UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
Commission File Number: 33-90342
BANKILLINOIS FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 37-1338484
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
100 WEST UNIVERSITY, CHAMPAIGN, ILLINOIS 61820
(Address of principal executive offices) (Zip Code)
(217) 351-6500
(Registrant's telephone number, including area code)
Indicate by "X" whether the registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 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
Indicate the number of shares outstanding of the registrant's common stock,
as of July 27, 1998:
BankIllinois Financial Corporation Common Stock 5,394,729
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TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BANKILLINOIS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1997
(Unaudited, in thousands, except per share data)
<TABLE>
June 30, Dec. 31,
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $21,108 $28,958
Federal funds sold 5,000 19,600
Investments in debt and equity securities:
Available-for-sale, at estimated market value 131,386 135,317
Held-to-maturity, estimated market value of $27,991 and
$18,635 at June 30, 1998 and December 31, 1997,
respectively 27,862 18,519
Non-marketable equity securities 1,620 1,550
Mortgage loans held for sale 4,781 1,408
Loans, net of allowance for loan losses of $5,432 and
$5,306 at June 30, 1998 and December 31, 1997
respectively 308,771 309,729
Premises and equipment 9,753 11,253
Accrued interest receivable 4,907 4,833
Other assets 8,762 8,199
Total assets $523,950 $539,366
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, noninterest bearing $62,644 $59,693
Demand, interest bearing 141,235 146,776
Savings 16,997 16,623
Time deposits $100,000 and over 38,578 41,196
Other time 143,063 152,866
Total deposits 402,517 417,154
Federal funds purchased and securities sold under
repurchase agreements 48,104 49,857
Federal Home Loan Bank advances 7,000 8,000
Accrued interest payable 1,432 1,736
Other liabilities 5,871 5,289
Total liabilities 464,924 482,036
Stockholders' equity:
Common stock, $0.01 par value; 6,500,000 shares authorized:
5,466,815 shares issued 55 55
Paid in capital 28,942 28,880
Retained earnings 30,706 29,006
Accumulated other comprehensive income 409 298
60,112 58,239
Less: treasury stock, at cost, 72,086 and 69,053
shares at June 30, 1998 and December 31, 1997,
respectively (1,086) (909)
Total stockholders' equity 59,026 57,330
Total liabilities and stockholders' equity $523,950 $539,366
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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BANKILLINOIS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1998 and 1997
(Unaudited, in thousands, except per share data)
<TABLE>
<S> <C> <C>
Interest income: 1998 1997
Interest and fees on loans $13,966 $12,892
Interest and dividends on investments in
debt and equity securities
Taxable 4,575 4,996
Tax-exempt 203 151
Interest on federal funds sold and interest
-bearing deposits 366 333
Total interest income 19,110 18,372
Interest expense:
Deposits 8,260 8,030
Federal funds purchased and securities sold
under repurchase agreements 1,146 1,104
Federal Home Loan Bank advances 239 296
Total interest expense 9,645 9,430
Net interest income 9,465 8,942
Provision for loan losses 255 150
Net interest income after provision
for loan losses 9,210 8,792
Noninterest income:
Trust fees 1,102 999
Service charges on deposit accounts 303 328
Security transactions, net 35 7
Gain on sales of mortgage loans held-for-sale, net 277 119
Other 671 746
Total noninterest income 2,388 2,199
Noninterest expenses:
Salaries and employee benefits 4,429 3,935
Net occupancy 690 754
Equipment 448 447
Data processing 374 357
Federal deposit insurance premiums 25 24
Other 1,768 1,567
Total noninterest expenses 7,734 7,084
Income before income taxes 3,864 3,907
Income taxes 1,257 1,295
Net income $2,607 $2,612
Other comprehensive income, before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 131 (119)
Less: reclassification adjustment for gains
included in net income (20) 0
Other comprehensive income, net of tax 111 (119)
Comprehensive income $2,718 $2,493
Per share data:
Basic earnings per share $0.48 $0.48
Weighted average shares of common stock outstanding 5,404,143 5,402,934
Diluted earnings per share $0.47 $0.47
Weighted average shares of common stock and dilutive potential
common shares outstanding 5,572,706 5,511,037
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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BANKILLINOIS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended June 30, 1998 and 1997
(Unaudited, in thousands, except per share data)
<TABLE>
<S> <C> <C>
Interest income: 1998 1997
Interest and fees on loans $7,046 $6,542
Interest and dividends on investments in debt and equity securities
Taxable 2,256 2,532
Tax-exempt 118 76
Interest on federal funds sold and interest-bearing deposits 154 116
Total interest income 9,574 9,266
Interest expense:
Deposits 4,103 4,044
