UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 61824-4028
(Address of principal executive offices) (Zip Code)
(217) 351-6500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EXCHANGE CLASS ON WHICH REGISTERED
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The index to exhibits is located on page 63 of 64 total sequentially numbered
pages.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
As of March 15, 1999, the Registrant had issued and outstanding 5,329,460
shares of the Registrant's Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the Registrant as of March 15, 1999,
was $61,079,958.*
* Based on the last reported price ($23.25) of an actual transaction in
Registrant's Common Stock on March 3, 1999, and reports of beneficial
ownership filed by directors and executive officers of Registrant and by
beneficial owners of more than 5% of the outstanding shares of Common
Stock of Registrant; however, such determination of shares owned by
affiliates does not constitute an admission of affiliate status or
beneficial interest in shares of Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
BANKILLINOIS FINANCIAL CORPORATION
Form 10-K Annual Report
Table of Contents
Part I
Item 1. Description of Business. . . . . . . . . . . . . . . . . . . . . 1
A. General
B. Business of the Company and Subsidiaries
C. Competition
D. Monetary Policy and Economic Conditions
E. Regulation and Supervision
F. Employees
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 8
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . 8
Part II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters. . . . . . . . . . . . . . . . . 8
Item 6. Selected Consolidated Financial Data . . . . . . . . . . . . . . 9
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . .10
Item 7a. Quantitative and Qualitative Disclosures about Market Risk . . .27
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . .27
Item 9 Changes in and Disagreements on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . .51
Part III
Item 10. Directors and Executive Officers of the Registrant . . . . . . .52
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . .56
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . .59
Item 13. Certain Relationships and Related Transactions . . . . . . . . .60
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . .61
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
A. GENERAL
BankIllinois Financial Corporation (the "Company"), a Delaware
corporation, is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHCA"). The Company was incorporated
on December 9, 1994, and on June 30, 1995, acquired all of the outstanding
stock of BankIllinois and The Champaign National Bank following the merger
(the "Merger") of Central Illinois Financial Corporation ("CIF") and
BankIllinois Financial Co. ("BKI"). On October 20, 1995, BankIllinois and
The Champaign National Bank were merged to form BankIllinois ("BankIllinois"
or the "Bank"), an Illinois chartered bank. On September 14, 1998,
BankIllinois Trust Company, the Company's only non-bank subsidiary, was
merged into BankIllinois.
B. BUSINESS OF THE COMPANY AND SUBSIDIARIES
GENERAL
The Company conducts the business of banking and offers trust services
through BankIllinois, its wholly owned subsidiary. As of December 31, 1998,
the Company had consolidated total assets of $537.4 million, stockholders'
equity of $60.7 million and trust assets under administration of
approximately $408.9 million. Substantially all of the income of the Company
is currently derived from dividends received from BankIllinois. The amount
of these dividends is directly related to the earnings of BankIllinois and is
subject to various regulatory restrictions. See "Regulation and
Supervision."
BankIllinois conducts a general banking business embracing most of the
services, both consumer and commercial, which banks may lawfully provide,
including the following principal services: the acceptance of deposits to
demand, savings and time accounts and the servicing of such accounts;
commercial, consumer and real estate lending, including installment loans and
personal lines of credit; safe deposit operations; and additional services
tailored to the needs of individual customers, such as the sale of traveler's
checks, cashier's checks and other specialized services. BankIllinois also
offers personalized financial planning services through the PrimeVest
Investment Center at BankIllinois, which services include a broad spectrum of
investment products, including stocks, bonds, mutual funds and tax advantaged
investments. In addition, the trust & investments division offers a wide
range of services such as acting as trustee, consultant, guardian, executor
and agent.
Commercial lending at BankIllinois covers such categories as
agriculture, manufacturing, capital, inventory, construction, real estate
development and commercial mortgages. Commercial lending, particularly loans
to small and medium sized businesses, accounts for a major portion of
BankIllinois' loan portfolio. BankIllinois' retail banking division makes
direct loans to consumers for various purposes, including home equity and
direct automobile loans. The consumer mortgage loan department, which is
part of the retail banking division, specializes in real estate loans to
individuals. BankIllinois also purchases installment obligations from
retailers, primarily without recourse.
BankIllinois' principal sources of income are interest and fees on
loans and investments and service fees. Its principal expenses are interest
paid on deposits and general operating expenses. BankIllinois' primary
service area is Champaign County, Illinois.
LENDING ACTIVITIES
GENERAL. BankIllinois' primary source of revenue is interest revenue
from its lending activities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net
Interest Income."
LOAN PORTFOLIO COMPOSITION. BankIllinois' loan portfolio totaled
approximately $292.6 million at December 31, 1998, representing 54% of
BankIllinois' total assets at that date. At that date, BankIllinois' loan
portfolio included approximately $112.3 million of commercial, financial and
agricultural loans, $132.9 million of real estate loans and $47.4 million of
installment and consumer loans. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Financial
Condition Loans."
Page 1
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
For a discussion of risks with respect to BankIllinois' loan
portfolio, BankIllinois' strategies for addressing and managing such risks,
BankIllinois' non-performing loans and BankIllinois' allowance for losses on
loans, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Results of Operations Allowance for Loan Losses and
Loan Quality" and " Financial Condition Loans."
INTEREST RATES AND FEES. Interest rates and fees charged on
BankIllinois' loans are affected primarily by the market demand for loans and
the supply of money available for lending purposes. These factors are
affected by, among other things, general economic conditions and the policies
of the Federal government, including the Board of Governors of the Federal
Reserve System (the "Federal Reserve"), legislative tax policies and
governmental budgetary matters. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net
Interest Income."
INVESTMENT SECURITIES
The carrying value of the Company's securities at December 31, 1998
was approximately $191.1 million, representing 36% of the Company's total
assets. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Financial Condition Investment Securities."
INTEREST RATE SENSITIVITY
For a discussion of BankIllinois' approach to managing its mix of
interest rate sensitive assets and liabilities, see "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial
Condition Interest Rate Sensitivity."
C. COMPETITION
The Company faces strong competition both in originating loans and in
attracting deposits. Competition in originating real estate loans comes
primarily from other commercial banks, savings institutions and mortgage
bankers making loans secured by real estate located in the Company's market
area. Commercial banks and finance companies, including finance company
affiliates of automobile manufacturers, provide vigorous competition in
consumer lending. The Company competes for real estate and other loans
principally on the basis of the interest rates and loan fees it charges, the
types of loans it originates and the quality of services it provides to
borrowers.
The Company faces substantial competition in attracting deposits from
other commercial banks, savings institutions, money market and mutual funds,
credit unions and other investment vehicles. The ability of the Company to
attract and retain deposits depends on its ability to provide investment
opportunities that satisfy the requirements of investors as to rate of
return, liquidity, risk and other factors. The Company attracts a
significant amount of deposits through its branch offices, primarily from the
communities in which those branch offices are located; therefore, competition
for those deposits is principally from other commercial banks and savings
institutions located in the same communities. The Company competes for these
deposits by offering a variety of deposit accounts at competitive rates,
convenient business hours and convenient branch locations with interbranch
deposit and withdrawal privileges at each.
D. MONETARY POLICY AND ECONOMIC CONDITIONS
The earnings of commercial banks and bank holding companies are
affected not only by general economic conditions, but also by the policies of
various governmental regulatory agencies. In particular, the Federal Reserve
regulates money and credit conditions and interest rates in order to
influence general economic conditions and interest rates, primarily through
open market operations in U. S. government securities, varying the discount
rate on member banks and nonmember bank borrowings and setting reserve
requirements against bank deposits. Such Federal Reserve policies and acts
have a significant influence on overall growth and distribution of bank
loans, investments, deposits and related interest rates. The Company cannot
accurately predict the effect, if any, such policies and acts may have in the
future on its business or earnings.
