SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
__________________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 14, 1999
-------------------
MB FINANCIAL, INC.
---------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware
(State or Other Jurisdiction or Incorporation)
0-24566
(Commission File Number)
36-3895923
(IRS Employer Identification Number)
1200 North Ashland Avenue
Chicago, Illinois 60622
(Address of Principal Executive Offices)
(773) 278-4040
(Registrant's telephone number; including area code)
Item 5. Other Events
Manufacturers Bank is filing this Current Report on Form 8-K to
incorporate by reference herein the Consolidated Financial Statements of Coal
City Corporation and Subsidiaries as of December 31, 1998 and 1997 and for the
years ended December 31, 1998, 1997 and 1996.
Item 7. Financial Statements and Exhibits
(c) Exhibits
99 Consolidated Financial Statements of Coal City Corporation and
Subsidiaries as of December 31, 1998 and 1997 and for the years ended December
31, 1998, 1997 and 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MB FINANCIAL, INC.
Date: May 5, 1999
BY /s/ Mitchell Feiger
----------------------------
Mitchell Feiger, President and
Chief Executive Officer
CONTENTS
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of income 3
Consolidated statements of changes in stockholders' equity 4
Consolidated statements of cash flows 5 and 6
Notes to consolidated financial statements 7 -32
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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three
year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ McGladrey & Pullen, LLP
Mokena, Illinois
February 9, 1999
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(Amounts in Thousands)
1998 1997
-------- --------
ASSETS
Cash and due from banks $23,669 $36,302
Investment securities:
Securities available for sale 212,020 136,685
Securities held to maturity (fair value of $11,529
at December 31, 1998, $5,679 at December 31, 1997) 11,142 5,242
Stock in Federal Home Loan Bank 2,614 615
Federal funds sold 20,350 37,400
Loans (net of allowance for loan losses of $6,344
at December 31, 1998, $7,922 at December 31, 1997) 542,009 519,399
Lease investments, net 21,931 22,887
Premises and equipment, net 11,483 11,045
Other assets 8,380 10,703
Intangibles, net 18,293 22,418
-------- --------
Total assets $ 871,891 $ 802,696
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $128,218 $ 131,064
Interest bearing 517,443 552,996
-------- --------
Total deposits 645,661 684,060
Short-term borrowings 130,521 18,013
Long-term borrowings 12,034 22,415
Other liabilities 11,815 12,261
-------- --------
Total liabilities 800,031 736,749
Minority Interest in Subsidiary - 3,421
-------- --------
Corporation Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust
Holding Solely Junior Subordinated Debentures - 10,000
-------- --------
Corporation Obligated Mandatorily Redeemable
Capital Securities of Subsidiary Trust Holding
Solely Junior Subordinated Debentures 25,000 -
-------- --------
Stockholders' Equity
Preferred stock, Class B, $150,000 par value;
authorized 100 shares; issued December 31,
1997 68 shares - 10,200
Common stock, no par value, $10 stated value;
authorized 200,000 shares; issued December 31,
1998 48,957 shares; December 31, 1997 49,707 shares 490 497
Additional paid-in capital 23,794 24,446
Retained earnings 22,232 17,062
Accumulated comprehensive income 344 321
-------- --------
Total stockholders' equity 46,860 52,526
-------- --------
Total liabilities and stockholders' equity $871,891 $802,696
======== ========
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997 and 1996
(Amounts in Thousands Except Earnings Per Common Share)
1998 1997 1996
Interest income:
Loans $ 44,929 $ 41,313 $ 30,107
Investment securities:
Taxable 11,787 8,527 7,941
Nontaxable 305 433 673
Federal funds sold 611 1,413 809
-------- -------- --------
Total interest income 57,632 51,686 39,530
-------- -------- --------
Interest expense on:
Deposits 22,319 21,617 16,529
Short-term borrowings 5,118 1,353 669
Long-term borrowings 2,389 2,202 982
-------- -------- --------
Total interest expense 29,826 25,172 18,180
-------- -------- --------
Net interest income 27,806 26,514 21,350
Provision for loan losses 750 971 572
-------- -------- --------
Net interest income after provision
for loan losses 27,056 25,543 20,778
-------- -------- --------
Other income:
Service fees 3,548 3,085 2,076
Lease financing, net 1,418 1,172 395
Net gains on sale of securities available
for sale 167 138 75
Gain on sale of Coal City National Bank 4,099 - -
Other 708 540 393
-------- -------- --------
9,940 4,935 2,939
-------- -------- --------
Other expenses:
Salaries and employee benefits 12,954 11,556 8,667
Occupancy and equipment expense 3,773 2,934 2,167
Amortization expense 3,254 3,321 2,021
Other 7,056 6,384 4,013
-------- -------- --------
27,037 24,195 16,868
-------- -------- --------
Income before income taxes and
minority interest 9,959 6,283 6,849
Income taxes 3,605 2,402 2,576
-------- -------- --------
Income before minority interest 6,354 3,881 4,273
Minority interest (99) (432) (636)
-------- -------- --------
Net income 6,255 3,449 3,637
Preferred stock dividend 1,085 276 -
-------- -------- --------
