or for the
account or benefit of, U.S. Persons unless the Capital Securities are registered
under the Securities Act or an exemption from the registration requirements of
the Securities Act is available. See "Notice to Investors."
The Initial Purchaser has agreed that it will offer or sell the Capital
Securities only to (i) Persons whom it reasonably believes to be QIBs in
reliance on Rule 144A under the Securities Act, and (ii) a limited number of
Institutional Accredited Investors within the meaning of Rule 501(a)(l), (2),
(3) or (7) of Regulation D under the Securities Act.
The Capital Securities are new issues of securities with no established
trading market. The Corporation has been advised by the Initial Purchaser that
it intends to make a market in the Capital Securities, but it is not obligated
to do so and such market making may be interrupted or discontinued without
notice. No assurance can be given about the liquidity of the trading market for
the Capital Securities.
The Capital Securities are expected to be eligible for quotation on
PORTAL.
The Corporation and the Trust have agreed in the Purchase Agreement
that, subject to certain conditions, prior to 90 days following the Issue Date,
neither will, directly or indirectly, issue, sell, offer or agree to sell, grant
any option for the sale of, or otherwise dispose of, Capital Securities, any
securities convertible into, exchangeable or exercisable for Capital Securities
or the Junior Subordinated Debentures or any debt securities substantially
similar to the Junior Subordinated Debentures or any equity security
substantially similar to the Capital Securities, except with the prior written
consent of the Initial Purchaser and except for any disposal of the Junior
Subordinated Debentures following a liquidation of the Trust.
The Corporation and the Trust have agreed to indemnify the Initial
Purchaser and certain other persons against certain liabilities, including
liabilities under the Securities Act, and will contribute to payments the
Initial Purchaser may be required to make with respect thereto.
The Initial Purchaser may serve as a financial advisor to the
Corporation from time to time in the future.
Until the placement of the Capital Securities is completed, rules of
the Commission may limit the ability of the Initial Purchaser to bid for and
purchase the Capital Securities. As an exception to these rules, the Initial
Purchaser is permitted to engage in certain transactions that stabilize the
price of the Capital Securities. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Capital
Securities. If the Initial Purchaser creates a short position in the Capital
Securities in connection with the offering (i.e., if it sells more Capital
Securities than are contemplated on the cover page of this Offering Memorandum),
the Initial Purchaser may reduce that short position by purchasing Capital
Securities in the open market. In general, purchases of a security for the
purpose of stabilization or to reduce a short position could cause the price of
the security to be higher than it might otherwise be in the absence of such
purchases.
None of the Corporation, the Trust or the Initial Purchaser makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions contemplated in the preceding paragraph may have on the price
of the Capital
88
Securities. In addition, none of the Corporation, the Trust or the Initial
Purchaser makes any representation that the Initial Purchaser will engage in
such transactions or that such transactions, once commenced, will not be
discontinued.
NOTICE TO INVESTORS
Because of the following restrictions, purchasers of Capital Securities
are advised to consult legal counsel prior to making any offer, resale or pledge
of Capital Securities.
Each purchaser of Capital Securities, by its acceptance thereof, will
be deemed to have acknowledged, represented to and agreed with the Trust, the
Corporation and the Initial Purchaser as follows:
(1) It understands and acknowledges that the Capital
Securities have not been registered under the Securities Act or any
other applicable securities law, are being offered for resale in
transactions not requiring registration under the Securities Act or any
other securities laws, and none of the Capital Securities or Junior
Subordinated Debentures may be offered, sold, pledged or otherwise
transferred except in compliance with the registration requirements of
the Securities Act or any other applicable securities laws, pursuant to
an exemption therefrom or in a transaction not subject thereto and, in
each case, in compliance with the conditions for transfer set forth in
paragraph (4) below.
(2) It is not an "affiliate" (as defined in Rule 144 under the
Securities Act) of the Corporation, or acting on behalf of the
Corporation or the Trust, and it is either:
(a) a QIB (as defined in Rule 144A promulgated under
the Securities Act), and is aware that any sale of the Capital
Securities to it will be made in reliance on Rule 144A; and
such acquisition will be for its own account or for the
account of another QIB over which it exercises sole investment
discretion; or
(b) an Institutional Accredited Investor within the
meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501
under the Securities Act or, if the Capital Securities are to
be purchased for one or more accounts ("investor accounts")
for which it is acting as fiduciary or agent (except if it is
a bank as defined in Section 3(a)(2) of the Securities Act, or
a savings and loan association or other institution as
described in Section 3(a)(5)(A) of the Securities Act, whether
acting in its individual or in a fiduciary capacity), each
such investor account is an Institutional Accredited Investor
on a like basis; in the normal course of its business, it
invests in or purchases securities similar to the Capital
Securities, and it has such knowledge and experience in
financial and business matters that it is capable of
evaluating the merits and risks of purchasing the Capital
Securities; and it is aware that it (or any investor account)
may be required to bear the economic risk of an investment in
the Capital Securities for an indefinite period of time and it
(or such investor account) is able to bear such risk for an
indefinite period.
(3) It understands and acknowledges that none of the Trust,
the Corporation, the Initial Purchaser or any person representing the
Trust, the Corporation or the Initial Purchaser has made any
representation to it with respect to the Trust, the Corporation or the
offering or sale of the Capital Securities, other than the information
contained or incorporated by reference in this Offering Memorandum,
which Offering Memorandum has been delivered to it and upon which it is
relying in making its investment decision with respect to the Capital
Securities; and it has had access to such financial and other
information concerning the Trust, the Corporation and the Capital
Securities as it has deemed necessary in connection with its decision
to purchase the Capital Securities, including an opportunity to ask
questions of and receive information from the Trust, the Corporation
and the Initial Purchaser, and it has received and reviewed all
information which it has requested.
(4) It is purchasing the Capital Securities for its own
account, or for one or more investor accounts for which it is acting as
a fiduciary or agent, in each case for investment, and not with a view
to, or for offer or sale in connection with, any distribution thereof
in violation of the Securities Act or other applicable securities laws,
89
subject to any requirement of law that the disposition of its property
or the property of such investor account or accounts be at all times
within its or their control and subject to its or their ability to
resell such Capital Securities pursuant to an effective registration
statement under the Securities Act or under Rule 144A or any other
exemption from registration available under the Securities Act; and it
agrees on its own behalf and on behalf of any investor account for
which it is purchasing Capital Securities, and each subsequent holder
of Capital Securities by its acceptance thereof will be deemed to
agree, to offer, sell or otherwise transfer such Capital Securities
prior to the date which is two years after the later of the original
issuance date thereof and the last date on which the Corporation or any
"affiliate" of the Corporation was the owner of such Capital Securities
(or any predecessor Capital Securities) (the "Resale Restriction
Termination Date") only (a) to the Corporation, (b) pursuant to a
registration statement which has been declared effective under the
Securities Act, (c) as long as the Capital Securities are eligible for
resale pursuant to Rule 144A, to a person it reasonably believes is a
QIB that purchases for its own account or for the account of a QIB to
whom notice is given that the transfer is being made in reliance on
Rule 144A, (d) to an Institutional Accredited Investor within the
meaning of subparagraph (a)(l), (2), (3) or (7) of Rule 501 under the
Securities Act that is purchasing the Capital Securities for its own
account or for the account of such an Institutional Accredited Investor
for investment purposes and not with a view to, or for offer or sale in
connection with, any distribution in violation of the Securities Act,
or (e) pursuant to any other available exemption from the registration
requirements of the Securities Act, subject in each of the foregoing
cases to any requirement of law that the disposition of its property or
the property of such investor account or accounts be at all times
within its or their control and to compliance with any applicable state
securities laws; it being understood that, if any resale or other
transfer of Capital Securities is proposed to be made pursuant to
clause (d) above prior to the Resale Restriction Termination Date, the
transferor shall deliver a letter substantially in the form of Annex A
hereto from the transferee to the Trust, which shall provide, among
other things, that the transferee is an Institutional Accredited
Investor within the meaning of subparagraph (a)(l), (2), (3) or (7) of
Rule 501 under the Securities Act and that it is acquiring such Capital
Securities for investment purposes and not for distribution in
violation of the Securities Act; it being understood further that the
Trust and the Corporation reserve the right prior to any offer, sale or
other transfer prior to the Resale Restriction Termination Date
pursuant to clause (d) or (e) above to require the delivery of an
opinion of counsel, certifications and other information satisfactory
to the Trust and the Corporation. Each purchaser acknowledges that each
certificate representing Capital Securities will contain a legend
substantially to the following effect:
THE CAPITAL SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE
SECURITIES LAW. NEITHER THESE CAPITAL SECURITIES NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED,
PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT
TO, REGISTRATION.
THE HOLDER OF THESE CAPITAL SECURITIES BY ITS ACCEPTANCE
HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THESE SECURITIES,
PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS
TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE DATE HEREOF AND THE
LAST DATE ON WHICH THE CORPORATION OR ANY AFFILIATE OF THE CORPORATION
WAS THE OWNER OF THESE CAPITAL SECURITIES (OR ANY PREDECESSOR OF THESE
CAPITAL SECURITIES) ONLY (A) TO THE CORPORATION, (B) PURSUANT TO A
REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (C) SO LONG AS THESE CAPITAL SECURITIES ARE ELIGIBLE
FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE
144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES FOR ITS
OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO
WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A, (D) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE
MEANING OF SUBPARAGRAPH (A)(1), (2), (3) OR (7) OF RULE 501
90
UNDER THE SECURITIES ACT THAT IS ACQUIRING THESE CAPITAL SECURITIES FOR
ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED
INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER
OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE
SECURITIES ACT, OR (E) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM
THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE
RIGHT OF THE TRUST AND THE CORPORATION PRIOR TO ANY SUCH OFFER, SALE OR
TRANSFER (I) PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF
AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION
SATISFACTORY TO EACH OF THEM, AND (II) PURSUANT TO CLAUSE (D) TO
REQUIRE THAT THE TRANSFEROR DELIVER TO THE TRUST A LETTER FROM THE
TRANSFEREE SUBSTANTIALLY IN THE FORM OF ANNEX A TO THE OFFERING
MEMORANDUM DATED JULY 21, 1998. SUCH HOLDER FURTHER AGREES THAT IT WILL
DELIVER TO EACH PERSON TO WHOM THESE CAPITAL SECURITIES ARE TRANSFERRED
A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND.
