EXHIBIT 99.2
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
OF
HILLSIDE INVESTORS, LTD. AND SUBSIDIARIES
DECEMBER 31, 2003, 2002 AND 2001
Independent Auditors' Report
----------------------------
The Boards of Directors
CIB Marine Bancshares, Inc. and
First Banks, Inc.:
We have audited the accompanying consolidated balance sheets of Hillside
Investors, Ltd. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, stockholder's equity, and
cash flows for each of the years in the three-year period ended December 31,
2003. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express
no such opinion. 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 Hillside
Investors, Ltd. and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 23, all of the common stock of Hillside Investors,
Ltd. was sold in a cash sale on November 30, 2004 to First Banks, Inc. of
St. Louis, Missouri.
As discussed in Note 1 to the consolidated financial statements,
effective January 1, 2002 the Company adopted Statement of Financial
Accounting Standard No. 142, Goodwill and Other Intangible Assets, and
Statement of Financial Accounting Standard No. 147 Acquisitions of Certain
Financial Institutions.
/s/ KPMG LLP
Milwaukee, Wisconsin
March 25, 2005
HILLSIDE INVESTORS, LTD.
(A WHOLLY-OWNED SUBSIDIARY OF CIB MARINE BANCSHARES, INC.)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
-------------- ------------------------------
2004 2003 2002
-------------- --------------- --------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents:
Cash and due from banks...................................$ 14,904 $ 18,950 $ 74,837
Federal funds sold........................................ 97,616 2,470 20,861
-------------- --------------- --------------
Total cash and cash equivalents...................... 112,520 21,420 95,698
Securities:
Available for sale, at fair value......................... 389,240 264,784 216,554
Held to maturity (fair value of $16,968,
$18,817 and $31,667, respectively)..................... 16,067 17,792 30,636
-------------- --------------- --------------
Total securities..................................... 405,307 282,576 247,190
Loans....................................................... 724,741 1,138,817 1,313,855
Allowance for loan losses................................. (38,115) (55,490) (30,270)
-------------- --------------- --------------
Net loans.............................................. 686,626 1,083,327 1,283,585
Premises and equipment, net................................. 11,875 12,429 11,873
Accrued interest receivable................................. 4,352 6,139 8,405
Goodwill.................................................... 2,156 2,156 12,140
Other intangible assets, net................................ 785 982 1,693
Foreclosed properties....................................... 1,884 37,688 750
Assets of companies held for disposal....................... 12,684 26,557 73,274
Other assets................................................ 19,820 26,508 10,856
-------------- --------------- --------------
Total Assets.........................................$ 1,258,009 $ 1,499,782 $ 1,745,464
============== =============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Noninterest-bearing demand................................$ 55,658 $ 87,177 $ 79,675
Interest-bearing demand................................... 23,928 24,567 15,512
Savings................................................... 195,594 275,270 235,114
Time...................................................... 866,279 927,399 942,072
-------------- --------------- --------------
Total deposits....................................... 1,141,459 1,314,413 1,272,373
Short-term borrowings....................................... 7,637 49,619 224,867
Long-term borrowings........................................ 30,008 30,526 31,391
Accrued interest payable.................................... 3,307 3,367 4,330
Liabilities of companies held for disposal.................. 10,181 21,453 50,934
Other liabilities........................................... 10,124 23,915 6,509
-------------- --------------- --------------
Total Liabilities.................................... 1,202,716 1,443,293 1,590,404
STOCKHOLDER'S EQUITY
Common stock, no par value; 200,000 shares authorized;
103,100 shares issued and outstanding..................... - - -
Capital surplus............................................. 103,139 103,139 103,139
Retained earnings (deficit)................................. (47,106) (46,099) 50,997
Accumulated other comprehensive income (loss), net.......... (740) (551) 924
-------------- --------------- --------------
Total Stockholder's Equity........................... 55,293 56,489 155,060
-------------- --------------- --------------
Total Liabilities and Stockholder's Equity...........$ 1,258,009 $ 1,499,782 $ 1,745,464
============== =============== ==============
See accompanying Notes to Consolidated Financial Statements
2
HILLSIDE INVESTORS, LTD.
(A WHOLLY-OWNED SUBSIDIARY OF CIB MARINE BANCSHARES, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------------------- --------------------------------------------
2004 2003 2003 2002 2001
--------------- ---------------- --------------- ------------- -------------
(DOLLARS IN THOUSANDS)
INTEREST AND DIVIDEND INCOME
Loans...........................................$ 39,368 $ 63,016 $ 80,626 $ 89,789 $ 86,558
Securities:
Taxable....................................... 4,740 3,881 5,357 7,479 10,467
Tax-exempt.................................... 674 766 1,009 1,106 1,144
Dividends..................................... 242 174 243 177 151
Federal funds sold.............................. 503 429 464 473 585
--------------- ---------------- --------------- ------------- -------------
Total interest and dividend income.......... 45,527 68,266 87,699 99,024 98,905
--------------- ---------------- --------------- ------------- -------------
INTEREST EXPENSE
Deposits........................................ 22,703 27,254 35,280 40,459 46,552
Short-term borrowings........................... 928 1,619 1,874 3,633 5,786
Long-term borrowings............................ 274 269 353 509 1,454
--------------- ---------------- --------------- ------------- -------------
Total interest expense...................... 23,905 29,142 37,507 44,601 53,792
--------------- ---------------- --------------- ------------- -------------
Net interest income............................. 21,622 39,124 50,192 54,423 45,113
Provision for credit losses..................... 5,244 95,342 113,183 24,339 7,627
--------------- ---------------- --------------- ------------- -------------
Net interest income (loss) after provision
for credit losses......................... 16,378 (56,218) (62,991) 30,084 37,486
--------------- ---------------- --------------- ------------- -------------
NONINTEREST INCOME
Loan fees....................................... 1,460 940 1,274 1,744 2,516
Deposit service charges......................... 1,021 1,264 1,662 1,620 1,321
Other service fees.............................. 278 266 355 295 217
Other income.................................... 951 987 1,166 1,321 1,262
Gain on sale of investment securities, net...... - - - 1,430 2,818
--------------- ---------------- --------------- ------------- -------------
Total noninterest income.................... 3,710 3,457 4,457 6,410 8,134
--------------- ---------------- --------------- ------------- -------------
NONINTEREST EXPENSE
Compensation and employee benefits.............. 6,352 7,434 9,873 8,657 7,278
Equipment....................................... 574 544 747 768 708
Occupancy and premises.......................... 1,414 1,385 1,666 1,358 1,391
Professional services........................... 6,006 3,683 5,691 4,243 3,498
Write down and losses on assets................. 1,277 1,359 3,728 - -
Goodwill and other intangible assets impairment. - - 14,359 - -
Other expense................................... 9,348 5,765 9,498 6,629 5,563
--------------- ---------------- --------------- ------------- -------------
Total noninterest expense................... 24,971 20,170 45,562 21,655 18,438
--------------- ---------------- --------------- ------------- -------------
Income (loss) from continuing operations
before income taxes......................... (4,883) (72,931) (104,096) 14,839 27,182
Income tax expense (benefit).................... - (8,034) (11,068) 5,036 9,135
--------------- ---------------- --------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (4,883) (64,897) (93,028) 9,803 18,047
Discontinued operations
Pre-tax income (loss) from operations of
companies held for disposal................. 3,876 (4,318) (3,205) (755) -
Income tax expense........................... - 1,372 863 121 -
--------------- ---------------- --------------- ------------- -------------
Income (loss) from discontinued operations.. 3,876 (5,690) (4,068) (876) -
--------------- ---------------- --------------- ------------- -------------
NET INCOME (LOSS)...........................$ (1,007) $ (70,587) $ (97,096) $ 8,927 $ 18,047
=============== ================ =============== ============= =============
See accompanying Notes to Consolidated Financial Statements
3
HILLSIDE INVESTORS, LTD.
(A WHOLLY-OWNED SUBSIDIARY OF CIB MARINE BANCSHARES, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
COMMON STOCK
---------------------- ACCUMULATED
RETAINED OTHER
STATED CAPITAL EARNINGS COMPREHENSIVE
SHARES VALUE SURPLUS (DEFICIT) INCOME (LOSS) TOTAL
----------- --------- ----------- ----------- ---------------- -----------
(DOLLARS IN THOUSANDS)
BALANCE, DECEMBER 31, 2000......... 103,100 $ - $ 85,939 $ 25,930 $ 1,131 $ 113,000
=========== ========= =========== =========== ================ ===========
Comprehensive income:
Net income......................... - - - 18,047 - 18,047
Other comprehensive income:
Unrealized securities holding
gains arising during the period. - - - - 2,296 2,296
Reclassification adjustment for
investment security gains
included in net income.......... - - - - (2,818) (2,818)
Income tax effect................ - - - - 207 207
-----------
Total comprehensive income.. 17,732
Capital injection from parent...... - - 7,500 - - 7,500
Dividends paid to parent........... - - - (807) - (807)
----------- --------- ----------- ----------- ---------------- -----------
BALANCE, DECEMBER 31, 2001......... 103,100 $ - $ 93,439 $ 43,170 $ 816 $ 137,425
=========== ========= =========== =========== ================ ===========
Comprehensive income:
Net income......................... - - - 8,927 - 8,927
Other comprehensive income:
Unrealized securities holding
gains arising during the period. - - - - 1,759 1,759
Reclassification adjustment for
investment security gains
included in net income.......... - - - - (1,430) (1,430)
Income tax effect................ - - - - (130) (130)
Foreign currency translation
adjustment...................... (91) (91)
-----------
Total comprehensive income.. 9,035
Capital injection from parent...... - - 9,700 - - 9,700
Dividends paid to parent........... - - - (1,100) - (1,100)
----------- --------- ----------- ----------- ---------------- -----------
BALANCE, DECEMBER 31, 2002......... 103,100 $ - $ 103,139 $ 50,997 $ 924 $ 155,060
=========== ========= =========== =========== ================ ===========
Comprehensive loss:
Net loss........................... - - - (97,096) - (97,096)
Other comprehensive income (loss):
Unrealized securities holding
losses arising during the period - - - - (2,233) (2,233)
Income tax effect................ - - - - 667 667
Foreign currency translation
adjustment...................... 91 91
-----------
Total comprehensive loss.... (98,571)
----------- --------- ----------- ----------- ---------------- -----------
BALANCE, DECEMBER 31, 2003......... 103,100 $ - $ 103,139 $ (46,099) $ (551) $ 56,489
=========== ========= =========== =========== ================ ===========
Comprehensive loss:
Net loss (unaudited)............... - - - (1,007) - (1,007)
Other comprehensive loss:
Unrealized securities holding
losses arising during the period
(unaudited)..................... - - - - (189) (189)
-----------
Total comprehensive loss
(unaudited)................ (1,196)
----------- --------- ----------- ----------- ---------------- -----------
BALANCE, SEPTEMBER 30, 2004
(UNAUDITED) 103,100 $ - $ 103,139 $ (47,106) $ (740) $ 55,293
=========== ========= =========== =========== ================ ===========
See accompanying Notes to Consolidated Financial Statements
4
HILLSIDE INVESTORS, LTD.
(A WHOLLY-OWNED SUBSIDIARY OF CIB MARINE BANCSHARES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------------- ----------------------------------------
2004 2003 2003 2002 2001
------------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) from continuing operations...................$ (4,883) $ (64,897) $ (93,028) $ 9,803 $ 18,047
Net income (loss) from discontinued operations............. 3,876 (5,690) (4,068) (876) -
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred loan fee amortization......................... (1,555) (4,801) (4,955) (6,571) (6,869)
Depreciation and other amortization.................... 2,275 3,558 4,600 3,169 1,622
Stock dividends received on FHLB stock................. (181) (220) (287) (178) (145)
Provision for credit losses............................ 5,244 95,342 113,183 24,339 7,627
Deferred tax expense (benefit)......................... - - (413) (4,685) 9,702
Goodwill impairment.................................... - - 14,359 - -
Write down and losses on assets........................ 1,277 1,359 3,728 - -
Gain on sale of investment securities.................. - - - (1,430) (2,818)
(Increase) decrease in interest receivable
and other assets..................................... 1,118 (25,245) (8,386) (4,622) 7,193
Increase (decrease) in interest payable
and other liabilities................................ (7,041) 42,812 21,086 2,641 (1,643)
------------- ------------ ------------- ------------ ------------
Net cash provided by operating activities............ 130 42,218 45,819 21,590 32,716
------------- ------------ ------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of securities available for sale............ 744,835 84,802 109,467 123,250 561,155
Maturities of securities held to maturity.............. 1,670 9,502 13,367 15,448 36,808
Purchase of securities available for sale.............. (893,596) (140,163) (181,675) (213,517) (499,750)
Purchase of securities held to maturity................ - (850) (1,067) (9,202) (23,396)
Proceeds from sales of securities available for sale... - - - 76,396 61,681
Repayments of mortgage-backed securities
held to maturity..................................... 47 468 566 809 1,886
Repayments of mortgage-backed securities
available for sale................................... 38,038 81,623 92,129 47,824 17,341
Purchase of mortgage-backed securities
available for sale................................... (15,007) (73,198) (73,198) (95,987) (98,840)
Net increase in other investments...................... (146) (1,529) (1,529) - -
Capital injection from parent company.................. - - - 9,700 7,500
Dividends paid to parent company....................... - - - (1,100) (807)
Net (increase) decrease in loans....................... 386,448 34,553 64,062 (105,592) (343,812)
(Increase) decrease in net assets of companies
held for disposal.................................... 2,601 (642) 17,327 (15,853) (6,628)
Proceeds from sale of foreclosed properties............ 9,698 755 755 978 575
Proceeds from sale of loans held for sale.............. 6,555 - - - -
Proceeds from sale of assets........................... 10 - - - -
Capital expenditures................................... - (921) (1,286) (919) (2,957)
------------- ------------ ------------- ------------ ------------
Net cash provided by (used in) investing activities.. 281,153 (5,600) 38,918 (167,765) (289,244)
------------- ------------ ------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits........................ (173,388) 11,617 42,920 241,151 119,673
Proceeds from long-term borrowings..................... - - - - 7,500
Repayments of long-term borrowings..................... - - - (7,500) -
Net increase (decrease) in short-term borrowings....... (16,795) (114,270) (201,935) 1,386 118,295
------------- ------------ ------------- ------------ ------------
Net cash provided by (used in) financing activities.. (190,183) (102,653) (159,015) 235,037 245,468
------------- ------------ ------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents....... 91,100 (66,035) (74,278) 88,862 (11,060)
Cash and cash equivalents, beginning of year............... 21,420 95,698 95,698 6,836 17,896
------------- ------------ ------------- ------------ ------------
Cash and cash equivalents, end of year.....................$ 112,520 $ 29,663 $ 21,420 $ 95,698 $ 6,836
============= ============ ============= ============ ============
5
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------------- ----------------------------------------
2004 2003 2003 2002 2001
------------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid (received) during the year for:
Interest.................................................$ 23,965 $ 29,941 $ 38,470 $ 44,829 $ 54,649
Income taxes............................................. (6,844) 2,797 2,933 11,568 493
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
Transfers of loans to foreclosed properties...............$ - $ 1,850 $ 13,221 $ 370 $ 1,993
Increase in foreclosed properties and short-term
borrowings from first mortgage assumed...................$ - $ - $ 26,687 $ - $ -
Decrease in foreclosed properties and short-term
borrowings on property transfer to first mortgage lender.$ 25,187 $ - $ - $ - $ -
Transfers of loans to loans held for sale.................$ 6,564 $ - $ - $ - $ -
Net assets of businesses acquired through loan
collection activities....................................$ - $ - $ - $ 9,695 $ -
See accompanying Notes to Consolidated Financial Statements
6
HILLSIDE INVESTORS, LTD.