Net income available to
common stockholders $ 5,170 $ 3,173 $ 3,637
======== ======== ========
Earnings per common share:
Basic earnings per common share $ 105.47 $ 63.83 $ 73.28
Diluted earnings per common share $ 104.50 $ 63.83 $73.28
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
(Amounts In Thousands Except for Shares Information)
Additional Accumulated
Preferred Common Paid-In Retained Comprehensive
Stock Stock Capital Earnings Income T
-------- -------- -------- -------- -------- ---
Balance, December 31, 1995 $ - $ 505 $ 24,740 $ 10,490 $ 891 $ 36
Issuance of 405 shares of
common stock - 4 307 - -
Purchase and retirement of 1,067
shares of common stock - (11) (523) (338) - (
Comprehensive income:
Net income - - - 3,637 - 3
Other comprehensive income:
Unrealized securities losses
arising during the
year, net of taxes
of $279 - - - - (526) (
Reclassification adjustments
for gains on sale of
investments included in net
income, net of tax of $25 - - - - (50)
Comprehensive income 3
-------- -------- -------- -------- -------- ----
Balance, December 31, 1996 - 498 24,524 13,789 315 39
Issuance of 140 shares of
common stock - 1 114 - -
Issuance of 68 shares of
preferred stock 10,200 - - - - 10
Purchase and retirement of
232 shares of common stock - (2) (192) - - (
Minority interest effect of premium
received over book value for
interest in Peterson Bank - - - 100 -
Dividends paid on preferred
stock - - - (276) - (
Comprehensive income:
Net income - - - 3,449 - 3
Other comprehensive income:
Unrealized securities
gains arising during
the year, net of taxes
of $50 - - - - 97
Reclassification adjustments
for gains on sale of
investments included in
net income, net of
tax of $47 - - - - (91)
Comprehensive income 3
-------- -------- -------- -------- -------- ----
Balance, December 31, 1997 10,200 497 24,446 17,062 321 52
Purchase and retirement of
68 shares of preferred
stock (10,200) - - - - (10,
Purchase and retirement
of 750 shares of
common stock - (7) (652) - (
Dividends paid on
preferred stock - - - (1,085) (1,
Comprehensive income:
Net income - - - 6,255 6
Unrealized securities
gains arising during
the year, net of taxes
of $77 - - - - 133
Reclassification adjustments
for gains on sale of
investments included in
net income, net of tax
of $57 - - - - (110) (
Comprehensive income 6
-------- -------- -------- -------- -------- ----
Balance, December 31, 1998 $ - $ 490 $ 23,794 $22,232 $ 344 $ 46
======== ======== ======== ======== ======== ====
See Notes to Consolidated Financial Statements.
/TABLE
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
(Amounts in Thousands)
1998 1997 1996
Cash Flows From Operating Activities
Net income $ 6,255 $ 3,449 $ 3,637
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 8,916 7,142 5,286
(Gain) loss on disposal of premises and
equipment and leased equipment (356) 166 33
(Gain) on sale of Coal City National Bank (4,099) - -
Amortization of intangibles 3,254 3,320 2,192
Provision for loan losses 750 971 572
Provision (credit) for deferred income taxes 158 (1,085) 263
Bond (accretion), net (3,721) (325) (206)
Securities (gains), net (167) (131) (75)
(Gain) on sale of loans (139) - -
Proceeds from sale of loans 8,855 - -
Loans originated for sale (8,716) - -
Minority interest in net income 99 432 636
Decrease in other assets 2,389 1,329 1,434
(Decrease) in other liabilities (801) (2,116) (321)
-------- -------- --------
Net cash provided by operating
activities 12,677 13,152 13,451
-------- -------- --------
Cash Flows From Investing Activities
Proceeds from sales, maturities and
calls of securities available for sale 255,006 110,772 86,987
Proceeds from maturities and calls
of securities held to maturity 1,549 5,834 5,761
Purchase of securities available for sale (341,905) (94,382) (31,564)
Purchase of securities held to maturity (7,553) (395) (841)
Purchase of stock in Federal Home Loan Bank (1,999) - -
Federal funds sold, net (2,450) (16,600) (9,601)
Increase in loans, net of principal
collections (41,209) (13,518) (48,997)
Purchases of premises and equipment (3,022) (1,805) (370)
Proceeds from sales of premises and
equipment and leased equipment 3,628 737 220
Purchase of leased equipment (10,003) (9,835) (14,620)
Principal collected on lease investments 659 (264) 168
Purchase of minority interests (2,328) (2,649) (227)
Proceeds from sale of Coal City National
Bank, net of cash retained
by Coal City National Bank 5,481 - -
Purchase of U.S. Bancorp, Inc., net
of cash acquired - (15,800) -
-------- -------- --------
Net cash (used in) investing activities (144,146) (37,905) (13,084)
-------- -------- --------
Cash Flows From Financing Activities
Net increase (decrease) in noninterest
bearing deposits 3,153 5,981 (4,071)
Net increase (decrease) in interest
bearing deposits 10,500 (1,065) 318
Net increase in short-term borrowings 112,508 8,652 6,245
Proceeds from long-term borrowings 7,667 15,179 6,942
Principal paid on long-term borrowings (18,048) (8,802) (4,788)
Issuance of Corporation Obligated
Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding
Solely Junior Subordinated Debentures 10,000
Redemption of Corporation Obligated
Mandatorily Redeemable Preferred Securities
of Subsidiary Trust Holding
Solely Junior Subordinated Debentures (10,000)
Issuance of Corporation Obligated
