<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
-------------------------------------------------
Commission File number 000-24149
-------------------------------------------------
CENTRAL ILLINOIS BANCORP, INC.
(Exact name of registrant as specified in its charter)
ILLINOIS 37-1203599
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
N27 W24025 Paul Court, Pewaukee, Wisconsin 53072
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(414) 695-6010
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
At May 10, 1999 the Company had 107,153 shares of $1.00 par value
common stock outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL ILLINOIS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ -----------
(In thousands, except share data)
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents:
Cash and Due from Banks $ 18,164 $ 14,980
Federal Funds Sold 13,425 7,100
----------- -----------
Total Cash and Cash Equivalents 31,589 22,080
----------- -----------
Loans - Held for Sale 5,318 8,900
Securities:
Available for Sale, at fair value 186,450 114,545
Held to Maturity (approximate fair value of
$94,867 and $103,540, respectively) 93,631 101,739
----------- -----------
Total Securities 280,081 216,284
----------- -----------
Loans 1,005,926 915,711
Less: Allowance for Loan Loss (11,671) (10,657)
----------- -----------
Net Loans 994,255 905,054
----------- -----------
Premises and Equipment, net 20,592 15,524
Accrued Interest Receivable 10,057 8,839
Deferred Income Taxes 5,120 4,253
Goodwill and Core Deposit Intangibles, net 12,550 3,727
Foreclosed Properties -- --
Other Assets 1,784 1,862
----------- -----------
Total Assets $ 1,361,346 $ 1,186,523
=========== ===========
LIABILITIES:
Deposits:
Non-Interest Bearing Demand $ 76,538 $ 80,280
Interest Bearing Demand 38,592 40,036
Savings 152,950 108,305
Time 905,711 782,412
----------- -----------
Total Deposits 1,173,791 1,011,033
----------- -----------
Short-term Borrowings 10,835 3,255
Accrued Interest Payable 5,041 4,880
Accrued Income Taxes 2,838 921
Other Liabilities 2,069 2,338
Long-term Borrowings 20,000 20,000
----------- -----------
Total Liabilities 1,214,574 1,042,427
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock, $1.00 par value; 50,000,000 Shares
Authorized; 107,153 and 107,153 Shares
Issued and Outstanding, respectively 107 107
Capital Surplus 120,427 120,381
Retained Earnings 25,955 22,833
Accumulated Other Comprehensive Income 283 775
----------- -----------
Total Stockholders' Equity 146,772 144,096
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,361,346 $ 1,186,523
=========== ===========
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements
<PAGE> 3
CENTRAL ILLINOIS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
---------------------------
1999 1998
-------- ---------
(In thousands, except share data)
<S> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans $ 20,676 $ 14,308
Loans Held For Sale 90 85
Securities:
Taxable 2,785 2,260
Tax-exempt 382 281
Dividends 51 60
Federal Funds Sold 49 303
-------- --------
Total Interest and Dividend Income 24,033 17,297
-------- --------
INTEREST EXPENSE:
Deposits 11,991 9,029
Short-term Borrowings 135 74
Long-term Borrowings 261 217
-------- --------
Total Interest Expense 12,387 9,320
-------- --------
Net Interest Income 11,646 7,977
Provision for Loan Loss 1,486 908
-------- --------
Net Interest Income After Provision for Loan Loss 10,160 7,069
-------- --------
NONINTEREST INCOME:
Loan Fees 590 788
Deposit Service Charges 307 313
Other Service Fees 191 238
Trust 133 64
Gain on Sale of Branch 805 0
Gain on Sale of Other Assets 4 14
Securities Gains, net 0 0
-------- --------
Total Noninterest Income 2,030 1,417
-------- --------
NONINTEREST EXPENSE:
Salaries and Employees Benefits 4,685 4,521
Equipment 511 262
Occupancy and Premises 632 476
Professional Services 224 102
Advertising/Marketing 152 140
Amortization of Intangibles 101 81
Other 1,027 1,104
-------- --------
Total Noninterest Expense 7,332 6,686
-------- --------
Income Before Income Taxes 4,858 1,800
Income Tax Expense 1,736 520
-------- --------
NET INCOME $ 3,122 $ 1,280
======== ========
EARNINGS PER SHARE:
Basic $ 29.14 $ 14.11
Diluted 28.82 14.05
Weighted Average Shares - Basic 107,153 90,745
Weighted Average Shares - Diluted 108,327 91,123
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements
<PAGE> 4
CENTRAL ILLINOIS BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
----------------- OTHER
PAR CAPITAL RETAINED COMPREHENSIVE
SHARES VALUE SURPLUS EARNINGS INCOME TOTAL
------ ----- ------- -------- ------------- --------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 90,735 91 86,241 14,179 221 100,732
Comprehensive Income:
Net Income 1,280 1,280
Other Comprehensive Income:
Unrealized Securities Holding Gains
Arising During the Period 130 130
Income Tax Effect (50) (50)
--------- ------- --------
1,280 80 1,360
--------- ------- --------
Exercise of Stock Options 33 50 50
Non-Cash Compensation 1316 1,316
------- ------ --------- --------- ------- ---------
BALANCE, MARCH 31, 1998 90,768 $ 91 $ 87,607 $ 15,459 $ 301 $ 103,458
======= ====== ========= ========= ======= =========
BALANCE, DECEMBER 31, 1998 107,153 $ 107 $ 120,381 $ 22,833 $ 775 $ 144,096
Comprehensive Income:
Net Income 3,122 3,122
Other Comprehensive Income:
Unrealized Securities Holding Losses
Arising During the Period (786) (786)
Income Tax Effect 294 294
--------- ------- ---------
3,122 (492) 2,630
--------- ------- ---------
Non-Cash Compensation 46 46
------- ------ --------- --------- ------- ---------
BALANCE, MARCH 31, 1999 107,153 $ 107 $ 120,427 $ 25,955 $ 283 $ 146,772
======= ====== ========= ========= ======= =========
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements
<PAGE> 5
CENTRAL ILLINOIS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
----------------------
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,122 $ 1,280
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation and Amortization 723 409
Non-Cash Compensation 46 1,316
Provision for Loan loss 1,486 908
Originations of Loans Held for Sale (33,572) (46,641)
Proceeds from Sale of Loans Held for Sale 37,154 43,781
Deferred Tax Benefits 1,355 280
Gain on Sale of Branch (805) 0
Gain on Sale of Other Assets (4) (14)
Increase in Interest Receivable and Other Assets (1,327) (386)
Increase (Decrease) in Interest Payable and Other Liabilities (745) 332
--------- ---------
Net Cash Provided by Operating Activities 7,433 1,265
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of Securities Available for Sale 3,061 5,795
Maturities of Securities Held to Maturity 13,378 5,159
Purchase of Securities Available for Sale (75,521) (16,863)
Purchase of Securities Held to Maturity (6,888) (13,324)
Repayments of Mortgage-Backed Securities
Held to Maturity 1,618 1,236
Repayments of Mortgage-Backed Securities Available for Sale 1,176 458
Purchase of Mortgage-Backed Securities Available for Sale (1,508) 0
Purchase of FHLB Stock Available for Sale 0 (992)
Net Increase in Loans (105,081) (45,600)
Proceeds from Sale of Repossessed Property 0 80
Proceeds from Sale of Fixed Assets 7 0
Proceeds from Sale of Branches 3,085 0
Capital Expenditures (504) (479)
Purchase of Branch Assets and Deposits 101,491 0
--------- ---------
Net Cash Used in Investing Activities (65,686) (64,530)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Deposits 59,613 64,915
Proceeds from Long-term Borrowings 0 20,000
Repayments of Long-term Borrowings 0 (2,150)
Proceeds from Capital Transactions 0 50
Net Increase (Decrease) in Short-term Borrowings 8,149 (5,960)
--------- ---------
Net Cash Provided by Financing Activities 67,762 76,855
--------- ---------
Net Increase in Cash and Cash Equivalents 9,509 13,590
Cash and Cash Equivalents, Beginning of Period 22,080 9,774
--------- ---------
Cash and Cash Equivalents, End of Period $ 31,589 $ 23,364
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 12,226 $ 8,904
Income taxes 520 313
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements
<PAGE> 6
CENTRAL ILLINOIS BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except share data)
Note 1--Basis of Presentation
The accompanying unaudited consolidated financial statements should be read in
conjunction with Central Illinois Bancorp, Inc's ("Company") 1998 Annual Report
on Form 10 K/A. In the opinion of management, the unaudited consolidated
financial statements included in this report reflect all adjustments which are
necessary to present fairly the financial condition, results of operations and
cash flows as of and for the three months ended March 31, 1999 and 1998. The
results of operations for the three months ended March 31, 1999 are not
necessarily indicative of results to be expected for the entire year.
