MINUTES

STATE BANKING BOARD OF ILLINOIS

Meeting of Tuesday, September 30, 1997

Chicago, Illinois

The meeting of the State Banking Board of Illinois was called to order at 10:30 a.m. by Chairman Jack Schaffer. Roll call was taken.

Members Present

Jack Schaffer, Chairman
Office of Banks and Real Estate

Class A Members

R. Cary Capparelli
Donald Gutowski
Sondra A. Healy
Jack Lageschulte

Class B Members

Joy French Becker, Chairman
The Farmers State Bank and Trust Company, Jacksonville

A. Dean Decker, President and CEO
Central Trust and Savings Bank, Geneseo

Susan J. Dubs, President
Richmond Bank, Richmond

John G. Eck, Senior Vice President
ABN AMRO Bank, N.V., Chicago

Gary N. Edwards, President and CEO
Golden State Bank, Golden

Mark G. Field, President and Chairman
The Farmers Bank of Liberty, Liberty

Dennis B. Long, Chairman and CEO
Bank of Rantoul, Rantoul

Paul V. Reagan, Senior Vice President and U.S. General Counsel
Harris Bank, Chicago

Members Absent

Judith F. Quesenberry, CEO and Vice President
The First State Bank, Grand Chain

Chuck E. Waterman, Chairman and Chief Executive Officer
South Holland Trust & Savings Bank, South Holland

Staff Present

Patrick F. Andre, Assistant Director, Fiduciary Activities
Arthur J. Appl, Jr., Director, Division of International Bank Supervision
Wendy Bosak, Administrative Assistant
Patrick Brady, Deputy Commissioner
Robert Burke, Director, Division of Commercial Bank Supervision-Chicago
Jerry D. Cavanaugh, Assistant General Counsel
Scott D. Clarke, Assistant Commissioner
David Conner, Director, Fiscal Division
Russell E. Curry, Director, Division of Commercial Bank Supervision-Springfield
Dina Mansour, Senior Corporate Attorney
Dale Turner, General Counsel
John M. Turner, Assistant Director, Information Systems Section

I. OLD BUSINESS

There was no old business to discuss.

II. NEW BUSINESS

Chairman Schaffer asked for reports from the various staff members representing each of our divisions.

Mr. Robert Burke reported that there are currently 163 banks with assets of approximately 70 billion dollars located in Cook County and the continuous counties. The overall rating of the banks is very good with 97% of the banks having a satisfactory rating of a 1 or 2, only 3 % of the banks are rated 3 which is considered fair. Currently there are no 4 or 5 rated banks. The Office of Banks and Real Estate ( "OBRE") has not had a bank rated 4 or 5 since December 1995.

The Commercial Bank Supervision Division is in the process of revising examination schedules to implement statutory changes permitting an 18 month examination cycle. A bank surveillance program is being developed to monitor the condition of banks between examinations using federal examination data base, call reports and uniform bank performance reports to monitor growth and any adverse trends and conditions of banks. Quarterly reports will be written on all banks and reports will be evaluated to determine the level of supervision needed for each bank. The reports will also be used to evaluate banks seeking approval for corporate activities, which should reduce processing time on application transactions. The division started extensive off-site work in 1996. Currently approximately 35% of the examination work is performed off-site. The bureau is using the Bloomberg system to analyze securities portfolios. Very recently OBRE has requested securities portfolios from banks on computer disks to the bureau. Developed a procedure to import data into an Excel spreadsheet and then import into Bloomberg. We have reviewed the letter requesting examination information from 8 to 4 pages and numbers of requested information has been reduced from 65 to 40. Examination reports are being returned within an average of 27 days and we are continually working to reduce that number. Examiners are training in areas of specialization, certification as a chartered financial analyst, certified fraud examiners and certified bank auditors.

Mr. Russell Curry reported the division is working with Central Management Services to establish remote field offices. The division hopes to have field offices established in the next few months. Reduce examination work by 30-40% to the off-site field offices. There are 398 banks in the Springfield area. Twenty-five charters were lost since the beginning of the year (about 6% banks, about 12% assets) because of mergers or conversions. They are in the process of reducing the number of districts from 6 to 5. Ratings - 98% of banks are in the 1 and 2 category, there are six 3 rated banks and one 4 rated bank. We are hopeful that some national banks will convert into the state banking system. A minimum of 45 days notice is provided to bankers prior to examination. Examiners are enrolled in the Chartered Financial Analyst courses, Certified Fraud Examiner courses and Certified Bank Examiner courses. One bank is operating under a cease and desist order and 12 banks have adopted the board resolutions at OBRE direction to address minor problems seen during examination.

Mr. Art Appl provided an overview of entry for foreign banks wanting to operate in Illinois.

A state chartered bank - The only way for a foreign bank to do a retail deposit business in the U.S. Branch (Banking Office) - Direct branches of a bank domiciled outside the U.S. with full banking powers, although the FDIC will not insure the deposits and since Illinois' Interstate Law does not allow DeNovo branching into the state by domestic banks. Reigle Neal eliminates De Novo foreign branch entry unless their deposit taking ability is limited even further. The existing branches are grandfathered. The number of branches have decreased to a current number of 36. Total assets are at there highest levels, $75 billion for the 36 branches. The examination process is coordinated with other states and the federal regulators. The rating system is termed ROC-A and is a 1-5 scale, same as the domestic CAMELS rating. The banks are in good condition, one-1, thirty-three-2's and two-3's. No problem institutions.