THE HOLDER OF THESE CAPITAL SECURITIES BY ITS ACCEPTANCE
HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT EITHER: (1) IT IS NOT
AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION (3)(3) OF THE
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"),
OR A PLAN TO WHICH SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986,
AS AMENDED ("CODE"), IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON
BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR
ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE
SUCH PURCHASE, OR (2) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED
TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR
WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.
(5) It agrees that in the event at some future time it wishes to
dispose of any of the Capital Securities, it will not do so unless such
disposition is made in accordance with any applicable securities laws of any
state of the United States and the legend set forth in paragraph (4).
(6) It understands and acknowledges that (a) the Capital Securities
will be issued and may be transferred only in blocks having an aggregate stated
Liquidation Amount of not less than $100,000 in the case of Capital Securities
and an aggregate stated principal amount of not less than $100,000 in the case
of Junior Subordinated Debentures, (b) any attempted transfer of Junior
Subordinated Debentures or Capital Securities, as the case may be, in a block
having an aggregate liquidation amount or an aggregate stated principal amount,
as the case may be, of less than $100,000 shall be void and of no legal effect
whatsoever, (c) any such purported transferee shall be deemed not to be the
holder of such Junior Subordinated Debentures or Capital Securities, as the case
may be, for any purpose, including but not limited to the receipt of payments on
such Junior Subordinated Debentures or Capital Securities, (d) such purported
transferee shall be deemed to have no interest whatsoever in such Junior
Subordinated Debentures or Capital Securities, as the case may be, and (e) the
Capital Securities and the Junior Subordinated Debentures will contain a legend
to the foregoing effect.
(7) It understands and acknowledges that the Capital Securities sold in
reliance on Rule 144A will be represented by the Global Capital Securities,
while Capital Securities sold other than in reliance on Rule l44A will be issued
only in certificated form.
(8) It understands and acknowledges that the Trust, the Corporation and
the Initial Purchaser and others will rely upon the truth and accuracy of the
foregoing acknowledgments, representations and agreements and agrees that, if
any of the acknowledgments, representations or agreements deemed to have been
made by it by its purchase of the Capital Securities are no longer accurate, it
shall promptly notify the Trust and the Initial Purchaser; and if it is
acquiring any Capital Securities as a fiduciary or agent for one or more
investor accounts, it represents that it has sole investment discretion with
respect to each such account and that it has full power to make the foregoing
acknowledgments, representations and agreements on behalf of each such account.
91
(9) Either (1) it is not an employee benefit plan within the meaning of
Section 3(3) of ERISA, or a plan to which Section 4975 of the Code is
applicable, a trustee or other person acting on behalf of such an employee
benefit plan or plan, or any other person or entity using the assets of any
employee benefit plan or plan to finance such purchase, or (2) such purchase
will not result in a prohibited transaction under Section 406 of ERISA or
Section 4975 of the Code for which there is no applicable statutory or
administrative exemption.
LEGAL MATTERS
Certain legal matters will be passed upon for the Corporation and the
Trust by Schwartz, Cooper, Greenberger & Krauss, Chartered, and for the Initial
Purchaser by Thacher Proffitt & Wood. Certain matters of Delaware law relating
to the validity of the Capital Securities will be passed upon for the Trust by
Richards, Layton & Finger, special Delaware counsel to the Trust.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of the Corporation as of December
31, 1997 and 1996 and for each of the years in the three-year period ended
December 31, 1997 have been audited by McGladrey & Pullen, LLP, independent
certified public accountants, as set forth in their report included herein.
92
ANNEX A
TRANSFEREE LETTER OF REPRESENTATION
Coal City Capital Trust I
1200 North Ashland Avenue
Chicago, Illinois 60622
Attn: Administrative Trustees
Ladies and Gentlemen:
In connection with the proposed transfer to us of the Floating Rate
Capital Securities (the "Capital Securities") of Coal City Capital Trust I (the
"Trust"), we confirm that:
1. We understand that the Capital Securities have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or other applicable securities laws, and may not be
offered, sold or otherwise transferred except as permitted in the
following sentence. We agree on our behalf and on behalf of any
investor account for which we are purchasing Capital Securities to
offer, sell or otherwise transfer such Capital Securities prior to the
date which is two years after the later of the date of original issue
thereof and the last date on which Coal City Corporation (the
"Corporation") or any "affiliate" of the Corporation was the owner of
such Capital Securities (or any predecessor thereto) (the "Resale
Restriction Termination Date") only (a) to the Corporation, (b)
pursuant to a registration statement which has been declared effective
under the Securities Act, (c) so long as the Capital Securities are
eligible for resale pursuant to Rule 144A under the Securities Act, to
a person we reasonably believe is a "qualified institutional buyer" (a
"QIB") as defined in Rule 144A of the Securities Act that purchases for
its own account or for the account of a QIB to whom notice is given
that the transfer is being made in reliance on Rule 144A, (d) to an
institutional "accredited investor" (an "Institutional Accredited
Investor") within the meaning of subparagraph (a)(l), (2), (3) or (7)
of Rule 501 under the Securities Act that is acquiring the Capital
Securities for its own account or for the account of such an
Institutional Accredited Investor for investment purposes and not with
a view to, or for offer and sale in connection with, any distribution
in violation of the Securities Act, or (e) pursuant to any other
available exemption from the registration requirements under the
Securities Act, subject to the right of the Trust and the Corporation
prior to any such offer, sale or transfer (i) pursuant to clause (d) or
(e) above to require the delivery of an opinion of counsel,
certifications and/or other information satisfactory to each of them,
and (ii) pursuant to clause (d) above to require that the transferor
deliver to the Trust a letter from the transferee substantially similar
to this letter.
2. We are an Institutional Accredited Investor purchasing for
our own account or for the account of such an Institutional Accredited
Investor for investment purposes and not with a view to, or for offer
or sale in connection with, any distribution in violation of the
Securities Act or any other applicable securities laws and we have such
knowledge and experience in financial and business matters as to be
capable of evaluating the merits and risks of our investment in the
Capital Securities, and we and any accounts for which we are acting are
each able to bear the economic risk of our or its investment for an
indefinite period.
3. We are acquiring the Capital Securities purchased by us for
our own account or for one or more accounts as to each of which we
exercise sole investment discretion.
4. You and the Corporation are entitled to rely upon this
letter and you are irrevocably authorized to produce this letter or a
copy hereof to any interested party in any administrative or legal
proceeding or official inquiry with respect to the matters covered
hereby.
A-1
5. We are (1) not an employee benefit plan within the meaning
of Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or a plan to which Section 4975 of the Internal
Revenue Code of 1986, as amended ("Code"), is applicable, a trustee or
other person acting on behalf of such an employee benefit plan or plan,
or any other person or entity using the assets of any employee benefit
plan or plan to finance such purchase, or (2) such purchase will not
result in a prohibited transaction under Section 406 of ERISA or
Section 4975 of the Code for which there is no applicable statutory or
administrative exemption.
THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH. THE
LAWS OF THE STATE OF NEW YORK.
Very truly yours,
Name of Purchaser:
------------------------------------
By:
------------------------------------
Date:
------------------------------------
The Capital Securities will be registered in the name of the beneficial owner as
follows:
Name:
------------------------------------
Address:
------------------------------------
Taxpayer ID Number:
------------------------------------
A-2
INDEX TO FINANCIAL STATEMENTS
PAGE
------------
Independent Auditor's Report ................................................... F-2
Consolidated Balance Sheets at March 31, 1998 (unaudited) and December 31,
1997 and 1996 (audited) ....................................................... F-3
Consolidated Statements of Income for each of the years in the three year period
ended December 31, 1997 (audited) and for the three months ended March 31,
1998 and 1997 (unaudited) ..................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for each of the years
in the three year period ended December 31, 1997 (audited) and for the three
months ended March 31, 1998 (unaudited) ....................................... F-5
Consolidated Statements of Cash Flows for each of the years in the three year
period ended December 31, 1997 (audited) and for the three months ended
March 31, 1998 and 1997 (unaudited) ........................................... F-6 and F-7
Notes to Financial Statements .................................................. F-8
F-1
[MCGLADREY & PULLEN, LLP LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Coal City Corporation and Subsidiaries
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of Coal City
Corporation and Subsidiaries, as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three year period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 Coal City
Corporation and Subsidiaries, as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/S/ MCGLADREY & PULLEN, LLP
---------------------------
MCGLADREY & PULLEN, LLP
Mokena, Illinois
February 20, 1998
F-2
COAL CITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(STATEMENT AMOUNTS IN THOUSANDS)
MARCH 31,
1998 DECEMBER 31,
-----------------------
ASSETS (unaudited) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 36,318 $ 36,302 $ 31,465
Investment securities:
Securities available for sale 136,670 136,685 100,470
Securities held to maturity (fair value of $5,638 at March 31, 1998,
$5,679 at December 31, 1997 and $9,995 at December 31, 1996) 5,224 5,242 9,511
Stock in Federal Home Loan Bank 615 615 -
Federal funds sold - 37,400 20,800
Loans (net of allowance for loan losses of $7,751 at March 31, 1998,
$7,922 at December 31, 1997 and $4,692 at December 31, 1996) 519,163 519,399 383,610
Lease investments, net 21,812 22,887 18,637
Premises and equipment, net 11,066 11,045 6,416
Other assets 10,702 10,703 4,871
Intangibles, net 21,105 22,418 12,018
----------------------------------
TOTAL ASSETS $ 762,675 $ 802,696 $ 587,798
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 130,331 $ 131,064 $ 96,678
Interest bearing 504,117 552,996 413,039
-----------------------------------
TOTAL DEPOSITS 634,448 684,060 509,717
Short-term borrowings 29,365 18,013 9,361
Long-term borrowings 20,537 22,415 160,38
Other liabilities 11,937 12,261 7,197
----------------------------------
TOTAL LIABILITIES 696,287 736,749 542,313
----------------------------------
Minority Interest in Subsidiary 1,544 3,421 6,359
----------------------------------
Corporation Obligated Mandatorily Redeemable Preferred Securities
Of Subsidiary Trust Holding Solely Junior Subordinated Debentures 10,000 10,000 -
----------------------------------
Stockholders' Equity
Preferred stock, Class B, $150,000 par value;
authorized 100 shares; issued 68 shares 10,200 10,200 -
Common stock, no par value, $10 stated value; authorized 200,000
shares; issued March 31, 1998 48,957 shares; December 31,
1997 49,707 shares; December 31, 1996 49,799 shares 490 497 498
Additional paid-in capital 23,779 24,446 24,524
Retained earnings 20,186 17,062 13,789
Accumulated other comprehensive income 189 321 315
----------------------------------
TOTAL STOCKHOLDERS' EQUITY 54,844 52,526 39,126
----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 762,675 $ 802,696 $ 587,798
==================================
See Notes to Consolidated Financial Statements.