The preparation of financial statements in conformity with generally accepted
accounting principles 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 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 the Company's net interest income and
the value of its recorded assets and liabilities.
Reclassifications have been made to certain amounts as of and for the quarter
ended March 31, 1998, to be consistent with classifications for 1999.
Note 2--Earnings Per Share Computations
The following provides a reconciliation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Quarter Ended March 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Net income $ 3,122 $ 1,280
========= =========
Weighted average shares outstanding:
Basic 107,153 90,745
Effect of dilutive stock options outstanding 1,174 378
--------- ---------
Diluted 108,327 91,123
========= =========
Earnings per share -- Basic $ 29.14 $ 14.11
Effect of dilutive stock options outstanding (0.32) (0.06)
--------- ---------
Earning per share -- Diluted $ 28.82 $ 14.05
========= =========
</TABLE>
<PAGE> 7
Note 3--Business Combinations
On February 26, 1999, the Company sold a branch building in Charleston,
Illinois, along with loans and deposits with net book values of $14,393 and
$12,191, respectively. The transaction was accounted for as a sale. The net
proceeds were $3,085 and the gain on the transaction was $805 which is reflected
as a component of "Non-Interest Income" in the Consolidated Statement of Income.
On March 29, 1999, the Company purchased two banking offices in Arlington
Heights and Mount Prospect, Illinois, and assumed deposits of $115,797. The net
purchase price for premises and equipment and deposit premium was $14,490. The
transaction was accounted for as a purchase. The excess of the acquisition cost
over the fair value of net assets acquired and deposit liabilities assumed in
the amount of $8,925 is being amortized for up to 15 years using the
straight-line method.
Note 4--New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). The statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges typically allows a derivative's gains and losses to offset
related results in the hedged item in the income statement and requires that a
company must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting treatment.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. A company
may also implement the statement as of the beginning of any quarter after
issuance. SFAS 133 cannot be applied retroactively. SFAS 133 must be applied to
(a) derivative instruments, and (b) certain derivative instruments embedded in
hybrid contracts that were issued, acquired, or substantially modified after
December 31, 1997 (and, at the entity's election, before January 1, 1998).
In the opinion of management, the Company currently has no derivative
instruments as defined in SFAS 133 and adoption of this statement is not
expected to have a material effect on the Company's financial position or
results of operations.
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Following is a discussion and analysis of the Company's consolidated financial
condition as of March 31, 1999 and its results of operations for the quarter
then-ended. References in the discussion below to the "Company" include the
Company's subsidiaries unless otherwise specified. This discussion and analysis
should be read in conjunction with the consolidated financial statements and
footnotes presented elsewhere in this report as well as the 1998 Annual Report
on Form 10-K/A which was filed by the Company on April 30, 1999.
FORWARD LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of Section 21E under the
Securities Exchange Act of 1934, as amended, such as discussions of the
Company's pricing and fee trends, credit quality and outlook, new business
results, expansion plans, anticipated expenses and planned schedules and
projected costs for Year 2000 work. The Company intends such forward-looking
statements to be subject to the safe harbor created thereby and is including
this statement to avail itself of these safe harbor provisions. Forward-looking
statements, which are based on certain assumptions and describe future plans,
strategies and expectations of the company, are identified by statements
containing words and phrases such as "may," "project," "are confident," "should
be," "will be," "predict," "believe," "plan," "expect," "estimate,"
"anticipate," and similar expressions. These forward-looking statements reflect
the Company's current views with respect to future events and financial
performance, but are subject to many uncertainties and factors relating to the
Company's operations and the business environment which could change at any time
and which could cause actual results to differ materially from those expressed
or implied by such forward-looking statements. There are inherent difficulties
in predicting factors that may affect the accuracy of such statements. Potential
risks and uncertainties that may affect the Company's operations, performance,
development, and business results include the following:
- the risk of adverse changes in business conditions in the banking
industry generally and in the specific Midwestern markets in which the
Company's subsidiary banks operate;
- changes in the legislative and regulatory environment resulting in
increased competition or operating expenses;
- changes in interest rates and changes in monetary and fiscal policies;
- increased competition from other financial and non-financial
institutions;
- inability of the Company to generate or obtain the funds necessary to
achieve its future growth objectives;
- inability to manage the Company's future growth;
- inability to attract and retain key personnel;
<PAGE> 9
- changes in the financial condition or operating results of one or more
borrowers or related groups of borrowers or borrowers within a related
industry or group, to which one or more of the Company's subsidiary
banks have extended credit, resulting in a concentration of credit
risk with respect to such borrowers;
- factors that may affect the Company's ability, or the ability of its
customers or suppliers, to achieve Year 2000 readiness in a timely
manner; including the Company's ability to continue to fund its Year
2000 renovation and to retain capable staff through the completion of
its Year 2000 renovation, and the ability of its vendors, clients,
counter-parties and customers to complete Year 2000 renovation efforts
on a timely basis and in a manner that allows them to continue normal
business operations or furnish products, services or data to the
Company without disruption, as well as the Company's ability to
accurately evaluate their readiness in this regard and, where
necessary, develop and implement effective contingency plans;
- the competitive impact of technological advances in the conduct of the
banking business; and
- other risks set forth from time to time in the Company's filings with
the Securities and Exchange Commission.
These risks and uncertainties should be considered in evaluating forward-looking
statements, and undue reliance should not be placed on such statements. The
Company does not assume any obligation to update or revise any forward-looking
statements subsequent to the date on which they are made.
OVERVIEW
The Company had net income for the first quarter of 1999 of $3.1 million as
compared to $1.3 million for the first quarter of 1998, which represented a
143.9% increase. Net income for the quarter ended March 31, 1999 included a $0.8
million pre-tax, or $0.5 million after-tax, gain on the sale of a branch
facility. Net income for the quarter ended March 31, 1998 included $1.3 million
pre-tax, or $0.8 million after-tax, non-cash compensation expense related to the
extension of the expiration date of all previously issued and outstanding stock
options granted under the Company's stock option plans as of February 25, 1998.
The remainder of the increase in net income, of $0.5 million, is primarily due
to the growth of the Company.
Basic and diluted earnings per share were $29.14 and $28.82, respectively for
the three months ended March 31, 1999 as compared to $14.11 and $14.05,
respectively, for the three months ended March 31, 1998. The return on average
assets for the quarter ended March 31, 1999 was 1.04% as compared to 0.61% for
the quarter ended March 31, 1998. The return on average equity for the quarter
ended March 31, 1999 was 8.71% as compared to 5.10% for the quarter ended March
31, 1998. Total assets at March 31, 1999 were $1.4 billion which represented a
14.7% increase from total assets of $1.2 billion at December 31, 1998.
The Company achieved its growth by focusing on the development of banking
relationships with small to medium-sized businesses and through the opening of
new banks and branches, internal growth and acquisitions. During the first
quarter of 1999 the Company purchased two banking facilities, one in Arlington
Heights and one in Mount Prospect, both of which are in the Chicago metropolitan
market. The Company assumed $115.8 million in deposits as a result of the
purchase of these two facilities. The Company also sold its branch facility in
Charleston,
<PAGE> 10
Illinois along with $14.4 million in loans and $12.2 million in deposits. In
1998, CIB-Indiana and the trust company began operations, and the Company's bank
subsidiaries opened four de novo branch facilities and acquired one existing
branch facility with $13.2 million in deposits.