Federal funds purchased and securities sold under
repurchase agreements 591 568
Federal Home Loan Bank advances 117 149
Total interest expense 4,811 4,761
Net interest income 4,763 4,505
Provision for loan losses 90 75
Net interest income after provision for loan losses 4,673 4,430
Noninterest income:
Trust fees 547 503
Service charges on deposit accounts 148 163
Security transactions, net 8 4
Gain on sales of mortgage loans held-for-sale, net 158 75
Other 339 373
Total noninterest income 1,200 1,118
Noninterest expenses:
Salaries and employee benefits 1,946 1,929
Net occupancy 337 381
Equipment 231 225
Data processing 182 174
Federal deposit insurance premiums 13 13
Other 823 728
Total noninterest expenses 3,532 3,450
Income before income taxes 2,341 2,098
Income taxes 764 698
Net income $1,577 $1,400
Other comprehensive income, before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 103 555
Less: reclassification adjustment for gains
included in net income (5) 0
Other comprehensive income, net of tax 98 555
Comprehensive income $1,675 $1,955
Per share data:
Basic earnings per share $0.29 $0.26
Weighted average shares of common stock outstanding 5,407,106 5,400,151
Diluted earnings per share $0.28 $0.25
Weighted average shares of common stock and dilutive potential
common shares outstanding 5,563,447 5,508,773
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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BANKILLINOIS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ending June 30, 1998 and 1997
(Unaudited, in thousands)
<TABLE>
<S> <C> <C>
1998 1997
Cash flows from operating activities:
Net income $2,607 $2,612
Adjustments to reconcile net income to net cash (used
in) provided by operating activities:
Depreciation and amortization 532 565
Amortization of bond premiums, net 0 6
Provision for loan losses 255 150
Gain on security transactions (35) (7)
Gain on sales of loans, net (277) (119)
Loss on sale of premises and equipment, net 248 135
Increase in accrued interest receivable (74) (209)
Decrease in accrued interest payable (304) (50)
Increase in other assets (545) (1,480)
Increase in other liabilities 505 248
Stock appreciation rights 63 36
Proceeds from sales of loans originated for sale 27,945 10,589
Loans originated for sale (31,041) (11,102)
Net cash (used in) provided by
operating activities (121) 1,374
Cash flows from investing activities:
Net decrease (increase) in loans 677 (10,578)
Proceeds from maturity of investments in debt securities:
Held-to-maturity 2,065 4,946
Available-for-sale 32,350 19,000
Proceeds from sales of investments:
Non-marketable 0 145
Purchases of investments in debt and equity securities:
Held-to-maturity (11,403) (7,025)
Available-for-sale (35,906) (29,457)
Non-marketable (70) 0
Principal paydowns from mortgage-backed and mortgage-related securities:
Held-to-maturity 0 170
Available-for-sale 7,685 667
Purchases of premises and equipment (652) (998)
Proceeds from sale of premises and equipment 1,380 1
Net cash used in investing activities (3,874) (23,129)
Cash flows from financing activities:
Net decrease in demand and savings deposits (2,216) (2,891)
Net decrease in time deposits $100 and over (2,618) (3,797)
Net decrease in other time deposits (9,803) (2,812)
Net decrease in federal funds purchased and
securities sold under repurchase agreements (1,753) (17)
Net decrease in Federal Home Loan Bank advances (1,000) 0
Cash dividends paid (824) 0
Treasury stock transactions, net (237) (254)
Fractional shares purchased following stock dividend (4) (3)
Net cash used in financing activities (18,455) (9,774)
Net decrease in cash and cash equivalents (22,450) (31,529)
Cash and cash equivalents at beginning of year 48,558 59,195
Cash and cash equivalents at end of year $26,108 $27,666
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $9,950 $9,480
Income taxes 984 774
Disposal of equipment subject to valuation allowance 304 0
Change in unrealized gain (loss) on securities available-for-sale 168 (180)
Change in deferred taxes attributable to unrealized gain (loss) on securities
available-for-sale 57 (61)
Real estate acquired through or in lieu of foreclosure 26 1,842
Dividends declared not paid 432 0
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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BANKILLINOIS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and
therefore do not include all information and footnotes necessary for fair
presentation of financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles.
In the opinion of management, the condensed consolidated financial
statements of BankIllinois Financial Corporation (the "Company") and
subsidiaries as of June 30, 1998 and for the three-month and six-month
periods ended June 30, 1998 and 1997 include all adjustments necessary for
fair presentation of the results of those periods. All such adjustments are
of a normal recurring nature.
Results of operations for the three-month and six-month periods ended
June 30, 1998 are not necessarily indicative of the results which may be
expected for the year ended December 31, 1998.