(A WHOLLY-OWNED SUBSIDIARY OF CIB MARINE BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Hillside Investors, Ltd. is a one bank holding company and is a
wholly-owned subsidiary of CIB Marine Bancshares, Inc. ("CIB Marine").
References to "Hillside" include the subsidiaries of Hillside Investors,
Ltd. unless otherwise specified. The primary sources of revenue are
providing loans to small and middle-market business customers and the
investment in securities. Hillside owns 100% of CIB Bank, which offers a
competitive range of deposit and other financial products to its customers.
Offices and, generally, customers are located in the Chicago, Illinois
market. Hillside's subsidiary, CIB Construction, LLC ("CIB Construction")
has an 84% interest in Canron Corporation ("Canron"), a steel fabrication
and erection company which had operations in the United States, Canada and
Mexico. Canron was acquired as a result of collection activities, as was
MICR, Inc ("MICR"), a manufacturer of payment processing systems, and CIB
Marine Commercial Finance, LLC ("Commercial Finance"), which engaged in
factoring receivables. In the second quarter of 2004, substantially all the
assets of Commercial Finance were sold and in the fourth quarter of 2004
(unaudited) the company was dissolved.
The accounting and reporting policies of Hillside conformed to
accounting principles generally accepted in the United States of America.
Hillside and its subsidiaries utilize the accrual basis of accounting.
The unaudited interim consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and reflect all adjustments which are necessary to
present fairly Hillside's financial condition, results of operations and
cash flows. Certain information and footnote disclosures have been omitted
or abbreviated.
CONSOLIDATION
The consolidated financial statements include the accounts of Hillside
and its wholly-owned and majority owned subsidiaries including companies
which are held for disposal. All significant intercompany balances and
transactions have been eliminated. Minority interest in Canron is immaterial
to the consolidated financial statements and is included in liabilities of
companies held for disposal.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. Estimates used in the preparation of the
consolidated financial statements are based on various factors, including
the current interest rate environment and the general strength of the local
economy. Changes in these factors can significantly affect Hillside's net
interest income and the value of its recorded assets and liabilities.
CASH FLOWS
For purposes of presentation in the statements of cash flows, cash and
cash equivalents are defined as those amounts included in the consolidated
balance sheet captions "Cash and Due from Banks" and "Federal Funds Sold,"
all of which mature within ninety days.
OTHER INVESTMENTS
Investments in equity investments which are not readily marketable are
accounted for using the equity method when Hillside's ownership is at least
20% in a corporate entity, but less than a controlling interest. Investments
which fall below the specified interests are accounted for using the cost
method.
7
The equity method of accounting requires Hillside to record its
proportionate share of income or loss as an increase or decrease in its
investment and a corresponding gain or loss in noninterest income. Cash
dividends or other distributions received by Hillside are recorded as
reductions in the carrying amount of the investment.
An impairment loss is recognized in noninterest expense when there is a
decline in value that is considered other than temporary.
SECURITIES HELD TO MATURITY
Bonds, notes and certain debt securities which Hillside has the positive
intent and ability to hold to maturity are reported at cost and adjusted for
premiums and discounts that are recognized in interest income using the
interest method over the period to maturity. Impairments in the value of
securities held to maturity which are other than temporary are accounted for
as a realized loss.
SECURITIES AVAILABLE FOR SALE
Available for sale securities consist of equity securities, bonds, notes
and other debt securities not classified as held to maturity securities or
trading securities. Available for sale securities are carried at fair value
with unrealized net gains and losses reported net of deferred tax, if any,
in accumulated other comprehensive income in stockholder's equity. Gains and
losses on the sale of available for sale securities are determined using the
specific identification method. Impairments in the value of available for
sale securities, which are other than temporary, are accounted for as a
realized loss.
LOANS, ALLOWANCE FOR LOAN LOSSES AND PROVISION FOR CREDIT LOSSES
Loans that management has the intent and ability to hold to maturity for
the foreseeable future are carried at the amount of unpaid principal,
increased by costs to originate and reduced by net deferred fees and an
allowance for loan losses. The accrual of interest on loans is generally
discontinued when a loan becomes ninety days delinquent unless the credit is
well secured and in process of collection. Loans are placed on nonaccrual or
charged off at an earlier date if collection of principal or interest is
considered by management to be doubtful. Unpaid interest that has previously
been recorded as income is written off against interest income when a loan
is placed on nonaccrual. Interest on loans is calculated by using the simple
interest method on daily balances of the principal amount outstanding.
Interest payments received on loans which are on nonaccrual are generally
applied to reduce the loan principal. Loans are returned to accrual status
once a borrower has demonstrated repayment performance on the contractual
schedule for a period of six consecutive months and the expectation is that
contractual payments will continue to be made during the remaining term of
the loan.
The allowance for loan losses is established through a provision for
loan losses charged to expense. Loans are charged against the allowance when
management believes that the collectibility of the principal amount is
unlikely and where loans are sold at less than their outstanding principal
balances. Recoveries of amounts previously charged off are credited to the
allowance.
The provision for loan losses is included in the provision for credit
losses in the statements of operations. Also included in the provision for
credit losses is the expense for probable losses on unfunded loan
commitments and standby letters of credit. Estimated losses on unfunded loan
commitments and standby letters of credit are accrued and included in other
liabilities.
Management periodically reviews the loan portfolio in order to establish
an allowance for loan losses that are probable at the reporting date. The
allowance for loan losses is based on management's evaluation of individual
loans and the entire loan portfolio, including such factors as the volume
and character of loans outstanding, the relationship of the allowance for
loan losses to outstanding loans, past loan loss experience, expected loan
repayments, the estimated value of any underlying collateral on individual
loans and general economic conditions.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in the
loan portfolio and/or in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review Hillside's allowance for loan losses. Such agencies may
require Hillside to recognize additions to the allowance based on their
judgments about information available to them at the time of their
examination.
A loan is considered impaired when, based on current information and
events, it is probable that Hillside will be unable to collect the scheduled
payments of principal or interest when due according to the contractual
terms of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value and the probability of
collecting scheduled
8
principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a loan-by-loan basis, taking into
consideration all of the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay, the
borrower's prior payment records and the amount of the shortfall in relation
to the principal and interest owed. Impairment is measured on a loan-by-loan
basis for commercial and construction loans by either the present value of
expected future cash flows discounted at the loan's effective interest rate,
the loan's obtainable market price, or the fair value of the collateral if
the loan is collateral dependent. Interest accrual ceases on loans
considered to be impaired.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, Hillside does not separately identify
individual consumer and residential loans for impairment.
Loan origination fees are deferred and certain direct origination costs
are capitalized. The amounts deferred and capitalized are included in the
carrying amount of the loans and amortized over the estimated life of the
loans as an adjustment of the yield of the related loan. Fees for loans sold
and other loan fees are included in loan fee income as realized.
INTANGIBLE ASSETS
Goodwill and core deposit intangibles have arisen as a result of the
acquisition of companies or assets. Fair values have been determined by
examining stock prices of publicly traded financial institutions with
similar performing characteristics as the reporting units. Where market
prices are not available and the reporting unit is held for disposal, third
party valuations or anticipated offer values are used. Intangible assets
with definite lives are amortized over the estimated remaining benefit
periods. Core deposit intangibles are amortized over approximately ten years
on an accelerated basis. Prior to 2002, goodwill was amortized on a straight
line basis over 15 years. Intangible assets with indefinite lives and
goodwill are not amortized, but are evaluated for impairment at least
annually.
In October 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 147, Acquisitions of
Certain Financial Institutions (SFAS 147). SFAS 147 expands the scope of
SFAS 141 and 142 to include unidentifiable intangible assets established in
the acquisition of bank branches. Under SFAS 147 goodwill associated with
these acquisitions will not be subject to amortization and will be tested
for impairment. Hillside adopted SFAS 147 on September 30, 2002 and in
accordance with its provisions, reversed goodwill amortization previously
recorded in 2002. See Note 7 to the consolidated financial statements for
further information on the impact of the adoption of these statements.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment are carried at cost less
accumulated depreciation computed primarily using the straight-line method.
Maintenance and repairs are charged to expense as incurred, while renewals
and betterments are capitalized. Leasehold improvements included in premises
and equipment are amortized over the shorter of the useful life of the
improvements or the term of the lease. Rent expense on non-cancellable
leases is accrued on the straight-line basis over the term of the lease
based upon minimum rents.
FORECLOSED PROPERTIES
Foreclosed properties includes other real estate (ORE) assets that have
been received in satisfaction of defaulted loans. ORE is initially recorded
and subsequently carried at the lower of cost or fair value less estimated
selling costs. Any valuation adjustments required at the date of transfer
are charged to the allowance for loan losses. Subsequently, operating
results from ORE, reductions in value of the foreclosed property, and
realized gains and losses on sale are recorded in noninterest income or
noninterest expense as appropriate.
ASSETS OF COMPANIES HELD FOR DISPOSAL
Assets of companies held for disposal include companies acquired in
partial or full satisfaction of loans, primarily through foreclosure. These
assets are carried at the lower of cost or current fair value, less
estimated selling costs, and the aggregate assets and liabilities are shown
as separate categories on the consolidated balance sheets. When these assets
are acquired in full or partial satisfaction of a loan, any excess of the
related loan balance over the fair value, less estimated selling cost, is
charged as a loan loss against the allowance for loan losses. Net operating
income or loss of companies held for disposal which do not meet the criteria
as a discontinued operation are reported in noninterest income or
noninterest expense. Net operating income or loss of companies held for
9
disposal which meet the criteria as a discontinued operation are included in
income or loss from discontinued operations, unless a decision is made to
cease operations and liquidate the assets and liabilities of the company.
Once a decision is made to liquidate the company, Hillside ceases recording
any future operating income or losses of the company and records an
impairment loss, if any, based on the estimated value of the company's net
assets. The impairment loss is recorded in loss from discontinued
operations. If a company classified as held for disposal is not sold within
one year, accounting standards require that it no longer be accounted for as
an asset held for disposal, and it's operating income is included in
noninterest income or noninterest expense as appropriate.
ADVERTISING EXPENSE
Advertising costs are charged to expense as incurred. Advertising
expense, included in noninterest expense, totaled $0.4 million in both 2003
and 2002, and $0.3 million in 2001.
INCOME TAXES
Hillside and its subsidiaries are included in the consolidated U.S.
Federal and state income tax returns of its parent. Hillside is party to a
tax sharing agreement with its parent and essentially provides for income
taxes as if it filed its own separate income tax returns. Any tax
liabilities on that basis are paid to Hillside's parent. Any refunds due on
that basis are received from Hillside's parent. Benefits related to net
operating loss carry forwards and carry backs are recorded only to the
extent such benefits are available at the consolidated tax return level.
Deferred income taxes are provided for temporary differences between the
amounts reported for assets and liabilities for financial statement purposes
and their tax bases. Deferred tax assets are recognized for temporary
differences that are expected to be deductible in future years' tax returns
and for operating loss and tax credit carry-forwards. Deferred tax assets
are reduced by a valuation allowance by way of a charge to income tax
expense when in the opinion of management, it is deemed more likely than not
that some or all of the deferred tax assets will not be realized. Deferred
tax liabilities are recognized for temporary differences that will be
taxable in future years' tax returns.
Canron files its own Canadian and provincial income tax returns.
Canadian, U.S. federal, state and provincial income taxes related to Canron
are included in discontinued operations.
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through income tax expense.
FOREIGN CURRENCY TRANSLATION
In January 2000, CIB Bank established a foreign office in the Cayman
Islands. The office, which accepted Eurodollar deposits, was closed in the
fourth quarter of 2004 in connection with the sale of the bank. See Note 23
- - Subsequent Events (unaudited).