The following table presents selected consolidated financial information for the
Company. The selected consolidated financial information should be read in
conjunction with the unaudited consolidated financial statements, including the
related notes.
<PAGE> 11
<TABLE>
<CAPTION>
AS OF OR FOR THE QUARTER ENDED
3/31/99 12/31/98(3) 3/31/98
----------- ------------ -----------
(In thousands, except share amounts)
<S> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income - (TE) $ 24,271 $ -- $ 17,441
Interest expense 12,387 -- 9,320
----------- ----------- -----------
Net interest income - (TE) 11,884 -- 8,121
Tax equivalent adjustment (238) -- (144)
----------- ----------- -----------
Net interest income 11,646 -- 7,977
Provision for loan loss 1,486 -- 908
----------- ----------- -----------
Net interest income after provision
for loan loss 10,160 -- 7,069
Noninterest income 2,030 -- 1,417
Noninterest expense 7,332 -- 6,686
----------- ----------- -----------
Income before income taxes 4,858 -- 1,800
Income tax expense 1,736 -- 520
----------- ----------- -----------
Net Income $ 3,122 $ -- $ 1,280
=========== =========== ===========
PER SHARE DATA
Earnings per share - Basic $ 29.14 -- $ 14.11
Earnings per share - Diluted 28.82 -- 14.05
Cash dividends -- -- --
Book value per share at end of period 1,369.74 1,344.77 1,139.80
SELECTED ACTUAL ENDING BALANCES
Total assets $ 1,361,346 $ 1,186,523 $ 888,480
Earning assets 1,304,750 1,147,995 858,286
Securities available for sale 186,450 114,545 66,043
Securities held to maturity 93,631 101,739 113,508
Loans, including held for sale 1,011,244 924,611 664,710
Allowance for loan loss (11,671) (10,657) (7,622)
Total deposits 1,173,791 1,011,033 747,745
Noninterest-bearing demand deposits 76,538 80,280 51,252
Borrowings 30,835 23,255 30,210
Stockholders' equity 146,772 144,096 103,458
SELECTED AVERAGE BALANCES
Total assets $ 1,219,184 $ -- $ 857,582
Earning assets 1,182,566 -- 823,949
Total securities 223,877 -- 173,201
Loans, including held for sale 954,914 -- 627,543
Allowance for loan loss (11,138) -- (7,162)
Total deposits 1,033,240 -- 728,680
Noninterest-bearing demand deposits 70,860 -- 55,518
Borrowings 31,361 -- 21,407
Stockholders' equity 145,381 -- 101,869
RATIOS
Average loans to average deposits 92.42% -- 86.12%
Return on average assets (1) 1.04% -- 0.61%
Return on average equity (1) 8.71% -- 5.10%
Leverage capital ratio 11.10% 12.57% 11.70%
Efficiency ratio (2) 52.70% -- 70.10%
Net interest margin (1) 4.08% -- 4.00%
Allowance for loan loss to period end loans 1.15% 1.15% 1.15%
Allowance for loan loss to non-performing loans 270.79% 265.89% 561.68%
Non-performing loans to total loans 0.43% 0.43% 0.20%
Net loan charge-offs to average loans (1) 0.20% -- (0.01)%
Total risk-based capital ratio 12.66% 14.61% 14.64%
Average equity to average assets 11.92% -- 11.88%
OTHER DATA
Number of employees (FTE) 435 410 336
Number of banking facilities 31 30 26
Shares outstanding at end of period 107,153 107,153 90,768
Weighted average shares outstanding - Basic 107,153 -- 90,745
Weighted average shares outstanding - Diluted 108,327 -- 91,123
</TABLE>
(1) Annualized
(2) Efficiency ratio calculated as follows: Non-Interest expense divided by the
sum of net interest income (TE) and non-interest income net of gains and
losses on securities.
(3) Only balance sheet information has been provided for comparison purposes.
(TE) - Tax Equivalent Basis, 35% for 1999, 34% for 1998.
(FTE) Full-time equivalent
<PAGE> 12
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the most significant component of the Company's earnings.
Net interest income is the difference between interest earned on the Company's
income-producing assets and interest paid on deposits and borrowed funds. Net
interest margin is this difference expressed as a percentage of average earning
assets. The amount of the Company's net interest income is affected by several
things, including interest rates and the volume and relative mix of earning
assets and liabilities. Although the Company can control certain of these
factors, others, such as the general level of credit demand, fiscal policy and
Federal Reserve Board monetary policy, are beyond management's control.
The following table sets forth information regarding average balances, interest
income and interest expense and average rates earned or paid, as the case may
be, for each of the Company's major asset and liability categories, and for
total liabilities and shareholders' equity. The following table expresses
interest income on a tax equivalent basis in order to compare the effective
yield on earning assets. This means that interest income on tax-exempt loans and
tax-exempt investment securities has been adjusted to reflect the income tax
savings provided by these tax-exempt assets. The tax equivalent adjustment was
based on the Company's effective federal income tax rates of 35% for 1999 and
34% for 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------------------
1999 1998
-------------------------------------- ---------------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
ASSETS BALANCE EARNED/PAID YIELD/COST BALANCE EARNED/PAID YIELD/COST
--------- ------------ ---------- ---------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS (TE)
Securities
Taxable $ 193,574 $ 2,835 5.94% $ 151,122 $ 2,320 6.23%
Tax-exempt 30,303 588 7.87% 22,079 398 7.31%
---------- -------- ---- --------- -------- ----
Total Securities 223,877 3,423 6.20% 173,201 2,718 6.36%
Loans (1)
Commercial and agricultural 888,450 19,383 8.85% 556,824 12,958 9.44%
Real estate 39,017 847 8.80% 44,568 935 8.51%
Installment and other consumer 22,212 479 8.75% 21,393 442 8.38%
---------- -------- ---- --------- -------- ----
Total loans 949,679 20,709 8.84% 622,785 14,335 9.33%
Federal funds sold 3,775 49 5.26% 23,205 303 5.30%
Loans - held for sale 5,235 90 6.97% 4,758 85 7.25%
---------- -------- ---- --------- -------- ----
TOTAL EARNING ASSETS (TE) 1,182,566 $ 24,271 8.32% 823,949 $ 17,441 8.58%
======== ==== ======== ====
NONINTEREST EARNING ASSETS
Cash and due from banks 12,047 12,531
Premises and equipment 15,410 12,621
Allowance for loan loss (11,138) (7,162)
Accrued interest receivable 9,581 7,549
Deferred income taxes 4,878 2,475
Goodwill and core deposit intangibles, net 3,975 3,300
Foreclosed properties 69 260
Other assets 1,796 2,059
---------- ---------
Total Noninterest Earning Assets 36,618 33,633
---------- ---------
TOTAL ASSETS $1,219,184 $ 857,582
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Deposits
Interest-bearing demand deposits $ 37,282 $ 237 2.58% $ 31,240 $ 211 2.74%
Money market 84,790 934 4.47% 46,893 519 4.49%
Other savings deposits 28,390 225 3.21% 23,756 168 2.87%
Time Deposits of $100,000 or more 245,439 3,186 5.26% 132,677 1,906 5.83%
Time Deposits 566,479 7,409 5.30% 438,596 6,225 5.76%
---------- -------- ---- --------- -------- ----
TOTAL INTEREST-BEARING DEPOSITS 962,380 11,991 5.05% 673,162 9,029 5.44%
Short-term borrowings 10,828 135 5.06% 5,580 74 5.38%
Long-term borrowings 20,533 261 5.16% 15,827 217 5.56%
---------- -------- ---- --------- -------- ----
Total borrowed funds 31,361 396 5.12% 21,407 291 5.51%
TOTAL INTEREST BEARING LIABILITIES 993,741 $ 12,387 5.05% 694,569 $ 9,320 5.44%
======== ==== ======== ====
NONINTEREST BEARING LIABILITIES
Noninterest-bearing demand deposits 70,860 55,518
Accrued interest payable 4,701 3,475
Accrued income taxes 1,583 837
Other liabilities 2,918 1,314
STOCKHOLDERS' EQUITY 145,381 101,869
---------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $1,219,184 $ 857,582
========== =========
NET INTEREST INCOME (TE) AND INTEREST
RATE SPREAD (2) $ 11,884 3.27% $ 8,121 3.14%
======== ==== ======== ====
NET INTEREST MARGIN (TE) (3) 4.08% 4.00%
==== ====
</TABLE>
- -------------------------------------------------
(TE) - Tax Equivalent Basis, 35% for 1999, 34% for 1998.