NOTE 2. GAINS ON SECURITIES TRANSACTIONS
Gains on security transactions include proceeds from sales, calls and
maturities of available-for-sale securities as well as calls and maturities
of held-to-maturity securities. Gross gains and losses were as follows:
Six Months Ended Three Months Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
Available-for-sale $30 $- $8 $-
Held-to-maturity 5 7 - 4
$35 $7 $8 $4
NOTE 3. STOCK DIVIDEND
At its regular board meeting on May 19, 1998, the Board of Directors of
the Company declared a one-for-twenty, or five percent, common stock
dividend. The record date of the stock dividend was May 22, 1998, and the
distribution date was June 8, 1998. The accompanying unaudited condensed
consolidated financial statements have been restated to take the stock
dividend into account.
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ITEM 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
ASSETS AND LIABILITIES
Total assets decreased $15,416,000, or 2.9%, from $539,366,000 at
December 31, 1997 to $523,950,000 at June 30, 1998. Decreases primarily in
cash and due from banks, federal funds sold, securities available-for-sale
and premises and equipment, offset somewhat by increases in securities held-
to-maturity and mortgage loans held-for-sale resulted in the decrease in
assets.
The decrease in cash and due from banks of $7,850,000, or 27.1%, at June
30, 1998 compared to December 31, 1997 was attributable to a smaller dollar
amount of deposit items in process of collection at June 30, 1998 compared to
December 31, 1997.
Federal funds sold decreased $14,600,000, or 74.5%, at June 30, 1998
compared to December 31, 1997. This decrease was a result of excess federal
funds sold being used to purchase securities held-to-maturity.
Investments in securities held-to-maturity increased $9,343,000, or
50.5%, at June 30, 1998 compared to December 31, 1997. Investments in
securities available-for-sale decreased $3,931,000, or 2.9%, at June 30, 1998
compared to December 31, 1997. The net increase in investments in debt and
equity securities was a result of management's decision to shift assets into
investment securities that yield a higher rate of return than federal funds
sold. The Company has approximately $65,000,000 of investments maturing
within one year.
Loans remained stable with a slight decrease of $958,000, or 0.3%, from
December 31, 1997 to June 30, 1998. Included in this change was a decrease
of $4,238,000, or 3.5%, in commercial loans, a decrease of $1,351,000, or
2.5% in residential real estate loans, and a decrease of $933,000, or 1.8%,
in consumer loans. Somewhat offsetting these decreases was a $5,690,000, or
6.6% increase in commercial real estate loans.
Premises and equipment decreased $1,500,000, or 13.3%, from December 31,
1997 to June 30, 1998. This decrease was primarily due to the sale of a
vacant building and the adjacent parking lot with a book value of $1,499,000.
Mortgage loans held-for-sale increased $3,373,000 or 239.6%, from
December 31, 1997 to June 30, 1998. The increase was due to strong demand in
the mortgage loan area. A decrease in interest rates in the first six months
of 1998 caused a large increase in refinancing as well as originating new
mortgage loans.
Other assets increased $563,000, or 6.9%, from December 31, 1997 to June
30, 1998. This was primarily due to the purchase of property with a book
value of $613,000. This property was acquired as part of the agreement to
sell the building and parking lot included in premises and equipment. This
property is currently listed for sale.
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Total liabilities decreased $17,112,000, or 3.6%, from $482,036,000 at
December 31, 1997 to $464,924,000 at June 30, 1998. Decreases in deposits,
federal funds purchased and securities sold under repurchase agreements and
Federal Home Loan Bank advances were the primary reasons for the decrease in
liabilities.
Federal funds purchased and securities sold under repurchase agreements
decreased $1,753,000, or 3.5%, from $49,857,000 at December 31, 1997 to
$48,104,000 at June 30, 1998. Included in this change were decreases in
federal funds purchased of $3,725,000 and term repurchase agreements of
$273,000. Somewhat offsetting these decreases was an increase in daily
repurchase agreements of $2,245,000.
Total deposits decreased $14,637,000, or 3.5%, from $417,154,000 at
December 31, 1997 to $402,517,000 at June 30, 1998. The decrease included a
$9,803,000, or 6.4%, decrease in other time deposits, a $5,541,000, or 3.8%
decrease in interest bearing demand deposits and a $2,618,000, or 6.4%,
decrease in time deposits $100,000 and over. These decreases were somewhat
offset by an increase of $2,951,000 or 4.9%, in noninterest bearing demand
deposits, and an increase of $374,000, or 2.3%, in savings deposits. The
decrease in deposits was attributable to seasonal run-off, as experienced in
prior years. Total deposits were $394,630,000 at June 30, 1997 compared to
$402,517,000 at June 30, 1998, a 2.0% increase.