Hillside's nonbank subsidiary, Canron, had operations in the United
States, Canada and Mexico at the time of acquisition. As of December 31,
2003, operations in western United States, western Canada and Mexico had
been sold. The remaining assets in the United States and eastern Canada are
in the process of liquidation. See Note 2 - Business Combinations and Note 8
- - Companies Held for Disposal for further information.
Hillside's foreign subsidiaries use the local currency as their
functional currency. Assets and liabilities are translated at exchange rates
in effect at the balance sheet date. Net exchange gains or losses resulting
from the translation of financial statements of foreign operations are
recorded as a separate component of accumulated other comprehensive income
within stockholder's equity. The effect of foreign currency re-measurement
and changes in exchange rates are recorded in the cost of contract revenue
as it is expensed against the contract as incurred.
DERIVATIVE AND HEDGING ACTIVITIES
Hillside uses certain derivative financial instruments to help manage
its risk or exposure to changes in interest rates and in conjunction with
its mortgage banking operations. Effective January 1, 2001, Hillside adopted
SFAS 133, as amended by SFAS 138 and SFAS 149, which established new rules
for the recognition and measurement of derivatives and hedging activities.
10
Under SFAS 133, all derivatives are recognized on the balance sheet at
their fair value. On the date a derivative contract is entered into,
Hillside designates the derivative as either (1) a hedge of the fair value
of a recognized asset or liability or of an unrecognized firm commitment
("Fair-Value Hedge"), (2) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a recognized
asset or liability ("Cash-Flow Hedge"), (3) a foreign-currency fair-value or
cash-flow hedge ("Foreign-Currency Hedge"), (4) a hedge of a net investment
in a foreign operation, or (5) held for trading ("Trading Instruments").
Changes in the fair value of a derivative that is highly effective as, and
that is designated and qualifies as, a Fair-Value Hedge, along with the loss
or gain on the corresponding hedged asset or liability (including losses or
gains on firm commitments), are recorded in current-period earnings. Changes
in the fair value of a derivative that is highly effective as, and that is
designated and qualifies as, a Cash-Flow Hedge are recorded in other
comprehensive income until earnings are affected by the variability of cash
flows (e.g., when periodic settlements on a variable-rate asset or liability
are recorded in earnings). Changes in the fair value of derivatives that are
highly effective as, and that are designated and qualify as,
Foreign-Currency Hedges are recorded in either current-period earnings or
other comprehensive income, depending on whether the hedge transaction meets
the criteria for a Fair-Value Hedge or a Cash-Flow Hedge. If, however, a
derivative is used as a hedge of a net investment in a foreign operation,
its changes in fair value, to the extent effective as a hedge, is recorded
in the cumulative translation adjustment account within equity. Changes in
the fair value of derivative trading instruments are reported in the
current-period statement of operations.
At the time the hedging instrument is entered into, Hillside formally
documents all relationships between hedging instruments and hedged items, as
well as its risk-management objective and strategy for undertaking various
hedge transactions. This process includes linking all derivatives that are
designated as Fair-Value Hedges, Cash-Flow Hedges, or Foreign-Currency
Hedges to specific assets and liabilities on the balance sheet or to
specific firm commitments or forecasted transactions. Hillside formally
assesses for all hedging, both at the hedge's inception and on an ongoing
basis, whether the derivatives that are used in hedging transactions will be
or have been highly effective in offsetting changes in fair values or cash
flows of hedged items and whether they are expected to continue to be highly
effective in the future. When it is determined that a derivative is not
highly effective as a hedge or that it has ceased to be a highly effective
hedge, Hillside discontinues hedge accounting prospectively.
Hillside discontinues hedge accounting prospectively when (1) it is
determined that the derivative is no longer effective in offsetting changes
in the fair value or cash flows of a hedged item (including firm commitments
or forecasted transactions); (2) the derivative expires or is sold,
terminated, or exercised; (3) it is unlikely that a hedged forecasted
transaction will occur; (4) a hedged firm commitment no longer meets the
definition of a firm commitment; or (5) management determines that
designation of the derivative as a hedge instrument is no longer
appropriate.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective Fair-Value Hedge, the
derivative will continue to be carried on the balance sheet at its fair
value, and the hedged asset or liability will no longer be adjusted for
changes in fair value. When hedge accounting is discontinued because the
hedged item no longer meets the definition of a firm commitment, the
derivative will continue to be carried on the balance sheet at its fair
value, and any asset or liability that was recorded pursuant to recognition
of the firm commitment will be removed from the balance sheet and recognized
as a gain or loss in current-period earnings. When hedge accounting is
discontinued because it is probable that a forecasted transaction will not
occur, the derivative will continue to be carried on the balance sheet at
its fair value, and gains and losses that were accumulated in other
comprehensive income will be recognized immediately in earnings. In all
other situations in which hedge accounting is discontinued, the derivative
will be carried at its fair value on the balance sheet, with changes in its
fair value recognized in the current-period statement of operations.
Hillside uses interest rate swaps to hedge changes in the fair value of
fixed rate borrowings and specified deposits attributable to changes in
market interest rates. Hillside primarily engages in floating-pay,
fixed-receive swaps, whereby Hillside pays a floating interest rate based
upon an index (e.g. 1-month LIBOR) and receives a fixed rate of interest.
This type of transaction effectively changes the net interest cash flows
from a fixed rate to floating rate. This particular transaction is engaged
in to provide a funding liability that more closely offsets the market risk
of certain floating rate assets whose rate is highly correlated with the
index rate off which the floating rate is paid in the interest rate swap.
Hillside generally enters into swap agreements with nationally recognized
securities firms and monitors the credit status of counterparties and the
level of collateral for such swaps.
The adoption of SFAS 133 on January 1, 2001, resulted in the following
after tax adjustment as of or for the year ended December 31, 2001: an
increase in consolidated assets of $2.6 million; an increase in consolidated
liabilities of $2.5 million; and an increase in net income of $0.03 million.
11
NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR COSTS OF EXIT OR DISPOSAL ACTIVITIES
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). Under the previous
accounting guidance, a company recognized a liability for an exit cost when
it committed to an exit plan. Under SFAS 146, expenses related to exit,
disposal or restructuring activities initiated after December 31, 2002, must
be recorded when such costs are incurred and can be measured at fair value.
Any recorded liability is then adjusted for future changes in estimated cash
flows. The adoption in 2003 had no effect on Hillside's financial position
or results of operations.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities (SFAS 149), to amend and
clarify financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). In addition, SFAS 149 requires that
contracts with comparable characteristics be accounted for similarly. SFAS
No. 149 is effective for contracts entered into or modified after June 30,
2003 (with certain exceptions) and for hedging relationships designated
after June 20, 2003. Adoption of SFAS 149 in 2003 did not materially affect
the consolidated results of operations or financial position of Hillside.
LIABILITIES AND EQUITY
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS 150 establishes standards regarding the manner in which an issuer
classifies and measures certain types of financial instruments having
characteristics of both liabilities and equity. Pursuant to SFAS 150, such
freestanding financial instruments (i.e., those entered into separately from
an entity's other financial instruments or equity transactions or that are
legally detachable and separately exercisable) must be classified as
liabilities or, in some cases, assets. In addition, SFAS 150 requires that
financial instruments containing obligations to repurchase the issuing
entity's equity shares and, under certain circumstances, obligations that
are settled by delivery of the issuer's shares be classified as liabilities.
SFAS 150 amends SFAS No. 128, Earnings Per Share, and SFAS 133. It nullifies
(or partially nullifies) various Emerging Issues Task Force consensuses.
SFAS 150 is effective for financial instruments entered into or modified
after May 31, 2003 and for contracts in existence at the start of the first
interim period beginning after June 15, 2003. Hillside did not have any
outstanding financial instruments at September 30, 2004 (unaudited) or
December 31, 2003 that would require reclassification as a result of SFAS
150.
INVESTMENTS
In March, 2004, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 03-01, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." EITF 03-01 provides
guidance on the other-than-temporary impairment models for marketable debt
and equity securities accounted for under SFAS No 115, "Accounting for
Certain Investments in Debt and Equity Securities," and SFAS No. 124,
"Accounting for Certain Investments Held by Not-for-Profit Organizations,"
and non-marketable equity securities accounted for under the cost method.
The EITF developed a basic three-step model to evaluate whether an
investment is other-than-temporarily impaired. The effective date of the
recognition and measurement provisions as included in paragraphs 10-20 of
EITF 03-01 has been delayed. Hillside adopted the disclosure requirements in
the 2003 consolidated financial statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Interpretation No. 46 (Revised),
Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements (FIN 46R), to
improve financial reporting of special purpose and other entities. In
accordance with the interpretation, business enterprises that represent the
primary beneficiary of another entity by retaining a controlling financial
interest in that entity's assets, liabilities, and results of operating
activities must consolidate the entity in their financial statements. Prior
to the issuance of FIN 46R, consolidation generally occurred when an
enterprise controlled another entity through voting interests. Adoption of
the accounting provisions of FIN 46R in 2003 did not have a material affect
on the consolidated results of operations or financial position of Hillside.
12
NOTE 2 -- BUSINESS COMBINATIONS
Canron Acquisition
In 1999, one of Hillside's borrowers (the "Borrower") experienced a
substantial decline in net worth as a result of a similar decline in the
market value of a publicly traded common stock which comprised a large part
of the Borrower's net worth. The decline in the value of this security
caused liquidity problems for the Borrower with respect to its obligations
to Hillside and other lenders. A substantial amount of collateral held by
Hillside related to this borrowing relationship included certain assets of,
and the Borrower's approximately 84% interest in, Canron. Canron has been
involved in a wide variety of fabrication and erection projects which
include high-rise buildings, bridges, airports, stadiums and other unique
projects. Canron also offered construction services, including the
supervision and restoration of projects of the types noted above.
On April 24, 2002, the Borrower filed a lawsuit against Hillside and
certain of its officers seeking damages and to rescind the Borrower's pledge
of the Canron stock as collateral. On April 25, 2002, the Borrower filed for
bankruptcy reorganization and Hillside filed an action to lift the
bankruptcy stay to take possession and control of the Borrower's interest in
Canron. On August 21, 2002, Hillside and the Borrower agreed upon a
settlement of all claims and demands between the parties. The settlement
order entered in the Bankruptcy Court established Hillside's claim at $15.3
million and provided that in the event the Borrower fails to pay Hillside
$13.3 million on or before October 30, 2002, Hillside would become the owner
of the Borrower's 84% interest in Canron, subject to an option of the
Borrower to acquire the 84% interest in Canron from Hillside on or before
December 31, 2002 for $14.5 million, plus any funds contributed by Hillside
to Canron after October 30, 2002. In addition, the settlement resulted in
the transfer of the Borrower's interest in a condominium development in
exchange for an $0.8 million reduction in the amount of Hillside's claim,
and a release and dismissal by Hillside and the Borrower of any claims that
each might have against the other.
The Borrower failed to pay Hillside the $13.3 million on or before
October 30, 2002, and Hillside became the owner of the Borrower's 84%
interest in Canron through a newly formed and wholly-owned subsidiary, CIB
Construction, LLC ("CIB Construction"). On October 31, 2002, Hillside
recognized a $1.8 million charge-off related to the $13.3 million of loans
that were secured by the stock in Canron, and transferred $11.5 million to
Companies Held For Disposal, which represented the book value of Hillside's
ownership in Canron.
The acquisition was accounted for under the purchase method of
accounting. Hillside's ownership interest in Canron was recorded at its
estimated fair value of $5.9 million at October 31, 2002. As a result,
Hillside recognized an additional $5.6 million charge-off during the fourth
quarter of 2002 relative to the loans secured by the Canron stock.
Hillside's investment in Canron is classified as an asset held for disposal
and recorded at the lower of cost or fair market value. In 2003, an
impairment loss of $1.5 million was recorded and is included in loss from
discontinued operations.
During the third quarter of 2003, Canron determined to proceed with a
wind down of its affairs and the orderly liquidation of its assets. During
2004, Canron discontinued its fabrication and erection operations. Canron
was sold to CIB Marine in conjunction with the sale of CIB Bank. See Note 8
- - Companies Held for Disposal for further discussion.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition.
OCTOBER 31,
2002
-----------
(DOLLARS IN
Assets: THOUSANDS)
Cash on deposit at Hillside........................ $ 609
Accounts receivable................................ 36,627
Inventories and contracts in progress.............. 13,354
Other assets....................................... 5,319
---------
Current assets.................................. 55,909
Deferred tax asset................................. 5,355
Property and equipment, net........................ 17,231
---------
Total assets acquired........................... 78,495
13
Liabilities:
Current portion of loans payable to Hillside....... 3,757
Other liabilities.................................. 39,168
---------
Current liabilities............................. 42,925
Loans payable to Hillside.......................... 27,861
Loans payable to unaffiliated banks................ 1,814
---------
Total liabilities assumed....................... 72,600
---------
Net assets acquired.................................. $ 5,895
=========
Other Acquisitions
In August 2002, Hillside acquired through a wholly-owned subsidiary
certain of the assets of Commercial Finance, a business engaged in the
factoring of receivables. These assets were acquired from a borrower who was
in default of its obligations to Hillside. The aggregate cost of the
business was the forgiveness of indebtedness of $3.8 million which
approximated its fair market value as determined by an independent
valuation. Additionally, $2.1 million of loans to the borrower were
charged-off. Approximately $3.8 million was principally assigned to goodwill
and other intangible assets. During 2003, Hillside recorded a $3.7 million
impairment loss on goodwill and other intangible assets. In the second
quarter of 2004, substantially all the assets of Commercial Finance were
sold and in the fourth quarter of 2004 (unaudited) the company was
dissolved.
NOTE 3 -- CASH AND DUE FROM BANKS
Reserves in the form of deposits with the Federal Reserve Bank and vault
cash totaling $5.7 million and $3.7 million were maintained to satisfy
federal regulatory requirements as of December 31, 2003 and 2002,
respectively. These amounts are included in cash and due from banks in the
consolidated balance sheet.