Mandatorily Redeemable Capital
Securities of Subsidiary Trust Holding
Solely Junior Subordinated Debentures 25,000
Issuance of common stock - 115 311
Purchase and retirement of common stock (659) (194) (872)
Purchase and retirement of preferred stock (10,200)
Dividends paid on preferred stock (1,085) (276)
-------- -------- --------
Net cash provided by financing
activities 118,836 29,590 4,085
-------- -------- --------
(continued)CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31, 1998, 1997 and 1996
(Amounts in Thousands)
1998 1997 1996
Net increase (decrease) in cash
and due from banks $(12,633) $ 4,837 $ 4,452
Cash and due from banks:
Beginning 36,302 31,465 27,013
-------- -------- --------
Ending $ 23,669 $ 36,302 $ 31,465
======== ======== ========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors $ 22,363 $ 21,179 $ 16,320
Other interest paid 6,917 3,567 1,644
Income taxes paid, net of refunds 4,310 2,037 2,495
Supplemental Schedule of Noncash Investing Activities
Acquisition of U.S. Bancorp, Inc.
Assets acquired:
Securities available for sale $ 52,261
Securities held to maturity 1,099
Stock in Federal Home Loan Bank 615
Loans, net 124,248
Premises and equipment 5,020
Accrued interest and other assets 6,155
Core deposit intangibles 5,654
Excess of cost over fair value of
net assets acquired 8,637
-------
203,689
-------
Liabilities Assumed:
Noninterest bearing deposits 28,405
Interest bearing deposits 141,022
Other liabilities 8,262
-------
177,689
-------
Net assets acquired 26,000
Issuance of preferred stock (10,200)
-------
Net cash payment $ 15,800
========
Sale of Coal City National Bank
Assets sold:
Cash $ 2,319
Securities available for sale 15,418
Securities held to maturity 173
Federal funds sold 19,500
Loans, net 17,573
Premises and equipment, net 696
Other 317
-------
55,996
-------
Liabilities sold:
Deposits 52,052
Other 243
-------
52,295
-------
Net assets sold $ 3,701
=======
Cash received $ 7,800
=======
Real estate acquired in settlement of losses $ 276 $ 1,006
======= =======
See Notes to Consolidated Financial Statements.
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands)
Note 1. Significant Accounting Policies
Coal City Corporation (Company) is a 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 (Bank), 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, sold January 28, 1998
Manufacturers National Corporation - 100% 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.
Comprehensive income: Financial Accounting Standards Board Statement No. 130,
Reporting Comprehensive Income, 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 the 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 year
ended December 31, 1998, and the effect of Statement No. 130 is reflected for
all periods presented.
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. Areas involving the use of management's estimates
and assumptions, and which are more susceptible to change in the near term
include the allowance for loan losses and the determination and carrying value
of impaired loans.
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 Bank,
deposits, and federal funds purchased and sold and short-term borrowings are
reported net.
Securities held to maturity: Debt securities for which the Bank has 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.
Securities available for sale: Securities classified as available for sale are
those debt securities that the Bank intends to hold for an indefinite period of
time, but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Bank's 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 accumulated comprehensive income, 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 held for sale: Loans held for sale are those loans the Company intends
to sell in the foreseeable future. They are carried at the lower of aggregate
cost or market value. Gains and losses on sales of loans are recognized at
settlement dates and are determined by the difference between the sales proceed
plus the value of the mortgage servicing rights compared to the carrying value
of the loans. All sales are made without recourse. There were no loans held
for sale at December 31, 1998 and 1997.
Loans: Loans are stated at the amount of unpaid principal reduced by the
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 Bank is 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 Bank 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.
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 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.
Lease investments: The 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 3-15
Intangibles: In acquiring its subsidiaries, 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 fifteen to
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.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.
Earnings per common share: Basic earnings per common share is determined by
dividing net income available to common stockholders and weighted average
common shares outstanding. Diluted earnings per common share is determined by
dividing net income available to common stockholders by weighted average common
shares outstanding including additional shares that would have been outstanding
if dilutive potential shares had been issued.