Page 2
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
E. REGULATION AND SUPERVISION
GENERAL
Financial institutions and their holding companies are extensively
regulated under federal and state law. As a result, the growth and earnings
performance of the Company can be affected not only by management decisions
and general economic conditions, but also by the requirements of applicable
state and federal statutes and regulations and the policies of various
governmental regulatory authorities, including the Federal Reserve, the
Federal Deposit Insurance Corporation (the "FDIC"), the Illinois Commissioner
of Banks and Real Estate (the "Commissioner"), the Internal Revenue Service
and state taxing authorities and the Securities and Exchange Commission (the
"SEC"). The effect of applicable statutes, regulations and regulatory
policies can be significant, and cannot be predicted with a high degree of
certainty.
Federal and state laws and regulations generally applicable to
financial institutions, such as the Company and its subsidiary, regulate,
among other things, the scope of business, investments, reserves against
deposits, capital levels relative to operations, the nature and amount of
collateral for loans, the establishment of branches, mergers, consolidations
and dividends. The system of supervision and regulation applicable to the
Company and its subsidiary establishes a comprehensive framework for their
respective operations and is intended primarily for the protection of the
FDIC's deposit insurance funds and the depositors, rather than the
shareholders, of financial institutions.
The following is a summary of the material elements of the regulatory
framework that applies to the Company and its subsidiary. It does not
describe all of the statutes, regulations and regulatory policies that apply
to the Company and its subsidiary, nor does it restate all of the
requirements of the statutes, regulations and regulatory policies that are
described. As such, the following is qualified in its entirety by reference
to the applicable statutes, regulations and regulatory policies. Any change
in applicable law, regulations or regulatory policies may have a material
effect on the business of the Company and its subsidiary.
RECENT REGULATORY DEVELOPMENTS
PENDING LEGISLATION. Legislation has been introduced in the Congress
that would allow bank holding companies to engage in a wider range of
nonbanking activities, including greater authority to engage in securities
and insurance activities. The expanded powers generally would be available
to a bank holding company only if the bank holding company and its bank
subsidiary remain well-capitalized and well-managed. At this time, the
Company is unable to predict whether the proposed legislation will be enacted
and, therefore, is unable to predict the impact such legislation may have on
the Company and BankIllinois.
THE COMPANY
GENERAL. The Company, as the sole shareholder of BankIllinois, is a
bank holding company. As a bank holding company, the Company is registered
with, and is subject to regulation by, the Federal Reserve under the Bank
Holding Company Act, as amended (the "BHCA"). In accordance with Federal
Reserve policy, the Company is expected to act as a source of financial
strength to BankIllinois and to commit resources to support BankIllinois in
circumstances where the Company might not otherwise do so. Under the BHCA,
the Company is subject to periodic examination by the Federal Reserve. The
Company is also required to file with the Federal Reserve periodic reports of
the Company's operations and such additional information regarding the
Company and its subsidiary as the Federal Reserve may require. The Company
is also subject to regulation by the Commissioner under the Illinois Bank
Holding Company Act, as amended.
INVESTMENTS AND ACTIVITIES. Under the BHCA, a bank holding company
must obtain Federal Reserve approval before: (i) acquiring, directly or
indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after the acquisition, it would own or control more than
5% of the shares of the other bank or bank holding company (unless it already
owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank; or (iii) merging or
consolidating with another bank holding company. Subject to certain
conditions (including certain deposit concentration limits established by the
BHCA), the Federal Reserve may allow a bank holding company to acquire banks
located in any state of the United States without regard to whether the
acquisition is prohibited by the law of the state in which the target bank is
located. In approving interstate acquisitions, however, the Federal Reserve
is required to give effect to applicable state law limitations on the
aggregate amount of deposits that may be held by the acquiring bank holding
company and its insured depository institution affiliates in the state in
which the target bank is located (provided that those limits do not
discriminate against out-of-state depository institutions or their
Page 3
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
holding companies) and state laws which require that the target bank have
been in existence for a minimum period of time (not to exceed five years)
before being acquired by an out-of-state bank holding company.
The BHCA also generally prohibits the Company from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any
company which is not a bank and from engaging in any business other than that
of banking, managing and controlling banks or furnishing services to banks
and their subsidiaries. This general prohibition is subject to a number of
exceptions. The principal exception allows bank holding companies to engage
in, and to own shares of companies engaged in, certain businesses found by
the Federal Reserve to be so closely related to banking ... as to be a
proper incident thereto. Under current regulations of the Federal Reserve,
the Company and its subsidiary is permitted to engage in a variety of
banking-related businesses, including the operation of a thrift, sales and
consumer finance, equipment leasing, the operation of a computer service
bureau (including software development), and mortgage banking and
brokerage. The BHCA generally does not place territorial restrictions on the
domestic activities of non-bank subsidiaries of bank holding companies.
Federal law also prohibits any person or company from acquiring
control of a bank or a bank holding company without prior notice to the
appropriate federal bank regulator. Control is defined in certain cases as
the acquisition of 10% of the outstanding shares of a bank or bank holding
company.
CAPITAL REQUIREMENTS. Bank holding companies are required to
maintain minimum levels of capital in accordance with Federal Reserve capital
adequacy guidelines. If capital falls below minimum guideline levels, a bank
holding company, among other things, may be denied approval to acquire or
establish additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following
minimum regulatory capital requirements for bank holding companies: a risk-
based requirement expressed as a percentage of total risk-weighted assets,
and a leverage requirement expressed as a percentage of total assets. The
risk-based requirement consists of a minimum ratio of total capital to total
risk-weighted assets of 8%, at least one-half of which must be Tier 1
capital. The leverage requirement consists of a minimum ratio of Tier 1
capital to total assets of 3% for the most highly rated companies, with a
minimum requirement of 4% for all others. For purposes of these capital
standards, Tier 1 capital consists primarily of permanent stockholders'
equity less intangible assets (other than certain mortgage servicing rights
and purchased credit card relationships). Total capital consists primarily of
Tier 1 capital plus certain other debt and equity instruments which do not
qualify as Tier 1 capital and a portion of the company's allowance for loan
and lease losses.
The risk-based and leverage standards described above are minimum
requirements. Higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual banking
organizations. For example, the Federal Reserve's capital guidelines
contemplate that additional capital may be required to take adequate account
of, among other things, interest rate risk, or the risks posed by
concentrations of credit, nontraditional activities or securities trading
activities. Further, any banking organization experiencing or anticipating
significant growth would be expected to maintain capital ratios, including
tangible capital positions (i.e., Tier 1 capital less all intangible assets),
well above the minimum levels.
As of December 31, 1998, the Company had regulatory capital in excess
of the Federal Reserve's minimum requirements, with a risk-based capital
ratio of 19.1% and a leverage ratio of 11.1%.
DIVIDENDS. The Delaware General Corporation Law (the "DGCL") allows
the Company to pay dividends only out of its surplus (as defined and computed
in accordance with the provisions of the DGCL) or if the Company has no such
surplus, out of its net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. Additionally, the Federal Reserve
has issued a policy statement with regard to the payment of cash dividends by
bank holding companies. The policy statement provides that a bank holding
company should not pay cash dividends which exceed its net income or which
can only be funded in ways that weaken the bank holding company's financial
health, such as by borrowing. The Federal Reserve also possesses enforcement
powers over bank holding companies and their non-bank subsidiaries to prevent
or remedy actions that represent unsafe or unsound practices or violations of
applicable statutes and regulations. Among these powers is the ability to
proscribe the payment of dividends by banks and bank holding companies.
FEDERAL SECURITIES REGULATION. The Company's common stock is
registered with the SEC under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Consequently, the Company is subject to the
information, proxy solicitation, insider trading and other restrictions and
requirements of the SEC under the Exchange Act.
Page 4
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
BANKILLINOIS
GENERAL. BankIllinois is an Illinois-chartered bank, the deposit
accounts of which are insured by the FDIC's Bank Insurance Fund ("BIF"). As
a BIF-insured, Illinois-chartered bank, BankIllinois is subject to the
examination, supervision, reporting and enforcement requirements of the
Commissioner, as the chartering authority for Illinois banks, and the FDIC,
as administrator of the BIF.