(1) Loan balance totals include non-accruals.
(2) Interest rate spread is the net of the average rate on interest earning
assets and interest bearing liabilities.
(3) Net interest margin is the ratio of net interest income (TE) to average
earning assets.
<PAGE> 13
Net interest income on a tax equivalent basis was $11.9 million for the first
quarter of 1999 representing a 46.3% increase from first quarter of 1998 net
interest income of $8.1 million. The increase in the volume of earning assets,
and the liabilities to fund these assets, from the first quarter of 1998 to the
first quarter of 1999, accounted for most of the increase in net interest
income. A 13 basis point increase in the net interest spread between the periods
accounted for the remainder.
The following table presents an analysis of changes on a tax-equivalent (TE)
basis in net interest income resulting from changes in average volumes of
interest earning assets and interest bearing liabilities and average rates
earned and paid.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, 1999 COMPARED
TO QUARTER ENDED MARCH 31, 1998 (1)
----------------------------------------
VOLUME RATE TOTAL % CHANGE
------- -------- ------- --------
(In thousands)
<S> <C> <C> <C> <C>
INTEREST INCOME (TE)
Loans (including fees) $ 7,164 $ (790) $ 6,374 44.46%
Securities - taxable 626 (111) 515 22.20%
Securities - tax-exempt 157 33 190 47.74%
------- ------- ------- -----
Total Securities 783 (78) 705 25.94%
Federal funds sold (253) (1) (254) (83.83)%
Loans - held for sale 9 (4) 5 5.88%
------- ------- ------- -----
TOTAL INTEREST INCOME (TE) 7,703 (873) 6,830 39.16%
------- ------- ------- -----
INTEREST EXPENSE
Interest-bearing demand deposits 39 (13) 26 12.32%
Money market 417 (2) 415 79.96%
Other savings deposits 35 22 57 33.93%
Time deposits of 100,000 or more 1,480 (200) 1,280 67.16%
Other time deposits 1,703 (519) 1,184 19.02%
Borrowings - short term 66 (5) 61 82.43%
Borrowings - long term 61 (17) 44 20.28%
------- ------- ------- -----
TOTAL INTEREST EXPENSE 3,801 (734) 3,067 32.91%
------- ------- ------- -----
NET INTEREST INCOME (TE) $ 3,902 $ (139) $ 3,763 46.34%
======= ======= ======= =====
</TABLE>
- ----------------------------------------------------------------
(TE) - Tax Equivalent Basis
(1)- Variances which were not specifically attributable to volume or rate have
been allocated proportionally between volume and rate using absolute values
as a basis for the allocation. Nonaccruing loans were included in the
average balances used in determining yields.
<PAGE> 14
INTEREST INCOME. Total interest income for the first quarter of 1999 was $24.0
million, 39.0% higher than interest income of $17.3 million for the first
quarter of 1998. The primary reason for the increase in interest income is the
increase in the volume of all categories of the Company's average earning
assets. Average earning assets increased 43.5% to $1.2 billion during the first
quarter of 1999 from $823.9 million in the first quarter of 1998. The increase
in interest income due to increased volume was partially offset by a 26 basis
point decrease in the average interest rate earned on interest earning assets
from the first quarter of 1998 to the first quarter of 1999. The decrease in the
average interest rate earned is primarily the result of an overall decline in
market interest rates during this period which resulted in a large portion of
the Company's assets being repriced at a lower rate during this period.
Interest earned on loans is the largest component of total interest earned and
represented 86.4% and 83.2% of total interest earned in the first quarters of
1999 and 1998, respectively. Interest earned on securities in the Company's
portfolio accounted for the balance of total interest earned.
INTEREST EXPENSE. Total interest expense increased 32.9% to $12.4 million in the
first quarter of 1999 from $9.3 million in the first quarter of 1998. This
increase was primarily due to an increase in the volume of interest bearing
liabilities. Increased volume accounted for $3.8 million of the increase in
total interest expense from the first quarter of 1998 to the first quarter of
1999. The increase in interest expense due to volume was partially offset by a
39 basis point decrease in the average interest rate paid on interest bearing
liabilities.
Interest expense on time deposits represents the largest component of total
interest expense. The ratio of interest expense on time deposits to total
interest expense has remained relatively constant from the first quarter of 1998
to the first quarter of 1999, at 87.2% and 85.5%, respectively. The significant
level of interest expense on time deposits is due to the fact that the Company
has used these types of deposits to fund a large portion of the growth in its
loan portfolio.
The Company's interest rate spread, which is the difference between the average
interest rate on interest earning assets and the average interest rate on
interest bearing liabilities, was 3.27% and 3.14% for the first quarter of 1999
and 1998, respectively. The net interest margin was 4.08% and 4.00% for the
first quarter of 1999 and 1998, respectively.
PROVISION FOR LOAN LOSS AND ALLOWANCE FOR LOAN LOSS
The provision for loan loss represents charges made to earnings in order to
maintain an adequate allowance for loan loss. The provision for loan loss was
$1.5 million for the first quarter of 1999 as compared to $0.9 million for the
first quarter of 1998. At March 31, 1999 the allowance for loan loss was $11.7
million or 1.15% of total loans outstanding as compared to $10.7 million and
1.15%, respectively, at December 31, 1998. The increase in the provision and the
allowance is primarily due to the increase in the average loans outstanding.
The Company maintains its allowance at a level that the Company considers
sufficient to absorb potential loss in the loan portfolio. The Company increases
the allowance by the amount of the provision for loan loss as well as recoveries
of previously charged-off loans and decreases the allowance by the amount of
loan charge-offs. The provision provides for current loan loss and maintains the
allowance at a level commensurate with management's evaluation of the risks
inherent in the loan portfolio. The Company's loan review department performs a
comprehensive analysis of the allowance on a quarterly basis. The Company
considers various factors when determining the amount of the provision and the
adequacy of the allowance. Some of the factors include:
- past due and nonperforming assets;
- specific internal analysis of loans requiring special attention;
- the current level of regulatory classified and criticized assets and
the risk factors associated with each;
- changes in the type and volume of the loan portfolio;
- net charge-offs; and
- review by the Company's internal loan review personnel.
The Company considers current national and local economic trends, prior loss
history, underlying collateral values, credit concentrations, and industry risks
when evaluating the adequacy of the provision. The Company develops an estimate
of loss on specific loans in conjunction with an overall risk evaluation of the
total loan portfolio.
<PAGE> 15
The following table summarizes changes in the allowance for loan loss for the
quarters ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
----------------------
1999 1998
-------- ----------
(In thousands)
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD $ 10,657 $ 6,692
Loans charged-off
Commercial (83) (1)
Real estate
1-4 family (47) --
Commercial (100) --
Construction -- --
Consumer (27) (5)
Credit card loans (2) (4)
Other (250) --
-------- --------
TOTAL CHARGE-OFFS (509) (10)
-------- --------
RECOVERIES OF LOANS CHARGED-OFF
Commercial 10 30
Real estate
1-4 family -- --
Commercial -- --
Construction 8 --
Consumer 19 2
Credit card loans -- --
Other -- --
-------- --------
TOTAL RECOVERIES 37 32
-------- --------
NET LOANS (CHARGED-OFF)/RECOVERED (472) 22
Current period provision 1,486 908
-------- --------
BALANCE AT END OF PERIOD $ 11,671 $ 7,622
======== ========
RATIO OF NET LOANS CHARGED-OFF TO AVERAGE LOANS (ANNUALIZED) 0.20% -0.01%
======== ========
</TABLE>
<PAGE> 16
Net charge-offs for the first quarter of 1999 were $472,000 as compared to net
recoveries of $22,000 for the first quarter of 1998. Although net charge-offs
have increased, the ratio of net loan charge-offs to average loans was still
only 0.20%, annualized for the first quarter of 1999.