Weighted average common shares outstanding were 49,021, 49,713 and 49,628 for
the years ended December 31, 1998, 1997 and 1996. Weighted average common
shares outstanding including dilutive shares were 49,473, 49,713 and 49,628 for
the years ended December 31, 1998, 1997 and 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 was December 31, 1997. On January 1, 1997, the Company
adopted FAS 125 except as it relates to transactions involving secured
borrowings and collateral which was adopted on January 1, 1998. The effect of
adoption of this Statement was not material.
Derivatives: In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities (FAS 133). FAS 133 requires companies to record derivatives on the
balance sheet as assets or liabilities at fair value. Depending on the use of
the derivative and whether it qualifies for hedge accounting, gains or losses
resulting from changes in the values of those derivatives would either be
recorded as a component of net income or as a change in stockholders' equity.
The Company is required to adopt this new standard January 1, 2000. Management
has not yet determined the impact of this standard.
Note 2. Purchase of U.S. Bancorp, Inc.
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.
The unaudited pro forma results of operations, which follow, assume that the
acquisition had occurred at January 1, 1996. 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.
Unaudited pro forma consolidated results of operations for the years ending
December 31, 1997 and 1996 are as follows:
1997 1996
Net interest income $ 56,833 $ 55,234
Net income $ 2,157 $ 2,818
Net income available to common stockholders $ 1,290 $ 1,951
Basic earnings per common share $ 25.94 $ 39.32
Diluted earnings per common share $ 25.94 $ 39.32
The pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the acquisition
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 Bank is 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 $1,147,000 and $11,770,000 at December
31, 1998 and 1997, respectively.
Note 4. Intangibles
Intangibles consist of the following as of December 31:
1998
Core Deposit Goodwill Total
Cost $ 13,418 $ 17,039 $ 30,457
Accumulated amortization 8,816 3,348 12,164
-------- -------- --------
$ 4,602 $ 13,691 $ 18,293
======== ======== ========
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
======== ======== ========
The amount of goodwill recognized decreased by $993,000 during the year ended
December 31, 1998 due to negative goodwill of $818,000 being recognized on the
purchase of the minority interests in Manufacturers National Corporation and a
reduction of goodwill of $175,000 related to Coal City National Bank which was
sold January 28, 1998.
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.
Goodwill increased by $7,898,000 during the year ended December 31, 1997 due to
goodwill of $8,637,000 being recorded in the acquisition of U.S. Bancorp, Inc.,
net of negative goodwill of $739,000 being recognized on 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 $1,611,000 and $2,347,000 at December 31,
1998 and 1997, respectively.
Note 5. Investment Securities
Carrying amounts and fair values of securities available for sale are
summarized as follows:
Gross Gross
Amortized UnrealizedUnrealized Fair
AVAILABLE FOR SALE Cost Gains Losses Value
December 31, 1998
U.S. Treasury securities $ 128,630 $ 182 $ (64) $128,748
U.S. government agencies and corporations 80,089 473 (151) 80,411
Mortgage-backed securities 2,779 82 - 2,861
--------- ------- -------- --------
Totals $ 211,498 $ 737 $ (215) $212,020
========= ======= ======== ========
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
========= ======= ======== ========
Gross realized gains and losses from the sale of securities available for sale
are as follows:
For the Years Ended December
1998 1997 1996
Realized gains $ 169 $ 138 $ 114
Realized (losses) (2) - (39)
------- ------- --------
Net gains $ 167 $ 138 $ 75
======= ======= ========
Carrying amounts and fair values of securities being held to maturity are
summarized as follows:
Gross Gross
Amortized UnrealizedUnrealized Fair
HELD TO MATURITY Cost Gains Losses Value
December 31, 1998
States and political subdivisions $ 5,524 $ 391 $ (3) $ 5,912
Mortgage-backed securities 4,651 4 (7) 4,648
Other securities 967 2 969
------- ------- ------- -------
$11,142 $ 397 $ (10) $ 11,529
======= ======= ======= =======
December 31, 1997:
States and political subdivisions $ 4,423 $ 437 $ $ 4,860
Other securities 819 819
------- ------- ------- -------
Totals $ 5,242 $ 437 $ $ 5,679
======= ======= ======= =======
The amortized cost and fair value of securities, as of December 31, 1998, 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.
December 31, 1998
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or less $124,622 $124,678 $ 438 $ 442
Due after one year through five years 84,097 84,481 5,061 5,442
Due after five years through ten years 728 734
Due after ten years 264 263
Mortgage-backed securities 2,779 2,861 4,651 4,648
-------- -------- -------- --------
Totals $211,498 $212,020 $ 11,142 $ 11,529
======== ======== ======== ========
Securities with carrying amounts as follows were pledged as collateral on
public deposits and for other purposes as required or permitted by law:
December 31,
1998 1997
Available for sale $ 65,404 $ 55,705
Held to maturity 2,306
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
Loans consist of:
December 31,
1998 1997
Commercial $ 211,395 $ 197,668
Commercial real estate 226,455 162,487
Residential real estate 54,741 94,587
Real estate construction 21,059 37,079
Installment and other 34,703 35,500
-------- --------
548,353 527,321
Allowance for loan losses (6,344) (7,922)
-------- --------
Loans, net $ 542,009 $ 519,399
======== ========
Loans are made 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 Bank. At December 31, 1998 and 1997, commercial loans included
$89,301,000 and $85,658,000, respectively, of loans which were collateralized
by assignment of leases primarily for computers and related equipment.