Federal Home Loan Bank advances decreased $1,000,000, or 12.5%, from
$8,000,000 at December 31, 1997 to $7,000,000 at June 30, 1998. The decrease
was the result of a $1,000,000 advance maturing during the first quarter of
1998.
Other liabilities increased $582,000, or 11.0%, from $5,289,000 at
December 31, 1997 to $5,871,000 at June 30, 1998. Included in this increase
was $409,000 attributable to organizational changes implemented to improve
efficiency, including plans to merge BankIllinois Trust Company into
BankIllinois.
CAPITAL
Total stockholders' equity increased $1,696,000 from December 31, 1997
to June 30, 1998. The change is summarized as follows:
(IN THOUSANDS)
Stockholders' equity, December 31, 1997 $57,330
Net income 2,607
Treasury stock transactions, net (237)
Stock appreciation rights 63
Purchase of fractional shares related to stock dividend (4)
Cash dividends declared (844)
Other comprehensive income 111
Stockholders' equity, June 30, 1998 $59,026
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At its regular board meeting on June 16, 1998, the Board of Directors of
the Company declared a cash dividend of $0.08 per share of the Company's
common stock. The dividend of $432,000 was payable on July 16, 1998 to
holders of record on July 6, 1998. A first quarter cash dividend of $412,000
was paid April 17, 1998.
The Company and BankIllinois are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company's and BankIllinois' financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, BankIllinois must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and BankIllinois' capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and BankIllinois to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management believes, as
of June 30, 1998, that the Company and BankIllinois meet all capital adequacy
requirements to which they are subject.
As of June 30, 1998, the most recent notification from its primary
regulatory agency categorized BankIllinois as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, BankIllinois must maintain minimum total capital to risk-
weighted assets, Tier I capital to risk-weighted assets, and Tier I capital
to average assets ratios as set forth in the table. There are no conditions
or events since that notification that management believes have changed
BankIllinois' category.
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The Company's and BankIllinois' actual capital amounts and ratios are
presented in the following table (in thousands):
<TABLE>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes: action provisions:
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998:
Total capital
(to risk-weighted assets)
Consolidated $61,709 18.1% $27,258 8.0% N/A
BankIllinois $55,169 16.4% $27,110 8.0% $33,888 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated $57,433 16.9% $13,629 4.0% N/A
BankIllinois $50,918 15.1% $13,555 4.0% $20,333 6.0%
Tier I capital
(to average assets)
Consolidated $57,433 10.9% $21,025 4.0% N/A
BankIllinois $50,918 9.8% $20,888 4.0% $26,110 5.0%
</TABLE>
INTEREST RATE SENSITIVITY
The concept of interest sensitivity attempts to gauge exposure of
BankIllinois' net interest income to adverse changes in market driven
interest rates by measuring the amount of interest-sensitive assets and
interest-sensitive liabilities maturing or subject to repricing within a
specified time period. Liquidity represents the ability of BankIllinois to
meet the day-to-day demands of deposit customers balanced by its investments
of these deposits. BankIllinois must also be prepared to fulfill the needs
of credit customers for loans with various types of maturities and other
financing arrangements. BankIllinois monitors its interest rate sensitivity
and liquidity through the use of static gap reports which measure the
difference between assets and liabilities maturing or repricing within
specified time periods.
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The following table presents the Company's interest rate sensitivity at
various intervals at June 30, 1998:
<TABLE>
RATE SENSITIVITY OF EARNING ASSETS AND INTEREST BEARING LIABILITIES
(dollars in thousands)
1-30 31-90 91-180 181-365 Over
Days Days Days Days 1-year Total
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $5,000 -- -- -- -- 5,000
Debt and equity securities <F1> 9,570 12,461 14,253 28,815 95,769 160,868
Loans <F2> 78,835 18,456 25,289 36,343 160,061 318,984
Total interest earning assets 93,405 30,917 39,542 65,158 255,830 484,852
Interest bearing liabilities:
Savings and interest-bearing
demand deposits $158,232 -- -- -- -- 158,232
Time deposits 18,958 34,661 24,363 35,572 68,087 181,641
Federal funds purchased and securities
sold under repurchase agreements 42,854 3,000 2,050 -- 200 48,104
Federal Home Loan Bank advances -- -- 2,000 1,000 4,000 7,000
Total interest bearing liabilities $220,044 37,661 28,413 36,572 72,287 394,977
Net asset (liability) funding gap $(126,639) (6,744) 11,129 28,586 183,543 89,875
Repricing gap 0.42 0.82 1.39 1.78 3.54 1.23
Cumulative repricing gap 0.42 0.48 0.57 0.71 1.23 1.23
<FN>
<F1> Debt and equity securities include securities available-for-sale.