Although the Company monitors and maintains the allowance at a level that it
considers to be adequate to provide for the inherent risk of loss in the loan
portfolio, there can be no assurance that future losses will not exceed
estimated amounts or that additional provisions will not be required in the
future. In addition, the Company's determination as to the adequacy of the
allowance is subject to review by the FDIC and state banking agencies, as part
of their examination process, which could result in an additional provision to
the allowance upon completion of their periodic examinations.
NONPERFORMING ASSETS AND LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
The level of nonperforming assets is an important element in assessing the
Company's asset quality and the associated risk in its loan portfolio.
Nonperforming assets include nonaccrual loans, restructured loans and foreclosed
property. Loans are placed on nonaccrual status when it is determined that it is
probable that principal and interest amounts will not be collected according to
the terms of the loan agreement. A loan is classified as restructured when the
interest rate is reduced or the term is extended beyond the original maturity
date because of the inability of the borrower to service the loan under the
original terms. Foreclosed property represents properties acquired by the
Company through loan defaults by customers.
The following table summarizes the composition of the Company's nonperforming
assets, loans 90 days past due or more and still accruing, and related asset
quality ratios as of the dates indicated.
<TABLE>
<CAPTION>
AS OF OR FOR THE QUARTER ENDED
-------------------------------------------------------
MARCH 31, 1999 DECEMBER 31, 1998 MARCH 31, 1998
--------------- ----------------- --------------
<S> <C> <C> <C>
NONACCRUAL LOANS
Commercial 1,276 718 734
Real estate
1-4 family 110 110 335
Commercial 2,181 2,213 213
Construction 280 281 24
Consumer 102 75 51
Credit card loans -- -- --
Other 361 611 --
--------- ------- -------
Total nonaccrual loans 4,310 4,008 1,357
--------- ------- -------
Foreclosed property -- -- 210
Restructured loans -- -- --
--------- ------- -------
Total nonperforming assets 4,310 4,008 1,567
========= ======= =======
90 DAY OR MORE PAST DUE AND STILL ACCRUING
Commercial 2,474 3,440 842
Real estate
1-4 family 393 250 224
Commercial 767 787 694
Construction 850 992 --
Consumer 54 87 81
Credit card loans 20 25 48
Other 26 3 -
--------- ------- -------
TOTAL 90 DAYS OR MORE PAST DUE AND STILL ACCRUING 4,584 5,584 1,889
========= ======= =======
Allowance for loan loss 11,671 10,657 7,622
Loans at end of period, including held for sale 1,011,244 924,611 664,710
Average loans, at end of period 954,914 746,319 627,543
RATIOS
Ratio of allowance to loans at period end 1.15% 1.15% 1.15%
Ratio of net loans charged-off to average loans (annualized) 0.20% N/A (0.01)%
Ratio of recoveries to loans charged-off 7.27% N/A 320.00%
Nonaccrual loans as a percent of total loans 0.43% 0.43% 0.20%
Nonperforming assets as a percent of total assets (1) 0.32% 0.34% 0.18%
Foreclosed properties as a percent of loans 0.00% 0.00% 0.03%
Allowance as a percent of nonaccrual loans 270.79% 265.89% 561.68%
Allowance as a percent of non performing assets 270.79% 265.89% 486.41%
Nonaccrual loans and 90+ days past due loans as
a percent of total loans 0.88% 1.04% 0.49%
Nonaccrual and 90+ days past due loans as
a percent of total assets 0.65% 0.81% 0.37%
Allowance as a percent of nonperforming
and 90+ days past due loans 131.22% 111.10% 220.54%
</TABLE>
- -------------------------------------------------------------
(1) Non performing assets include non accrual loans, restructured loans and
foreclosed property.
<PAGE> 17
Total nonaccrual loans at March 31, 1999 increased $302,000, or 7.5%, to $4.3
million from $4.0 million at December 31, 1998. The ratio of nonaccrual loans to
total loans was 0.43% at March 31, 1999 and December 31, 1998. The Company did
not have any restructured loans or foreclosed property at March 31, 1999, or
December 31, 1998.
At March 31, 1999, the Company had $4.6 million in loans that were past due 90
days or more and still accruing as compared to $5.6 million at December 31,
1998. The ratio of nonperforming assets and loans past due 90 or more days and
still accruing to total assets was 0.65% at March 31, 1999 as compared to 0.81%
at December 31, 1998.
NONINTEREST INCOME
Noninterest income for the first quarter of 1999 was $2.0 million, an increase
of $0.6 million or 43.3% from the first quarter of 1998. The increase is
primarily a result of the sale of the Company's branch facility in Charleston,
Illinois in February 1999, which resulted in a gain of $0.8 million. Partially
offsetting the gain in 1999, total service fees, which are comprised of loan
fees, deposit service charges and other service fees,decreased 18.8% from $1.3
million for the first quarter of 1998 to $1.1 million for the first quarter of
1999. A decrease in Service fees on loans represented most of the decrease and
was caused by a $6.6 million, or 15.1%, decrease in the volume of mortgage loans
sold in the first quarter of 1999 compared to the first quarter of 1998. Trust
income also increased $69,500 or 109.1% in the first quarter of 1999 and is a
result of growth in trust assets and increased sales initiatives.
NONINTEREST EXPENSE
Total noninterest expense for the first quarter of 1999 was $7.3 million, an
increase of $0.6 million, or 9.7%, from first quarter 1998 total noninterest
expense of $6.7 million. The first quarter of 1998 includes $1.3 million in
non-cash compensation expense as a result of the extension, in February 1998, of
the expiration date of all previously issued and unexpired stock options granted
under its stock option plans. The related amount of non-cash compensation
recorded in the first quarter of 1999 was $46,000. Had this non-cash
compensation expense not been incurred in either year, the increase in the total
noninterest expense would have been $1.9 million or 35.9%. The increase in
noninterest expense, after adjusting for the non-cash compensation expense, is
primarily a result of the growth of the Company including internal growth and
the opening of new branch facilities and banks.
Salaries and employee benefits represent the largest component of noninterest
expense. Total salaries and benefits for the first quarter of 1999 were $4.7
million as compared to $4.5 million for the first quarter of 1998, unadjusted,
and $3.4 million in 1998, adjusting for the non-cash compensation expense
discussed above. Equipment and net occupancy expense increases of 95.2% and
32.9% over 1998 were primarily a result of the opening of new bank and branch
facilities. Professional services expense increased $122,000 or 118.2% mostly
due to the use of additional legal and accounting services for SEC quarterly and
annual filings that have been required only since the second quarter of 1998.
The overhead efficiency ratio was 52.7% for the quarter ended March 31, 1999 and
70.1% for the same quarter in 1998.
INCOME TAXES
The Company records a provision for income taxes currently payable, along with a
provision for income taxes payable in the future. Deferred taxes arise from
temporary timing differences between financial statement and income tax
<PAGE> 18
reporting. The increase in the income tax provision was primarily due to
increases in taxable income in each of the corresponding periods and the
movement of the Company into a higher tax bracket in 1999.
FINANCIAL CONDITION
SECURITIES
The Company seeks to manage its investment portfolio in a manner that promotes
the achievement of liquidity goals, optimizes after-tax net income, provides
collateral to secure borrowings, assists the Company in meeting various
regulatory requirements and that is consistent with its interest rate risk
policies. The Company manages the maturity structure of the portfolio to provide
a stream of cash flows, to complement the interest-rate risk management of the
Company, and to promote the long-term after-tax earnings of the Company.
The carrying value and tax equivalent yield of the Company's securities are set
forth in the following table.