DEPOSIT INSURANCE. As an FDIC-insured institution, BankIllinois is
required to pay deposit insurance premium assessments to the FDIC. The FDIC
has adopted a risk-based assessment system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their respective levels of capital and results of
supervisory evaluations. Institutions classified as well-capitalized (as
defined by the FDIC) and considered healthy pay the lowest premium while
institutions that are less than adequately capitalized (as defined by the
FDIC) and considered of substantial supervisory concern pay the highest
premium. Risk classification of all insured institutions is made by the FDIC
for each semi-annual assessment period.
During the year ended December 31, 1998, BIF assessments ranged from
0% of deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 1999, BIF assessment rates will continue to range from
0% of deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution (i)
has engaged or is engaging in unsafe or unsound practices, (ii) is in an
unsafe or unsound condition to continue operations or (iii) has violated any
applicable law, regulation, order, or any condition imposed in writing by, or
written agreement with, the FDIC. The FDIC may also suspend deposit
insurance temporarily during the hearing process for a permanent termination
of insurance if the institution has no tangible capital. Management of the
Company is not aware of any activity or condition that could result in
termination of the deposit insurance of BankIllinois.
FICO ASSESSMENTS. Since 1987, a portion of the deposit insurance
assessments paid by members of the FDIC's Savings Association Insurance Fund
("SAIF") has been used to cover interest payments due on the outstanding
obligations of the Financing Corporation ("FICO"). FICO was created in 1987
to finance the recapitalization of the Federal Savings and Loan Insurance
Corporation, the SAIF's predecessor insurance fund. As a result of federal
legislation enacted in 1996, beginning as of January 1, 1997, both SAIF
members and BIF members became subject to assessments to cover the interest
payments on outstanding FICO obligations. These FICO assessments are in
addition to amounts assessed by the FDIC for deposit insurance. Until
January 1, 2000, the FICO assessments made against BIF members may not exceed
20% of the amount of the FICO assessments made against SAIF members. Between
January 1, 2000 and the final maturity of the outstanding FICO obligations in
2019, BIF members and SAIF members will share the cost of the interest on the
FICO bonds on a pro rata basis. During the year ended December 31, 1998, the
FICO assessment rate for SAIF members ranged between approximately 0.061% of
deposits and approximately 0.063% of deposits, while the FICO assessment rate
for BIF members ranged between approximately 0.012% of deposits and
approximately 0.013% of deposits. During the year ended December 31, 1998,
BankIllinois paid FICO assessments totaling $49,000.
SUPERVISORY ASSESSMENTS. All Illinois banks are required to pay
supervisory assessments to the Commissioner to fund the operations of the
Commissioner. The amount of the assessment is calculated based on the bank's
total assets, including consolidated subsidiaries, as reported to the
Commissioner. During the year ended December 31, 1998, BankIllinois paid
supervisory assessments to the Commissioner totaling $52,000.
CAPITAL REQUIREMENTS. The FDIC has established the following minimum
capital standards for state-chartered insured non-member banks, such as
BankIllinois: a leverage requirement consisting of a minimum ratio of Tier 1
capital to total assets of 3% for the most highly-rated banks with a minimum
requirement of at least 4% for all others, and a risk-based capital
requirement consisting of a minimum ratio of total capital to total risk-
weighted assets of 8%, at least one-half of which must be Tier 1 capital. For
purposes of these capital standards, Tier 1 capital and total capital consist
of substantially the same components as Tier 1 capital and total capital
under the Federal Reserve's capital guidelines for bank holding companies
(see "--the Company--Capital Requirements").
The capital requirements described above are minimum
requirements. Higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual institutions. For
example, the regulations of the FDIC provide
Page 5
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
that additional capital may be required to take adequate account of, among
other things, interest rate risk or the risks posed by concentrations of
credit, nontraditional activities or securities trading activities.
During the year ended December 31, 1998, BankIllinois was not required
by the FDIC to increase its capital to an amount in excess of the minimum
regulatory requirement. As of December 31, 1998, the Bank exceeded its
minimum regulatory capital requirements with a leverage ratio of 9.8% and a
risk-based capital ratio of 17.2%.
Federal law provides the federal banking regulators with broad power
to take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators'
corrective powers include: requiring the institution to submit a capital
restoration plan; limiting the institution's asset growth and restricting its
activities; requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired; restricting
transactions between the institution and its affiliates; restricting the
interest rate the institution may pay on deposits; ordering a new election of
directors of the institution; requiring that senior executive officers or
directors be dismissed; prohibiting the institution from accepting deposits
from correspondent banks; requiring the institution to divest certain
subsidiaries; prohibiting the payment of principal or interest on
subordinated debt; and ultimately, appointing a receiver for the institution.
As of December 31, 1998, BankIllinois was well capitalized, as defined by
FDIC regulations.
DIVIDENDS. Under the Illinois Banking Act, Illinois-chartered banks
may not pay, without prior regulatory approval, dividends in excess of their
net profits.
The payment of dividends by any financial institution or its holding
company is affected by the requirement to maintain adequate capital pursuant
to applicable capital adequacy guidelines and regulations, and a financial
institution generally is prohibited from paying any dividends if, following
payment thereof, the institution would be undercapitalized. As described
above, BankIllinois exceeded its minimum capital requirements under
applicable guidelines as of December 31, 1998. As of December 31, 1998,
approximately $4.6 million was available to be paid as dividends to the
Company by BankIllinois. Notwithstanding the availability of funds for
dividends, however, the FDIC may prohibit the payment of any dividends by
BankIllinois if the FDIC determines such payment would constitute an unsafe
or unsound practice.
INSIDER TRANSACTIONS. BankIllinois is subject to certain restrictions
imposed by federal law on extensions of credit to the Company and its
subsidiary, on investments in the stock or other securities of the Company
and its subsidiary and the acceptance of the stock or other securities of
the Company or its subsidiary as collateral for loans. Certain limitations
and reporting requirements are also placed on extensions of credit by
BankIllinois to its directors and officers, to directors and officers of the
Company and its subsidiary, to principal stockholders of the Company, and
to "related interests" of such directors, officers and principal
stockholders. In addition, federal law and regulations may affect the terms
upon which any person becoming a director or officer of the Company or its
subsidiary or a principal stockholder of the Company may obtain credit
from banks with which BankIllinois maintains a correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies have
adopted guidelines which establish operational and managerial standards to
promote the safety and soundness of federally insured depository
institutions. The guidelines set forth standards for internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, asset quality and earnings. In addition, in October 1998, the
federal banking regulators issued safety and soundness standards for
achieving Year 2000 compliance, including standards for developing and
managing Year 2000 project plans, testing remediation efforts and planning
for contingencies.
In general, the safety and soundness guidelines prescribe the goals to
be achieved in each area, and each institution is responsible for
establishing its own procedures to achieve those goals. If an institution
fails to comply with any of the standards set forth in the guidelines, the
institution's primary federal regulator may require the institution to submit
a plan for achieving and maintaining compliance. If an institution fails to
submit an acceptable compliance plan, or fails in any material respect to
implement a compliance plan that has been accepted by its primary federal
regulator, the regulator is required to issue an order directing the
institution to cure the deficiency. Until the deficiency cited in the
regulator's order is cured, the regulator may restrict the institution's rate
of growth, require the institution to increase its capital, restrict the
rates the institution pays on deposits or require the institution to take any
action the regulator deems appropriate under the circumstances. Noncompliance
with the standards established by the
Page 6
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
safety and soundness guidelines may also constitute grounds for other
enforcement action by the federal banking regulators, including cease and
desist orders and civil money penalty assessments.
BRANCHING AUTHORITY. Illinois banks, such as BankIllinois, have the
authority under Illinois law to establish branches anywhere in the State of
Illinois, subject to receipt of all required regulatory approvals.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act"), both state and national banks are allowed to
establish interstate branch networks through acquisitions of other banks,
subject to certain conditions, including certain limitations on the aggregate
amount of deposits that may be held by the surviving bank and all of its
insured depository institution affiliates. The establishment of new
interstate branches or the acquisition of individual branches of a bank in
another state (rather than the acquisition of an out-of-state bank in its
entirety) is allowed by the Riegle-Neal Act only if specifically authorized
by state law. The legislation allowed individual states to "opt-out" of
certain provisions of the Riegle-Neal Act by enacting appropriate legislation
prior to June 1, 1997. Illinois has enacted legislation permitting
interstate mergers beginning on June 1, 1997, subject to certain conditions,
including a prohibition against interstate mergers involving an Illinois bank
that has been in existence and continuous operation for fewer than five
years.