Information about impaired loans as of and for the year ended December 31, 1998
is as follows:
Loans for which there is a related allowance for credit losses $ 2,263
Other impaired loans
Total impaired loans $ 2,263
Average monthly balance of impaired loans $ 290
Related allowance for credit losses $ 350
Interest income recognized on impaired loans $ 114
There were no impaired loans during the year ended December 31, 1997.
Activity in the allowance for loan losses was as follows:
Years Ended December 31,
1998 1997 1996
Balance, beginning $ 7,922 $ 4,692 $ 4,134
Decreases resulting from sale
of subsidiary (399)
Provision charged to operations 750 971 572
Amounts charged off (2,090) (343) (29)
Recoveries of amounts charged off 161 28 15
Addition resulting from purchase
of U.S. Bancorp, Inc. 2,574
-------- -------- --------
Balance, ending $ 6,344 $ 7,922 $ 4,692
======== ======== ========
Loans outstanding to bank executive officers and directors, including companies
in which they have management control or beneficial ownership, at December 31,
1998 and 1997, were approximately $5,483,000 and $8,702,000, 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, 1998 is as follows:
Balance, beginning $ 8,702
Additions 4,475
Principal payments and other reductions (7,694)
---------
Balance, ending $ 5,483
=========
Note 7. Lease Investments
Lease investments by categories follow:
December 31,
1998 1997
Direct financing leases:
Minimum lease payments receivable $ 627 $ 1,237
Estimated residual value 338 450
Less unearned lease income (40) (117)
-------- --------
925 1,570
-------- --------
Operating leases:
Equipment, at cost 35,070 29,678
Less accumulated depreciation (14,064) (8,361)
-------- --------
21,006 21,317
-------- --------
Lease investments, net $ 21,931 $ 22,887
======== ========
The minimum lease payments receivable for direct financing leases and operating
leases are due as follows for the years ending December 31:
Year Direct
Financing Operating
1999 $ 389 $ 7,432
2000 238 6,272
2001 3,566
2002 1,012
2003 110
-------- --------
$ 627 $ 18,392
======== ========
Income from lease investments, is composed of:
Years Ended December 31,
1998 1997 1996
Rental income on operating leases $ 8,051 $ 6,916 $ 4,730
Income from lease payments on direct
financing leases 77 46 39
Gain on sale of leased equipment 389
--------- -------- --------
Income on lease investments, gross 8,517 6,962 4,769
Less:
Depreciation on operating leases (7,099) (5,790) (4,374)
-------- -------- --------
Income from lease investments, net $ 1,418 $ 1,172 $ 395
======== ======== ========
Note 8. Premises and Equipment
Premises and equipment consist of:
December 31,
1998 1997
Land and land improvements $ 2,800 $ 2,975
Buildings and improvements 6,531 6,843
Furniture and equipment 5,830 4,582
-------- --------
15,161 14,400
Accumulated depreciation (3,678) (3,355)
-------- --------
Premises and equipment, net $ 11,483 $ 11,045
======== ========
Depreciation on premises and equipment totaled $1,817,000, $1,352,000 and
$912,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Note 9. Deposits
The composition of deposits is as follows:
December 31,
1998 1997
Demand deposits, noninterest bearing $128,218 $131,064
NOW and money market accounts 142,703 166,390
Savings deposits 82,438 96,266
Time certificates, $100,000 or more 116,332 143,705
Other time certificates 175,970 146,635
-------- --------
Total $645,661 $684,060
======== ========
At December 31, 1998, the scheduled maturities of time certificates are as
follows:
1999 $263,290
2000 24,783
2001 4,083
2002 146
--------
$292,302
========
Note 10. Short-Term Borrowings
Short-term borrowings consisted of:
December 31,
1998 1997
Securities sold under agreement to repurchase $127,288 $12,385
U.S. Treasury demand notes 3,233 5,628
-------- --------
$130,521 $ 18,013
======== ========
Information concerning short-term borrowings is summarized as follows:
December 31,
1998 1997
Securities sold under agreement to repurchase:
Average balance during the year $ 91,180 $ 11,929
Average interest rate during the year 5.09% 6.15%
Maximum month-end balance during the year 179,023 53,681
U.S. Treasury securities underlying the agreements at
carrying value (fair value) at December 31, 1998 98,531
U.S. Treasury demand notes:
Average balance during the year $ 3,056 $ 2,487
Average interest rate during the year 5.04% 4.87%
Maximum month-end balance during the year 6,150 6,863
U.S. Treasury securities underlying the agreements at
carrying value (fair value) at December 31, 1998 8,087 7,994
Note 11. Long-Term Borrowings
At December 31, 1998 and 1997, the Company has a secured revolving note payable
to LaSalle National Bank with an outstanding balance of $3,250,000 and
$9,000,000, respectively. The note bears interest at a rate equal to the
adjusted LIBOR rate, 7.06% at December 31, 1998. 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, 1998 and 1997, the Company has an unsecured revolving note
payable to LaSalle National Bank with an outstanding balance of $250,000 and
$4,500,000, respectively. The note bears interest at the bank's prime rate,
7.75% at December 31, 1998, 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 $8,534,000 and $8,915,000
at December 31, 1998 and 1997 which accrue interest at rates ranging from 6.35%
to 8.65% and require aggregate monthly payments of $286,908, including interest
at various dates through August 2003. Equipment included in lease investments
with a December 31, 1998 and 1997, depreciated cost of $10,248,000 and
$11,179,000, respectively, is pledged as collateral on these notes.