<TABLE>
<CAPTION>
AT MARCH 31, 1999 AT DECEMBER 31, 1998
--------------------------- -----------------------
YIELD TO YIELD TO
AMOUNT MATURITY AMOUNT MATURITY
--------------------------- ------------------------
(In thousands)
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY
U.S. Government & Agencies (including mortgage-backed securities) 65,888 5.75% 74,844 5.97%
States and political subdivisions 27,293 7.46% 26,445 7.37%
Other notes and bonds 450 7.10% 450 7.10%
--------- ---- --------- ----
TOTAL SECURITIES HELD TO MATURITY 93,631 6.26% 101,739 6.34%
--------- ---- --------- ----
SECURITIES AVAILABLE FOR SALE
U.S. Government & Agencies (including mortgage-backed securities) $ 176,945 5.47% $ 104,364 5.56%
States and political subdivisions 3,595 11.34% 3,572 11.17%
Other notes and bonds 2,362 6.02% 2,264 6.07%
Federal Home Loan Bank stock 3,057 6.25% 3,057 6.63%
Other equities 37 - 37 -
--------- ---- --------- ----
SECURITIES AVAILABLE FOR SALE BEFORE MARKET VALUE ADJUSTMENT 185,996 5.62% 113,294 5.84%
--------- ---- --------- ----
TOTAL SECURITIES BEFORE MARKET VALUE ADJUSTMENT $ 279,627 5.83% $ 215,033 6.08%
Available For Sale Market Value Adjustment (FAS 115) 454 - 1,251 -
--------- ---- --------- ----
TOTAL SECURITIES $ 280,081 5.82% $ 216,284 6.04%
========= ==== ========= ====
</TABLE>
<PAGE> 19
Total securities outstanding at March 31, 1999 were $280.1 million, an increase
of 29.5%, as compared to $216.3 million at December 31, 1998. The increase in
the securities portfolio was directly related to the Company's growth during
this period. Because the securities portfolio is one of the Company's primary
sources of liquidity, the Company increased the size of its portfolio to
maintain a relatively constant ratio of securities to assets. The ratio of total
securities to total assets was 20.6% at March 31, 1999 as compared to 18.2% at
December 31, 1998.
The Company has classified certain of its securities as held to maturity and
certain of its securities as available for sale. Securities classified as held
to maturity are those that the Company has both the positive intent and ability
to hold to maturity, and are reported at amortized cost. Securities classified
as available for sale are those the Company has not classified as held to
maturity or as trading securities. The Company does not currently maintain any
securities for trading purposes. The Company may sell securities classified as
available for sale if needed for liquidity, asset/liability management, or other
reasons. Securities available for sale are reported at fair value, with
unrealized gains and losses, net of taxes, included as a separate component of
accumulated other comprehensive income in equity.
As of March 31, 1999, $186.0 million, or 66.6%, of the securities portfolio was
classified as available for sale and $93.6 million, or 33.4%, of the portfolio,
as held to maturity. These ratios were 53.0% and 47.0% at December 31, 1998. The
Company's designation of securities between available for sale and held to
maturity is based on a number of factors including the Company's current and
projected liquidity position and current and projected loan to deposit ratio.
The increase in the percentage of securities classified as available for sale
reflects the Company's decision, based on such factors, to make a larger
percentage of its securities portfolio available to meet the Company's liquidity
needs, if necessary, and to allow the Company the opportunity to react to
changes in market interest rates and changes in the yield relationship between
alternative investments.
LOANS
GENERAL. The Company offers a broad range of loan products, including commercial
loans, commercial real estate loans, commercial and residential real estate
construction loans, one-to-four family residential real estate loans, and
various types of consumer loans. The Company's underwriting standards, as
contained within the Company's loan policy, are based on the general assumption
that the primary source of repayment should be the regular operating cash flows
of the borrower and the secondary source should be the liquidation and
disposition of collateral.
Loans, net of the allowance for loan loss, were $994.3 million at March 31,
1999, an increase of $89.2 million, or 9.9%, from $905.1 million at December 31,
1998 and represented 73.0% of the Company's total assets at March 31, 1999.
Substantially all of the increase was in the areas of commercial real estate
loans, commercial loans and construction loans, which in the aggregate
represented 91.7% of gross loans at March 31, 1999 and 89.3% of gross loans at
December 31, 1998. The increase in loans is consistent with the Company's
strategy to focus on establishing banking relationships with small to
medium-sized businesses and has been achieved by hiring lenders who have
experience and expertise in making loans to these customers in the markets
served by the Company.
The following table sets forth a summary of the Company's loan
portfolio by category for each of the periods indicated. The data for each
category is presented in terms of total dollars outstanding and as a percentage
of the total loans outstanding.
<TABLE>
<CAPTION>
AS OF
-----------------------------------------------------
MARCH 31, 1999 DECEMBER 31, 1998
------------------------ ------------------------
(In thousands)
<S> <C> <C> <C> <C>
Commercial $ 284,771 28.3% $ 273,331 29.8%
Agricultural 7,032 0.7% 8,283 0.9%
Real estate
1-4 family 47,117 4.7% 52,348 5.7%
Commercial 514,479 51.0% 428,252 46.7%
Construction 125,019 12.4% 117,703 12.8%
Consumer 15,763 1.6% 17,652 1.9%
Credit card loans 1,343 0.1% 1,454 0.2%
Other 12,131 1.2% 17,929 2.0%
----------- ------- ----------- -------
GROSS LOANS 1,007,655 100.0% 916,952 100.0%
======= =======
Deferred Loan Fees (1,729) (1,241)
Allowance for loan loss (11,671) (10,657)
----------- -----------
Net loans $ 994,255 $ 905,054
=========== ===========
</TABLE>
<PAGE> 20
CREDIT CONCENTRATION
Credit risk, the risk that one or more of the Company's borrowers will not be
able to repay some or all of their obligations to the Company, is inherent in
the Company's business. Credit concentration risk occurs when a relatively large
percentage of the credit extended by the Company is concentrated in loans to a
small group of borrowers and their related interests or to borrowers within a
related industry or group. Large loan balances outstanding to one borrower,
including affiliated groups of borrowers, create special credit risks that are
not present when the same loan amount is extended to a group of unrelated
borrowers. Collection of the entire loan amount is contingent upon the ability
of one borrower, or affiliated group of borrowers, to repay the credit. If, for
example, an individual borrower defaults in its payment obligations, the
aggregate amount of the loans to that borrower and his or her related businesses
may be in jeopardy. If, instead, the Company had made separate loans having the
same aggregate value to two or more unaffiliated borrowers, the loans to the
unaffiliated borrowers would not be jeopardized by the problems of the
defaulting borrower.
At March 31, 1999, the Company had 23 borrowing relationships in which it had
one or more lending commitments to a single borrower and its related interests,
which in the aggregate, were in excess of $10 million. The total outstanding
lending commitment associated with these 23 borrowing relationships, including
lines of credit which may not have been fully drawn as of March 31, 1999, was
approximately $340.2 million, after giving effect to approximately $126.4
million in overlapping credit exposure among the 23 borrowing relationships. The
aggregate principal amount actually drawn and outstanding at March 31, 1999 with
respect to these borrowing relationships was approximately $188.6 million, after
giving effect to approximately $55.9 million in overlapping credit exposure
among the 23 borrowing relationships, or 18.8% of the Company's gross loans
outstanding as of that date. The Company's largest lending commitment at March
31, 1999 was approximately $46.2 million, of which approximately $11.2 million
was outstanding as of that date.
At March 31, 1999, the Company's loan portfolio also included borrowing
relationships with commercial and residential real estate developers, investors
and contractors with an outstanding balance of approximately $413.0 million, or
41.1%, of gross loans. The abilities of these borrowers to meet their repayment
obligations are likely to be similarly affected by the same economic conditions,
thus increasing the likelihood that more than one borrower will default if such
adverse economic conditions occur.
The loans and lines of credit described in the two preceding paragraphs
are generally collateralized by commercial or multi-family real estate, other
business collateral and/or personal property. Management has no reason to
believe these loans represent any greater risk of loss than the Company's other
loans which are similarly collateralized and underwritten.