14
NOTE 4 -- SECURITIES
The amortized cost, gross unrealized gains and losses, and approximate
fair values of securities are as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
SECURITIES AVAILABLE FOR SALE COST GAINS LOSSES VALUE
------------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 2004 (UNAUDITED)
U.S. Treasuries and agencies..................... $ 289,013 $ 122 $ 373 $ 288,762
Obligations of states and political subdivisions. 8,291 - 6 8,285
Commercial paper................................. 4,100 3 - 4,103
Mortgage-backed securities....................... 84,494 291 777 84,008
Federal Home Loan Bank stock..................... 4,082 - - 4,082
------------- ------------ ------------ ------------
$ 389,980 $ 416 $ 1,156 $ 389,240
============= ============ ============ ============
DECEMBER 31, 2003
U.S. Treasuries and agencies..................... $ 136,950 $ 470 $ 89 $ 137,331
Obligations of states and political subdivisions. 16,071 4 69 16,006
Other notes and bonds............................ 250 - - 250
Commercial paper................................. 2,083 1 - 2,084
Mortgage-backed securities....................... 106,081 364 1,232 105,213
Federal Home Loan Bank stock..................... 3,900 - - 3,900
-------------- ------------ ------------ ------------
$ 265,335 $ 839 $ 1,390 $ 264,784
============== ============ ============ ============
DECEMBER 31, 2002
U.S. Treasuries and agencies..................... $ 60,633 $ 365 $ - $ 60,998
Obligations of states and political subdivisions. 4,248 2 7 4,243
Other notes and bonds............................ 250 - - 250
Commercial paper................................. 8,300 4 - 8,304
Mortgage-backed securities....................... 137,827 1,347 28 139,146
Federal Home Loan Bank stock..................... 3,613 - - 3,613
-------------- ------------ ------------ ------------
$ 214,871 $ 1,718 $ 35 $ 216,554
============== ============ ============ ============
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
SECURITIES HELD TO MATURITY COST GAINS LOSSES VALUE
------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 2004 (UNAUDITED)
Obligations of states and political subdivisions. $ 15,562 $ 886 $ 2 $ 16,446
Other notes and bonds............................ 250 - 1 249
Mortgage-backed securities....................... 255 18 - 273
------------- ------------ ------------ ------------
$ 16,067 $ 904 $ 3 $ 16,968
============= ============ ============ ============
DECEMBER 31, 2003
Obligations of states and political subdivisions. $ 17,240 $ 1,010 $ 5 $ 18,245
Other notes and bonds............................ 250 - 1 249
Mortgage-backed securities....................... 302 21 - 323
------------- ------------ ------------ ------------
$ 17,792 $ 1,031 $ 6 $ 18,817
============= ============ ============ ============
DECEMBER 31, 2002
U.S. Treasuries and agencies..................... $ 1,999 $ 6 $ - $ 2,005
Obligations of states and political subdivisions. 27,521 984 13 28,492
Other notes and bonds............................ 250 - - 250
Mortgage-backed securities....................... 866 54 - 920
------------- ------------ ------------ ------------
$ 30,636 $ 1,044 $ 13 $ 31,667
============= ============ ============ ============
Assets, primarily securities, carried at approximately $158.1 million
(unaudited), $90.7 million and $94.8 million at September 30, 2004, December
31, 2003 and 2002, respectively, were pledged to secure public deposits,
Federal Home Loan Bank advances and for other purposes as required or
permitted by law. The approximate fair value of these assets was $158.7
million (unaudited), $91.6 million and $95.7 million at September 30, 2004,
December 31, 2003 and 2002, respectively.
15
The amortized cost and fair value of securities as of December 31, 2003
and 2002, by contractual maturity, are shown below. Certain securities,
other than mortgage-backed securities, may be called earlier than their
maturity date. Expected maturities may differ from contractual maturities in
mortgage-backed securities because certain mortgages may be prepaid without
penalties. Therefore, mortgage-backed securities are not included in the
maturity categories in the following maturity schedules.
DECEMBER 31, 2003
-----------------------------------------------------------
SECURITIES SECURITIES
HELD TO MATURITY AVAILABLE FOR SALE
----------------------------- -----------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------------- -------------- -------------- -------------
(DOLLARS IN THOUSANDS)
Due in one year or less.................. $ 1,857 $ 1,874 $ 59,935 $ 60,060
Due after one year through five years.... 7,754 8,189 84,623 84,672
Due after five years through ten years... 5,377 5,732 3,196 3,218
Due after ten years...................... 2,502 2,699 7,600 7,721
-------------- -------------- -------------- -------------
17,490 18,494 155,354 155,671
Federal Home Loan Bank stock............. - - 3,900 3,900
Mortgage-backed securities............... 302 323 106,081 105,213
-------------- -------------- -------------- -------------
$ 17,792 $ 18,817 $ 265,335 $ 264,784
============== ============== ============== =============
DECEMBER 31, 2002
-----------------------------------------------------------
SECURITIES SECURITIES
HELD TO MATURITY AVAILABLE FOR SALE
----------------------------- -----------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------------- ------------- -------------- -------------
(DOLLARS IN THOUSANDS)
Due in one year or less.................. $ 12,817 $ 12,837 $ 37,372 $ 37,522
Due after one year through five years.... 6,571 6,907 36,002 36,217
Due after five years through ten years... 6,044 6,417 57 56
Due after ten years...................... 4,338 4,586 - -
-------------- -------------- -------------- -------------
29,770 30,747 73,431 73,795
Federal Home Loan Bank stock............. - - 3,613 3,613
Mortgage-backed securities............... 866 920 137,827 139,146
-------------- -------------- -------------- -------------
$ 30,636 $ 31,667 $ 214,871 $ 216,554
============== ============== ============== =============
The following table shows unrealized gross losses and fair value of
securities at December 31, 2003, by length of time that individual
securities in each category have been in a continuous loss position.
AT DECEMBER 31, 2003
----------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
---------------------------- ------------------------ --------------------------
UNREALIZED UNREALIZED UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
-------------- ------------ ----------- ----------- ------------ ------------
(DOLLARS IN THOUSANDS)
SECURITIES
Available for sale and held to maturity:
U.S. Treasury and agencies............... $ 20,424 $ 88 $ - $ - $ 20,424 $ 88
Obligations of states and political
subdivisions......................... 16,853 72 335 3 17,188 75
Other notes and bonds.................... 250 1 - - 250 1
Mortgage-backed securities............... 90,656 1,232 - - 90,656 1,232
-------------- ------------ ----------- ----------- ------------ ------------
Total securities available for sale
and held to maturity................. $ 128,183 $ 1,393 $ 335 $ 3 $ 128,518 $ 1,396
============== ============ =========== =========== ============ ============
As of December 31, 2003, management has concluded that the unrealized
losses above are temporary in nature since they are primarily related to
market interest rates and are not related to the underlying credit quality
of the issuers of securities in our investment portfolio. Additionally,
Hillside has the intent and ability to hold these investments for a time
necessary to recover the amortized cost.
16
Proceeds from the sale of securities available for sale during 2002 were
$76.4 million. There were no sales of securities available for sale in 2003
or in the period ended September 30, 2004 (unaudited). Net realized gains on
the sale of these securities available for sale were $1.4 million in 2002.
There were no sales of held to maturity securities in any of these periods.
NOTE 5 -- LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans
The components of loans were as follows:
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
---------------- ------------------------------
2004 2003 2002
---------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Commercial............................ $ 181,475 $ 298,438 $ 376,087
Factored receivables.................. - 11,448 6,779
Commercial real estate................ 442,559 646,751 648,662
Commercial real estate construction... 92,234 158,463 250,180
Residential real estate............... 6,871 22,773 31,108
Home equity loans..................... 1,806 2,396 4,622
Consumer loans........................ 481 524 642
---------------- -------------- --------------
Gross loans......................... $ 725,426 $ 1,140,793 $ 1,318,080
Deferred loan fees.................... (685) (1,976) (4,225)
---------------- -------------- --------------
Total loans......................... $ 724,741 $ 1,138,817 $ 1,313,855
Allowance for loan losses............. (38,115) (55,490) (30,270)
---------------- -------------- --------------
Loans, net.......................... $ 686,626 $ 1,083,327 $ 1,283,585
================ ============== ==============
The following table lists information on nonperforming and certain past
due loans.
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
----------------- ------------------------
2004 2003 2002
----------------- ----------- ------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans..................................... $ 75,569 $ 97,084 $ 20,804
Restructured loans................................... 4 7 10
Loans 90 days or more past due and still accruing.... 10,007 - 2,079
Loans 90 days or more past due and still accruing at September 30, 2004
(unaudited) are loans which have contractually matured, are well secured and
are in the process of collection or renewal. Subsequent to September 30,
2004 (unaudited), these loans were either paid in full or renewed under
normal terms.
Information on impaired loans is as follows:
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
----------------- ------------------------
2004 2003 2002
----------------- ----------- ------------
(DOLLARS IN THOUSANDS)
Impaired loans without a specific allowance.......... $ 14,110 $ 10,505 $ -
Impaired loans with a specific allowance............. 71,891 90,062 18,970
-------------- ---------- -----------
Total impaired loans............................ 86,001 100,567 $ 18,970
============== ========== ===========
Allowance for loan loss related to impaired loans.... $ 20,448 $ 23,539 $ 5,376
Interest income recognized on impaired loans......... $ 2,477 $ 4,691 $ 258
During 2003, Hillside recognized net losses on sale of foreclosed
property and impairment losses of $2.1 million. These amounts are included
in write down and losses on assets.
17
At September 30, 2004 and December 31, 2003, Hillside had $3.8 million
(unaudited) and $11.0 million, respectively, in outstanding principal
balances on loans secured or partially secured by the stock of Hillside's
parent, CIB Marine. Of this amount, $1.4 million (unaudited) at September
30, 2004 and $2.9 million at December 31, 2003 were classified as nonaccrual
loans or were ninety or more days past due and still accruing. Specific
reserves on these loans were $0.4 million at December 31, 2003. There were
no specific reserves on these loans at September 30, 2004 (unaudited).
Credit Concentrations
At December 31, 2003, Hillside had nine secured borrowing
relationships, to one borrower or a related group of borrowers, that
exceeded $25.0 million. The total outstanding commitments, including lines
of credit not fully drawn on these loans ranged from 44% to 160% of equity
and from 2% to 8% of total loans. The principal drawn and outstanding on
these loans ranged from $10.5 million to $85.1 million, and the aggregate
balance outstanding on these nine relationships was $367.3 million. Four of
the nine relationships included loans with specific allowances for a loss.
At December 31, 2003, the aggregate outstanding principal balance of these
four relationships was $175.4 million and included $31.1 million of loans
with specific allowances for loan losses of $8.1 million. At September 30,
2004 (unaudited), the aggregate outstanding principal balance of these four
relationships was $111.9 million and included $14.4 million of loans with
specific allowances for loan losses of $5.5 million.
At December 31, 2003, Hillside had credit relationships within six
industries or industry groups that exceeded $25 million and 5% of total
loans as follows:
% OF
OUTSTANDING % OF STOCKHOLDER'S
INDUSTRY BALANCE TOTAL LOANS EQUITY
---------------------------------------- ------------------ ----------------- -------------------
(DOLLARS IN MILLIONS)
Residential Real Estate Developers,
Investors and Contractors............. $ 277.6 24% 491%
Commercial Real Estate Developers....... 234.2 21 415
Hospitality............................. 103.7 9 184
Nursing/Convalescent Home............... 81.5 7 144
Manufacturers........................... 64.9 6 115
Retail Trade............................ 53.5 5 95
Allowance for Loan Losses
Changes in the allowance for loan losses were as follows:
(UNAUDITED)
FOR THE PERIOD ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
----------------------------------- -------------------------------------------
2004 2003 2003 2002 2001
----------------- ---------------- ------------- ------------- --------------
(DOLLARS IN THOUSANDS)
Balance at beginning of period.....................$ 55,490 $ 30,270 $ 30,270 $ 17,746 $ 11,220
Charge-offs........................................ (27,283) (42,616) (73,969) (11,464) (1,311)
Recoveries......................................... 3,475 541 753 527 210
----------------- ---------------- ------------- ------------- --------------
Net loan charge-offs............................. (23,808) (42,075) (73,216) (10,937) (1,101)
Allowance acquired................................. - - - 122 -
Allowance related to loans sold (1) ............... (711) - - - -
Provision for loan losses.......................... 7,144 80,595 98,436 23,339 7,627
----------------- ---------------- ------------- ------------- --------------
Balance at end of period...........................$ 38,115 $ 68,790 $ 55,490 $ 30,270 $ 17,746
================= ================ ============= ============= ==============
Allowance for loan losses
as a percentage of total loans................... 5.26% 5.68% 4.87% 2.30% 1.46%
================= ================ ============= ============= ==============
<FN>
(1) Allowance on factoring receivable loans owned by Hillside's
subsidiary Commercial Finance.
18
Provision for Credit Losses
The provision for credit losses consisted of the following components.
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------------------------- -------------------------------------------
2004 2003 2003 2002 2001
---------------- ---------------- ------------- ------------- --------------
(DOLLARS IN THOUSANDS)
Provision for loan losses.......................... $ 7,144 $ 80,595 $ 98,436 $ 23,339 $ 7,627
Provision for losses
on unfunded loan commitments and standby
letters of credit (1)........................... (1,900) 14,747 14,747 1,000 -
---------------- ---------------- ------------- ------------- --------------
Total provision for credit losses............... $ 5,244 $ 95,342 $ 113,183 $ 24,339 $ 7,627
================ ================ ============= ============= ==============
<FN>
(1) For additional information related to provision for losses on
unfunded loan commitments and standby letters of credit, see Note
13 - Other Liabilities.