F-3
COAL CITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(STATEMENT AMOUNTS IN THOUSANDS EXCEPT EARNINGS PER SHARE)
Three Months Ended
March 31, Years Ended December 31,
-------------------------------------------------------------------
1998 1997
(unaudited) (unaudited) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans $ 11,159 $ 8,202 $ 41,313 30,107 $ 26,271
Investment securities:
Taxable 2,531 1,625 8,527 7,941 7,719
Nontaxable 82 125 433 673 817
Federal funds sold 118 122 1,413 809 1,760
Other - - - - 5
--------------------------------------------------------------------
TOTAL INTEREST INCOME 13,890 10,074 51,686 39,530 36,572
--------------------------------------------------------------------
Interest expense on:
Deposits 5,593 4,308 21,617 16,529 15,220
Short-term borrowings 731 85 1,353 669 463
Long-term borrowings 563 367 2,202 982 1,153
--------------------------------------------------------------------
TOTAL INTEREST EXPENSE 6,887 4,760 25,172 18,180 16,836
--------------------------------------------------------------------
NET INTEREST INCOME 7,003 5,314 26,514 21,350 19,736
Provision for loan losses 188 171 971 572 240
--------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,815 5,143 25,543 20,778 19,496
--------------------------------------------------------------------
Other income:
Service fees 790 514 3,085 2,076 1,628
Lease financing, net 245 228 1,172 395 263
Net gains (losses) on sale of securities available 15 29 138 75 (558)
for sale
Gain on sale of Coal City National Bank 4,099 - - - -
Other operating income 351 49 540 393 566
--------------------------------------------------------------------
5,500 820 4,935 2,939 1,899
--------------------------------------------------------------------
Other expenses:
Salaries and employee benefits 3,653 2,260 11,556 8,667 8,601
Occupancy and equipment expense 946 481 2,934 2,167 1,917
Amortization expense 811 409 3,321 2,021 2,167
Other operating expenses 1,430 1,032 6,384 4,013 4,325
--------------------------------------------------------------------
6,840 4,182 24,195 16,868 17,010
--------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST 5,475 1,781 6,283 6,849 4,385
Applicable income taxes 1,885 737 2,402 2,576 1,504
--------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 3,590 1,044 3,881 4,273 2,881
Minority interest (32) (152) (432) (636) (444)
--------------------------------------------------------------------
NET INCOME 3,558 892 3,449 3,637 2,437
Other comprehensive income, unrealized
securities gains (losses), net of income taxes (132) (447) 6 (576) 2,301
--------------------------------------------------------------------
COMPREHENSIVE INCOME $ 3,426 $ 445 $ 3,455 $ 3,061 $ 4,738
====================================================================
NET INCOME $ 3,558 $ 892 $ 3,449 $3,637 $ 2,437
Preferred stock dividend 434 - 276 - 267
--------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 3,124 $ 892 $ 3,173 $3,637 $ 2,170
====================================================================
Basic earnings per common share $ 63.48 $ 17.92 $ 63.83 $ 73.28 $ 43.27
====================================================================
See Notes to Consolidated Financial Statements.
F-4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 AND THE THREE MONTHS ENDED MARCH
31, 1998 (UNAUDITED)
(STATEMENT AMOUNTS IN THOUSANDS EXCEPT FOR SHARES INFORMATION)
Accumulated
Additional Other
Preferred Common Paid-In Retained Comprehensive
Stock Stock Capital Earnings Income Total
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $ - $ 495 $ 24,167 $ 8,320 $ (1,410) $ 31,572
Issuance of 1,112 shares of
common stock - 12 694 - - 706
Issuance of 35 shares of
preferred stock 3,500 - - - - 3,500
Purchase and retirement of 200
shares of common stock - (2) (121) - - (123)
Redemption of 35 shares of
preferred stock (3,500) - - - - (3,500)
Dividends paid on preferred stock - - - (267) - (267)
Net income - - - 2,437 - 2,437
Change in accumulated other
comprehensive income,
net of tax of $1,401 - - - - 2,301 2,301
-----------------------------------------------------------------------------
Balance, December 31, 1995 - 505 24,740 10,490 891 36,626
Issuance of 405 shares of
common stock - 4 307 - - 311
Purchase and retirement of 1,067
shares of common stock - (11) (523) (338) - (872)
Net income - - - 3,637 - 3,637
Change in accumulated other
comprehensive income,
net of tax of $304 - - - - (576) (576)
-----------------------------------------------------------------------------
Balance, December 31, 1996 - 498 24,524 13,789 315 39,126
Issuance of 140 shares of common stock - 1 114 - - 115
Issuance of 68 shares of
preferred stock 10,200 - - - - 10,200
Purchase and retirement of 232
shares of common stock - (2) (192) - - (194)
Minority interest effect of premium
received over book value for
interest in Peterson Bank - - - 100 - 100
Dividends paid on preferred stock - - - (276) - (276)
Net income - - - 3,449 - 3,449
Change in accumulated other
comprehensive income,
net of tax of $3 - - - - 6 6
-----------------------------------------------------------------------------
Balance, December 31, 1997 10,200 497 24,446 17,062 321 52,526
Purchase and retirement of 750
shares of common stock (unaudited) - (7) (667) - - (674)
Dividends paid on preferred stock
(unaudited) - - - (434) - (434)
net income (unaudited) - - - 3,558 - 3,558
Change in accumulated other comprehensive
income, net of tax of $71 (unaudited) - - - - (132) (132)
-----------------------------------------------------------------------------
Balance, March 31, 1998 (unaudited) $ 10,200 $ 490 $ 23,779 $ 20,186 $ 189 $ 54,844
=============================================================================
See Notes to Consolidated Financial Statements.