The principal payments are due as follows during the years ending December 31:
Amount
1999 $ 3,030
2000 3,456
2001 2,259
2002 977
2003 540
Thereafter 1,772
--------
$ 12,034
========
Note 12. Employee Benefit Plans
The Company has a defined contribution 401(k) plan which covers all full-time
employees of the 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 1998, 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, 1998, 1997 and 1996, were $635,000,
$441,000 and $387,000, respectively.
A supplemental/nonqualified retirement plan covers employees who hold the
position of vice president or higher. Contributions to the plan were $60,000,
$64,000 and $50,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
A noncontributory profit sharing plan covered substantially all full-time
employees of U.S. Bancorp, Inc., which was merged with Manufacturers Bank in
1997. 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 consist of:
December 31,
1998 1997
Deferred tax assets:
Allowance for loan losses $ 1,760 $ 1,946
Other items 276 229
-------- --------
2,036 2,175
-------- --------
Securities discount accretion (692) (96)
Securities available for sale (178) (198)
Lease investments (2,229) (1,918)
Premises and equipment (1,398) (1,482)
Core deposit intangible (1,611) (2,347)
Other items (209) (277)
-------- --------
(6,317) (6,318)
-------- --------
Net deferred tax liability $ (4,281) $ (4,143)
======== ========
Income taxes consist of:
Years Ended December 31,
1998 1997 1996
Current expense:
Federal $ 3,351 $ 3,141 $ 2,100
State 96 346 213
------- ------- -------
3,447 3,487 2,313
Deferred expense (benefit) 158 (1,085) 263
------- ------- -------
$ 3,605 $ 2,402 $ 2,576
======= ======= =======
The reconciliation between the statutory federal income tax rate and the
effective tax rate on consolidated income follows:
Years Ended December 31,
1998 1997 1996
Income tax at statutory rate 35.0 % 35.0 % 35.0 %
Increase (decrease) due to:
Graduated tax rates (0.9) (1.0) (1.0)
Tax exempt income (0.6) (2.4) (3.3)
Nondeductible interest expense 0.1 0.3 0.4
State tax on income, net of federal
income tax benefit 0.6 3.6 1.9
Nondeductible amortization 3.5 4.3 4.1
Nondeductible acquisition expense 1.1
Other items, net (1.5) (2.7) 0.5
------ ------ ------
Effective income tax rate 36.2 % 38.2 % 37.6 %
====== ====== ======
Note 14. Commitments and Contingent Liabilities
Financial instruments with off-balance-sheet risk: The Bank is 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 Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments.
A summary of the Bank's exposure to off-balance-sheet risk is as follows:
December 31,
1998 1997
Firm commitments to extend credit $126,332 $ 91,825
Standby letters of credit 10,263 12,608
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
Bank evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank 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 Bank 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 Bank deems
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 Bank's market area. Investments in securities issued by state and
political subdivisions also involve governmental entities within the Bank's
market area. 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.
Note 15. Regulatory Restrictions
The Company's primary source of cash is dividends from the Banks.
The Bank is 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 Bank also has an internal
policy that dividends declared will not be in excess of the amounts which would
cause the Bank to fall below the minimum required to be categorized as well
capitalized.
The Company and the Bank 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 Bank's
assets, liabilities, and certain off-balance-sheet items are calculated under
regulatory accounting practices. The Company's and Bank's 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 Bank to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier 1 capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes the Company and Bank meet all
capital adequacy requirements to which they are subject as of December 31,
1998.
As of December 31, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain the total risk-based, Tier 1 risk-based, and
Tier 1 leverage ratios as set forth in the well capitalized column in the table
below. There are no conditions or events since that notification that
management believes have changed the Bank's categories.