Representative Office - Offices allowed to conduct loan production and other representational functions. There are 44 representative offices, 16 of which are banks headquartered outside the U.S. The Office of Banks and Real Estate has new examination powers and will start examinations for these offices in 1998. An interesting transaction arising out of the Reigle Neal and Interstate Banking will result in the Chicago banking office of Bank Leumi being acquired and operated in Chicago by its New York State Chartered Bank Subsidiary, Bank Leumi Trust Co., N.Y. Taking out of our responsibilities for supervisory oversight and into the State Banking Department of New York.

Mr. Patrick Andre reported in order to exercise fiduciary powers in Illinois it is necessary to obtain a certificate of authority. The different forms of corporate fiduciaries are 1) Trust Company, which after the first of January could be formed as a corporation, a limited liability company, partnership, limited partnership and/or any entity could be formed as a trust company. We have trust departments of state chartered banks, trust departments of state chartered savings banks and savings and loans, and the foreign bank branches are authorized to conduct fiduciary activities. However, to date, no foreign bank branches have taken advantage of the opportunity to have trust powers.

OBRE would also regulate any person that is holding themselves out to the public as a professional fiduciary. This was added to the law about two years ago to close the loophole for someone that was freelancing and actually holding themselves out as a professional fiduciary like a corporate fiduciary would do without regulation.

OBRE currently examines every corporate fiduciary in the state on a 12 to 18 month cycle. In 1995 we had 27 trust companies, 263 departments of banks and $937 billion in assets under administration. Currently we have 32 trust companies, 225 state bank departments and assets of

$1.18 trillion (about 20% increase). OBRE is the primary regulator for the corporate fiduciaries in Illinois, we share regulation with the Fed and the FDIC.

Currently there are twelve examiners on staff. Corporate fiduciaries are rated on the Uniform Trust Rating System, uniform throughout the country and federal regulators. There are 6 components. Effort to change the rating system the first of next year, which will be called MOCA - Management Operations Compliance and Audits. The states have not been involved in this process. Basically a 3 rated institution is okay. Some of the definitions for ratings will be changed. Most 3 rated institutions will become 2's. Currently there are 8-1's, 131-2's, 113-3's, no 4's, no 5's and 9 new institutions which have not been rated. In an effort to catch up with MOCA, new work programs have been developed that are now being tested. Results have been shared with the Federal Reserve.

Mr. John Turner reported the Information Systems Section has twelve examiners specializing in information systems examinations, 2 field supervisors (one Chicago, one downstate), 5 field examiners in Chicago, 5 field examiners downstate. Three information systems examiners took the CISA examination (Certified Information Systems Auditor) and passed. Currently 450 entities that information systems exam, which include banks, foreign branches, trust companies and 23 service providers. Rating is a 1-5 scale following the FFIEC Information Systems Handbook Guidelines. A 3 rating in information systems is not the same as a 3 rating in commercial. A 3 means less than satisfactory. Four percent of entities examined received a 1 rating, 83 % are 2 rated, 12% are rated 3, no 4 or 5 rated entities at this time. A challenge we face is the rapid deployment of technology. Our goal is to cover all institutions whether in-house system or serviced. Another undertaking is a review of year 2000, which is discussed at all examinations. The goal is to have every institution examined by June of 1998 using the year 2000 examination procedures.

Ms. Dina Mansour - Ms. Mansour focused on DeNovo banks. Since 1990 to present we have chartered 43 new DeNovo banks in Illinois. The statute was amended to provide for interim bank mergers. Instituted statutory language for reverse stock splits to provide for SubChapter S corporation status. Limited interstate activity. Ms. Mansour opened for discussion the minimum capital requirement for DeNovo banks in Illinois, other states and other regulatory agencies.

Mr. Clarke mentioned that there have been 17 new charters of independent trust companies and several are pending. The minimum capital for trust company is $2 million.

Mr. Jerry Cavanaugh reported on 1997 State Legislation. He distributed Public Acts that have been acted upon. Mr. Cavanaugh highlighted the following public acts:

(House Bill 1707) - Federal Welfare Reform, Financial Institutions, and Child Support Enforcement - Database Matches

(House Bill 586) - Financial Institutions Selling Insurance

(House Bill 1655) - "Safe Harbor" Reliance on Agency Interpretation

(House Bill 690) - Age of Illinois Charters in Interstate Mergers; Illinois Deposit Limits in One Banking Organization

(House Bill 1288) - Agency's Regulatory Relief and Technical Improvements Bill

(House Bill 2215) - Regulation of Pawnbrokers by the Office of Banks and Real Estate

Fee Structure

Mr. Clarke provided an overview of the existing fee structure; asset based fees, examination fees and application & miscellaneous fees. He alerted the board of the possibility that at some point there may need to be an adjustment to fee structure that responds to changing industry.

III. Open Discussion

Mr. Clarke reported that close to $2.3 million will be rebated to the banks this year.

Chairman Schaffer discussed the forthcoming regulation of pawnbrokers and non-bank ATM's.

IV. Adjournment

There being no further business before the board, Mr. Gutowski moved to adjourn the meeting. Mr. Decker seconded. The motion carried unanimously. The meeting adjourned at 12:30 p.m.