F-5
COAL CITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(STATEMENT AMOUNTS IN THOUSANDS)
Three Months Ended
March 31, Years Ended December 31,
---------------------------------------------------------
1998 1997
(unaudited) (unaudited) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 3,558 $ 892 $ 3,449 $ 3,637 $ 2,437
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,177 1,407 7,142 5,286 2,853
(Gain) loss on disposal of premises and equipment
and leased equipment 13 - 166 33 (10)
(Gain) on sale of Coal City National Bank (4,099) - - - -
Amortization of intangibles 811 410 3,320 2,192 2,167
Provision for loan losses 188 171 971 572 240
Provision (credit) for deferred income taxes (303) (64) (1,085) 263 (282)
Bond (accretion) amortization, net (484) (56) (325) (206) 304
Securities (gains) losses, net (15) (29) (131) (75) 558
Minority interest in net income 32 152 432 636 444
Decrease in accrued other assets 49 (966) 1,329 1,434 471
Increase (decrease) in other liabilities 222 1,115 (2,116) (321) 474
-------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,149 3,032 13,152 13,451 9,656
-------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sales, maturities and calls of securities
available for sale 61,758 8,138 110,772 86,987 107,137
Proceeds from maturities and calls of securities held to
maturity - 435 5,834 5,761 9,576
Purchase of securities available for sale (77,054) (11,697) (94,382) (31,564) (122,184)
Purchase of securities held to maturity - - (395) (841) (2,522)
Federal funds sold, net 17,900 3,550 (16,600) (9,601) 20,601
Increase in loans, net of principal collections (17,747) (9,214) (13,518) (48,997) (26,201)
Purchases of premises and equipment (1,658) (3,158) (1,805) (370) (1,502)
Proceeds from sales of premises and equipment and
leased equipment 3 - 737 220 12
Proceeds from sales of other real estate owned 73 - - - -
Purchase of leased equipment - - (9,835) (14,620) (5,425)
Principal collected on lease investments (187) 73 (264) 168 160
Purchase of minority interests (1,508) - (2,649) (227) (33)
Proceeds from sale of Coal City National Bank, net 5,481 - - - -
Purchase of U.S. Bancorp, Inc., net of cash acquired - - (15,800) - -
Purchase of Peterson Bank, net of cash acquired - - - - (18,601)
-------------------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (12,939) (11,873) (37,905) (13,084) (38,982)
-------------------------------------------------------
Cash Flows From Financing Activities
Net increase (decrease) in noninterest bearing deposits 5,266 (5,250) 5,981 (4,071) 701
Net increase (decrease) in interest bearing deposits (2,826) 6,488 (1,065) 318 21,905
Net increase in short-term borrowings 11,352 1,611 8,652 6,245 (861)
Proceeds from long-term borrowings 5,622 10,000 15,179 6,942 19,785
Principal paid on long-term borrowings (7,500) (6,863) (8,802) (4,788) (9,469)
Corporation Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust Holding
Solely Junior Subordinated Debentures - - 10,000 - -
Issuance of common stock - - 115 311 706
Purchase and retirement of common stock (674) - (194) (872) (123)
Issuance of preferred stock - - - - 3,500
Redemption of preferred stock - - - - (3,500)
Dividends paid on preferred stock (434) - (276) - (267)
-------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,806 5,986 29,590 4,085 32,377
-------------------------------------------------------
(continued)
F-6
COAL CITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(STATEMENT AMOUNTS IN THOUSANDS)
Three Months Ended
March 31, Years Ended December 31,
-----------------------------------------------------------
1998 1997
(unaudited) (unaudited) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS $ 16 $ (2,855) $ 4,837 $ 4,452 $ 3,051
Cash and due from banks:
Beginning 36,302 31,465 31,465 27,013 23,962
-----------------------------------------------------------
Ending $ 36,318 $ 28,610 $ 36,302 $ 31,465 $ 27,013
===========================================================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors $ 6,170 $ 4,643 $ 21,179 $ 16,320 $ 15,965
Other interest paid 624 447 3,567 1,644 990
Income taxes paid, net of refunds - - 2,037 2,495 1,080
Supplemental Schedule of Noncash Investing Activities
Acquisitions of U.S. Bancorp, Inc. in 1997
and Peterson Bank in 1995
Assets acquired:
Securities available for sale $ 52,261 $ 53,910
Securities held to maturity 1,099 4,758
Federal funds sold - 11,000
Stock in Federal Home Loan Bank 615 -
Loans, net 124,248 89,666
Premises and equipment 5,020 3,003
Accrued interest and other assets 6,155 2,027
Core deposit intangibles 5,654 5,944
Excess of cost over fair value of net assets acquired 8,637 6,239
--------- --------
203,689 176,547
--------- --------
Liabilities assumed:
noninterest bearing deposits 28,405 23,491
Interest bearing deposits 141,022 131,507
Other liabilities 8,262 2,948
--------- ---------
177,689 157,946
--------- ---------
Net assets acquired 26,000 18,601
Issuance of preferred stock (10,200) -
--------- ----------
NET CASH PAYMENT $ 15,800 $ 18,601
========= ==========
Real estate acquired in settlement of losses $ 1,006
=========
Transfer of securities from held to maturity to available for sale $ 529
==========
See Notes to Consolidated Financial Statements.
F-7
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Coal City Corporation (Company) is a multi-bank holding company providing
financial and other banking services to customers primarily located in the
Chicago/Northeastern Illinois area. The Company through its banking
subsidiaries, Coal City National Bank (formerly known as Allied Bank/Coal City
National) and Manufacturers Bank (Banks), makes loans to individuals as well as
commercial entities. Specific loan terms vary as to interest rate, repayment and
collateral requirements based on the type of loan requested and the credit
worthiness of the prospective borrower.
Principles of consolidation: The consolidated financial statements include the
accounts of Coal City Corporation and the following subsidiaries:
Coal City National Bank - 100% owned subsidiary
Manufacturers National Corporation - 90.61% owned subsidiary
Manufacturers Bank - 100% owned subsidiary of Manufacturers National
Corporation
Ashland Management Agency, Inc. - 100% owned subsidiary of Manufacturers Bank
MB 1200 - 100% owned subsidiary of Manufacturers Bank
Manufacturers Deferred Exchange Corp. - 100% owned subsidiary of Manufacturers Bank
All material intercompany items and transactions have been eliminated in
consolidation.
During the year ended December 31, 1997, Manufacturers Bank, Peterson Bank, U.S.
Bank and U.S. Bancorp, Inc. were merged.
Unaudited interim financial statements: The consolidated financial statements as
of March 31, 1998 and for the three months ended March 31, 1998 and 1997, are
unaudited, but in the opinion of management reflect all adjustments (consisting
of only normal recurring accruals) necessary for a fair presentation of
financial condition at March 31, 1998, and results of operations for the three
months ended March 31, 1998 and 1997. The results of the interim period ended
March 31, 1998 are not necessarily indicative of the results expected for the
year ended December 31, 1998.
Basis of financial statement presentation: The accounting and reporting policies
of the Company conform to generally accepted accounting principles and general
practices within the financial services industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the year. Actual results could differ from
those estimates.
Cash and cash equivalents: For purposes of reporting cash flows, cash and due
from banks includes cash on hand and amounts due from banks (including cash
items in process of clearing). Cash flows from loans originated by the Banks,
deposits, and federal funds purchased and sold and short-term borrowings are
reported net.
Securities held to maturity: Debt securities for which the Banks have both the
positive intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost. Amortization of premiums and
accretion of discounts, computed by the interest method over their contractual
lives, is included in interest income.
F-8
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities available for sale: Securities classified as available for sale are
those debt securities that the Banks intend to hold for an indefinite period of
time, but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Banks' assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors.
Securities available for sale are reported at fair value with unrealized gains
or losses reported as a separate component of stockholders' equity, net of the
related deferred tax effect. The amortization of premiums and accretion of
discounts, computed by the interest method over their contractual lives, are
recognized in interest income. Realized gains or losses, determined on the basis
of the cost of specific securities sold, are included in earnings.
Loans: Loans are stated at the amount of unpaid principal, reduced by unearned
discount and fees and an allowance for loan losses.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amount amortized as an adjustment of the related loan's
yield. The Banks are amortizing these amounts over the contractual life of the
loan. Commitment fees based upon a percentage of a customer's unused line of
credit and fees related to standby letters of credit are recognized over the
commitment period.
Interest is accrued daily on the outstanding balances. For impaired loans,
accrual of interest is discontinued on a loan when management believes, after
considering collection efforts and other factors, that the borrower's financial
condition is such that collection of interest is doubtful. Cash collections on
impaired loans are credited to the loan balance, and no interest income is
recognized on those loans until the principal balance has been determined to be
collectible.
A loan is impaired when it is probable the Banks will be unable to collect all
contractual principal and interest payments due in accordance with the terms of
the loan agreement. Impaired loans are measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. The amount of
impairment, if any, and any subsequent changes are included in the allowance for
loan losses.
F-9
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
estimated losses on existing loans, based on an evaluation of the collectibility
of loans and prior loss experience. This evaluation also takes into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrower's ability to pay. While
management uses the best information available to make its evaluation, future
adjustments to the allowance may be necessary if there are significant changes
in economic conditions. In addition, regulatory agencies, as an integral part of
their examination process, periodically review the Banks' allowance for loan
losses, and may require the Banks to make additions to the allowance based on
their judgment about information available to them at the time of their
examinations.
Lease investments: Manufacturers Bank's investment in assets leased to others is
reported as lease investments, net, using the direct finance and operating
methods of accounting. Direct financing leases are stated at the sum of
remaining minimum lease payments from lessees plus estimated residual values
less unearned lease income. Unearned lease income on direct financing leases is
recognized over the lives of the leases using the level-yield method. The
investment in equipment in operating leases is stated at cost less depreciation
using the straight-line method over a five-year life.
Premises and equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed primarily by the
straight-line method for buildings and primarily by the 200% declining balance
method for all other assets over the following estimated useful lives:
Years
-----------
Land improvements 20
Buildings 15-39
Leasehold and other improvements 5-20
Furniture and equipment 5-15
Intangibles: In acquiring its subsidiary banks, the portion of the purchase
price which represents value assigned to the existing deposit base for which the
annual interest and servicing costs are below market rates (core deposit
intangibles) is being amortized by the declining balance method over three to
nine years. The excess of cost over fair value of net assets acquired (goodwill)
is being amortized on the straight-line method over twenty years. The Company
reviews its intangible assets annually to determine potential impairment by
comparing the carrying value of the intangibles with the anticipated future cash
flows of the related banks.
F-10
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes: The Company and its subsidiaries file consolidated income tax
returns.
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Basic earnings per common share: Basic earnings per share are calculated on the
basis of the weighted average number of shares outstanding after deducting the
dividends on preferred stock.
During 1997, the Company adopted Financial Accounting Standards Board Statement
No. 128, Earnings per Share, which provides for the presentation of basic
earnings per share and diluted earnings per share. Diluted earnings per share
does not differ from basic earnings per share since the inclusion of the granted
options and warrants would have an antidilutive effect on basic earnings per
share. The effect of adopting this statement had no effect on the previously
reported earnings per share for 1996.
Accounting for transfers and servicing of financial assets and extinguishment of
liabilities: Financial Accounting Standards Board Statement No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities (FAS 125), distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. A transfer of financial assets
in which the transferor surrenders control over those assets is accounted for as
a sale to the extent that consideration other than beneficial interest in the
transferred assets is received in exchange. FAS 125 also established standards
on the initial recognition and measurement of servicing assets and other
retained interest and servicing liabilities, and their subsequent measurement.
FAS 125 requires that debtors reclassify financial assets pledged as collateral
and that secured parties recognize those assets and their obligation to return
them in certain circumstances in which the secured party has taken control of
those assets. In addition, FAS 125 requires that a liability be derecognized
only if the debtor is relieved of its obligation through payment to the creditor
or by being legally released from being the primary obligor under the liability
either judicially or by the creditor.