Director and Officer Loans
Certain directors and principal officers of Hillside and its
subsidiaries and companies with which they are affiliated, are customers of,
and have banking transactions with, the subsidiary bank in the ordinary
course of business. This indebtedness has been incurred on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with unrelated persons. The activity in
these loans is as follows:
(UNAUDITED)
FOR THE PERIOD ENDED
SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
-------------------- ----------------------------------------
2004 2003 2002 2001
-------------------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
Balance at beginning of period. $ 24,498 $ 18,395 $ 15,119 $ 15,787
Balance adjustments ........... (13,738) 3,802 3,082 -
New loans...................... 13,534 3,361 1,929 3,410
Repayments..................... (23,323) (1,060) (1,735) (4,078)
-------------------- ------------- ----------- ------------
Balance at end of period....... $ 971 $ 24,498 $ 18,395 $ 15,119
==================== ============= =========== ============
Balance adjustments are primarily due to Director and Officer status
changes, including resignations.
NOTE 6 -- PREMISES AND EQUIPMENT, NET
The major classes of premises and equipment and accumulated depreciation
are summarized as follows:
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
2003 2002
------------ --------------
(DOLLARS IN THOUSANDS)
Land...................................... $ 2,594 $ 2,594
Buildings and improvements................ 8,882 8,404
Furniture and equipment................... 7,092 4,493
Computer equipment and software........... 1,454 386
Construction in progress.................. - 51
------------ ----------------
20,022 15,928
Less: Accumulated depreciation............ (7,593) (4,055)
------------ ----------------
$ 12,429 $ 11,873
============ ================
Depreciation expense totaled $0.7 million for both the years ended
December 31, 2003 and 2002. Total rental expense was $0.5 million
(unaudited), $0.7 million and $0.6 million for the period ended September
30, 2004 and the years ended December 31, 2003 and 2002, respectively.
19
Hillside leases certain premises and equipment under non-cancellable
operating leases, which expire at various dates through 2014. Such
non-cancellable operating leases also include fair value options to renew.
The following is a schedule by years of annual future minimum rental
commitments required under operating leases that have initial or remaining
non-cancellable lease terms in excess of one year as of December 31, 2003.
AMOUNT
--------------
(DOLLARS IN
THOUSANDS)
2004........... $ 666
2005........... 707
2006........... 618
2007........... 505
2008........... 400
Thereafter..... 1,663
--------------
Total $ 4,559
==============
NOTE 7 -- GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill and other intangibles are
as follows:
OTHER INTANGIBLE ASSETS
-----------------------------------------------
CORE CUSTOMER TOTAL
DEPOSIT BASE IDENTIFIABLE
GOODWILL INTANGIBLES INTANGIBLES INTANGIBLES
-------------- ------------- -------------- ------------
(DOLLARS IN THOUSANDS)
Balance, December 31, 2000 $ 9,399 $ 2,270 $ - $ 2,270
Recorded during the year - - - -
Amortization expense (742) (491) - (491)
-------------- ------------- -------------- ------------
Balance, December 31, 2001 $ 8,657 $ 1,779 $ - $ 1,779
Recorded during the year 3,483 - 390 390
Amortization expense - (425) (51) (476)
-------------- ------------- -------------- ------------
Balance, December 31, 2002 $ 12,140 $ 1,354 $ 339 $ 1,693
Recorded during the year 4,156 - - -
Impairment loss (14,140) - (219) (219)
Amortization expense - (372) (120) (492)
-------------- ------------- -------------- ------------
Balance, December 31, 2003 $ 2,156 $ 982 $ - $ 982
Amortization expense (unaudited) - (197) - (197)
-------------- ------------- -------------- ------------
Balance, September 30, 2004 (unaudited) $ 2,156 $ 785 $ - $ 785
============== ============= ============== ============
Goodwill recorded during 2003 resulted from the consolidation of MICR,
which was previously classified as assets of companies held for disposal.
The goodwill related to MICR was classified as a component of assets of
companies held for disposal at December 31, 2002. The amount of goodwill at
September 30, 2004 (unaudited) relates solely to MICR.
As of December 31, 2003, the estimated future amortization expense for
amortized intangible assets was:
CORE DEPOSIT
INTANGIBLES
----------------------
(DOLLARS IN THOUSANDS)
Estimated annual amortization expense:
2004 $ 241
2005 170
2006 170
2007 170
2008 170
Thereafter 61
----------------------
Total $ 982
20
The gross carrying amount of intangible assets and accumulated
amortization was:
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
-------------------------------- -----------------------------------------------------------------
2004 2003 2002
-------------------------------- ------------------------------- -------------------------------
GROSS NET GROSS NET GROSS NET
CARRY ACCUMULATED CARRY CARRY ACCUMULATED CARRY CARRY ACCUMULATED CARRY
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
------ ------------ ------ ------ ------------ ------ ------ ------------ ------
(DOLLARS IN THOUSANDS)
Amortizing Intangible
Assets:
Core deposit intangibles $ 3,959 $ 3,174 $ 785 $ 3,959 $ 2,977 $ 982 $ 3,959 $ 2,605 $ 1,354
Other identifiable
intangibles - - - - - - 390 51 339
------------------------------- ------------------------------ --------------------------------
Total amortizing
Intangible assets $ 3,959 $ 3,174 785 $ 3,959 $ 2,977 982 $ 4,349 $ 2,656 1,693
Non-Amortizing Goodwill 2,156 2,156 12,140
--------- -------- ---------
Total intangible assets,
net $ 2,941 $ 3,138 $ 13,833
========= ======== =========
Hillside's aggregate amortization expense for goodwill and other
intangibles was $0.2 million for the nine months ended September 30, 2004
(unaudited) and $0.5 million for both the years ended December 31, 2003 and
2002. As a result of the annual impairment testing of goodwill, Hillside
determined that certain goodwill and other intangible assets became impaired
in 2003. Impairment losses totaling $14.4 million were recorded in 2003.
During 2003, goodwill of $5.5 million associated with the acquisition of two
nonbank subsidiaries, MICR and Commercial Finance, was considered impaired
and written off based upon disposition plans and the estimated fair value of
those subsidiaries. An additional $0.2 million of customer base intangible
assets associated with Commercial Finance was considered impaired and
written off. The entire amount of goodwill related to the acquisition of CIB
Bank totaled $8.7 million was considered impaired due to its substantial
operating losses in 2003 and was written off in full.
In accordance with SFAS 142 and 147, Hillside discontinued the
amortization of goodwill in 2002 and continues to amortize core deposit
intangibles and other identifiable intangibles with definite lives. A
reconciliation of previously reported net income adjusted for the
discontinuance of the amortization of goodwill is as follows:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001
------------- ------------ -----------
(DOLLARS IN THOUSANDS)
Net income (loss):
Net income (loss) as reported.............................. $ (97,096) $ 8,927 $ 18,047
Add back: discontinued goodwill amortization............... N/A N/A 529
------------- ------------ -----------
Adjusted net income (loss)............................... $ (97,096) $ 8,927 $ 18,576
============= ============ ===========
NOTE 8 -- COMPANIES HELD FOR DISPOSAL
CIB Construction
Hillside acquired 84% of the outstanding stock of Canron through loan
collection activities in 2002 and subsequently transferred its interest in
Canron to CIB Construction (See Note 2 - Business Combinations.) CIB
Construction and its subsidiaries are classified as companies held for
disposal. At December 31, 2003, the consolidated CIB Construction commenced
a wind down of its affairs and a voluntary liquidation of its assets. The
gross assets and liabilities of CIB Construction and its subsidiaries are
reported on the consolidated balance sheet. Intercompany loan and cash
balances and interest income and expense between consolidated CIB
Construction and Hillside have been eliminated from the totals shown on the
consolidated financial statements. The net income or loss associated with
CIB Construction is presented as discontinued operations in Hillside's
consolidated statement of operations.
The net after-tax loss for 2003 was $4.1 million, including $1.5
million of impairment losses recorded to reflect the estimated net
realizable value upon liquidation. In November 2004, in conjunction with the
sale of Hillside, CIB Construction was sold to CIB Marine at its net book
value of $1.2 million, which approximated its estimated fair market value.
21
The following table summarizes the composition of CIB Construction's
balance sheets. The September 30, 2004 and December 31, 2003 balance sheets
reflect expected liquidation values net of selling costs.
(UNAUDITED)
SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
-------------------- --------------------------------
2004 2003 2002
-------------------- --------------- -------------
Assets: (DOLLARS IN THOUSANDS)
Cash on deposit at Hillside........................ $ 1,660 $ 2,407 $ 332
Accounts receivable................................ 2,589 12,807 33,610
Inventories and contracts in progress.............. - 1,438 7,629
Other current assets............................... 1,613 - 4,195
------------ --------------- -------------
Current assets.................................. 5,862 16,652 45,766
Deferred tax asset................................. - - 4,269
Property and equipment, net........................ 8,482 12,312 17,026
------------ --------------- -------------
Total assets.................................. $ 14,344 $ 28,964 $ 67,061
============ =============== =============
Liabilities and stockholder's equity:
Current portion of loans payable to Hillside
and its affiliates................................ $ 2,700 $ 11,625 $ 3,921
Income tax payable................................. 1,409 1,074 3,104
Other liabilities.................................. 6,072 13,623 31,127
------------ --------------- -------------
Current liabilities............................. 10,181 26,322 38,152
Loans payable to Hillside and its affiliates....... - - 22,272
Loans payable to unaffiliated banks................ - 2,137 1,814
------------ --------------- -------------
Total liabilities............................. 10,181 28,459 62,238
Stockholder's equity .............................. 4,163 505 4,823
------------ --------------- -------------
Total liabilities and stockholder's equity.... $ 14,344 $ 28,964 $ 67,061
============ =============== =============
The amounts reported in the consolidated balance sheets for assets and
liabilities of companies held for disposal for CIB Construction reflect the
elimination of intercompany loan and deposit balances.
MICR
At December 31, 2002, Hillside management which had the authority to
do so, developed and implemented a plan to sell MICR, a wholly-owned
subsidiary. During 2003, Hillside received two indications of interest for
MICR. These indications of interest did not further materialize into firm
offers. As of December 31, 2003, because MICR had not been sold within one
year, accounting standards require that it no longer be accounted for as an
asset held for sale, but be consolidated within the financial statements of
Hillside. At December 31, 2002, MICR had assets of $6.5 million and
liabilities of $0.6 million. During 2003, an impairment loss of $2.0 million
related to goodwill on MICR was recognized and included within noninterest
expense. MICR had net assets of $4.7 million (unaudited) and $4.6 million at
September 30, 2004 and December 31, 2003, respectively. In November 2004, in
conjunction with the sale of Hillside, MICR was sold to CIB Marine at its
net book value of $4.2 million (unaudited), which approximated its estimated
fair market value.
22
NOTE 9 -- OTHER ASSETS
The following table summarizes the composition of Hillside's other
assets.
(UNAUDITED)
FOR THE PERIOD FOR THE YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
-------------------- ----------------------------
2004 2003 2002
-------------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Prepaid expenses.................................... $ 1,228 $ 200 $ 183
Accounts receivable................................. 312 631 183
Fair value of derivatives........................... 3,035 3,380 5,425
Other investments................................... 3,272 3,703 2,000
Income tax receivable............................... 10,339 17,149 3,065
Other............................................... 1,634 1,445 -
-------------------- ------------- -------------
$ 19,820 $ 26,508 $ 10,856
==================== ============= =============
Other investments include investments in limited partnership interests
in various affordable housing partnerships. The carrying value of these
investments was $2.7 million (unaudited) at September, 30, 2004, $3.2
million at December 31, 2003 and $2.0 million at December 31, 2002. Hillside
has engaged in these transactions to provide additional qualified
investments under the Community Reinvestment Act and to receive related
income tax credits. The partnerships provide affordable housing to
low-income residents within Hillside's markets and other locations.
Also included in other investments at September 30, 2004 and December
31, 2003, respectively, is $0.6 million (unaudited) and $0.5 million of
stock in Hillside's parent company, CIB Marine. This stock was pledged as
collateral on loans and was acquired in 2003 as a result of collection
efforts when the borrowers defaulted on their obligations. The stock is
recorded at the lower of cost or estimated fair value. An estimated
impairment loss of $0.1 million (unaudited) for the nine months ended
September 30, 2004 and $1.6 million for the year ended December 31, 2003 was
recorded in write down and losses on assets.
NOTE 10 -- DEPOSITS
The aggregate amount of time deposits of $100,000 or more at December
31, 2003 and 2002 were $294.9 million and $325.8 million, respectively.
These amounts include brokered time deposits of $85.9 million, or 6.5% of
total deposits at December 31, 2003, and $71.9 million, or 5.7% of total
deposits at December 31, 2002.
At December 31, 2003, the scheduled maturities of time deposits are as
follows:
(DOLLARS IN THOUSANDS)
2004......... $ 609,179
2005......... 143,553
2006......... 53,391
2007......... 48,518
2008......... 15,781
Thereafter... 56,977
-------------
Total........ $ 927,399
=============
NOTE 11 -- SHORT-TERM BORROWINGS
Borrowings with original maturities of one year or less are classified
as short-term. Federal funds purchased generally represent one-day
borrowings. Securities sold under repurchase agreements represent borrowings
maturing within one year that are collateralized by US Treasury and
Government Agency Securities. The fair value of securities sold under
repurchase agreements was approximately $3.6 million and $38.2 million at
December 31, 2003 and 2002, respectively. Hillside's factoring subsidiary,
Commercial Finance, has a $12.0 million revolving line of credit to support
its operating needs and as of December 31, 2003, the outstanding balance on
this line was $7.3 million. This line was terminated in 2004 (unaudited)
upon sale of Commercial Finance.