DEPOSITS
The Company has experienced significant growth in deposits, which represent the
major source of funding for the Company's earning assets. Total deposits
increased $162.8 million, or 16.1%, to $1.2 billion during the first quarter of
1999. A significant portion of the deposit growth was a result of the
acquisition of the two branch facilities in the Chicago metropolitan market. The
deposits assumed as a result of this purchase accounted for $115.8 million, or
71.1%, of the deposit growth during the first quarter of 1999.
Time deposits represent the largest component of interest bearing deposit
liabilities. The percentage of time deposits to total deposits was 77.2% at
March 31, 1999 and 77.4% at December 31, 1998. These percentages reflect the
Company's significant reliance on time deposits as a source of funding.
Total time deposits of $100,000 and over, as a percentage of total time deposits
was 30.2% at March 31, 1999 and 28.7% at December 31, 1998. Brokered time
deposits were $77.1 million, or 6.6%, of total deposits at March 31, 1999 and
$58.7, or 5.8%, of total deposits at December 31, 1998.
At March 31, 1999 noninterest bearing demand deposits were equal to $76.5
million, interest bearing demand deposits were equal to $38.6 million and
savings deposits were equal to $152.9 million. These numbers were $80.3 million,
$40.0 million and $108.3 million, respectively, at December 31, 1998. The 41.2%
increase in savings from December 31, 1998 to March 31, 1999 was mostly due to
the branch acquisition mentioned above since these branches had higher deposit
concentrations in savings products.
<PAGE> 21
BORROWINGS
The Company also uses, on a limited basis, other types of borrowings to
meet liquidity needs and to fund asset growth. These borrowings include:
- federal funds purchased from correspondent banks;
- securities sold under agreements to repurchase;
- Federal Home Loan Bank advances; and
- loans from other commercial banks.
The Company currently has a $25.0 million revolving line of credit with an
unaffiliated commercial bank. At March 31, 1999, there was a $7.0 million
outstanding balance on this line of credit.
Total borrowings were $30.8 million at March 31, 1999 and $23.3 million at
December 31, 1998, representing 2.3% and 2.0% of total assets. Federal Home Loan
Bank advances accounted for $20.0 million of total borrowings at both March 31,
1999 and December 31, 1998, representing 64.9% and 86.0% of total borrowings,
respectively.
CAPITAL
The Company and its subsidiary banks are subject to various regulatory capital
guidelines. In general these guidelines define the various components of core
capital and assign risk weights to various categories of assets. The risk-based
capital guidelines require financial institutions to maintain minimum levels of
capital as a percentage of risk-weighted assets.
The risk-based capital information of the Company at March 31, 1999 and December
31, 1998 are contained in the following table. The capital levels of the
Company, and the subsidiary banks are, and have been, substantially in excess of
the required regulatory minimum during the periods indicated. The Company
intends to maintain its capital level and the capital levels of its banks at or
above levels sufficient to support future growth and maintain sufficiently high
lending limits to permit the Company's subsidiary banks to meet the credit needs
of medium-sized commercial borrowers.
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
--------------- -------------------
(In thousands)
<S> <C> <C>
RISK WEIGHTED ASSETS (RWA) $ 1,149,711 $ 1,028,322
=========== ===========
AVERAGE ASSETS (1) $ 1,206,635 $ 1,110,753
=========== ===========
CAPITAL COMPONENTS
Stockholders' equity $ 146,772 $ 144,096
Less: Disallowed intangibles (12,550) (3,724)
Add/less: Unrealized loss/(gain) on securities (283) (775)
----------- -----------
TIER 1 CAPITAL 133,939 139,597
Allowable allowance for loan loss 11,671 10,657
----------- -----------
TOTAL RISK BASED CAPITAL $ 145,610 $ 150,254
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------------------------------------------------
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------- ------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------------------- ------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to RWA) 145,610 12.66% 91,560 8.00% 114,450 10.00%
Tier 1 Capital (to RWA) 133,939 11.65% 45,780 4.00% 68,670 6.00%
Tier 1 Leverage (to Avg Assets) 133,939 11.10% 48,265 4.00% 60,332 5.00%
</TABLE>
(1) Average assets as calculated for risk-based capital (deductions include
current period balances for goodwill and other intangibles).
<PAGE> 22
LIQUIDITY
The objective of liquidity risk management is to ensure that the Company has
adequate funds available to fund various commitments, including loan demand,
deposit withdrawals and other obligations and opportunities, in a timely manner.
The Company's Asset/Liability Management Committee actively manages the
Company's liquidity position by estimating, measuring and monitoring its sources
and uses of funds and its liquidity position. The Company's sources of funding
and liquidity include both asset and liability components. The Company's funding
requirements are primarily met by the inflow of funds from deposits and to a
much lesser extent, from other borrowings, including the Company's $25.0 million
line of credit, as discussed under "Borrowings." Additional funding is provided
by the maturation and repayment of loans and securities. Additional sources of
liquidity include cash and cash equivalents, federal funds, loans held for sale
and the sale of securities.
The following discussion should be read in conjunction with the statements of
cash flows for the quarters ended March 31, 1999 and March 31, 1998 contained in
the consolidated financial statements.
Net cash provided by operating activities was $7.4 million and $1.3 million for
the quarters ended March 31, 1999 and 1998, respectively. The increase in net
cash provided by operating activities was primarily due to higher net income and
net proceeds from loans held for sale during the first quarter of 1999.
Net cash used in investing activities was $65.7 million and $64.5 million for
the quarters ended March 31, 1999 and 1998, respectively. The increase in cash
used for investing activities during both quarters was primarily due to the net
increase in loans and securities purchases, net of sales and maturities. In
addition, during the first quarter of 1999, the purchase of branch assets and
deposits provided $101.5 million in cash.
Net cash provided by financing activities was $67.8 million and $76.9 million
for the quarters ended March 31, 1999 and 1998, respectively. Deposits, which
include demand, money market and savings accounts, as well as time deposits,
represented the largest source of net cash provided by financing activities.
Additional sources of cash provided by financing activities include short and
long-term borrowings.
The Company was able to meet its liquidity needs during the first quarter of
1999 and expects that these needs will be met throughout the remainder of 1999.
YEAR 2000
The Company and its subsidiaries are dependent upon information technology in
substantially all aspects of their ongoing operations. Accordingly, successfully
addressing Year 2000 concerns to protect the Company from risks associated with
it is of highest importance to management. Although the nature of the Year 2000
problem is such that there can be no complete assurance that it will be
successfully resolved, a risk mitigation program is well under way.
In order to adequately assess the impact of the Year 2000 problem, a "Year 2000
Committee" was created by the Company. The committee reports to the Boards of
Directors of the Company and the banks on a monthly basis with regard to the
status of Year 2000 testing, progress achieved in connection with Year 2000
assessments and other matters related to risk mitigation and analysis.
The committee completed the inventory and assessment phase of the program in
March 1998. This inventory categorized each "system" based upon its importance
to the Company. "System" includes any hardware, software, or service, either
internal or external, that is required to operate the Company's business. Of the
182 systems identified, 53 were deemed to be "mission critical." Testing and
validation of all internal mission critical systems was completed in January
1999, and all mission critical systems were determined to be Year 2000 ready.
Internal certification and implementation of all systems which are Year 2000
ready was completed by March 31, 1999.
<PAGE> 23
As part of the assessment phase, the Company also attempted to identify and
establish controls for the risks posed by the possible lack of Year 2000
preparedness by its customers. Between May and July 1998, the Company sent
surveys to commercial customers with loans that exceeded a certain threshold.
The Credit Administration Department has analyzed the responses that have been
received from these customers to assess potential risk exposure. Based on the
analysis, a special reserve allocation may be included in the allowance for loan
loss. As of March 31, 1999, no reserve had been allocated as no high risk
assessments have been assigned. In addition, the Company's Loan Policy requires
that Year 2000 contingencies be addressed in any loan commitment and a Year 2000
worksheet and assessment be completed for each new loan or renewed loan. The
Loan Policy also requires that additional covenants and other Year 2000
provisions are also included in all loan documents to address Year 2000
requirements. The Company has also adopted a policy to manage risks posed by its
funds providers and capital market/asset management counter-parties.