STATE BANK ACTIVITIES. Under federal law and FDIC regulations, FDIC
insured state banks are prohibited, subject to certain exceptions, from
making or retaining equity investments of a type, or in an amount, that are
not permissible for a national bank. Federal law and FDIC regulations also
prohibit FDIC insured state banks and their subsidiaries, subject to certain
exceptions, from engaging as principal in any activity that is not permitted
for a national bank or its subsidiary, respectively, unless the bank meets,
and continues to meet, its minimum regulatory capital requirements and the
FDIC determines the activity would not pose a significant risk to the deposit
insurance fund of which the bank is a member. These restrictions have not
had, and are not currently expected to have, a material impact on the
operations of BankIllinois.
FEDERAL RESERVE SYSTEM. Federal Reserve regulations, as presently in
effect, require depository institutions to maintain non-interest earning
reserves against their transaction accounts (primarily NOW and regular
checking accounts), as follows: for transaction accounts aggregating $46.5
million or less, the reserve requirement is 3% of total transaction accounts;
and for transaction accounts aggregating in excess of $46.5 million, the
reserve requirement is $1.395 million plus 10% of the aggregate amount of
total transaction accounts in excess of $46.5 million. The first $4.9
million of otherwise reservable balances are exempted from the reserve
requirements. These reserve requirements are subject to annual adjustment by
the Federal Reserve. BankIllinois is in compliance with the foregoing
requirements.
F. EMPLOYEES
The Company had a total of 218 employees at December 31, 1998,
consisting of 172 full-time employees and 46 part-time. The Company places a
high priority on staff development, which involves extensive training,
including customer service training. New employees are selected on the basis
of both technical skills and customer service capabilities. None of the
Company's employees are covered by a collective bargaining agreement with the
Company or its subsidiary. The Company offers a variety of employee
benefits, and management considers its employee relations to be excellent.
ITEM 2. PROPERTIES
BankIllinois owns the land and buildings at the Company's principal
executive offices in Champaign, Illinois. One building is BankIllinois' main
banking office, located at 100 W. University. The second building, located
adjacent to BankIllinois, is used for bank offices with excess space treated
as rental property. In addition, BankIllinois owns three separate branch
facilities, one a few blocks away, one approximately two miles away from the
main banking office of BankIllinois and the other approximately five miles
away. BankIllinois also leases space in two supermarket stores and operates
a branch facility at each store. One supermarket branch is situated in
Urbana, approximately three miles from BankIllinois' main office. The second
is located in Mahomet, approximately ten miles from BankIllinois' home
office. In addition, BankIllinois leases three other branch facility
locations, one approximately two miles southwest of the main office, a second
facility located two miles southeast of the main office, and a third facility
located two miles east of the main office. BankIllinois also leases
approximately 13,000 square feet in a building located down the street from
the main banking office. This location had been used for operations and
other support services. During 1997, some of these functions were relocated
to the Bank's main office and a sublease entered into for a portion of this
space.
Page 7
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
BankIllinois also owns one other building and three parking lots which
are located within a mile of its main office. The building is used for
storage. Two of the parking lots are partially leased and are also used by
BankIllinois employees. The third parking lot is for employee use only.
The Company believes that its facilities are adequate to serve its
present needs. The main office complex for the Company is owned in fee and
is unencumbered.
ITEM 3. LEGAL PROCEEDINGS
In the course of business, the Company and BankIllinois become
involved in various lawsuits and claims that are incidental to their
respective businesses. As of the date of filing this report, there were no
causes of action which would have a material adverse effect on the business
or financial condition of the Company or BankIllinois.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no items submitted to a vote of security holders in the
fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock was held by approximately 410 shareholders
of record as of March 15, 1999, and is traded in the over-the-counter market.
The following table shows, for the periods indicated, the range of
prices per share of the Company's Common Stock in the over-the-counter
market, as reported to the Company by the brokers known to the Company to
regularly follow the market for the Common Stock. Certain other private
transactions may have occurred during the periods indicated of which the
Company has no knowledge. The following prices represent inter-dealer prices
without retail markups, markdowns or commissions, and have not been adjusted
to reflect the 5% stock dividends paid by the Company in 1996, 1997 and 1998.
1996 QUARTER ENDING: PRICE/SHARE
March 31, 1996 $13.00 - $13.25
June 30, 1996 $13.25 - $14.00
September 30, 1996 $13.25 - $13.75
December 31, 1996 $14.00 - $16.25
1997 QUARTER ENDING: PRICE/SHARE
March 31, 1997 $15.25 - $16.50
June 30, 1997 $15.87 - $17.00
September 30, 1997 $16.00 - $18.75
December 31, 1997 $18.00 - $21.75
1998 QUARTER ENDING: PRICE/SHARE
March 31, 1998 $18.57 - $20.95
June 30, 1998 $20.00 - $22.50
September 30, 1998 $21.75 - $24.00
December 31, 1998 $21.50 - $23.25
The Company paid a 5% stock dividend in the second quarters of 1996,
1997 and 1998. In 1998, the Company also paid $0.08 per share cash dividends
in January, April, July and October. During the fourth quarter of 1998, the
Company declared an $0.08 per share cash dividend which was paid on January
22, 1999.
The ability of the Company to pay dividends in the future will be
primarily dependent upon its receipt of dividends from the Bank. In
determining cash dividends, the Board of Directors considers the earnings,
capital requirements, debt and dividend
Page 8
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
servicing requirements, financial ratio guidelines it has established, the
financial condition of the Company and other relevant factors. The Bank's
ability to pay dividends to the Company and the Company's ability to pay
dividends to its stockholders are also subject to certain regulatory
restrictions.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial
information for the Company for each of the five years ended December 31,
1998. The selected consolidated financial data should be read in conjunction
with the Consolidated Financial Statements of the Company, including the
related notes, presented elsewhere herein. All references to numbers of
shares and per share amounts have been retroactively restated to reflect the
5% stock dividends in 1996, 1997 and 1998.
<TABLE>
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest income $38,014 $37,346 $35,088 $35,903 $33,086
Interest expense 18,962 19,410 17,825 17,689 14,487
Net interest income 19,052 17,936 17,263 18,214 18,599
Provision for loan losses 535 465 375 3,097 565
Net interest income after provision for loan losses 18,517 17,471 16,888 15,117 18,034
Noninterest income 4,935 4,476 4,291 3,951 4,258
Noninterest expense 14,457 13,888 14,495 19,054 17,480
Income tax expense 2,921 2,659 2,183 248 1,466
Discontinued operations gain on disposal
of subsidiary <F1> 0 0 0 570 4,634
Net income $6,074 $5,400 $4,501 $336 $7,980
Basic earnings per share:
Income from continuing operations $1.13 $1.00 $0.83 ($0.04) $0.61
Discontinued operations gain on disposal of subsidiary 0.00 0.00 0.00 0.10 0.85
Net income $1.13 $1.00 $0.83 $0.06 $1.46
Diluted earnings per share:
Income from continuing operations $1.09 $0.98 $0.81 ($0.04) $0.61
Discontinued operations gain on disposal of subsidiary 0.00 0.00 0.00 0.10 0.85
Net income $1.09 $0.98 $0.81 $0.06 $1.46
Return on average total assets 1.15% 1.05% 0.92% 0.07% 1.64%
Return on average stockholders' equity 10.28% 9.95% 9.00% 0.68% 18.19%
Cash dividends declared per common share <F2> $0.32 $0.08 $0.00 $0.20 $0.11
Total assets $537,373 $539,366 $515,440 $520,586 $495,313
Investment in debt and equity securities 191,136 155,386 153,492 97,304 106,034
Loans held for investment, net 287,306 309,729 280,281 311,519 326,204
Deposits 409,898 417,154 404,130 419,157 394,677
Borrowings 59,963 57,857 52,941 45,273 47,504
Total stockholders' equity 60,707 57,330 52,096 48,408 46,766
Total stockholders' equity to total assets 11.30% 10.63% 10.11% 9.30% 9.44%
Average stockholders' equity to average assets 11.19% 10.57% 10.18% 10.00% 9.00%
<FN>
<F1> See Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations.