In December 2003, Hillside, through one of its nonbanking subsidiaries,
acquired title to a commercial office building that was being converted into
residential condominiums. The asset was acquired through a Deed in Lieu of
Foreclosure Settlement Agreement
23
("DIL Agreement") from a borrower who was in default on its obligation. The
asset acquired is included in "foreclosed properties" and had a balance of
$25.2 million at December 31, 2003. Pursuant to the DIL Agreement, Hillside
acquired the property subject to the first lien held by an unaffiliated
financial institution (Lender) and assumed the borrower's financial
obligation relating to that first lien. The assumed financial obligation is
reported as an outstanding non-recourse mortgage payable and had a balance
of $26.7 million at December 31, 2003. Under the terms of the assumption,
Hillside's liability to the Lender for payment of the assumed obligation was
limited to monies received through the liquidation of the acquired
collateral. The amended mortgage note payable bears an interest rate of 10%
and a maturity date of October 1, 2004, unless there is a default under the
DIL Agreement. The mortgage note was secured by the acquired property and
any related leases and rents. In the second quarter of 2004 (unaudited),
Hillside transferred its interest in the acquired property to the Lender in
return for the forgiveness of the assumed mortgage note. The transfer of
interest in the acquired property to the Lender in return for the
forgiveness of the assumed mortgage note resulted in no gain or loss.
The following is a summary of short-term borrowings.
AT PERIOD END FOR THE YEAR
------------------------ --------------------------------------
HIGHEST
WEIGHTED- DAILY WEIGHTED- BALANCES AT
AVERAGE AVERAGE AVERAGE MONTH
BALANCE RATE BALANCES RATE END
------------ ---------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 2004 (UNAUDITED)
Federal funds purchased and securities sold
under repurchase agreements.............. $ 6,054 1.32 % $ - - % $ -
Treasury, tax and loan note................ 1,583 1.51 - - -
------------ ---------- ----------- -----------
Total short-term borrowings......... $ 7,637 1.36 % - - -
DECEMBER 31, 2003
Federal funds purchased and securities sold
under repurchase agreements............... $ 12,084 1.39 % $ 125,964 1.25 % $ 185,409
Federal Home Loan Bank notes................ - - 529 3.40 5,000
Revolving lines of credit................... 7,252 4.00 6,489 4.15 9,510
Treasury, tax and loan note................. 3,596 0.73 1,224 0.74 7,404
Mortgage note payable....................... 26,687 10.00 73 10.00 26,687
------------ ---------- ----------- -----------
Total short-term borrowings.......... $ 49,619 6.36 % $ 134,279 1.40 %
DECEMBER 31, 2002
Federal funds purchased and securities
sold under repurchase agreements.......... $ 209,628 1.29 % $ 174,307 1.78 % $ 209,628
Federal Home Loan Bank notes................ 10,500 3.89 10,462 4.39 33,200
Revolving lines of credit................... 4,311 4.25 1,150 5.48 4,530
Treasury tax and loan note.................. 428 0.99 453 0.88 438
------------ ---------- ----------- -----------
Total short-term borrowings.......... $ 224,867 1.47 % $ 186,372 1.95 %
At December 31, 2003, CIB Bank was not in compliance with debt covenants
of certain financial standby letters of credit it participated in with other
banks. CIB Bank pledged securities to collateralize its obligation for these
participated standby letters of credit. The total value of securities
pledged to other parties related to these participated standby letters of
credit was $20.0 million at December 31, 2003. These certain standby letters
of credit were funded prior to September 30, 2004 (unaudited).
24
NOTE 12 -- LONG-TERM BORROWINGS
FHLB
The following table presents information regarding amounts payable to
the Federal Home Loan Bank of Chicago. All of the FHLB borrowings shown in
the following table are fixed rate borrowings.
(UNAUDITED)
SEPTEMBER 30, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002 CALLABLE
------------------- -------------------- --------------------- QUARTERLY
BALANCE RATE BALANCE RATE BALANCE RATE SCHEDULED @ PAR
---------- -------- ----------- -------- ----------- ------- MATURITY AFTER
(DOLLARS IN THOUSANDS) ----------- -------------
$ 2,500 4.95 $ 2,500 4.95 $ 2,500 4.95 1/16/08 1/16/01
24,146 7.07 23,997 7.07 23,810 7.07 6/30/08 N/A
---------- -------- ----------- -------- ------------ -------
$ 26,646 6.87 % $ 26,497 6.87 % $ 26,310 6.87 %
======== ======== =======
Hedged fair value adjustment: 3,362 4,029 5,081
---------- ----------- ------------
Total $ 30,008 $ 30,526 $ 31,391
========== =========== ============
Hillside is required to maintain qualifying collateral as security for
both the short-term and long-term FHLB notes. The debt to collateral ratio
is dependent upon the type of collateral pledged. As of December 31, 2003
and 2002, this collateral consisted of securities with a fair market value
of $36.4 million and $46.3 million, respectively.
On February 25, 2000, Hillside assumed a $25.0 million Federal Home Loan
Bank of Chicago advance due June 30, 2008, with a net cost, including
premium, of 7.07%. The premium amount of $1.7 million is being amortized to
interest expense over the life of the borrowing. The unamortized balance
related to this premium was $1.0 million and $1.2 million as of December 31,
2003 and 2002, respectively. Simultaneously with this advance, Hillside
entered into an interest rate swap with the Federal Home Loan Bank of
Chicago with a $25.0 million notional value and maturing on June 30, 2008,
whereby Hillside pays a variable rate of interest at the 1-month LIBOR rate
and earns a fixed rate of interest at 7.08% in order to hedge the interest
rate risk on the related debt. As of December 31, 2003 and 2002, the fair
value of the swap was approximately $4.0 million and $5.1 million,
respectively. The net cash received from the hedging relationship for the
nine months ended September 30, 2004 and for the years ended December 31,
2003 and 2002 was approximately $1.1 million (unaudited), $1.5 million and
$1.3 million, respectively. Hillside's management believes the swap
transaction will reduce interest rate risk by converting the fixed rate on
the advance to a variable rate similar to the loans funded with the proceeds
of these borrowings.
25
NOTE 13 -- OTHER LIABILITIES
The following table summarizes the composition of Hillside's other
liabilities.
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
------------------- --------------------------
2004 2003 2002
------------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Accounts payable.................................... $ 3,405 $ 3,419 $ 2,688
Accrued compensation and employee benefits.......... 501 637 507
Accrued audit and legal fees........................ 1,609 769 107
Accrued real estate taxes........................... 745 2,500 650
Accrual for unfunded commitments
and standby letters of credit losses............. 3,347 15,747 1,000
Accrued other....................................... 384 710 126
Deferred income tax payable......................... - - 1,080
Other............................................... 133 133 351
----------------- ------------ ------------
$ 10,124 $ 23,915 $ 6,509
================= ============ ============
Changes in the accrual for unfunded loan commitments and standby letters
of credit losses were as follows:
(UNAUDITED)
FOR THE PERIOD ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
---------------------------------- --------------------------------
2004 2003 2003 2002
--------------- ----------------- -------------- -----------------
(DOLLARS IN THOUSANDS)
Balance at beginning of period.................$ 15,747 $ 1,000 $ 1,000 $ -
Charge-offs.................................... (10,500) - - -
Provision for losses
on unfunded loan commitments and standby
letters of credit........................... (1,900) 14,747 14,747 1,000
--------------- ----------------- -------------- -----------------
Balance at end of period.......................$ 3,347 $ 15,747 $ 15,747 $ 1,000
=============== ================= ============== =================
NOTE 14 -- STOCKHOLDERS' EQUITY
CIB Bank is subject to various regulatory capital requirements
administered by the federal and state banking agencies. Pursuant to federal
holding company and bank regulations, the bank is assigned to a capital
category. The assigned capital category is largely determined by three
ratios that are calculated in accordance with specific instructions included
in the regulations: total risk adjusted capital, Tier 1 capital, and Tier 1
leverage ratios. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the bank subsidiaries must meet
specific capital guidelines that involve quantitative measures of the bank's
assets and certain off-balance sheet items as calculated under regulatory
accounting practices. The banks' capital amounts and classifications are
also subject to qualitative judgments by the regulators about components,
risk weightings and other factors. To be categorized as well-capitalized,
the bank must maintain total risk adjusted capital, Tier 1 capital, and Tier
1 leverage ratios of 10.0%, 6.0% and 5.0%, respectively.
There are five capital categories defined in the regulations:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Classification of a bank
in any of the undercapitalized categories can result in certain mandatory
and possible additional discretionary actions by regulators that could have
a direct material effect on the consolidated financial statements.
At September 30, 2004 (unaudited) and December 31, 2003, CIB Bank was
significantly undercapitalized under the regulatory framework for prompt
corrective action and for capital adequacy purposes. In August 2004, the
FDIC accepted the bank's capital restoration plan which was submitted to the
FDIC pursuant to prompt corrective action requirements as a result of the
bank being classified as significantly undercapitalized. In connection with
such plan, Hillside executed and delivered to the FDIC a Capital Maintenance
Commitment and Guaranty which provided assurance in the form of a financial
commitment that CIB Bank would comply with the plan until the bank has been
adequately capitalized on average during each of four consecutive quarters
and, in the event the bank fails to so comply, to pay to the bank the lesser
of five percent of the bank's total assets at the time the bank was
undercapitalized, or the amount which is necessary to bring the bank into
compliance with all capital standard applicable to the bank at the time it
failed to comply. Upon the sale of Hillside and the subsequent merger of the
bank into First Banks, the guaranty expired.
26
On January 30, 2003, CIB Bank entered into a Memorandum of Understanding
(the "Memorandum") with the Division of Banks and Real Estate of the
Illinois Department of Financial and Professional Regulation (the "DBRE")
and the FDIC (together the "Regulators"). The Memorandum was entered into as
a result of a deterioration in the credit quality of the loan portfolio, the
level of concentrations of credit, and weaknesses in the credit
administration process identified during the DBRE's regular examination of
the bank, which commenced on September 23, 2002.
Pursuant to the Memorandum, the bank agreed to take certain actions to
correct the deficiencies noted within the examination report. In addition,
during the period in which the Memorandum is in effect, the bank agreed to
maintain a Tier 1 leverage capital level equal to or exceeding 8% of the
bank's total assets. In the event such ratio is less than 8% as of June 30
or December 31 of each calendar year the Memorandum is in effect, the bank
is required within 30 days thereof to submit to the Regulators a plan for
the augmentation of the bank's capital accounts. Also, unless prior written
consent is received from the Regulators, the bank agreed to restrict its
loan growth to no more than 2% during any consecutive three-month period and
suspend the declaration or payment of dividends without regulatory approval.
In the second quarter of 2004 (unaudited), the bank consented to the
issuance of a Cease and Desist Order ("Order") with banking regulatory
authorities. Upon entering into the Order, the Memorandum was terminated.
The Agreement imposes certain restrictions and reporting requirements on the
bank and requires various actions to be taken. These restrictions are in
force during the life of the Order. These items include among others:
o Limitations on asset and loan growth,
o Adoption of a comprehensive plan to improve earnings,
o Development of a plan to reduce concentration of credit and loan
relationships classified as substandard or doubtful,
o Development of a system to correct loan administrative deficiencies,
o Development of a plan to correct and prevent violations of banking
laws and regulations related to affiliate transactions,
o Restrictions on dividend payment, and
o Maintenance of a Tier 1 leverage capital level equal to or exceeding
8% of the bank's total assets. In the event such ratio is less than
8% at any calendar quarter end, the bank is required within 90 days
to increase its capital ratio to not less than 8%, calculated as of
the end of that preceding quarterly period. Failure to comply could
have a material, adverse effect. As of September 30, 2004
(unaudited) and December 31, 2003, the bank's Tier 1 leverage
capital was 3.82% and 3.26%, respectively.
The actual and required capital amounts and ratios for CIB Bank is
presented in the table below.
TO BE WELL-CAPITALIZED
FOR CAPITAL UNDER PROMPT
ACTUAL ADEQUACY PURPOSES CORRECTIVE PROVISIONS
---------------- ------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------ -------- ------ ---------- --------
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 2004 (UNAUDITED)
Total Capital to Risk Weighted Assets $ 64,390 7.46% $ 69,031 8.00% $ 86,289 10.00%
Tier 1 Capital to Risk Weighted Assets 53,225 6.17 34,516 4.00 51,773 6.00
Tier 1 Leverage to Average Assets 53,225 4.18 50,905 4.00 63,631 5.00
DECEMBER 31, 2003
Total Capital to Risk Weighted Assets $ 71,548 5.31% $107,789 8.00% $ 134,737 10.00%
Tier 1 Capital to Risk Weighted Assets 54,034 4.01 53,895 4.00 80,842 6.00
Tier 1 Leverage to Average Assets 54,034 3.56 60,713 4.00 75,892 5.00
DECEMBER 31, 2002
Total Capital to Risk Weighted Assets $161,564 10.02% $129,043 8.00% $ 161,303 10.00%
Tier 1 Capital to Risk Weighted Assets 141,264 8.76 64,521 4.00 96,782 6.00
Tier 1 Leverage to Average Assets 141,264 8.71 64,860 4.00 81,075 5.00
27
NOTE 15 - OTHER EXPENSE
Other expense consisted of the following:
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------------- --------------------------------------------
2004 2003 2003 2002 2001
--------------- ---------------- --------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Processing charges from affiliates................$ 1,432 $ 1,749 $ 2,379 $ 2,737 $ 1,993
Correspondent bank charges........................ 112 150 196 165 121
Advertising/Marketing............................. 225 322 406 439 288
Amortization of goodwill and other intangibles.... 197 373 492 476 1,233
Communications.................................... 345 426 546 529 448
Supplies and printing............................. 93 118 164 128 122
Shipping and handling............................. 220 228 304 244 255
Collection expense................................ 1,619 1,285 2,647 661 30
FDIC and state assessment......................... 2,929 281 381 317 280
Recording and filing fees......................... 153 134 167 150 89
Foreclosed property............................... 955 9 797 33 15
Other expense..................................... 1,068 690 1,019 750 689
--------------- ---------------- --------------- ------------- -------------
TOTAL OTHER EXPENSE...........................$ 9,348 $ 5,765 $ 9,498 $ 6,629 $ 5,563
=============== ================ =============== ============= =============
NOTE 16 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Hillside is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. Hillside has entered into commitments to extend credit, which
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amounts recognized in the balance sheets.