FAS 125 was effective for transactions occurring after December 31, 1996, except
for transactions relating to secured borrowings and collateral for which the
effective date is December 31, 1997. On January 1, 1997, the Company adopted FAS
125 except as it relates to transactions involving secured borrowings and
collateral. The effect of adoption of this Statement was not material. The
Company also believes the adoption of FAS 125 for transactions related to
secured borrowings and collateral will not have a material impact on its
consolidated financial statements.
F-11
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive income: The Financial Accounting Standards Board has issued
Statement No. 130, Reporting Comprehensive Income, that the Company will be
required to adopt for its year ended December 31, 1998. This pronouncement is
not expected to have a significant impact on the Company's financial statements.
The Statement establishes standards for the reporting and presentation of
comprehensive income and its components. The Statement requires that items
recognized as components of comprehensive income be reported in a financial
statement. The Statement also requires that a company classify items of other
comprehensive income by their nature in a financial statement, and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. Comprehensive income of the Company currently consists of
unrealized gains and losses on securities available for sale. The Company
adopted Statement No. 130 during the three months ended March 31, 1998, and the
effect of Statement No. 130 is reflected for all periods presented.
NOTE 2. PURCHASE OF U.S. BANCORP, INC. AND PETERSON BANK
On May 7, 1997, the Company, through its subsidiary, Manufacturers National
Corporation, completed the purchase of 100% of U.S. Bancorp, Inc. for
$40,210,000. The purchase price was paid through a series of transactions
involving cash of $15,800,000, preferred stock of $10,200,000 and cash held by
U.S. Bancorp, Inc. of $14,210,000. The acquisition was accounted for as a
purchase with the results of operations of U.S. Bancorp, Inc. and Subsidiary
subsequent to the effective date of the agreement, April 30, 1997, included in
the consolidated financial statements. The excess of cost over the fair value of
net assets acquired (goodwill) was $8,637,000. Goodwill is being amortized over
a twenty year period.
On February 22, 1995, the Company, through its subsidiary, Manufacturers
National Corporation, completed the purchase of 158,859 shares (95.2%) of
Peterson Bank common stock for cash of $25,878,000. Additional purchases of
Peterson Bank common stock during the year increased the level of ownership to
100% and the aggregate purchase price to $26,368,000. The acquisition was
accounted for as a purchase with the results of operations of Peterson Bank and
Subsidiary subsequent to February 21, 1995, included in the consolidated
financial statements. The excess of cost over the fair value of net assets
acquired (goodwill) was $6,239,000. Goodwill is being amortized over a twenty
year period.
The unaudited pro forma results of operations, which follow, assume that the
U.S. Bancorp, Inc. acquisition had occurred at January 1, 1996 and that the
Peterson Bank acquisition had occurred at January 1, 1995. In addition to
combining the historical results of operations of the companies, the pro forma
calculations include purchase accounting adjustments related to the acquisition
and interest on borrowed funds. The pro forma calculations do not include any
anticipated cost savings as a result of the acquisitions.
F-12
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 2. PURCHASE OF U.S. BANCORP, INC. AND PETERSON BANK (CONTINUED)
Unaudited pro forma consolidated results of operations for the years ending
December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995
--------------------------------------------
Net interest income $ 56,833 $ 55,234 $ 38,589
============================================
Net income $ 2,157 $ 2,818 $ 2,430
============================================
Net income available to common stockholders $ 1,290 $ 1,951 $ 2,101
============================================
Basic earnings per common share $ 25.94 $ 39.32 $ 41.90
============================================
The pro forma results of operations are not necessarily indicative of the actual
results of operations that would have occurred had the purchases actually been
made at the beginning of the respective periods, or of results which may occur
in the future.
NOTE 3. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Banks are required to maintain reserve balances in cash or on deposit with
the Federal Reserve Bank, based on a percentage of deposits. The total of those
reserve balances was approximately $11,770,000 and $4,480,000 at December 31,
1997 and 1996, respectively.
NOTE 4. INTANGIBLES
Intangibles consist of the following as of December 31:
1997
-----------------------------------------
Core Deposit Goodwill Total
- ---------------------------------------------------------------------------------------------------
Cost $ 13,418 $ 18,032 $ 31,450
Accumulated amortization 6,515 2,517 9,032
-----------------------------------------
$ 6,903 $ 15,515 $ 22,418
=========================================
1996
-----------------------------------------
Core Deposit Goodwill Total
- ---------------------------------------------------------------------------------------------------
Cost $ 7,764 $ 10,134 $ 17,898
Accumulated amortization 4,002 1,878 5,880
-----------------------------------------
$ 3,762 $ 8,256 $ 12,018
=========================================
F-13
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 4. INTANGIBLES (CONTINUED)
The cost of the core deposit intangible increased by $5,654,000 during the year
ended December 31, 1997 as a result of the U.S. Bancorp, Inc. acquisition. The
cost of goodwill increased by $7,898,000 during the year ended December 31, 1997
due to goodwill of $8,637,000 related to the U.S. Bancorp, Inc. acquisition, net
of a reduction of goodwill of $739,000 related to the purchase of the minority
interests in Manufacturers National Corporation.
The amount included in deferred tax liabilities which pertains to the core
deposit intangible is approximately $2,347,000 and $1,279,000 at December 31,
1997 and 1996.
NOTE 5. INVESTMENT SECURITIES
Carrying amounts and fair values of securities available for sale are summarized
as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
AVAILABLE FOR SALE Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------
March 31, 1998 (unaudited):
U.S. Treasury securities $ 97,179 $ 233 $ (84) $ 97,328
U.S. government agencies and corporations 33,680 91 (80) 33,691
Mortgage-backed securities 5,513 138 - 5,651
------------------------------------------------------------
TOTALS $ 136,372 $ 462 $ (164) $ 136,670
============================================================
December 31, 1997:
U .S. Treasury securities $ 119,160 $ 311 $ (91) $ 119,380
U.S. government agencies and corporations 9,971 145 - 10,116
Mortgage-backed securities 7,022 167 - 7,189
------------------------------------------------------------
TOTALS $ 136,153 $ 623 $ (91) $ 136,685
============================================================
December 31, 1996:
U.S. Treasury securities $ 76,919 $ 250 $ (233) $ 76,936
U.S. government agencies and corporations 10,844 274 - 11,118
Mortgage-backed securities 12,132 284 - 12,416
------------------------------------------------------------
TOTALS $ 99,895 $ 808 $ (233) $ 100,470
============================================================
F-14
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 5. INVESTMENT SECURITIES (CONTINUED)
Gross realized gains and losses from the sale of securities available for sale
for the years ended December 31, are as follows:
For the Years Ended December 31,
-----------------------------------------------
1997 1996 1995
-----------------------------------------------
Realized gains $ 138 $ 114 $ 100
Realized (losses) - (39) (658)
-----------------------------------------------
NET GAINS (LOSSES) $ 138 $ 75 $ (558)
===============================================
Carrying amounts and fair values of securities being held to maturity are
summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
HELD TO MATURITY Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
March 31, 1998 (unaudited):
States and political subdivisions $ 4,256 $ 413 $ - $ 4,669
Other securities 968 1 - 969
---------------------------------------------------
TOTALS $ 5,224 $ 414 $ - $ 5,638
===================================================
December 31, 1997:
States and political subdivisions $ 4,423 $ 437 $ - $ 4,860
Other securities 819 - - 819
---------------------------------------------------
TOTALS $ 5,242 $ 437 $ - $ 5,679
===================================================
December 31, 1996:
States and political subdivisions $ 8,192 $ 487 $ (1) $ 8,678
Other securities 1,319 - (2) 1,317
---------------------------------------------------
TOTALS $ 9,511 $ 487 $ (3) $ 9,995
===================================================
F-15
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 5. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and fair value of securities, as of March 31, 1998 and
December 31, 1997, by contractual maturity are shown below. Maturities may
differ from contractual maturities in mortgage-backed securities because the
mortgages underlying the securities may be called or repaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the following maturity summary.
March 31, 1998 (unaudited)
---------------------------------------------------
Available for Sale Held to Maturity
---------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------------------------------------------
Due in one year or less $ 84,484 $ 84,651 $ 876 $ 886
Due after one year through five years 46,375 46,368 3,519 3,919
Due after five years through ten years - - 829 833
Due after ten years - - - -
Mortgage-backed securities 5,513 5,651 - -
---------------------------------------------------
TOTALS $ 136,372 $ 136,670 $ 5,224 $ 5,638
===================================================
December 31, 1997
---------------------------------------------------
Available for Sale Held to Maturity
---------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------------------------------------------
Due in one year or less $ 61,774 $ 62,000 $ 953 $ 969
Due after one year through five years 67,219 67,346 3,234 3,477
Due after five years through ten years - - 1,035 1,212
Due after ten years 138 150 20 21
Mortgage-backed securities 7,022 7,189 - -
---------------------------------------------------
TOTALS $ 136,153 $ 136,685 $ 5,242 $ 5,679
===================================================
Securities with carrying amounts as follows were pledged as collateral on public
deposits and for other purposes as required or permitted by law:
March 31, December 31,
1998 -------------------------------
(unaudited) 1997 1996
----------------------------------------------
Available for sale $ 67,178 $ 55,705 $ 70,917
Held to maturity - 2,306 6,106
F-16
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 5. INVESTMENT SECURITIES (CONTINUED)
The Company, as a member of the Federal Home Loan Bank System, is required to
maintain an investment in capital stock of the Federal Home Loan Bank in an
amount equal to 1% of its certain home loans. No ready market exists for the
stock, and it has no quoted market value. The stock is redeemable at par,
therefore, market value equals cost.