The required and actual amounts and ratios for the Company and Manufacturers
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
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1998
Total capital (to risk-weighted assets):
Consolidated $ 61,382 10.00 % $49,094 8.00% N/A N/A
Manufacturers Bank 62,917 10.26 49,078 8.00 $61,347 10.00%
Tier 1 capital (to risk-weighted assets):
Consolidated 45,293 7.38 24,547 4.00 N/A N/A
Manufacturers Bank 56,574 9.22 24,539 4.00 36,808 6.00
Tier 1 capital (to average assets):
Consolidated 45,293 5.25 34,509 4.00 N/A N/A
Manufacturers Bank 56,574 6.57 34,454 4.00 43,068 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 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 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 Bank 54,414 7.48 29,109 4.00 36,387 5.00
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: 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.
Corporation obligated mandatorily redeemable preferred and capital securities
of subsidiary trust holding solely junior subordinated debentures: The fair
values of these 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,
1998 1997
Carrying Carrying
Amount Fair Value Amount Fair Value
Financial Assets
Cash and due from banks $ 23,669 $ 23,669 $ 36,302 $ 36,302
Securities available for sale 212,020 212,020 136,685 136,685
Securities held to maturity 11,142 11,529 5,242 5,679
Stock in Federal Home
Loan Bank 2,614 2,614 615 615
Federal funds sold 20,350 20,350 37,400 37,400
Loans 542,009 549,737 519,399 523,624
Accrued interest receivable 4,872 4,872 5,571 5,571
Financial Liabilities
Deposits 645,661 646,201 684,060 683,586
Short-term borrowings 130,521 130,521 18,013 18,013
Long-term borrowings 12,034 12,034 22,415 22,415
Corporation obligated mandatorily
redeemable preferred securities
of subsidiary trust holding solely
junior subordinated debentures 10,000 10,000
Corporation obligated mandatorily
redeemable capital securities
of subsidiary trust holding solely
junior subordinated debentures 25,000 25,000
Accrued interest payable 2,652 2,652 2,106 2,106
Off-balance-sheet instruments, loan
commitments and standby
letters of credit
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. 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 become fully vested
four years after the date of grant and 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:
December 31,
1998 1997
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning of year 969 $ 892 490 $ 866
Granted 657 1,043 479 930
Exercised
Forfeited 33 930
------- ------- ------- -------
Outstanding at end of year 1,593 $ 957 969 $ 892
======= ======= ======= =======
Exercisable at end of year 158 $ 921 75 $ 891
======= ======= ======= =======
Weighted average fair value per
option of options granted
during the year $ 506.91 $ 393.82
======= =======
Options Summary: The following table presents certain information with respect
to stock options granted.
Options Outstanding and Exercisable
Weighted Weighted
Average Average
Number Remaining Exercise
Range of Exercise Prices Outstanding Contractual Life Price
$865-$871 490 7.0 $ 866
$930 479 8.0 930
$1,020 507 9.0 1,020
$1,080-$1,200 150 10.0 1,120
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,
1998 1997 1996
Net income
As reported $ 6,255 $ 3,449 $ 3,637
Pro forma 6,105 3,373 3,594
Basic earnings per common share
As reported $ 105.47 $ 63.83 $ 73.28
Pro forma 102.40 62.30 72.42
Diluted earnings per common share
As reported $ 104.50 $ 63.83 $ 73.28
Pro forma 101.46 62.30 72.42
In determining the pro forma amounts above, the value of each grant is
estimated at the grant date using the binomial method, with the following
weighted-average assumptions for each year presented: dividend rate of 0%,
risk-free interest rate of 6.0%, expected life of 10 years and expected price
volatility of 25%.
Note 18. 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.
In July 1998, the Company redeemed the $10.0 million in Preferred Securities
with proceeds from the issuance of Capital Securities and the detachable
warrants were canceled.
Note 19. 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.
During 1998, the Company redeemed all 68 shares of Class B preferred stock at
par value.
Note 20. 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 21. Issuance of Capital Securities
In July 1998, the Company issued $25.0 million in floating rate Corporation
Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trust Holding
Solely Junior Subordinated Debentures (Capital Securities) through Coal City
Capital Trust I (Trust), a statutory business trust and wholly owned subsidiary
of the Company. The Capital Securities pay cumulative cash distributions
quarterly at a rate per annum, reset quarterly, equal to the 3-month LIBOR plus
180 basis points. Proceeds from the sale of the Capital Securities were
invested by the Trust in floating rate (3-month LIBOR plus 180 basis points)
Junior Subordinated Deferrable Interest Debentures (Debentures) issued by the
Company which represents all of the assets of the Trust. The Capital
Securities are subject to mandatory redemption, in whole or in part, upon
repayment of the Junior Subordinated Debentures at the stated maturity in the
year 2028 or their earlier redemption, in each case at a redemption price equal
to the aggregate liquidation preference of the Capital Securities plus any
accumulated and unpaid distributions thereon to the date of redemption. Prior
redemption is permitted under certain circumstances.