Standby letters of credit are conditional commitments that Hillside
issues to guarantee the performance of a customer to a third-party. Fees
received to issue standby letters of credit are deferred and recognized as
noninterest income over the term of the commitment. The guarantees
frequently support public and private borrowing arrangements, including
commercial paper issuances, bond financings, and other similar transactions.
Hillside issues commercial letters of credit on behalf of customers to
ensure payments or collection in connection with trade transactions. In the
event of a customer's nonperformance, Hillside's credit loss exposure is the
same as in any extension of credit, up to the letter's contractual amount.
Management assesses the borrower's financial condition to determine the
necessary collateral, which may include marketable securities, real estate,
accounts receivable and inventory. Since the conditions requiring Hillside
to fund letters of credit may not occur, Hillside expects its future cash
requirements to be less than the total outstanding commitments. The maximum
potential future payments guaranteed by Hillside under standby letter of
credit arrangements at December 31, 2003 is approximately $70.8 million. At
December 31, 2003, Hillside had accrued a liability of $15.7 million for
probable losses related to standby letters of credit. The standby letters of
credit for which reserves were established were participated to unaffiliated
banks. Hillside has not defaulted on any payment obligations with the other
banks.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require the payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. Hillside
evaluates each customer's creditworthiness and determines the amount of the
collateral necessary based on management's credit evaluation of the
counterparty. Collateral held varies, but may include marketable securities,
accounts receivable, inventories, property and equipment, and real estate.
The derivative financial instruments with which Hillside is involved are
utilized for purposes of asset/liability management to modify the existing
market risk characteristics of certain hedged assets and liabilities and are
predominately comprised of interest rate swaps. An interest rate swap
agreement involves the exchange of fixed and floating rate interest payment
obligations based on the underlying notional principal amounts. The amounts
subject to market and credit risks are the streams of interest payments
under the agreements and not the notional principal amounts, which are used
only to express the volume of the transactions. Hillside's credit risk on a
swap agreement is limited to nonperformance of the counterparty's
obligations under the terms of the swap agreement. Hillside deals
exclusively with counterparties that have high
28
credit ratings, and based on management's assessments, all counterparties
were expected to meet any outstanding obligations as of December 31, 2003.
Hillside had $45.0 million (unaudited) notional value of receive
fixed/pay floating interest rate swaps outstanding as of September 30, 2004.
These interest rate swaps are used to hedge the fair value of various
deposits and borrowings, including $25 million notional to hedge borrowings
and $20 million notional to hedge fixed rate callable certificates of
deposit. The interest rate swaps effectively convert the fixed rate payments
on the liabilities to a floating rate and hedge their fair value from
changes in interest rates. The fair values of these interest rate swaps at
September 30, 2004 was $3.0 million (unaudited.)
Hillside had $65.0 million notional value of interest rate swaps
outstanding as of December 31, 2003, of which $55.0 million of these
interest rate swaps are received fixed/pay floating interest rate swaps used
to hedge the fair market value of various deposits and borrowings, including
$25 million notional to hedge borrowings and $30 million notional to hedge
fixed rate callable certificates of deposit. $10 million are classified in
the trading account and are comprised of two $5 million offsetting positions
in callable swaps. The interest rate swaps accounted for as hedges are
floating pay-fixed receive instruments and, as such, effectively convert the
fixed rate payments on the financial instruments to a floating rate and
hedge their fair value from changes in interest rates. Each hedge is matched
with the financial instrument as to final maturity, interest payment dates
and call features. These swaps are accounted for as Fair Value Hedges under
SFAS 133. Market value changes during the period of the interest rate swaps
and the hedged liabilities are reflected in noninterest income in the
statements of operations.
The following table summarizes the notional amount of off-balance sheet
financial instruments with credit risk.
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
------------------ ----------------------------
2004 2003 2002
------------------ ------------- -------------
(DOLLARS IN THOUSANDS)
Commitments to extend credit................... $ 62,157 $ 149,542 $236,793
Standby letters of credit...................... 22,139 70,796 80,898
Interest rate swaps............................ 45,000 65,000 95,000
For additional information related to interest rate swaps, see Note 12
- -- Long-term Borrowings.
NOTE 17 -- COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, Hillside has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. Hillside is not currently
involved in any material pending legal proceedings other than litigation of
a routine nature which is being defended and handled in the ordinary course
of business except as follows:
In August 2003, a shareholder of CIB Marine and a borrower of CIB Bank,
commenced an action in the Circuit Court of Cook County, Illinois, Chancery
Division, against CIB Marine, Central Illinois Bank, CIB Bank and two of
their now former directors and/or officers for damages arising out of an
alleged breach of fiduciary duty and fraudulent misrepresentations relative
to the financial condition of Canron and its principal shareholder by
defendants to induce the plaintiff to borrow money from CIB Bank and make a
$0.5 million investment in Canron. The original complaint was dismissed for
failure to state a claim and two subsequent amended complaints were
dismissed in whole or part, with the fraudulent misrepresentation claim
being the only remaining claim. Plaintiff has filed a third amended
complaint reasserting an additional claim for shareholders remedies arising
out of alleged improper lending practices. Defendants have filed a motion to
dismiss the shareholder remedies claim. Plaintiff seeks an unspecified
amount of compensatory and punitive damages, requests an order requiring CIB
Marine and the banks to repurchase his CIB Marine shares of stock at fair
value, and other forms of relief. While the outcome of these claims cannot
be determined at this time, CIB Bank intends to vigorously defend this
action.
In November 2004, CIB Bank commenced an action in the Circuit Court of
Cook County, Illinois County Department, Law Division, against a borrower
and certain guarantors for damages arising out of the defendants' default of
certain loan obligations. CIB Bank claims damages of approximately $2.9
million. In December 2004, the defendants filed a counterclaim against CIB
Bank, CIB Marine, and certain of its current and former directors and/or
officers for damages arising out of alleged misrepresentations relative to
defendants' purchase of CIB Marine stock from one of CIB Marine's largest
borrowers at the time, and breach of fiduciary duties. Defendants seek
compensatory damages in excess of $0.5 million and punitive damages of $2.0
million on the misrepresentation
29
claim, and compensatory damages of $2.5 million and punitive damages of $5.0
million on the breach of fiduciary duties claim. While the ultimate outcome
of this action cannot be determined at this time, CIB Bank intends to
vigorously defend this action.
On or about June 21, 2004, the former President and Chief Executive
Officer of CIB Bank made a demand against CIB Marine and certain of its
subsidiaries and affiliates including, among others, CIB Bank, arising out
of his purported unlawful termination of employment on March 2, 2004. The
claimant, who was also a director of CIB Marine and CIB Bank, offered to
settle his claim for $1.0 million. CIB Marine and CIB Bank deny the claim.
The claimant has not filed the threatened lawsuit. In the event the claimant
files the threatened action, CIB Bank intends to vigorously defend the
claim. The outcome of any such litigation, if filed, cannot be determined at
this time.
In connection with the marketing efforts to sell real estate owned by
Canron in Ontario, Canada, Canron retained an environmental consultant to
further investigate pre-existing groundwater contamination and other
potential contaminates located on the property. The consultant has confirmed
a previous evaluation obtained by Canron that from a risk assessment
perspective, the contaminations do not materially impact the intended use of
the property and would not require any material remediation. Canron does not
expect these issues to adversely affect the sale of the property and does
not, based on Canadian law, expect to incur any material remediation costs
associated with these environmental issues. In November 2004, in conjunction
with the sale of Hillside, Canron was sold to Hillside's parent, CIB Marine.
NOTE 18 -- OTHER BENEFIT PLANS
Hillside participates in the defined contribution 401(k) deferred
compensation plan of its parent, CIB Marine. All employees of Hillside who
have attained age 18 are eligible to participate in the plan. Employees
enter the plan on the first entrance date after their start date. Entrance
dates are January 1 and July 1 of each year. The Plan permits participants
to make voluntary tax deferred contributions of up to the maximum permitted
by law. Participants over the age of 50 are allowed to make a stated amount
of additional contributions on a tax deferred basis as permitted by law.
Through December 31, 2002, Hillside had not matched employee contributions.
During 2003 Hillside matched employee contributions up to 1% of compensation
and the total expense was $46 thousand. The administrative costs to maintain
the plan are paid by the plan. In the first quarter of 2004 (unaudited),
Hillside suspended the matching contribution.
CIB Marine has an employee stock ownership plan for the benefit of
employees, including Hillside employees, who attain a certain number of
hours worked and length of service. At December 31, 2003, the plan held
205,047 shares of common stock, all of which have been allocated to
participants. Hillside made contributions of $0.1 million in each of the
years 2003, 2002, and 2001. Contributions are discretionary and are
determined annually by the Board of Directors. The administrative costs to
maintain the plan are paid by the plan. In the first quarter of 2004
(unaudited), Hillside suspended contributions.
NOTE 19 -- INCOME TAXES
Hillside and its subsidiaries are included in the consolidated U.S.
Federal and state income tax returns of its parent. Hillside is party to a
tax sharing agreement with its parent and essentially provides for income
taxes as if it filed its own separate income tax returns. Any tax
liabilities on that basis are paid to Hillside's parent. Any refunds due on
that basis are received from Hillside's parent. The provision for income
taxes (benefits) on income (loss) from continuing operations is as follows:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
---------- ----------- ----------
(DOLLARS IN THOUSANDS)
Current tax provision:
Federal............... $ (10,655) $ 11,150 $ (422)
State................. -- (1,429) (145)
Foreign............... -- -- --
Deferred (benefit)...... (413) (4,685) 9,702
Foreign deferred........ -- -- --
---------- ----------- ----------
$ (11,068) $ 5,036 $ 9,135
========== =========== ==========
Hillside's actual income tax rates related to continuing operations of
10.6%, 33.9% and 33.6% for the years ended December 31, 2003, 2002 and 2001,
respectively, differ from the expected income tax rate of 35% in 2002 and
34% in 2001 primarily due to tax exempt interest income offset to a smaller
extent by state income taxes. In 2003, the actual benefit rate is lower than
the expected
30
income tax rate of 34% due to net operating loss carryforwards, the benefits
of which are offset by a valuation allowance provided in 2003.
The actual income tax rate related to discontinued operations of (26.9%)
and (16.0%) for the years ended December 31, 2003 and 2002, respectively,
differs from the expected income tax rate of 34% and 35%, respectively, due
to adjustments in the valuation allowance, foreign tax credits, foreign tax
rates and state and provincial tax rates. There were no discontinued
operations in 2001.
The components of deferred tax assets and liabilities from continuing
operations are as follows:
DECEMBER 31,
--------------------------
2003 2002
------------- ------------
(DOLLARS IN THOUSANDS)
Deferred tax assets.............. $ 34,782 $ 11,567
Valuation allowance.............. (25,155) --
Deferred tax liabilities......... (9,627) (12,647)
------------- ------------
$ -- $ (1,080)
============= ============
Net deferred tax assets (liabilities) are classified in the consolidated
balance sheets as other assets (liabilities). The changes in the net
deferred tax asset (liability) from year to year primarily comprises the
deferred tax expense (benefit) on income (loss) from continuing operations
and the deferred tax expense (benefit) included in other comprehensive
income.
There were U.S. Federal and state net operating loss carryforwards
(NOLs) attributable to Hillside at December 31, 2003 of approximately $44.5
million. $13.4 million of the U.S. Federal NOLs are related to Canron and
are subject to annual limitations under IRC Section 382. The NOLs expire in
varying amounts between 2007 and 2023. The amounts of NOLs and their future
utilization disclosed herein may not be the same as those which would be
available if Hillside were sold or spun off as a separate entity. In
addition, Hillside has $2.1 million of capital loss carryforwards of which
$1.7 million is attributable to Canron. The capital loss carryforwards
expire in 2008.
Realization of the net deferred tax assets over time is dependent upon
the existence of taxable income in carryback periods or Hillside generating
sufficient taxable income in future periods. In determining that realization
of the deferred tax assets in 2002 was more likely than not, Hillside gave
consideration to a number of factors including its recent earnings history,
the reversal of temporary differences which will give rise to earnings in
future years, tax planning opportunities and its expectations for taxable
earnings during the carryforward periods. Due to the magnitude of the loss
in 2003 and expectations of a loss in 2004, management reconsidered during
2003 whether it was more likely than not the deferred tax assets would be
realized and provided a full valuation allowance against net deferred tax
assets.
Valuation allowances have been established against deferred tax assets
where management believes that it is more likely than not that the deferred
tax assets will not be realized. A valuation allowance of $3.8 million was
created in 2002 related to loss carryforwards in which management believes
it is more likely than not the losses will expire unused due to annual
limitations under IRC Section 382.
The net deferred tax asset before valuation allowance of companies held
for disposal as of December 31, 2003 and 2002 was $8.2 million and $8.1
million, respectively. Management does not believe that it is more likely
than not that these net deferred tax assets will be realized. Therefore,
valuation allowances have been set up against these net deferred tax assets
in the amount of $8.2 million and $3.8 million for 2003 and 2002,
respectively.
A U.S. deferred tax liability has been provided for in 2003 related to
the repatriation of unremitted foreign earnings due to management's decision
to liquidate Canron.