<F2> Prior to the merger of CIF and BKI, only CIF paid cash dividends.
</FN>
</TABLE>
Page 9
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is designed to provide the
reader with a comprehensive review of the consolidated results of operations
for 1998, 1997 and 1996 for the Company, including BankIllinois, and an
analysis of the Company's financial condition at December 31, 1998 compared
to December 31, 1997 and at December 31, 1997 compared to December 31, 1996.
This discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes which begin at page 29 of
this report.
OVERVIEW
The four years ended December 31, 1998 was a period of transition for
the Company involving the fundamental reorganization of the consolidated
organization. The Company streamlined its subsidiary operations on September
14, 1998, by merging BankIllinois Trust Company into BankIllinois. During
the first quarter of 1998, the Company also enhanced its corporate identity
by changing its corporate name to BankIllinois Financial Corporation. Prior
to that date, it operated under the name of Central Illinois Financial Co.,
Inc.
At June 30, 1995, BankIllinois Financial Co. and Central Illinois
Financial Corporation merged to form the Company. The merger was accounted
for as a pooling of interest. Prior period consolidated financial statements
have been restated as though the prior entities had been consolidated for all
periods presented. On October 20, 1995, the two subsidiary banks,
BankIllinois and Champaign National Bank, were merged into a single resulting
bank known as BankIllinois and the trust operations were transferred to
BankIllinois Trust Company. Costs incurred during 1995 associated with the
merger were approximately $1,036,000. The resulting effect of these costs on
both basic and diluted earnings per share was a decrease of approximately
$0.19 for the year ended December 31, 1995.
In addition to the direct costs associated with the merger, the
Company also incurred non-recurring restructuring costs during 1995 of
approximately $1,786,000. Included in these restructuring costs were
expenses related to reduction in work force, computer related expenses,
adjustments to carrying value of premises and equipment deemed to be
unnecessary for the ongoing operation of the merged entity and the
consolidation of safe deposit boxes. Also in 1995, the Company recorded a
gain of $570,000 from discontinued operations as a result of the 1992 sale of
a subsidiary.
The Company's restructuring continued during 1997 and 1998. In May
1997, the Company incurred a loss of $131,000 on closing the Champaign Money
Market branch. In March 1998, a vacant building and parking lot that was
acquired during the merger, was sold at a loss of $250,000. In addition,
non-recurring organizational changes implemented to improve efficiency,
including the merger of BankIllinois Trust Company into BankIllinois, cost
the Company $480,000.
Management of the Company continues to spend significant time and
effort maintaining and improving asset quality. Changes in the loan policy
with an increased focus on credit analysis prior to loan approval and an
emphasis on early detection of problem assets instituted in 1995 contributed
to net loans charged off of $2,478,000 and the provision for loan losses of
$3,097,000 in 1995. The emphasis on loan quality resulted in net charge-offs
being reduced to $670,000 in 1996, $1,808,000 less than in 1995. Net charge-
offs declined from $746,000 in 1997 to $562,000 in 1998. The emphasis on
loan quality also resulted in a decrease in the provision for loan losses in
1996 by $2,722,000 from 1995 resulting in a $375,000 provision in 1996. The
provision for loan losses was $465,000 in 1997 and $535,000 in 1998. The
allowance for loan losses was $5,279,000, or 1.80% of loans, at December 31,
1998 compared to $5,306,000, or 1.68% of loans, at December 31, 1997.
RESULTS OF OPERATIONS
The Company had record earnings of $6,074,000 from operations in 1998
compared to $5,400,000 in 1997 and $4,501,000 in 1996. The Company had net
income of 1.15%, 1.05% and 0.92%, from operations on average assets in 1998,
1997 and 1996, respectively. The rate of return on operations in 1998
improved relative to 1997 and 1996. Basic earnings per share from continuing
operations was $1.13, $1.00 and $0.83 in 1998, 1997 and 1996, respectively.
Diluted earnings per share from operations was $1.09, $0.98 and $0.81 in
1998, 1997 and 1996, respectively.
NET INTEREST INCOME
Net interest income, the most significant component of the Company's
earnings, is the difference between interest received or accrued on the
Company's earning assets primarily loans and investments and interest paid or
accrued on deposits and short-term borrowings. In order to compare the
interest generated from different types of earning assets, the interest
income on certain tax-exempt investment securities and loans is increased for
analysis purposes to reflect the income tax savings provided by these tax-
exempt assets. The adjustment to interest income for tax-exempt investment
securities and loans was calculated based on
Page 10
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
the federal income tax statutory
rate of 34%. The adjustment to net interest income for the tax effect of
tax-exempt assets is shown in the following schedule. Net tax equivalent
(TE) interest income of $19,295,000 in 1998 reflected an increase from the
$18,105,000 recorded in 1997, which was an increase from the $17,471,000
recorded in 1996.
<TABLE>
NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
(in thousands)
1998 1997 1996
<S> <C> <C> <C>
Total interest income $38,014 $37,346 $35,088
Total interest expense 18,962 19,410 17,825
Net interest income 19,052 17,936 17,263
Tax equivalent adjustment:
Tax-exempt investments 236 156 196
Tax-exempt loans 7 13 12
Total adjustment 243 169 208
Net interest income (TE) $19,295 $18,105 $17,471
</TABLE>
Page 11
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
The following schedule "Consolidated Average Balance Sheet and
Interest Rates" provides details of average balances, interest income or
interest expense, and the average rates for the Company's major asset and
liability categories.
<TABLE>
CONSOLIDATED AVERAGE BALANCE SHEET AND INTEREST RATES
(dollars in thousands)
1998 1997 1996
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Taxable investment
securities <F1> $153,732 $9,115 5.93% $156,101 $9,796 6.28% $112,359 $6,797 6.05%
Tax-exempt investment
securities <F1> (TE) 10,008 695 6.94% 6,674 458 6.86% 8,471 576 6.80%
Federal funds sold 17,900 945 5.28% 13,973 762 5.45% 34,723 1,874 5.40%
Loans <F2><F3> (TE) 306,120 27,502 8.98% 296,170 26,499 8.95% 294,384 26,049 8.85%
Total interest earning assets
and interest income (TE) $487,760 $38,257 7.84% $472,918 $37,515 7.93% $449,937 $35,296 7.84%
Cash and due from banks $17,836 $17,919 $20,539
Premises and equipment 9,984 10,971 10,802
Other assets 12,386 11,490 10,197
Total assets $527,966 $513,298 $491,475
Liabilities and Stockholders' Equity
Interest bearing demand
deposits $148,492 5,184 3.49% $139,613 $5,087 3.64% $118,296 $3,745 3.17%
Savings 17,073 333 1.95% 17,557 334 1.90% 20,358 379 1.86%
Time deposits 183,346 10,471 5.71% 192,253 11,122 5.79% 193,486 11,096 5.73%
Short-term borrowings 48,687 2,401 4.93% 42,984 2,275 5.29% 39,598 2,006 5.07%
FHLB advances 8,962 573 6.39% 8,942 592 6.62% 9,000 599 6.66%
Total interest bearing
liabilities and interest
expense $406,560 18,962 4.66% $401,349 $19,410 4.84% $380,738 $17,825 4.68%
Noninterest bearing
demand deposits $55,469 $51,405 $54,229
Other liabilities 6,836 6,288 6,489
Total liabilities $468,865 $459,042 $441,456
Stockholders' equity 59,101 54,256 50,019
Total liabilities and
stockholders' equity $527,966 $513,298 $491,475
Interest spread (average
rate earned minus
average rate paid) (TE) 3.18% 3.09% 3.16%
Net interest income (TE) $19,295 $18,105 $17,471
Net yield on interest
earning assets (TE) 3.96% 3.83% 3.88%
<FN>
<F1> Investments in debt securities are included at carrying value.