<F2> Loans include mortgage loans held-for-sale.
</FN>
</TABLE>
At June 30, 1998, the Company was liability-sensitive due to the levels
of savings and interest bearing demand deposits, short-term time deposits,
federal funds purchased and securities sold under repurchase agreements. As
such, the effect of a decrease in the interest rate for all interest earning
assets and interest bearing liabilities of 100 basis points would increase
annualized net interest income by approximately $1,266,000 in the 1-30 days
category and $1,334,000 in the 1-90 days category assuming no management
intervention. An increase in interest rates would have the opposite effect
for the same time periods.
LIQUIDITY
The Company was able to meet liquidity needs during the first six months
of 1998. A review of the condensed consolidated statements of cash flows
included in the accompanying financial statements shows that the Company's
cash and cash equivalents decreased $22,450,000 from December 31, 1997 to
June 30, 1998. Although all areas had uses of cash, the majority of the cash
used was in the area of financing activities.
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There were differences in sources and uses of cash during the first half
of 1998 compared to the first half of 1997. Included in the change in cash
used by operating activities was an increase in loans originated for sale.
Less cash was used in investing activities during the first half of 1998
compared to the same period in 1997, as 1998 saw a slight decrease in loans
while 1997 experienced rapid loan growth. Paydowns on securities, which are
reflective of the current interest rate environment, were higher during the
first half of 1998 compared to the first half of 1997. Cash used in
financing activities was higher during the first half of 1998 compared to the
same period in 1997 because of lower deposits, lower borrowings, and the
payment of cash dividends.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is based on management's evaluation of the
loan portfolio in light of national and local economic conditions, changes in
the composition and volume of the loan portfolio, changes in the volume of
past due and nonaccrual loans, and other relevant factors. The allowance for
loan losses, which is reported as a deduction from loans, is available for
loan charge-offs. The allowance is increased by the provision charged to
expense and is reduced by loan charge-offs net of loan recoveries. The
balance of the allowance for loan losses was $5,432,000 at June 30, 1998
compared to $5,306,000 at December 31, 1997, as provisions of $255,000
exceeded net charge-offs of $129,000. The allowance for loan losses as a
percentage of total loans rose slightly to 1.70% at June 30, 1998, compared
to 1.68% at December 31, 1997.
The allowance for loan losses as a percentage of nonperforming loans
fell to 128% at June 30, 1998, compared to 180% at December 31, 1997. This
reduction was due to a $502,000 increase in loans 90 days past due and still
accruing and an increase of $777,000 in non-accrual loans. The increase of
$777,000 in non-accrual loans was primarily due to the placing of a
$2,700,000 loan to a printing company on non-accrual. This loan had been
reduced to $1,375,000 by June 30, 1998 through the liquidation of accounts
receivable and inventory and an auction for equipment was held on July 30,
1998. Based on the preliminary outcome of the auction, the specific loan
loss allocation of $500,000 for this credit appears to be adequate. Somewhat
offsetting the $1,375,00 increase in non-accrual loans was a $285,000 loan
returned to accrual status and the resolution of several smaller credits.
The increase in loans 90 days past due and still accruing was due primarily
to two commercial loan relationships which have loans that are past due by
maturity and are in the process of review prior to renewal. One of the
relationships has since been reviewed and renewed, and it is anticipated that
the other relationship will likewise receive an acceptable review in the near
future. Management believes that problem assets have been effectively
identified and that the allowance for loan losses is adequate to absorb
possible losses in the portfolio.
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
Net income for the first six months of 1998 was $2,607,000,
substantially unchanged from the first six months of 1997. Basic earnings
per share were $0.48 for both the first six months of 1998 and the same
period of 1997. Diluted earnings per share were $0.47 for both the first six
months of 1998 and the same period of 1997.
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<PAGE>
Operating earnings for the six months ended June 30, 1998, were
$3,089,000 compared to $2,698,000 for the same period in 1997, a 14.5%
increase. Basic operating earnings per share increased $0.07, or 14.0%, to
$0.57 in the first six months of 1998 from $0.50 in the same period of 1997.
Diluted operating earnings per share increased $0.06, or 12.2%, to $0.55 in
the first six months of 1998 from $0.49 in the same period of 1997. Net
income for the first six months of 1998 and 1997 was $2,607,000 and
$2,612,000, respectively. The difference between operating and net earnings
was due to non-recurring items affecting each of these two periods. The non-
recurring expense items, net of tax, in the first six months of 1998 were
$482,000. Included in these items was $317,000 related to organizational
changes implemented to improve efficiency, including plans to merge
BankIllinois Trust Company into BankIllinois. Also included was $165,000 of
expense related to a loss on disposal of property. The non-recurring item,
net of tax, in the first six months of 1997 was $86,000 which was
attributable to the closing of the Champaign Money Market branch in May 1997.