NOTE 6. LOANS
Net loans consist of:
March 31, December 31,
1998 --------------------------
(unaudited) 1997 1996
---------------------------------------------
Commercial $ 191,848 $ 197,668 $ 208,026
Commercial real estate 216,225 162,487 91,251
Residential real estate 52,458 94,587 67,541
Real estate construction 35,902 37,079 7,057
Installment and other 30,481 35,500 14,427
---------------------------------------------
526,914 527,321 388,302
Allowance for loan losses (7,751) (7,922) (4,692)
---------------------------------------------
Loans, net $ 519,163 $ 519,399 $ 383,610
=============================================
The Banks make loans to individuals as well as commercial and tax exempt
entities. Specific loan terms vary as to interest rate, repayment and collateral
requirements based on the type of loan requested and the credit worthiness of
the prospective borrower. Credit risk tends to be geographically concentrated in
that the majority of the loan customers are located in the market serviced by
the Banks. At March 31, 1998, December 31, 1997 and December 31, 1996,
commercial loans included $88,793,000, $85,658,000 and $113,960,000,
respectively, of loans which were collateralized by assignment of leases
primarily for computers and related equipment.
There were no impaired loans during the years ended December 31, 1997 and 1996.
F-17
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 6. LOANS (CONTINUED)
Activity in the allowance for loan losses was as follows:
Three Months Ended
March 31,
1998 1997 Years Ended December 31,
------------------------------------------------------------
(unaudited) (unaudited) 1997 1996 1995
------------------------------------------------------------
Balance, beginning $ 7,922 $ 4,692 $ 4,692 $ 4,134 $ 2,646
Decreases resulting from
sale of subsidiary (399) - - - -
Provision charged to operations 188 171 971 572 240
Amounts charged off (4) (4) (343) (29) (74)
Recoveries of amounts charged off 44 1 28 15 5
Addition resulting from
purchase of U.S. Bancorp, Inc. - - 2,574 - -
Addition resulting from
purchase of Peterson Bank - - - - 1,317
------------------------------------------------------------
Balance, ending $ 7,751 $ 4,860 $ 7,922 $ 4,692 $ 4,134
============================================================
Loans outstanding to bank executive officers and directors, including companies
in which they have management control or beneficial ownership, at December 31,
1997 and 1996, were approximately $8,702,000 and $11,736,000, respectively. In
the opinion of management, these loans have similar terms to other customer
loans. An analysis of the activity related to these loans for the year ended
December 31, 1997 is as follows:
Balance, beginning $ 11,736
Additions 2,705
Principal payments and other reductions (5,739)
------------
Balance, ending $ 8,702
-----------
F-18
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 7. LEASE INVESTMENTS, NET
Lease investments by categories follow:
December 31,
-------------------------
1997 1996
-------------------------
Direct financing leases:
Minimum lease payments receivable $ 1,237 $ 400
Estimated residual value 450 111
Less unearned lease income (117) (42)
-------------------------
1,570 469
-------------------------
Operating leases:
Equipment, at cost 29,678 24,739
Less accumulated depreciation (8,361) (6,571)
-------------------------
21,317 18,168
-------------------------
Lease investments, net $ 22,887 $18,637
=========================
The minimum lease payments receivable for direct financing leases and operating
leases are due as follows for the years ending December 31:
Direct
Year Financing Operating
- ---- ------------------------
1998 $ 610 $ 7,614
1999 389 5,669
2000 238 3,527
2001 - 1,761
2002 - 404
-----------------------
$ 1,237 $ 18,975
=======================
F-19
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 7. LEASE INVESTMENTS, NET (CONTINUED)
Income from lease investments for the years ended December 31, is composed of:
1997 1996 1995
-------------------------------------------
Rental income on operating leases $ 6,896 $ 4,730 $ 2,301
Income from lease payments on direct financing leases 46 39 52
Gain on sale of leased equipment - - 10
Residual income from discounted leases 20 - -
-------------------------------------------
Income on lease investments, gross 6,962 4,769 2,363
Less:
Depreciation on operating leases (5,790) (4,374) (2,079)
Other - - (21)
-------------------------------------------
Income from lease investments, net $ 1,172 $ 395 $ 263
===========================================
NOTE 8. PREMISES AND EQUIPMENT
Premises and equipment consist of:
December 31,
------------------------
1997 1996
------------------------
Land and land improvements $ 2,975 $ 1,840
Buildings and improvements 6,843 4,219
Furniture and equipment 4,582 2,453
------------------------
14,400 8,512
Accumulated depreciation (3,355) (2,096)
------------------------
Premises and equipment, net $ 11,045 $ 6,416
=========================
Depreciation on premises and equipment totaled $1,300,000, $912,000 and $774,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
F-20
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 9. DEPOSITS
The composition of deposits is as follows:
December 31,
-----------------------
1997 1996
-----------------------
Demand deposits, noninterest bearing $ 131,064 $ 96,678
NOW and money market accounts 166,390 139,257
Savings deposits 96,266 62,981
Time certificates, $100,000 or more 143,705 119,254
Other time certificates 146,635 91,547
-----------------------
TOTAL $ 684,060 $ 509,717
========================
At December 31, 1997, the scheduled maturities of time certificates are as
follows:
1998 $ 267,719
1999 16,891
2000 5,096
2001 351
2002 283
----------
$ 290,340
==========
NOTE 10. SHORT-TERM BORROWINGS
Short-term borrowings consisted of:
December 31,
------------------------
1997 1996
------------------------
Securities sold under agreement to repurchase $ 12,385 $ 2,194
U.S. Treasury demand notes 5,628 7,167
------------------------
$ 18,013 $ 9,361
========================
F-21
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 11. LONG-TERM BORROWINGS
At December 31, 1997, the Company has a secured revolving note payable to
LaSalle National Bank with an outstanding balance of $9,000,000. The note bears
interest at a rate equal to the adjusted LIBOR rate. The note requires quarterly
payments of interest only on the outstanding balance through June 1, 1999 at
which time the revolving feature of the note shall cease and the unpaid
principal amount shall convert to an installment note with quarterly payments
due, including interest at the adjusted LIBOR rate, through June 1, 2007.
At December 31, 1997, the Company has an unsecured revolving note payable to
LaSalle National Bank with an outstanding balance of $4,500,000. The note bears
interest at the bank's prime rate, 8.50% at December 31, 1997, and requires
payments of interest only on the outstanding balance through June 1, 1999 at
which time the revolving feature of the note shall cease and the unpaid
principal amount shall convert to an installment note with quarterly payments
due, including interest at the bank's prime rate, through June 1, 2007.
The Company also has notes payable to banks totaling $8,915,000 which accrue
interest at rates ranging from 6.20% to 8.75% and require aggregate monthly
payments of $307,500, including interest at various dates through November 2002.
Equipment included in lease investments with a December 31, 1997, depreciated
cost of $11,179,000 is pledged as collateral on these notes.
The principal payments are due as follows during the years ending December 31:
Amount
-----------
1998 $ 2,893
1999 3,020
2000 3,521
2001 2,710
2002 1,717
Thereafter 8,554
--------
$ 22,415
=========
F-22
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 12. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) plan which covers all full-time
employees of Manufacturers Bank and Coal City National Bank who have completed
three months of service prior to the first day of each month. The Company's
contributions consist of a discretionary profit-sharing contribution and a
discretionary matching contribution of the amounts contributed by the
participants. The Company's contributions are determined by the Board of
Directors on an annual basis. During 1997, the Company contributed on behalf of
each participant a matching contribution equal to 50% of each participant's
contribution up to a maximum of 4% of their compensation along with a profit
sharing contribution of 4% of total compensation. Each participant may also
contribute up to fifteen percent of their compensation on a pretax basis. The
Company's contributions to the plan, for the years ended December 31, 1997, 1996
and 1995, were $441,000, $387,000 and $263,000, respectively.
Manufacturers Bank has a supplemental, nonqualified retirement plan covering
employees who hold the position of vice president or higher. Contributions to
the plan were $64,000, $50,000, and $49,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
Manufacturers Bank also has a noncontributory profit sharing plan that covers
substantially all full-time employees of U.S. Bancorp, Inc., which during the
year was merged with Manufacturers Bank. The employer contribution was
determined by the Board of Directors. The expense related to the plan, for the
year ended December 31, 1997, was $150,000.
NOTE 13. INCOME TAXES
The deferred taxes at December 31, consist of the following:
1997 1996
---------------------
Deferred tax assets:
Allowance for loan losses $ 1,946 $ 927
Other items 229 179
---------------------
2,175 1,106
---------------------
Deferred tax liabilities:
Securities available for sale 198 195
Premises and equipment 3,400 1,736
Core deposit intangible 2,347 1,279
Other items 373 300
---------------------
6,318 3,510
---------------------
NET DEFERRED TAX (LIABILITY) $ (4,143) (2,404)
======================
F-23
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 13. INCOME TAXES (CONTINUED)
The components of income tax expense for the years ended December 31, are
as follows:
1997 1996 1995
-------------------------------------
Current expense:
Federal $ 3,141 $ 2,100 $1,763
State 346 213 23
-------------------------------------
3,487 2,313 1,786
Deferred expense (benefit) (1,085) 263 (282)
-------------------------------------
$ 2,402 $ 2,576 $1,504
=====================================
The reconciliation between the statutory federal income tax rate and the
effective tax rate on consolidated income for the years ended December 31, is as
follows:
1997 1996 1995
---------------------------------------
Income tax at statutory rate 35.0% 35.0 % 35.0%
Increase (decrease) due to:
Graduated tax rates (1.0) (1.0) (1.0)
Tax exempt income (2.4) (3.3) (7.0)
Nondeductible interest expenses 0.3 0.4 0.7
State tax on income, net of federal income tax
benefit 3.6 1.9 0.3
Nondeductible amortization 4.3 4.1 6.5
Nondeductible acquisition expense 1.1 - -
Other items, net (2.7) 0.5 (0.2)
---------------------------------------
Effective income tax rate 38.2% 37.6 % 34.3%
=======================================
NOTE 14. COMMITMENTS AND CONTINGENT LIABILITIES
Financial instruments with off-balance-sheet risk: The Banks are a party to
financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of their customers. These financial
instruments include commitments to extend credit and standby letters of credit
which, to varying degrees, involve elements of credit risk in excess of the
amount recognized in the balance sheets.