31
Tax related balances due to or from Hillside's parent as of December 31,
2003 and 2002 are as follows:
DECEMBER 31,
---------------------------------
2003 2002
--------------- ---------------
(DOLLARS IN THOUSANDS)
Due to Parent $ -- $ --
Due from Parent 17,581 3,785
-------------- --------------
$ 17,581 $ 3,785
============== ==============
NOTE 20 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The table below summarizes the information required by SFAS No. 107,
Disclosures about Fair Value of Financial Instruments (SFAS 107).
DECEMBER 31, 2003
--------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
------------- ------------
(DOLLARS IN THOUSANDS)
Financial Assets:
Cash and cash equivalents............. $ 21,420 $ 21,420
Securities available for sale......... 264,784 264,784
Securities held to maturity........... 17,792 18,817
Loans, net............................ 1,083,327 1,095,054
Accrued interest receivable........... 6,139 6,139
Financial Liabilities:
Deposit liabilities................... 1,314,413 1,326,646
Short term borrowings................. 49,619 49,619
Long term borrowings.................. 30,526 31,068
Accrued interest payable.............. 3,367 3,367
DECEMBER 31, 2003
---------------------------------
CONTRACTUAL
OR NOTIONAL CARRYING ESTIMATED
AMOUNT AMOUNT FAIR VALUE
----------- --------- ----------
(DOLLARS IN THOUSANDS)
Off-Balance Sheet Items:
Commitments to extend credit............................. $ 149,542 $ - $ -
Standby letters of credit................................ 70,796 (15,927) (15,927)
Interest rate swap agreements............................ 65,000 3,380 3,380
An accrued liability for probable losses on unfunded commitments to
extend credit and standby letters of credit totaled $15.7 million at
December 31, 2003.
DECEMBER 31, 2002
---------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
------------- -------------
(DOLLARS IN THOUSANDS)
Financial Assets:
Cash and cash equivalents............... $ 95,698 $ 95,698
Securities available for sale........... 216,554 216,554
Securities held to maturity............. 30,636 31,667
Loans receivable, net................... 1,283,585 1,299,624
Accrued interest receivable............. 8,405 8,405
Financial Liabilities:
Deposit liabilities..................... 1,272,373 1,295,047
Short Term Borrowings................... 224,867 224,867
Long Term Borrowings.................... 31,391 32,145
Accrued interest payable................ 4,330 4,330
32
DECEMBER 31, 2002
----------------------------------
CONTRACTUAL
OR NOTIONAL CARRYING ESTIMATED
AMOUNT AMOUNT FAIR VALUE
----------- --------- ----------
(DOLLARS IN THOUSANDS)
Off-Balance Sheet Items:
Commitments to extend credit............................. $ 236,793 $ - $ -
Standby letters of credit................................ 80,898 (1,355) (1,355)
Interest rate swap agreements............................ 95,000 5,425 5,425
An accrued liability for probable losses on unfunded commitments to
extend credit and standby letters of credit totaled $1.0 million at December
31, 2002.
Fair value amounts represent estimates of value at a point in time.
Significant estimates regarding economic conditions, loss experience, risk
characteristics associated with particular financial instruments and other
factors were used for the purposes of this disclosure. These estimates are
subjective in nature and involve matters of judgment. Therefore, they cannot
be determined with precision. Changes in the assumptions could have a
material impact on the amounts estimated.
While these estimated fair value amounts are designed to represent
estimates of the amounts at which these instruments could be exchanged in a
current transaction between willing parties, it is Hillside's intent to hold
most of its financial instruments to maturity. Therefore, it is not probable
that the fair values shown will be realized in a current transaction.
The estimated fair values disclosed do not reflect the value of assets
and liabilities that are not considered financial instruments. In addition,
the value of long-term relationships with depositors (core deposit
intangibles) are not reflected. The value of this item is significant.
Because of the wide range of valuation techniques and the numerous
estimates that must be made, it may be difficult to make reasonable
comparisons of Hillside's fair value to that of other financial
institutions. It is important that the many uncertainties discussed above be
considered when using the estimated fair value disclosures and to realize
that because of these uncertainties the aggregate fair value should in no
way be construed as representative of the underlying value of Hillside.
The following describes the methodology and assumptions used to estimate
fair value of financial instruments required by SFAS 107.
CASH AND CASH EQUIVALENTS
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates their fair value. For purposes of this disclosure
only, cash equivalents include cash and due from banks, Federal Funds sold
and repurchase agreements.
AVAILABLE FOR SALE AND HELD TO MATURITY SECURITIES
The estimated fair values of securities by type are provided in Note 4
to the consolidated financial statements. These are based on quoted market
prices, when available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities or
carrying values.
LOANS RECEIVABLE
For loans that reprice frequently, the carrying value approximates fair
value. The fair values of all other loans receivable were estimated by
discounting the expected future cash flows using current interest rates at
which similar loans would be made to borrowers with similar credit ratings
and maturities. The carrying value and the fair value of loans receivable is
net of the allowance for loan losses.
ACCRUED INTEREST RECEIVABLE
The carrying amounts of accrued interest approximate their fair value.
33
DEPOSIT LIABILITIES
The carrying value of deposits with no stated maturity approximates
their fair value as they are payable on demand. The estimated fair value of
fixed time deposits is based on discounted cash flow analyses. The discount
rates used in these analyses are based on market rates of alternative
funding sources currently available for similar remaining maturities.
SHORT-TERM BORROWINGS
The carrying value of short-term borrowings payable within 3 months or
less approximates their fair value. The estimated fair value of borrowed
funds with a maturity greater than 3 months is based on quoted market
prices, when available. Debt for which quoted prices were not available was
valued using cash flows discounted at a current market rate for similar
types of debt. For purposes of this disclosure, short-term borrowings are
those borrowings with stated final maturities of less than or equal to one
year, including securities sold under agreements to repurchase, US Treasury
Tax and loan notes, lines of credit, commercial paper and other similar
borrowings.
LONG-TERM BORROWINGS
The carrying value of long-term borrowings payable within 3 months or
less approximates their fair value. The estimated fair value of borrowed
funds with a maturity greater than 3 months is based on quoted market
prices, when available. Debt for which quoted prices were not available was
valued using cash flows discounted at a current market rate for similar
types of debt. For purposes of this disclosure, long-term borrowings are
those borrowings with stated final maturity of more than one year, including
Federal Home Loan Bank advances with stated final maturity of more than one
year.
ACCRUED INTEREST PAYABLE
The carrying amounts of accrued interest approximate their fair values.
OFF-BALANCE SHEET INSTRUMENTS
The fair value of interest rate swaps is based upon quoted market
prices, when available. If a quoted market price is not available, fair
value is estimated based on the net of the discounted cash flows of the
fixed leg and the floating leg of the swap using as a discount rate
currently existing rates available for swaps of comparable remaining term,
notional value, index and counterparty credit risk.
The fair value of commercial letters of credit and unused and open-ended
lines of credit have been estimated based on the equivalent fees charged,
net of expenses, that are or would be charged for comparable transactions
and estimated probable credit losses. The carrying value of standby letters
of credit represents the unearned fees charged for those commitments and the
accrual for probable credit losses.
34
NOTE 21 -- PARENT COMPANY FINANCIAL STATEMENTS
HILLSIDE INVESTORS, LTD.
The condensed financial statements of the parent company only, Hillside,
are presented as follows:
CONDENSED BALANCE SHEETS
DECEMBER 31,
---------------------------
2003 2002
------------- -------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks..................................$ 1 $ 2
Investments in subsidiaries.............................. 56,488 155,058
------------- -------------
Total Assets........................................$ 56,489 $ 155,060
============= =============
LIABILITIES
Total Liabilities...................................$ - $ -
STOCKHOLDER'S EQUITY
Common stock, no par value; Authorized 200,000
shares; 103,100 shares issued and outstanding.......... - -
Capital surplus.......................................... 103,139 103,139
Retained earnings (deficit).............................. (46,099) 50,997
Accumulated other comprehensive income (loss), net....... (551) 924
------------- -------------
Total Stockholder's Equity.......................... 56,489 155,060
------------- -------------
Total Liabilities and Stockholder's Equity..........$ 56,489 $ 155,060
============= =============
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
-------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
INTEREST AND DIVIDEND INCOME
Dividends from subsidiaries............ $ - $ 1,100 $ 807
-------------- --------------- ---------------
Total interest and dividend income... - 1,100 807
-------------- --------------- ---------------
Total interest expense............ - - -
-------------- --------------- ---------------
Net interest income (expense) - 1,100 807
Provision for credit losses............ - - -
-------------- --------------- ---------------
Net interest income (loss) after
provision for credit losses...... - 1,100 807
-------------- --------------- ---------------
NONINTEREST INCOME
Equity in undistributed earnings
of subsidiaries................... (97,096) 7,827 17,240
-------------- --------------- ---------------
Total noninterest income (loss). (97,096) 7,827 17,240
-------------- --------------- ---------------
NONINTEREST EXPENSE
Total noninterest expense......... - - -
-------------- --------------- ---------------
Income (loss) before income taxes....... (97,096) 8,927 18,047
-------------- --------------- ---------------
Income tax expense (benefit)............ - - -
-------------- --------------- ---------------
NET INCOME (LOSS)................. $ (97,096) $ 8,927 $ 18,047
============== =============== ===============
35
CONDENSED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
---------- ---------- ---------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................. $ (97,096) $ 8,927 $ 18,047
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Equity in undistributed loss (earnings) of subsidiaries..... 97,096 (7,827) (17,240)
Decrease (increase) in interest receivable and other assets. (1) (1,100) (807)
Increase (decrease) in interest payable and other liabilities -- -- 1
---------- ---------- ---------
Net cash provided by (used in) operating activities.... (1) -- 1
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital injection from parent company.................... -- 9,700 7,500
Net increase in investment in subsidiaries............... -- (9,700) (7,500)
Dividends received from subsidiaries .................... -- 1,100 807
Dividends paid to parent company......................... -- (1,100) (807)
---------- ---------- ---------
Net cash used in investing activities.................. -- -- --
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash provided by (used in) financing activities.... -- -- --
---------- ---------- ---------
Net (decrease) increase in cash and cash equivalents.......... (1) -- 1
Cash and cash equivalents, beginning of year.................. 2 2 1
---------- ---------- ---------
Cash and cash equivalents, end of year........................ $ 1 $ 2 $ 2
========== ========== =========
NOTE 22 - RELATED PARTY TRANSACTIONS
Hillside has a loan to a non-bank affiliate. The balance of this loan
was $6.7 million and $14.0 million at December 31, 2003 and 2002,
respectively, and is included in net loans. The loan was paid in full in
July 2004.
Hillside engages in federal funds transactions with other banking
affiliates. At December 31, 2003 and 2002, Hillside had $0.4 million and
$0.2 million, respectively, in federal funds sold to affiliates and $2.5
million and $4.6 million, respectively, of federal funds purchased from
affiliates. Net interest income on these transactions during 2003 and 2002
was $0.2 million each year, and is included in net interest income.
Included in noninterest income is $0.2 million for each of the years
2003 and 2002, and $0.1 million in 2001 for processing fees Hillside charged
to affiliates. Included in noninterest expense are amounts paid to
affiliates, net of rent received, for data processing and professional fees
of $6.2 million, $5.6 million and $4.7 million, respectively, for 2003, 2002
and 2001.
During the normal course of business, Hillside participates in loans
with banking affiliates. At December 31, 2003 and December 31, 2002,
Hillside had $65.1 million and $74.7 million, respectively, included in
loans and loan participations purchased from affiliates; and $72.5 million
and $117.4 million, respectively, in participations sold to affiliates.
At December 31, 2003, CIB Marine had a $28.0 million revolving line of
credit with a non-affiliated commercial bank. This line of credit was
secured by the common stock of certain of its subsidiaries, including
Hillside and CIB Bank. In the fourth quarter of 2004, CIB Marine paid off
this loan from the proceeds of the sale of Hillside and the stock of
Hillside and CIB Bank were released and delivered to the buyer.
NOTE 23 - SUBSEQUENT EVENTS (UNAUDITED)
SALE OF HILLSIDE, CANRON AND MICR
On November 30, 2004, CIB Marine sold all of the common stock of
Hillside and its wholly-owned subsidiary CIB Bank to First Banks, Inc.
("First Banks") of St. Louis, Missouri for $67.4 million in cash, of which
$5.4 million was used by CIB Marine to repay a short-term loan from First
Banks. The purpose of the loan was to fund the purchase of certain assets,
including Canron, MICR and the loans and related claims against the
borrowers in a Chicago condominium development loan, by CIB Marine in
November 2004 from
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CIB Bank pursuant to the terms of the stock purchase agreement. Canron and
MICR were sold to CIB Marine at their net book values of $1.2 million and
$4.2 million, respectively, which approximated fair market value.
On November 30, 2004, Hillside was merged with and into a wholly-owned
subsidiary of First Banks and on December 1, 2004, CIB Bank was merged into
First Bank, a wholly-owned subsidiary of First Banks.
LOANS
Subsequent to September 30, 2004, balances of loans charged off in
excess of previous specific allocations of the allowance for loan losses to
those loans totaled $7.7 million on three loans. In addition, one loan with
a balance of $19.5 million was placed on nonaccrual subsequent to September
30, 2004.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In December 2004, all outstanding interest rate swaps were terminated.
The net amount received as a result of terminating the interest rate swaps
was $0.5 million. The termination resulted in no gain or loss as a result of
purchase accounting adjustments recorded in conjunction with the sale of
Hillside on November 30, 2004.
LONG-TERM BORROWINGS
In December 2004, the $25.0 million advance with the FHLB was re-paid.
The cost associated with prepaying this advance was $3.0 million. The
repayment resulted in no gain or loss as a result of purchase accounting
adjustments recorded in conjunction with the sale of Hillside on November
30, 2004.
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