Note 22. Merger Agreement
On October 13, 1998 the Company and Avondale Financial Corporation (Avondale),
the holding company for Avondale Federal Savings Bank, announced they had
entered into a definitive agreement in connection with a merger of equals. At
December 31, 1998, Avondale had consolidated assets of $498.9 million and total
stockholders' equity of $38.1 million.
Under the terms of the agreement, the Company will be merged into Avondale and
Avondale will be renamed MB Financial, Inc. Each share of Coal City
Corporation common stock will be converted into 83.5 shares of MB Financial,
Inc. common stock while each share of Avondale will be converted into 1 share
of MB Financial, Inc. common stock. Stockholders of Coal City Corporation will
own approximately 58.5% of the combined company, while stockholders of Avondale
will own approximately 41.5%. Also in connection with the agreement, Avondale
and the Company granted each other an option to acquire up to 19.9% of the
outstanding common stock of the other upon the occurrence of certain events.
The merger will be accounted for as a reverse acquisition, with Coal City
Corporation being the accounting acquirer. The transaction is subject to
regulatory approval, the approval of the stockholders of both Avondale and the
Company and certain other conditions.
Note 23. Condensed Parent Company Financial Information
The condensed financial statements of Coal City Corporation (parent company
only) are presented below:
Balance Sheets
December 31,
1998 1997
Assets
Cash $ 179 $ 331
Investments in subsidiaries 65,942 68,353
Note receivable, subsidiary 7,500 7,500
Other assets 1,788 238
-------- --------
Total assets $ 75,409 $ 76,422
======== ========
Liabilities and Stockholders' Equity
Long-term borrowings $ 3,500 $ 13,809
Liabilities, other 49 87
Stockholders' Equity 46,860 52,526
Corporation obligated mandatorily redeemable
preferred securities at subsidiary trust
holding solely junior subordinated debentures 10,000
Corporation obligated mandatorily redeemable
capital securities of subsidiary trust
holding solely junior subordinated debentures 25,000
-------- --------
Total liabilities and stockholders' equity $ 75,409 $ 76,422
======== ========
Statements of Income
Years Ended December 31,
1998 1997 1996
Dividends from subsidiaries $ 2,888 $ 2,283 $ 1,491
Interest and other income 4,660 370 6
Interest and other expense (1,902) (1,804) (741)
------- ------- -------
Income before income tax expense (credits)
and equity in undistributed net income
of subsidiaries 5,646 849 756
Income tax expense (credits) 870 (596) (214)
------- ------- -------
Income before equity in undistributed net
income of subsidiaries 4,776 1,445 970
Equity in undistributed net income of subsidiaries 1,479 2,004 2,667
------- ------- -------
Net income $ 6,255 $ 3,449 $ 3,637
======= ======= =======
Statements of Cash Flows
Years Ended December 31,
1998 1997 1996
Cash Flows From Operating Activities
Net income $ 6,255 $ 3,449 $ 3,637
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1 (110)
Equity in undistributed net income of
subsidiaries (1,479) (2,004) (2,444)
Gain on sale of Coal City National Bank (4,099)
Change in other assets and other liabilities (1,358) (490) (295)
------- ------- -------
Net cash provided by (used in)
operating activities (680) 845 898
------- ------- -------
Cash Flows From Investing Activities
Purchase of subsidiary preferred stock (19,000)
Purchase of interest in grantor trust (309)
Sale of interest in grantor trust 309
Cash received from subsidiary for preferred
stock redemption 2,000 2,000
Purchase of minority interests (2,328) (2,649) (64)
Proceeds from sale of Coal City National Bank 7,800
Sale of interest in Peterson Bank 901
Issuance of note receivable from subsidiary (7,500)
Net decrease in securities purchased
under agreement to resell 1,504
------- ------- -------
Net cash provided by (used in)
investing activities 7,781 (26,557) 1,440
------- ------- -------
Cash Flows From Financing Activities
Purchase and retirement of common stock (659) (194) (872)
Issuance of common stock 115 311
Issuance of preferred stock 10,200
Purchase and retirement of preferred stock (10,200)
Dividends paid (1,085) (276)
Redemption of Corporation Obligated
Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding
Solely Junior Subordinated Debentures (10,000)
Issuance of Corporation Obligated Mandatorily
Redeemable Capital Securities of Subsidiary
Trust Holding Solely Junior Subordinated
Debentures 25,000
Proceeds from long-term borrowings 3,700 23,809
Principal paid on long-term borrowings (14,009) (7,750) (2,000)
------- ------- -------
Net cash provided by (used in)
financing activities (7,253) 25,904 (2,561)
------- ------- -------
Net increase (decrease) in cash (152) 192 (223)
Cash:
Beginning 331 139 362
------- ------- -------
Ending $ 179 $ 331 $ 139
======= ======= =======