Net interest income was $523,000, or 5.8% higher for the first six
months of 1998 compared to 1997. Total interest income was $738,000, or 4.0%
higher in 1998 compared to 1997, and interest expense increased $215,000, or
2.3%. The increase in interest income was due primarily to an increase in
average earning assets. The increase in interest expense was primarily due
to an increase in average interest bearing liabilities.
The increase in total interest income included an increase of
$1,074,000, or 8.3%, on loan interest income. This increase was primarily
due to the increase in average loans outstanding. Also contributing to the
increase in total interest income was an increase of $52,000, or 34.4%, on
tax-exempt investments in debt and equity securities. This increase was
primarily due to an increase in tax-exempt investments. There was also an
increase of $33,000, or 9.9%, on federal funds sold. Somewhat offsetting
these increases was a decrease of $421,000, or 8.4%, on taxable investments
in debt and equity securities. This decrease was mainly attributable to a
decrease in taxable investments as well as lower interest rates.
The provision for loan losses recorded was $255,000 during the first six
months of 1998. This was $105,000, or 70.0%, higher than the amount recorded
during the first six months of 1997. The provision during the first six
months of 1998 was based on management's analysis of the loan portfolio.
Total noninterest income increased $189,000, or 8.6%, during the first
six months of 1998 compared to the first six months of 1997. Included in
this increase was an increase of $158,000, or 132.8%, in gains on sales of
mortgage loans held-for-sale. This increase reflected a $17,518,000, or
172.6%, increase in mortgage loans held-for-sale which were closed during the
first six months of 1998 compared to the first six months of 1997. There was
also an increase of $103,000, or 10.3%, in trust fees which was primarily due
to an increase in the market value of the portfolio under management. Also
contributing to the increase in noninterest income was a $28,000, or 400.0%,
increase in gains on debt securities. This increase was a result of the
Company amortizing discounts on securities to their maturity date. Due to
decreasing interest rates, several securities were called during the first
six months of 1998 prior to maturity date which resulted in a gain being
recognized. Somewhat offsetting these increases was a decrease of $75,000,
or 10.1%, in other income in the first six months of 1998 compared to the
same period in 1997. Included in this decrease was a decrease in mortgage
servicing
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<PAGE>
income of $25,000 as a result of a large number of early payoffs and a lower
retention of servicing rights when selling loans during the first half of
1998 compared to 1997. In addition, computer service income decreased
$12,000. The first six months of 1997 included income from outside
processing the Company is no longer performing. Also affecting the decrease
in other income were some non-recurring items in the first six months of 1997
which included a prior period adjustment of $12,000 booked to Visa merchant
fee income and $19,000 booked to income for the sale of the East Central
Illinois Proprietary Network ATM system. Lower service charges and fees in
the first six months of 1998 compared to the first six months of 1997 also
contributed to the decrease in other income.
Total noninterest expenses increased $650,000, or 9.2%, during the first
six months of 1998 compared to the first six months of 1997. Included in the
increase were increases in salaries and employee benefits of $494,000, or
12.6%. Of this increase, $472,000 was due to organizational changes as
discussed previously. Other expenses also increased $201,000, or 12.8%.
Included in this increase was a loss on disposal of property of $248,000 in
1998 compared to $131,000 of expense due to a loss on the closing of the
Champaign Money Market branch in May 1997. Also contributing to the increase
in other expenses was an increase in legal expenses in anticipation of costs
associated with the organizational changes related to the forthcoming merger
of the Company's two subsidiaries, BankIllinois and BankIllinois Trust
Company. In addition, other expenses increased due to start-up and operating
costs associated with opening a new branch in May 1998. Marketing expenses
also increased $33,000 due to costs associated with increasing customer
awareness of the Company and its products, including development of an
internet site. These increases in noninterest expense were somewhat offset
by a decrease in net occupancy expense of $64,000, or 8.5%, which was
primarily due to lower maintenance and repair costs as well as lower real
estate taxes as a result of the sale of a vacant building and the adjacent
parking lot in March 1998.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998
Net income for the second quarter of 1998 was $1,577,000, a $177,000, or
12.6%, increase compared to the same period of 1997. Operating earnings were
the same as net income for both the second quarter of 1998 and 1997 as there
were no nonrecurring expenses during either of these periods. Basic earnings
per share increased $0.03, or 11.5%, to $0.29 in the second quarter of 1998
from $0.26 in the same period of 1997. Diluted earnings per share increased
$0.03, or 12.0%, to $0.28 in the second quarter of 1998 from $0.25 in the
same period of 1997.