<F2> Loans are net of allowance for loan losses. Nonaccrual loans are
included in the total.
<F3> Loan fees of approximately $801,000, $533,000 and $473,000 in 1998,
1997 and 1996, respectively, are included in total loan income.
</FN>
</TABLE>
Page 12
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
The following table presents, on a fully taxable equivalent basis,
an analysis of changes in net interest income resulting from changes in
average volumes of earning assets and interest bearing liabilities and
average rates earned and paid. The change in interest due to the combined
rate/volume variance has been allocated to rate and volume changes in
proportion to the absolute dollar amounts of change in each.
<TABLE>
ANALYSIS OF VOLUME AND RATE CHANGES
(in thousands)
1998 1997
INCREASE INCREASE
(DECREASE) (DECREASE)
FROM FROM
PREVIOUS DUE TO DUE TO PREVIOUS DUE TO DUE TO
YEAR VOLUME RATE YEAR VOLUME RATE
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Taxable investment securities ($681) ($146) ($535) $2,999 $2,733 $266
Tax-exempt investment 237 231 6 (118) (123) 5
securities
Federal funds sold 183 208 (25) (1,112) (1,129) 17
Loans 1,003 912 91 450 157 293
Total interest income $742 $1,205 ($463) $2,219 $1,638 $581
Interest Expense
Interest bearing demand deposits $97 $313 ($216) $1,342 $736 $606
Savings (1) (10) 9 (45) (53) 8
Time deposits (651) (501) (150) 26 (78) 104
Short-term borrowings 126 288 (162) 269 179 90
Federal Home Loan Bank advances (19) 1 (20) (7) (4) (3)
Total interest expense ($448) $91 ($539) $1,585 $780 $805
Net Interest Income (TE) $1,190 $1,114 $76 $634 $858 ($224)
</TABLE>
Total average earning assets increased from $472,918,000 in 1997 to
$487,760,000 in 1998, generating higher levels of interest income in 1998,
while interest expense decreased despite higher average interest bearing
liabilities. Average loans increased $9,950,000, resulting in an increase of
$1,003,000 in interest income, of which $912,000 was attributable to an
increase in the volume of loans and $91,000 was due to rate changes. The
Company continues to emphasize credit quality and pricing. Federal funds
sold increased $3,927,000, resulting in an increase of $183,000 in interest
income, of which $208,000 was attributable to an increase in volume and was
offset by a decrease of $25,000 due to lower interest rates. Tax-exempt
investment securities increased $3,334,000, resulting in an increase of
$237,000 in interest income of which $231,000 was attributable to an increase
in volume and $6,000 was due to rate changes. These increases were somewhat
offset by a decrease in taxable investment securities of $2,369,000 which
generated $681,000 less in interest income. Of this decrease, $146,000 was
attributable to the volume decrease and $535,000 was attributable to lower
interest rates.
Total average earning assets increased from $449,937,000 in 1996 to
$472,918,000 in 1997, generating higher levels of interest income in 1997,
while interest expense also increased. Average investments in taxable
investment securities increased $43,742,000 and generated an additional
$2,999,000 in interest income, of which $2,733,000 was attributable to the
volume increase. Average loans increased $1,786,000, resulting in an
increase of $450,000 in interest income, of which $157,000 was attributable
to an increase in the volume of loans and $293,000 was due to rate changes.
These increases were somewhat offset by decreases in average federal funds
sold and tax-exempt investment securities. Average federal funds sold
decreased $20,750,000 and contributed $1,112,000 less to interest income in
1997 as compared to 1996. Of this $1,112,000 decrease, $1,129,000 was due to
volume, offset by $17,000 due to rate. Interest income earned on tax-exempt
securities decreased $118,000 in 1997 due to a change in volume.
The Company establishes interest rates on loans and deposits based
on market rates such as the 91-day Treasury Bill rate and the prime rate and
interest rates offered by other financial institutions in the local
community. The level of risk and the value of collateral also are evaluated
when determining loan rates. The average rate earned on loans increased
slightly from 8.95% in 1997 to 8.98% in 1998. The yield on taxable
investment securities decreased 35 basis points from 6.28% for the year
Page 13
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
ended December 31, 1997 to 5.93% for the year ended December 31, 1998. The
yield on federal funds sold decreased 17 basis points from the year ended
December 31, 1997.
Despite the average balance of loans being higher during 1998 than
1997, the actual balances of loans at December 31, 1998 were lower than at
December 31, 1997. Real estate loans, commercial, financial and agricultural
loans, and installment and consumer loans, decreased $8,172,000, $9,662,000
and $4,616,000, respectively. The decrease in loans was caused by some large
commercial loans being paid off during 1998, as well as a continued emphasis
on loan quality. The Company has been unwilling to compromise its loan
underwriting standards in the currently competitive market.
Interest expense decreased $448,000 in 1998 compared to 1997. This
was primarily caused by the decrease of $651,000 of interest on time
deposits. Of this decrease, $501,000 was attributable to a decrease in
volume and $150,000 was attributable to rate, as the average rate paid
decreased from 5.79% in 1997 to 5.71% in 1998. Somewhat offsetting this
decrease was a $126,000 increase in interest expense on short-term borrowing
in 1998 compared to 1997. Of this $126,000 increase, $288,000 was due to an
increase in volume, offset by $162,000 due to rate. Included in the average
balance increase was an increase of $6,027,000 in daily repurchase agreements
and an increase of $118,000 in federal funds purchased. Somewhat offsetting
this increase was a $442,000 decrease in average term repurchase agreements.
Average interest bearing demand deposits increased from $139,613,000 in 1997
to $148,492,000 in 1998 and increased interest expense by $97,000 in 1998
compared to 1997. Of this increase, $313,000 was due to volume, offset by
$216,000 due to rate, as the average rate paid decreased from 3.64% in 1997
to 3.49% in 1998. A primary cause of this increased volume was the movement
of funds from time deposits to the Prime Investment account because of the
flat yield curve during 1998. The Prime Investment account pays a higher
rate of interest than a regular money market account on balances of $10,000
and over and provides greater access to funds than a certificate of deposit.
At December 31, 1998, the Prime Investment product accounted for $75,136,000,
or 47.8%, of all interest bearing demand deposits compared to $60,773,000, or
41.4%, at December 31, 1997.
Interest expense increased $1,585,000 in 1997 over 1996. This was
primarily caused by the increase of $1,342,000 of interest on interest
bearing demand deposits. Of this increase, $736,000 was attributable to an
increase in volume and $606,000 was attributable to rate, as the average rate
paid increased from 3.17% in 1996 to 3.64% in 1997. A primary cause of this
increase was the success of the Prime Investment account. At December 1997,
the Prime Investment product accounted for $60,773,000, or 41.4%, of all
interest bearing demand deposits compared to $42,775,000, or 33.6%, at
December 31, 1996. Interest expense on savings deposits decreased $45,000 in
1997 compared to 1996. Of this decrease, $53,000 was attributable to a
decrease in volume, offset by $8,000 which was attributable to an increase in
rate. The average interest rate paid increased from 1.86% in 1996 to 1.90%
in 1997. Interest expense on time deposits increased $26,000 in 1997
compared to 1996, reflecting the increase in average yield paid from 5.73% in
1996 to 5.79% in 1997, offset somewhat by the decrease in average time
deposits outstanding of $1,233,000. Interest expense on short-term
borrowings increased $269,000 in 1997 over 1996. The increase was a result
of average short-term borrowings increasing $3,386,000 in 1997 to $42,984,000
from $39,598,000 in 1996, and the interest rate increasing from 5.07% in 1996
to 5.29% in 1997. Included in the average balance increase was an increase
of $4,946,000 in daily repurchase agreements. Somewhat offsetting this
increase was a $1,056,000 decrease in average term repurchase agreements and
a $504,000 decrease in average federal funds purchased in 1997 compared to
1996.