The Banks' 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 Banks use the same credit policies in making commitments and conditional
obligations as they do for on-balance-sheet instruments.
F-24
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
A summary of the Banks' exposure to off-balance-sheet risk is as follows:
December 31,
----------------------------
1997 1996
----------------------------
Firm commitments to extend credit $ 91,825 $ 65,076
Standby letters of credit 12,608 10,412
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. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Banks evaluate each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Banks upon extension
of the credit, is based on management's credit evaluation of the party.
Collateral held varies, but may include securities, accounts receivable,
inventory, property and equipment, residential real estate and income producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Banks 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. Collateral held varies
as specified above and is required in instances which the Banks deem necessary.
Concentrations of credit risk: The majority of the loans, commitments to extend
credit, and standby letters of credit have been granted to customers in the
Banks' market area. Investments in securities issued by state and political
subdivisions (see Note 5) also involve governmental entities within the Banks'
market area. The concentrations of credit by type of loan are set forth in Note
6. The distribution of commitments to extend credit approximates the
distribution of loans outstanding. Standby letters of credit were granted
primarily to commercial borrowers.
Contingencies: In the normal course of business, the Company is involved in
various legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the Company's
consolidated financial statements.
F-25
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 15. REGULATORY RESTRICTIONS
The Company's primary source of cash is dividends from the Banks.
The Banks are subject to certain restrictions on the amount of dividends that
they may declare without prior regulatory approval. The dividends declared
cannot be in excess of the amount which would cause the Banks to fall below the
minimum required for capital adequacy purposes. The Banks also have an internal
policy that dividends declared will not be in excess of the amounts which would
cause the Banks to fall below the minimum required to be categorized as well
capitalized.
The Company and the Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and additional discretionary -
actions by regulators that, if undertaken, could have a direct material effect
on the Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company's and Banks'
assets, liabilities, and certain off-balance-sheet items are calculated under
regulatory accounting practices. The Company's and Banks' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Banks to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes the Company and Banks meet all
capital adequacy requirements to which they are subject as of March 31, 1998 and
December 31, 1997.
As of March 31, 1998 and December 31, 1997, the most recent notification from
the Federal Deposit Insurance Corporation categorized the Banks as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Banks must maintain the total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the well
capitalized column table below. There are no conditions or events since that
notification that management believes have changed the Banks' categories.
F-26
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 15. REGULATORY RESTRICTIONS (CONTINUED)
The required and actual amounts and ratios for the Company, Manufacturers
National Corporation, Manufacturers Bank and Peterson Bank are presented below.
Information for Coal City National Bank is not presented as it is not considered
a significant subsidiary.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Action
Actual Purposes(a) Provisions(a)
-----------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------
As of March 31, 1998 (unaudited)
Total capital (to risk-weighted assets):
Consolidated $ 54,861 9.58% $ 45,831 8.00% N/A N/A
Manufacturers Bank 60,523 10.55 45,881 8.00 $ 57,352 10.00%
Tier 1 capital (to risk-weighted assets):
Consolidated 42,379 7.40 22,916 4.00 N/A N/A
Manufacturers Bank 53,400 9.31 22,941 4.00 34,411 6.00
Tier 1 capital (to average assets):
Consolidated 42,379 5.44 31,186 4.00 N/A N/A
Bank 53,400 7.05 30,295 4.00 37,869 5.00
As of December 31, 1997
Total capital (to risk-weighted assets):
Consolidated 57,176 10.00 45,727 8.00 N/A N/A
Manufacturers National Corporation 54,257 9.95 43,615 8.00 N/A N/A
Manufacturers Bank 61,179 11.22 43,608 8.00 54,510 10.00
Tier 1 capital (to risk-weighted assets):
Consolidated 40,522 7.09 22,864 4.00 N/A N/A
Manufacturers National Corporation 47,491 8.71 21,807 4.00 N/A N/A
Manufacturers Bank 54,414 9.98 21,804 4.00 32,706 6.00
Tier 1 capital (to average assets):
Consolidated 40,522 5.15 31,477 4.00 N/A N/A
Manufacturers National Corporation 47,491 6.53 29,113 4.00 N/A N/A
Manufacturers Bank 54,414 7.48 29,109 4.00 36,387 5.00
As of December 31, 1996
Total capital (to risk-weighted assets):
Consolidated 43,595 10.14 34,385 8.00 N/A N/A
Manufacturers National Corporation 42,113 10.68 31,556 8.00 N/A N/A
Manufacturers Bank 26,670 10.05 21,239 8.00 26,548 10.00
Peterson Bank 15,142 11.57 10,466 8.00 13,082 10.00
Tier 1 capital (to risk-weighted assets):
Consolidated 34,404 8.00 17,193 4.00 N/A N/A
Manufacturers National Corporation 37,758 9.57 15,778 4.00 N/A N/A
Manufacturers Bank 23,792 8.96 10,619 4.00 15,929 6.00
Peterson Bank 13,665 10.45 5,233 4.00 7,849 6.00
Tier 1 capital (to average assets):
Consolidated 34,404 6.16 22,337 4.00 N/A N/A
Manufacturers National Corporation 37,758 7.48 20,197 4.00 N/A N/A
Manufacturers Bank 23,792 7.31 13,015 4.00 16,268 5.00
Peterson Bank 13,665 7.27 7,518 4.00 9,397 5.00
(a) The amount and ratios provided are minimums under the regulations.
N/A - Not applicable.
F-27
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 16. FAIR VALUE INFORMATION AND INTEREST RATE RISK
Fair values of financial instruments are management's estimate of the values at
which the instruments could be exchanged in a transaction between willing
parties. These estimates are subjective and may vary significantly from amounts
that would be realized in actual transactions. In addition, other significant
assets are not considered financial assets including deferred tax assets,
premises and equipment and intangibles. Further, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant
effect on the fair value estimates and have not been considered in any of the
estimates.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Cash and short-term investments: The carrying amounts reported in the
balance sheet for cash and due from banks and federal funds sold
approximate their fair values.
Securities held to maturity and available for sale: Fair values for
securities are based on quoted market prices, where available. If quoted
prices are not available, fair values are based on quoted market prices of
comparable instruments.
Stock in Federal Home Loan Bank: No ready market exists for the stock, and
it has no quoted market value. The stock is redeemable at par, therefore,
fair value equals cost.
Loans receivable: Most commercial loans, and some real estate mortgage
loans, are made on a variable rate basis. For those variable-rate loans
that reprice frequently, and with no significant change in credit risk,
fair values are based on carrying values. The fair values for fixed rate
and all other loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms
to borrowers with similar credit quality.
Deposit liabilities: The fair values disclosed for deposits with no defined
maturities are equal to their carrying amounts, which represent the amount
payable on demand. The carrying amounts for variable-rate, fixed-term money
market accounts and certificates of deposit approximate their fair value at
the reporting date. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
Short-term borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements and other short-term borrowings
approximate their fair values.
Long-Term Borrowings: The fair values of the Company's long-term borrowings
(other than deposits) are estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
F-28
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 16. FAIR VALUE INFORMATION AND INTEREST RATE RISK (CONTINUED)
Corporation obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures: The fair
values of these preferred securities are estimated using discounted cash
flow analyses, based on the Company's current incremental borrowing rates
for similar types of securities.
Accrued interest payable and receivable: The carrying amounts of accrued
interest approximate their fair values.
Off-balance-sheet instruments: Fair values for the Company's
off-balance-sheet lending commitments (guarantees, letters of credit and
commitments to extend credit) are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
The estimated fair value of financial instruments is as follows:
December 31,
--------------------------------------------------------------
1997 1996
--------------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------------------------------------
Financial Assets
Cash and due from banks $ 36,302 $ 36,302 $ 31,465 $ 31,465
Securities available for sale 136,685 136,685 100,470 100,470
Securities held to maturity 5,242 5,679 9,511 9,995
Stock in Federal Home
Loan Bank 615 615 - -
Federal funds sold 37,400 37,400 20,800 20,800
Loans 519,399 523,624 383,610 385,435
Accrued interest receivable 5,571 5,571 3,905 3,905
Financial Liabilities
Deposits 684,060 683,586 509,717 509,751
Short-term borrowings 18,013 18,013 9,361 9,361
Long-term borrowings 22,415 22,415 16,038 16,038
Corporation obligated mandatorily
redeemable preferred securities
of subsidiary trust holding solely
junior subordinated debentures 10,000 10,000 - -
Accrued interest payable 2,106 2,106 1,669 1,669
Off-balance-sheet instruments, loan
commitments and standby
letters of credit - - - -
F-29
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 16. FAIR VALUE INFORMATION AND INTEREST RATE RISK (CONTINUED)
The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, the fair
values of the Company's financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are more likely to prepay in a falling rate
environment and less likely to prepay in a rising rate environment. Conversely,
depositors who are receiving fixed rates are more likely to withdraw funds
before maturity in a rising rate environment and less likely to do so in a
falling rate environment. Management monitors rates and maturities of assets and
liabilities and attempts to minimize interest rate risk by adjusting terms of
new loans and deposits and by investing in securities with terms that mitigate
the Company's overall interest rate risk.
NOTE 17. MINORITY INTEREST PURCHASE OBLIGATION
In the agreement to originally acquire 80.1% of Manufacturers National
Corporation, the Company also granted put options to the tendering stockholders
on all shares tendered but not purchased by the Company on October 31, 1992. The
put options may be exercised by the selling stockholders at any time after
October 31, 1993. Through October 31, 1997, the option price increased annually
and the exercise price for the remaining option term is $11.66 per share. The
number of shares of Manufacturers National Corporation common stock subject to
the put option total 209,221. Put options expire if not exercised by October 31,
1998.