Net interest income was $258,000, or 5.7% higher for the second quarter
of 1998 compared to 1997. Total interest income was $308,000, or 3.3% higher
in the second quarter 1998 compared to the second quarter of 1997, and
interest expense increased $50,000, or 1.1% during the same periods. The
increase in interest income was due to an increase in average earning assets,
somewhat offset by lower yields. The increase in interest expense was due to
an increase in average interest bearing liabilities, somewhat offset by lower
interest rates.
The increase in total interest income included an increase of $504,000,
or 7.7%, on loan interest income. This increase was primarily due to the
increase in average loans outstanding
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<PAGE>
during the second quarter of 1998 compared to the second quarter of 1997.
In addition, there was an increase of $42,000, or 55.3%, on tax-exempt
investment income. This increase was due to an increase in tax-exempt
investments. There was also an increase of $38,000, or 32.8% on income from
federal funds sold. Somewhat offsetting these increases was a decrease of
$276,000, or 10.9%, on taxable investments in debt and equity securities.
This decrease was attributable to a decrease in taxable investments as well
as lower interest rates during the second quarter of 1998 compared to the
second quarter of 1997.
The provision for loan losses recorded was $90,000 during the second
quarter of 1998. This was $15,000, or 20.0%, higher than the amount recorded
during the second quarter of 1997. The provision during the second quarter
of 1998 was based on management's analysis of the loan portfolio.
Total noninterest income increased $82,000, or 7.3%, during the second
quarter of 1998 compared to the same period of 1997. Included in this
increase was an increase of $83,000, or 110.7%, in gains on sales of mortgage
loans held-for-sale. This increase reflects an $8,989,000, or 133.4%,
increase in mortgage loans held-for-sale which were closed during the second
quarter of 1998 compared to the second quarter of 1997. There was also an
increase of $44,000, or 8.7%, in trust fees which was due to an increase in
the market value of the portfolio under management. Also contributing to the
increase in noninterest income was a $4,000, or 100.0%, increase in gains on
debt securities. This increase was a result of the Company amortizing
discounts on securities to their maturity date. Due to decreasing interest
rates, several securities were called during the second quarter of 1998 prior
to maturity date which resulted in a gain being recognized. Somewhat
offsetting these increases was a decrease of $34,000, or 9.1%, in other
income. This decrease included a $16,000 decrease in mortgage servicing
income as a result of a large number of early payoffs and a lower retention
of servicing rights when selling loans during the second quarter of 1998
compared to 1997. Also affecting the decrease in other income was a $6,000
decrease in computer service income. The second quarter of 1997 included
income from outside processing the Company is no longer performing. Lower
service charges and fees in the second quarter of 1998 compared to the second
quarter of 1997 also contributed to the decrease in other income.
Total noninterest expenses increased $82,000, or 2.4%, during the second
quarter of 1998 compared to the second quarter of 1997. Included in the
increase were increases in salaries and employee benefits of $17,000, or
0.9%. Other expenses also increased $95,000, or 13.0%. Included in this
increase was $24,000 of legal expenses in anticipation of costs associated
with the BankIllinois and BankIllinois Trust Co. merger. The increase in
other expenses was also due to start-up and operating costs associated with
opening a new branch in May 1998. Also contributing to the increase in other
expenses was an increase in marketing expenses of $12,000 due to costs
associated with increased customer awareness of the Company and its products,
including development of an internet site. These increases in noninterest
expense were somewhat offset by a decrease in net occupancy expense of
$44,000, or 11.5%, which was primarily due to lower maintenance and repair
costs as well as lower real estate taxes and depreciation expense as a result
of the sale of a vacant building and parking lot in March 1998.
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<PAGE>
YEAR 2000
The federal banking regulators have issued several statements providing
guidance to financial institutions on the steps the regulators expect
financial institutions to take to become Year 2000 compliant. Each of the
federal banking regulators is also examining the financial institutions under
its jurisdiction to assess each institution's compliance with the outstanding
guidance. If an institution's progress in addressing the Year 2000 problem
is deemed by its primary federal regulator to be less than satisfactory, the
institution will be required to enter into a memorandum of understanding with
the regulator which will, among other things, require the institution to
promptly develop and submit an acceptable plan for becoming Year 2000
compliant and to provide periodic reports describing the institution's
progress in implementing the plan. Failure to satisfactorily address the
Year 2000 problem may also expose a financial institution to other forms of
enforcement action that its primary federal regulator deems appropriate to
address the deficiencies in the institution's Year 2000 remediation program.