The renovation phase of the project involves the correction of any Year 2000
related deficiencies. Since the majority of the systems used by the Company are
provided by vendors, this process has consisted primarily of regular
communication with such vendors to ascertain their readiness. The core banking
system in use by the Company is already Year 2000 ready and was designed that
way by the Company's software provider in the late 1980's. The hardware platform
and associated operating system that the Company's core banking system runs on
is also Year 2000 ready. Although vendor-supplied, a vast majority of the
systems in use by the Company are run internally on Company-owned platforms. All
such internal systems were renovated by December 31, 1998.
Another aspect of the renovation phase was to prepare contingency plans in the
event that systems are not Year 2000 ready. All contingency plans have been
developed and reviewed and are periodically being updated by the Year 2000
Committee. Remediation contingency plans revolve around trigger dates that will
cause the Company to replace systems for which significant progress toward
renovation has not been made. Each contingency plan will be tested for validity
during 1999. The Year 2000 Committee is also compiling a business impact
analysis for each core business process within the Company. This analysis
considers all systems that are required to support each business function,
focusing on the services that will be necessary if there is a business
disruption, such as a power failure, due to Year 2000 problems. Business impact
analysis also encompasses the determination of the "most reasonably likely Year
2000 worst case scenario" and the development of a contingency plan to cope with
such scenario. For example, the Company has an onsite twenty-four hour battery
backup at the data processing facility in case there is a power interruption. If
that fails, the Company has made arrangements for backup data processing
services with a third party vendor.
Business resumption contingency plans are also in place in case systems that
appear to be renovated and validated fail to work. These plans will be modified
based upon the outcome of the business impact analysis. These plans are
important in light of the fact that some outside servicers, such as utility and
telecommunication companies, are difficult to monitor for compliance. The
contingency plans therefore include building in as much redundancy as possible
and being prepared to switch to compliant vendors.
The estimated expense of the Company's Year 2000 project is $160,000, which will
not have a material impact on earnings. These expenses are for system upgrades
and dedicated personnel costs. Approximately one-half of these costs had been
incurred as of March 31, 1999. The use of outside consultants has been limited
to a validation study of the Company's core banking system testing methodology.
This discussion of Year 2000 issues includes numerous forward-looking statements
reflecting management's current assessment and estimates with respect to the
Company's Year 2000 compliance efforts and the impact of Year 2000 issues on the
Company's business and operations. Various factors could cause actual
<PAGE> 24
results to differ materially from those contemplated by such assessment,
estimates, and forward-looking statements, including many factors that are
beyond the control of the Company. These factors include, but are not limited
to, inaccurate representations by vendors and customers, technological changes,
economic conditions, and competitive considerations. See "Forward Looking
Statements" contained elsewhere in this document.
<PAGE> 25
Item 3. Quantitative And Qualitative Disclosures About Market Risk Sensitivity
As described in the Company's Annual Report on Form 10-K/A, filed on April 30,
1999, the Company manages its interest rate risk through measurement techniques
which include simulation of earnings and gap analysis.
The following table illustrates the period and cumulative Interest Sensitivity
Gap for March 31, 1999.
<TABLE>
<CAPTION>
0-3 4-6 7-12 2-5 Over 5
Months Months Months Years Years Total
--------- --------- --------- --------- --------- ---------
MARCH 31, 1999 (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans 614,527 51,700 99,512 226,148 19,357 1,011,244
Securities 10,801 14,248 24,050 188,504 42,478 280,081
Federal funds sold and interest bearing accounts 13,425 -- -- -- -- 13,425
--------- --------- --------- --------- --------- ---------
TOTAL INTEREST EARNING ASSETS 638,753 65,948 123,562 414,652 61,835 1,304,750
--------- --------- --------- --------- --------- ---------
Interest bearing liabilities:
Time deposits 297,491 174,060 303,304 132,456 150 907,461
Savings and interest bearing demand deposits 189,792 -- -- -- -- 189,792
Federal funds purchased 100 -- -- -- -- 100
Securities sold under agreements to repurchase 1,464 288 1,215 522 -- 3,489
Other borrowings 7,246 3,000 -- 2,000 15,000 27,246
--------- --------- --------- --------- --------- ---------
TOTAL INTEREST BEARING LIABILITIES 496,093 177,348 304,519 134,978 15,150 1,128,088
--------- --------- --------- --------- --------- ---------
Interest sensitivity GAP (by period) 142,660 (111,400) (180,957) 279,674 46,685 176,662
Interest sensitivity GAP (cumulative) 142,660 31,260 (149,697) 129,977 176,662 176,662
</TABLE>
<PAGE> 26
The following table illustrates the expected percentage change in net interest
income over a one year period due to an immediate change in short term U.S.
prime rates of interest as of March 31, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
Basis point changes
-----------------------------------------------
+200 -200 +100 -100
---- ----- ---- -----
<S> <C> <C> <C> <C>
MARCH 31, 1999
Net Interest Income change over one year 4.70% -6.42% 2.45% -3.18%
==== ===== ==== =====
DECEMBER 31, 1998
Net Interest Income change over one year 1.48% -4.03% 0.88% -1.95%
==== ===== ==== =====
</TABLE>
<PAGE> 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are parties to legal actions which arise in
the normal course of their business activities. In the opinion of management,
after consultation with legal counsel, the ultimate disposition of these
matters is not expected to have a materially adverse effect on the consolidated
financial condition or results of operations of the Company.
Item 2. Changes In Securities And Use Of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission Of Matters To A Vote Of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
- Exhibit 11 - Statement Re Computation of Earnings Per Share
- Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
None
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on this 17th day of May 1999.
Central Illinois Bancorp, Inc.
(Registrant)
/s/ Steven T. Klitzing
- ----------------------------------
Steven T. Klitzing
Senior Vice President and
Chief Financial Officer
<PAGE> 29
EXHIBIT INDEX
The following exhibits have been filed herewith:
Exhibit
Number Description
------ -----------
11 Computation of Earnings Per Share
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11 - STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(In thousands, except earnings per share amounts)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
--------------------------
1999 1998
--------------------------
<S> <C> <C>
Net income $ 3,122 1,280
========== ==========
Weighted average shares outstanding:
Basic 107,153 90,745
========== ==========
Diluted 108,327 91,123
========== ==========
Earnings per common share - Basic $ 29.14 14.11
Effect of stock options (0.32) (0.06)
---------- ----------
Earnings per common share - Diluted $ 28.82 14.05
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 18,164
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 13,425
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 186,450
<INVESTMENTS-CARRYING> 93,631
<INVESTMENTS-MARKET> 94,867
<LOANS> 1,005,926
<ALLOWANCE> 11,671
<TOTAL-ASSETS> 1,361,346
<DEPOSITS> 1,173,791
<SHORT-TERM> 10,835
<LIABILITIES-OTHER> 9,948
<LONG-TERM> 20,000
0
0
<COMMON> 107
<OTHER-SE> 146,665
<TOTAL-LIABILITIES-AND-EQUITY> 1,361,346
<INTEREST-LOAN> 20,766
<INTEREST-INVEST> 3,267
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 24,033
<INTEREST-DEPOSIT> 11,991
<INTEREST-EXPENSE> 12,387
<INTEREST-INCOME-NET> 11,646
<LOAN-LOSSES> 1,486
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,332
<INCOME-PRETAX> 4,858
<INCOME-PRE-EXTRAORDINARY> 4,858
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,122
<EPS-PRIMARY> 29.14
<EPS-DILUTED> 28.82
<YIELD-ACTUAL> 4.08
<LOANS-NON> 4,310
<LOANS-PAST> 4,584
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,657
<CHARGE-OFFS> 509
<RECOVERIES> 37
<ALLOWANCE-CLOSE> 11,671
<ALLOWANCE-DOMESTIC> 11,671
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