NOTE 18. STOCK OPTION PLAN
During 1995, the Company reserved 5,000 shares of common stock for issuance to
key employees of the Company or any of its subsidiaries under a stock option
plan approved by the Board of Directors and stockholders. Options granted may be
either options which are intended to be incentive stock options ("incentive
stock option") or options which are not intended to be incentive stock options
("non-statutory options"). Options granted under the Plan will expire not more
than ten years from the date of the grant, and in the case of incentive stock
options, the purchase price per share to be specified in each option will be not
less than the fair market value of a share of the Company's common stock on the
date the option is granted. Other pertinent information related to the plan is
as follows:
F-30
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 18. STOCK OPTION PLAN (CONTINUED)
December 31,
---------------------------------------------------------
1997 1996
---------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------
Outstanding at beginning of year 490 $ 866 - $ -
Granted 479 930 490 866
Exercised - - - -
Forfeited - - - -
---------------------------------------------------------
Outstanding at end of year 969 $ 892 490 $ 866
=========================================================
Exercisable at end of year 75 $ 891 25 $ 871
=========================================================
Weighted average fair value per
option of options granted
during the year $ 393.82 $ 348.18
============ ===========
Subsequent to December 31, 1997, an additional 507 shares under option were
granted at an exercise price of $1,020.
Options Summary: The following table presents certain information with respect
to stock options granted.
Options Outstanding and Exercisable
---------------------------------------------------------
Weighted Average Weighted Average
Number Remaining Exercise
Range of Exercise Prices Outstanding Contractual Life Price
- -------------------------------------------------------------------------------------------
$865-$871 490 8.0 $ 866
$930 479 9.0 930
F-31
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 18. STOCK OPTION PLAN (CONTINUED)
As permitted under generally accepted accounting principles, grants under the
plan are accounted for following the provisions of APB Opinion No. 25 and its
related interpretations. Accordingly, no compensation cost has been recognized
for grants made to date. Had compensation cost been determined based on the fair
value method prescribed in FASB Statement No. 123, reported net income and
earnings per common share would have been reduced to the pro forma amounts shown
below:
December 31,
-----------------------------------------------
1997 1996 1995
-----------------------------------------------
Net income
As reported $ 3,449 $ 3,637 $ 2,437
Pro forma 3,373 3,594 2,437
Basic earnings per common share
As reported $ 63.83 $ 73.28 $ 43.27
Pro forma 62.30 72.42 43.27
In determining the pro forma amounts above, the value of each grant is estimated
at the grant date using the binomial method, which is one of the methods
prescribed in Statement No. 123, with the following weighted-average
assumptions: dividend rate of 0%, risk-free interest rate of 6%, expected life
of 10 years and expected price volatility of 25%.
NOTE 19. ISSUANCE OF PREFERRED TRUST SECURITIES
In 1997, the Company established Coal City Capital Trust 1997-A, a Delaware
Business Trust (Trust) and purchased a $309,300 interest in common trust
securities of the Trust. The Trust then issued to Coal City Investors (CCI), an
Illinois general partnership comprised of the eight directors of the Company
$10.0 million in Corporation Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures
along with an option to purchase 5,000 shares of the Company common stock at
$1,000 per share. This option expired on July 7, 1997. In addition, a detachable
warrant was issued to CCI allowing the warrant holders to purchase up to $10.0
million of the Company's common stock at an exercise price ranging from $1,600
to $3,218 per share over the next ten years.
The debentures require quarterly payments of interest only at a rate of 9.25%
per annum. The principal portion of the debenture is due February 2027, but may
be repaid on or after February 2004. The Company shall have the right at any
time during the term to extend the interest payment period for up to 20
consecutive quarters, at the end of which period the Company shall pay all
interest then accrued and unpaid together with interest thereon.
F-32
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 20. PREFERRED STOCK
During 1997, as part of the transaction to acquire U.S. Bancorp, Inc., the
Company issued 68 shares of Class B preferred stock. The Class B preferred stock
is not cumulative as to dividends which are payable semiannually at a rate of
8.5%. At the option of the Company, the preferred shares are redeemable at par
value plus any unpaid accrued dividends.
The Class B preferred shares have a majority voting right provision which allows
the holder to vote only upon certain events deemed adverse to the holder of the
preferred stock, such as the failure of the Company to pay the required cash
dividends, or when certain business combinations are being considered.
NOTE 21. SUBSEQUENT EVENT, SALE OF COAL CITY NATIONAL BANK
On January 28, 1998, the Company sold all of the issued and outstanding shares
of Coal City National Bank common stock for cash of $7,800,000. The net assets
of Coal City National Bank at December 31, 1997 were approximately $3,662,000.
NOTE 22. CONDENSED PARENT COMPANY FINANCIAL INFORMATION
The condensed financial statements of Coal City Corporation (parent company
only) are presented below:
Balance Sheets
December 31,
-----------------------------
ASSETS 1997 1996
- --------------------------------------------------------------------------------------------------------------
Cash $ 331 $ 139
Investments in subsidiaries 68,353 47,136
Note receivable, subsidiary 7,500 -
Other assets 238 45
-----------------------------
TOTAL ASSETS $ 76,422 $ 47,320
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Long-term borrowing $ 23,809 $ 7,750
Liabilities, other 87 444
Stockholders' Equity 52,526 39,126
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 76,422 $ 47,320
=============================
F-33
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 22. CONDENSED PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
Statements of Income
Years Ended December 31,
--------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Dividends from subsidiaries $ 2,283 $ 1,491 $ 3,282
Interest and other income 370 6 -
Interest and other expense (1,804) (741) (1,052)
--------------------------------------------
INCOME BEFORE INCOME TAX CREDITS AND EQUITY
IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES 849 756 2,230
Income tax credits (596) (214) (324)
--------------------------------------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARIES 1,445 970 2,554
Equity (deficit) in undistributed net income of subsidiaries 2,004 2,667 (117)
--------------------------------------------
NET INCOME $ 3,449 $ 3,637 $ 2,437
============================================
F-34
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 22. CONDENSED PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
Statements of Cash Flows
Years Ended December 31,
------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 3,449 $ 3,637 $ 2,437
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization (110) - 4
Equity (deficit) in undistributed net income of subsidiaries (2,004) (2,444) 117
Change in other assets and other liabilities (490) (295) 737
------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 845 898 3,295
------------------------------------------
Cash Flows From Investing Activities
Purchase of subsidiary preferred stock (19,000) - (18,400)
Purchase of interest in grantor trust (309) - -
Cash received from subsidiary for
preferred stock redemption 2,000 - 7,000
Purchase of minority interests (2,649) (64) (33)
Purchase of interest in Peterson Bank - - (387)
Sale of interest in Peterson Bank 901 - -
Issuance of note receivable from subsidiary (7,500) - -
Net (increase) decrease in securities purchased under
agreement to resell - 1,504 (1,504)
------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (26,557) 1,440 (13,324)
------------------------------------------
Cash Flows From Financing Activities
Purchase and retirement of common stock (194) (872) (123)
Issuance of common stock 115 311 706
Issuance of preferred stock 10,200 - 3,500
Redemption of preferred stock - - (3,500)
Dividends paid (276) - (267)
Proceeds from long-term borrowings 23,809 - 17,500
Principal paid on long-term borrowings (7,750) (2,000) (7,750)
------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 25,904 (2,561) 10,066
------------------------------------------
NET INCREASE (DECREASE) IN CASH 192 (223) 37
Cash:
Beginning 139 362 325
------------------------------------------
Ending $ 331 $ 139 $ 362
==========================================
F-35
================================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS OFFERING MEMORANDUM IN CONNECTION WITH THE
OFFER MADE BY THIS OFFERING MEMORANDUM AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
CORPORATION, THE TRUST OR THE INITIAL PURCHASER. NEITHER THE DELIVERY OF THIS
OFFERING MEMORANDUM NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
CORPORATION OR THE TRUST SINCE THE DATE HEREOF. THIS OFFERING MEMORANDUM DOES
NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
-----------------------------------
TABLE OF CONTENTS
PAGE
--------------
Available Information ........................ 7
Forward-Looking Statements ................... 7
Summary ...................................... 8
Selected Consolidated Financial and
Other Date ................................ 12
Risk Factors ................................. 14
Coal City Corporation ........................ 21
Recent Developments .......................... 22
Use of Proceeds .............................. 23
Ratio of Earnings to Combined Fixed
Charges ................................... 24
Accounting Treatment ......................... 24
Capitalization ............................... 25
Management's Discussion and Analysis
of Financial Condition and Results of
Operations ................................ 26
Business ..................................... 42
Management ................................... 53
Supervision and Regulation ................... 54
Coal City Capital Trust I .................... 59
Description of Capital Securities ............ 60
Description of Junior Subordinated De-
bentures .................................. 72
Description of Guarantee ..................... 80
Relationship Among the Capital Secu-
rities, the Junior Subordinated De-
bentures and the Guarantee ................ 82
Consequences ................................. 83
ERISA Considerations ......................... 87
Plan of Distribution ......................... 87
Notice to Investors .......................... 89
Legal Matters ................................ 92
Independent Accountants ...................... 92
Transferee Letter of Representation .......... A-1
Index to Financial Statements ................ F-1
================================================================================
================================================================================
$25,000,000
COAL CITY CAPITAL TRUST I
FLOATING RATE CAPITAL SECURITIES
FULLY AND UNCONDITIONALLY
GUARANTEED, TO THE EXTENT
DESCRIBED HEREIN, BY
COAL CITY CORPORATION
-----------------------------------
OFFERING MEMORANDUM
-----------------------------------
SANDLER O'NEILL &
PARTNERS, L.P.
JULY 21, 1998
================================================================================