The Company utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and software
include those developed and maintained by the Company's data processing
provider and purchased software which is run on in-house computer networks.
In 1997, the Company initiated a review and assessment of all hardware and
software to confirm that it will function properly in the Year 2000. The
Company's data processing provider and those vendors which have been
contacted have indicated that their hardware and/or software will be Year
2000 compliant by the end of 1998. This will allow time for compliance
testing. Additionally, alarms, elevators, heating and cooling systems, and
other computer-controlled mechanical devices on which the Company relies are
being evaluated. Those found not to be in compliance will be modified or
replaced with a compliant product. While there will be some expenses
incurred during the next two years, the Company has not identified any
situations at this time that will require material cost expenditures to
become fully compliant. An unknown element at this time is the impact of the
Year 2000 on the Company's borrowing customers and their ability to repay.
The Company has initiated a program to communicate with key bank customers to
ensure they are properly prepared for the Year 2000 and will not suffer
serious adverse consequences.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company intends
such forward-looking statements to be covered by the safe harbor provisions
for forward-looking statements contained in the Private Securities Reform Act
of 1995, and is including this statement for purposes 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 generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project" or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material
adverse affect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, changes in: interest rates,
general economic conditions, legislative/regulatory changes, monetary and
fiscal policies
Page 17
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<PAGE>
of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality or composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in the Company's market area and accounting principles,
policies and guidelines. These risks and uncertainties should be considered
in evaluating forward-looking statements and undue reliance should not be
placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.
Page 18
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The are no material pending legal proceedings to which the Company or its
subsidiaries is a party other than ordinary routine litigation incidental to
their respective businesses.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 20, 1998, the Company's annual meeting of stockholders was held. At
the meeting, George T. Shapland, Dean R. Stewart and Roy V. VanBuskirk were
elected to serve as Class III directors with terms expiring in 2001.
Continuing as Class II directors until 2000 are Gregory B. Lykins and August
C. Meyer. Continuing as Class I directors until 1999 are David J. Downey,
Van A. Dukeman, Gene A. Salmon and James A. Sullivan. The stockholders also
voted to ratify the appointment of McGladrey & Pullen, LLP, as independent
auditors for the 1998 fiscal year.
There were 5,152,022 issued and outstanding shares of Common Stock entitled
to vote at the annual meeting. The voting on each item presented at the
annual meeting was as follows:
Election of Directors:
FOR WITHHELD
George T. Shapland 4,931,754 5,393
Dean R. Stewart 4,919,967 17,180
Roy V. VanBuskirk 4,932,079 5,068
Ratification of Independent Auditors:
FOR AGAINST ABSTAIN BROKER NON-VOTES
4,919,837 6,889 10,421 None
ITEM 5. OTHER INFORMATION
None
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27. Financial Data Schedule
b. Reports
None
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
BANKILLINOIS FINANCIAL CORPORATION
Date: August 5, 1998
By: /s/ David B. White
Executive Vice President
and Chief Financial Officer
Page 21
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 21,108
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 133,006
<INVESTMENTS-CARRYING> 27,862
<INVESTMENTS-MARKET> 27,991
<LOANS> 313,552<F1>
<ALLOWANCE> 5,432
<TOTAL-ASSETS> 523,950
<DEPOSITS> 402,517
<SHORT-TERM> 48,104
<LIABILITIES-OTHER> 7,303
<LONG-TERM> 7,000
0
0
<COMMON> 55
<OTHER-SE> 58,971
<TOTAL-LIABILITIES-AND-EQUITY> 523,950
<INTEREST-LOAN> 13,966
<INTEREST-INVEST> 4,778
<INTEREST-OTHER> 366
<INTEREST-TOTAL> 19,110
<INTEREST-DEPOSIT> 8,260
<INTEREST-EXPENSE> 9,645
<INTEREST-INCOME-NET> 9,465
<LOAN-LOSSES> 255
<SECURITIES-GAINS> 35
<EXPENSE-OTHER> 7,734
<INCOME-PRETAX> 3,864
<INCOME-PRE-EXTRAORDINARY> 3,864
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,607
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.47
<YIELD-ACTUAL> 7.95
<LOANS-NON> 2,985
<LOANS-PAST> 1,249
<LOANS-TROUBLED> 135
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,306
<CHARGE-OFFS> 266
<RECOVERIES> 137
<ALLOWANCE-CLOSE> 5,432
<ALLOWANCE-DOMESTIC> 5,432
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Includes mortgages available-for-sale and net of allowance
for loan losses of $5,432.
</FN>
</TABLE>