PROVISION FOR LOAN LOSSES
The quality of the Company's loan portfolio is of prime importance
to Company management and its Board of Directors, as loans are the largest
component of the Company's assets. BankIllinois maintains an independent
credit administration function which performs reviews of all large loans and
all loans which present indications of additional credit risk. Approval of
the senior loan committee, which meets weekly, is required prior to funding
of all secured credit relationships over $500,000 and all unsecured
relationships over $100,000. This committee also reviews nonaccrual loans
and other problem loans. The Board of Directors meets monthly to review
problem loans, BankIllinois' lending policies and practices, and the results
of credit administration analyses.
Continued emphasis on loan quality was reflected in net charge-offs
being slightly lower in 1998 than 1997. Net charge-offs decreased from
$746,000 in 1997 to $562,000 in 1998. The provision for loan losses
increased $70,000, from $465,000 in 1997 to $535,000 in 1998. (See the
section on Allowance for Loan Losses and Loan Quality elsewhere in this
report for further discussion relating to the adequacy of the allowance for
loan losses.) The Company charged off $811,000 in loans during 1998 compared
to $998,000 in 1997. The largest decrease was in the area of installment and
consumer loans which decreased from $945,000 in 1997 to $677,000 in 1998.
Recoveries of previously charged off loans were $249,000 in 1998 compared to
$252,000 in 1997. Net charge-offs increased from $670,000 in 1996 to
$746,000 in 1997. The provision for loan losses increased $90,000, from
$375,000 in 1996 to $465,000 in 1997. The Company charged off $998,000 in
loans during 1997 compared to $1,538,000 in 1996. The largest increase was
in the area of installment and consumer loans which increased from $725,000
in 1996 to $945,000 in 1997. Included in 1997 charge-offs was $445,000 of
credit card fraud charge-offs. Recoveries of previously charged off loans
Page 14
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
were $252,000 in 1997 compared to $868,000 in 1996. The Company continues to
emphasize credit analysis and early detection of problem loans.
NONINTEREST INCOME
Noninterest income increased $459,000, or 10.3%, from 1997 to 1998.
Included in this increase was an increase in gains on sales of loans of
$323,000, or 119.2%, from $271,000 in 1997 to $594,000 in 1998. This
increase reflected a $43,015,000, or 178.2%, increase in mortgage loans held-
for-sale which were closed during 1998 compared to 1997. The increase in
closed loans was attributable to a decrease in interest rates. Trust fees
increased $172,000, or 8.5%, from $2,026,000 in 1997 to $2,198,000 in 1998.
The increase in trust fees was a result of an increase in assets due to new
accounts. Other noninterest income increased $103,000, or 37.5%, from
$275,000 in 1997 to $378,000 in 1998. Included in this increase was a gain
of $104,000 booked on the sale of the credit card portfolio to a third party
during the third quarter of 1998. Also contributing to the increase in
noninterest income was a $22,000, or 57.9%, increase in net security
transactions from $38,000 in 1997 to $60,000 in 1998. 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 1998 prior to their maturity dates which resulted in a gain being
recognized. Somewhat offsetting this increase was a decrease in service
charges and fees of $161,000, or 8.6%, from $1,866,000 in 1997 to $1,705,000
in 1998. Included in this decrease, was a $100,000 decrease in mortgage
servicing income as a result of a large number of early payoffs due to the
low interest rate environment and a lower retention of servicing rights when
selling loans during 1998 compared to 1997. Lower service charges and fees
also affected other income in 1998 compared to 1997.
Noninterest income increased $185,000, or 4.3%, from 1996 to 1997.
Included in this increase was an increase in trust fees of $95,000, or 4.9%.
The bulk of this increase was in the farm management area due to grain market
prices and the timing of sales. Net security transactions increased $42,000,
or 1,050.0% from ($4,000) in 1996 to $38,000 in 1997. Due to decreasing
interest rates, some securities were called in 1997. The unamortized
discount on the called securities was taken into income at the call date.
Service charges and fees increased $27,000, or 1.5%, from $1,839,000 in 1996
to $1,866,000 in 1997. Contributing to the increase was the opening of the
Primevest Investment Center in 1996. Fees collected for brokerage, mutual
funds and annuity transactions were approximately $25,000 higher in 1997 than
in 1996.
NONINTEREST EXPENSE
Total noninterest expense increased $569,000, or 4.1%, to
$14,457,000 in 1998 from $13,888,000 in 1997. The 1997 expense was a
decrease of $607,000, or 4.2%, from 1996 noninterest expense of $14,495,000.
During 1998, salaries and employee benefits increased $541,000, or 7.0%,
from 1997. Other noninterest expense increased $221,000, or 11.9% from 1997.
During the same period, occupancy expense decreased $137,000, or 9.0%, office
supplies decreased $37,000, or 7.3%, and equipment expense decreased $21,000,
or 2.3%. During 1997, advertising and marketing expenses decreased $264,000,
or 32.1% from 1996, other noninterest expense decreased $229,000, or 11.0%,
office supplies decreased $85,000, or 14.4%, salaries and employee benefits
decreased $53,000, or 0.7%, and equipment decreased $47,000, or 4.9%. During
the same period, federal deposit insurance premiums increased $46,000 to
$48,000.
Salaries and employee benefits increased $541,000, or 7.0%, from
$7,742,000 in 1997 to $8,283,000 in 1998. Of this increase, $472,000 was due
to non-recurring organizational changes implemented to improve efficiency,
including the merger of BankIllinois Trust Company into BankIllinois.
Increases in compensation expense related to the additional revenue generated
by the mortgage origination area also contributed to the increase. During
1997, salaries and employee benefits decreased $53,000, or 0.7%, from
$7,795,000 to $7,742,000 as continued efficiencies resulted in a reduction of
the number of employees from 1996.
Other noninterest expense increased $221,000, or 11.9%, from
$1,862,000 in 1997 to $2,083,000 in 1998. Included in this increase was a
$250,000 loss on disposal of property in 1998 compared to a $131,000 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 associated with organizational changes related to the merger of the
Company's two subsidiaries, BankIllinois and BankIllinois Trust Company.
Other noninterest expense decreased $229,000, or 11.0%, from 1996 to 1997.
Included in the 1997 change was a decrease of $127,000 for director fees
which resulted from the adoption during the second quarter of 1997 of a
compensation plan using stock options for directors of the Company and
BankIllinois.
Occupancy expense decreased $137,000, or 9.0%, from $1,519,000 in
1997 to $1,382,000 in 1997. The 1998 decrease in occupancy expense was
primarily due to lower maintenance and repair costs as well as lower real
estate taxes, depreciation expense, and utility costs as a result of the sale
of a vacant building and the adjacent parking lot in March 1998. Occupancy
expense remained stable from 1996 to 1997 with an $8,000 increase.
Advertising and marketing expense remained stable during 1998 with
a $3,000 decrease compared to 1997. Advertising and marketing expense
decreased $264,000, or 32.1%, from $822,000 in 1996 to $558,000 in 1997.
1996 expenses were
Page 15
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
higher due to additional advertising to establish name recognition after the
merger of BankIllinois and Champaign National Bank in October 1995.
Federal deposit insurance premiums remained stable from 1997 to
1998. The premiums increased from $2,000 in 1996 to $48,000 in 1997. During
1996, the Deposit Insurance Funds Act of 1996 ("DIFA") eliminated the minimum
assessment of $1,000 semiannually that BankIllinois, being a well capitalized
institution with a risk classification of 1A was assessed during 1996. It
established a Financing Corporation ("FICO") rate that is not tied to the
FDIC risk classification. The FDIC insurance assessment is a combined rate
of the FICO, BIF and the FDIC risk classification. BankIllinois, being
classified 1A, incurred no FDIC risk classification expense. BankIllinois
incurred $49,000 of FDIC insurance assessments during 1998 compared to
$48,000 in 1997.
INCOME TAX EXPENSE
Income tax expense increased $262,000, or 9.9%, in 1998 compared to
1997, primarily due to higher income in 1998 resulting in more taxable income
for 1998 compared to 1997. Income tax expense increased $476,000, or 21.8%,
in 1997 compared to 1996, also due to higher income in 1997. The Company's
effective tax rate remained stable at 32.5%, 33.0% and 32.7% for the years
ended December 31, 1998, 1997 and 1996, respectively.
The tax effects of temporary differences which gave rise to
significant portions of the deferred tax assets and deferred tax liabilities
at December 31, 1998 and 1997 are shown in note 12 in the Notes to
Consolidated Financial Statements.
FINANCIAL CONDITION
Total assets remained stable at $537,373,000 at December 31, 1998
compared to $539,366,000 at December 31, 1997. This decrease in total assets
of less than 1% resulted from a decrease of $22,423,000, or 7%, in loans, net
of allowance for loan losses, a decrease of $13,100,000, or 67%, in federal
funds sold, a decrease of $11,262,000, or 8%, in securities available-for-
sale, a decrease of $9,878,000, or 34%, in cash and due from banks, and a
decrease in other assets of $2,859,000, or 35%. These decreases were
somewhat offset by an increase of $46,990,000, or 254%, in investment
securities, an increase of $9,543,000, or 678%, in mortgage loans available-
for-sale, and an increase in premises and equipment of $942,000 or 8%. The
decrease in year-end assets was partially a result of deposits being
$7,256,000, or 2%, lower at December 31, 1998 than at December 31, 1997.
Federal Home Loan Bank advances were $2,000,000, or 25%, higher at December
31, 1998 than at December 31, 1997. Average assets were $14,668,000, or 3%,
higher in 1998 than in 1997. Included in the increase in average assets was
an increase of $9,950,000, or 3%, in average net loans including mortgage
loans held for sale, an increase in federal funds sold of $3,927,000, or 28%.
The increase in average assets was a result of higher average deposits and
short-term borrowings in 1998. Total average deposits increased $3,552,000,
or 1%, in 1998 from 1997. Included in this increase were some shifts in the
average deposit mix in 1998 versus 1997. Average interest bearing demand
deposits increased $8,879,000, or 6%, while average noninterest bearing
deposits increased $4,064,000, or 8%. Somewhat offsetting these increases
were decreases in time deposits of $8,907,000, or 5%, and a decrease of
$484,000, or 3%, in savings deposits. Much of the shift in deposits was
attributable to the Prime Investment account.
Page 16
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
INVESTMENT SECURITIES
The carrying value of investments in debt and equity securities was
as follows:
<TABLE>
CARRYING VALUE OF SECURITIES
(in thousands)
December 31, 1998 1997 1996
<S> <C> <C> <C>
Available-for-sale:
U.S. Treasury $37,526 $40,530 $42,969
Federal agencies 77,012 87,478 78,262
Mortgage-backed securities 5,944 6,242 8,226
Corporate and other obligations 3,573 1,067 470
Total available-for-sale $124,055 $135,317 $129,927
Held-to-maturity:
U.S. Treasury 900 1,897 2,004
Federal agencies 31,828 9,615 12,039
Mortgage-backed securities 14,167 0 257
State and municipal 18,614 7,007 7,570
Total held-to-maturity $65,509 $18,519 $21,870
Non-marketable equity securities 1,572 1,550 1,695
Total securities $191,136 $155,386 $153,492
</TABLE>
The unrealized gain on securities available-for-sale, net of tax
effect, increased $735,000, to a gain of $1,033,000 at December 31, 1998 from
a gain of $298,000 at December 31, 1997.
The following table shows the maturities and weighted-average
yields of investment securities at December 31, 1998:
<TABLE>
MATURITIES AND WEIGHTED AVERAGE YIELDS OF DEBT SECURITIES
(dollars in thousands)
DECEMBER 31, 1998
1 YEAR 1 TO 5 5 TO 10 OVER
OR LESS YEARS YEARS 10 YEARS TOTAL
<S> <C> <C> <C> <C> <C>
Securities available-for-sale
U.S. Treasury $21,800 $15,726 $0 $0 $37,526
Federal agencies 16,169 51,924 8,919 0 77,012
Mortgage-backed securities 0 0 1,001 4,943 5,944
Other securities 3,257 316 0 0 3,573
Total $41,226 $67,966 $9,920 $4,943 $124,055
Average Yield (TE) 5.57% 5.97% 5.72% 6.08% 5.83%
Securities held-to-maturity
U.S. Treasury $900 $0 $0 $0 $900
Federal agencies 0 21,829 9,999 0 31,828
Mortgage-backed securities 0 0 0 14,167 14,167
State and municipal 3,491 3,113 10,215 1,795 18,614
Total $4,391 $24,942 $20,214 $15,962 $65,509
Average Yield (TE) 4.81% 5.66% 4.96% 5.30% 5.30%
</TABLE>
Page 17
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
LOANS
The following tables present the amounts and percentages of loans
at December 31 for the years indicated according to the categories of
commercial, financial and agricultural; real estate; and installment and
consumer loans.
<TABLE>
AMOUNT OF LOANS OUTSTANDING
(dollars in thousands)
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $112,265 $121,927 $110,059 $121,180 $113,325
Real estate 132,919 141,091 127,724 127,893 136,098
Installment and consumer, net
of unearned discount 47,401 52,017 48,085 68,328 82,044
Total loans $292,585 $315,035 $285,868 $317,401 $331,467
</TABLE>
<TABLE>
PERCENTAGE OF LOANS OUTSTANDING
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural 38.37% 38.70% 38.50% 38.18% 34.19%
Real estate 45.43% 44.79% 44.68% 40.29% 41.06%
Installment and consumer, net
of unearned discount 16.20% 16.51% 16.82% 21.53% 24.75%
Total 100.00% 100.00% 100.00% 100.00% 100.00%
</TABLE>
Total loans decreased by $22,450,000, or 7.1%, from December 31,
1997 to December 31, 1998, with decreases in commercial, financial and
agricultural loans, real estate loans and installment and consumer loans of
$9,662,000, $8,172,000 and $4,616,000 respectively. $5,706,000 of the
commercial, financial and agricultural loan decrease was attributable to a
decrease in dealer floor plan loans. The decrease in real estate loans was
mainly attributable to a decrease of $8,399,000 in residential real estate,
offset by a slight increase in commercial real estate. The emphasis on loan
quality and pricing, coupled with the competitive nature of the market, was
responsible for the decrease in loans.
Total loans increased by $29,167,000 from December 31, 1996 to
December 31, 1997, with increases in commercial, financial and agricultural
loans, real estate loans and installment and consumer loans of $11,868,000,
$13,367,000 and $3,932,000, respectively. $4,487,000 of the commercial,
financial, and agricultural loan increase was attributable to an increase in
dealer floor plan loans. The increase in real estate loans was attributable
to an increase of $17,066,000 in commercial real estate, offset by a decrease
of $3,699,000 in residential real estate. Strong loan demand was responsible
for the overall increase in loans.
The balance of loans outstanding as of December 31, 1998 by
maturities is shown in the following table:
<TABLE>
MATURITY OF LOANS OUTSTANDING
(dollars in thousands)
DECEMBER 31, 1998
1 YEAR 1-5 OVER 5
OR LESS YEARS YEARS TOTAL
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $54,788 $38,620 $18,857 $112,265
Real estate 10,991 43,251 78,677 132,919
Installment and consumer 13,867 31,787 1,747 47,401
Total $79,646 $113,658 $99,281 $292,585
Percentage of total loans outstanding 27.22% 38.85% 33.93% 100.00%
</TABLE>
As of December 31, 1998, commercial, financial and agricultural
loans with maturities of greater than one year were comprised of $10,916,000
in fixed-rate loans and $46,561,000 in floating-rate loans. Real estate
loans with maturities greater than one year at December 31, 1998 included
$32,505,000 in fixed-rate loans and $89,423,000 in floating-rate loans.
Page 18
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
ALLOWANCE FOR LOAN LOSSES AND LOAN QUALITY
The following table summarizes changes in the allowance for loan
losses by loan categories for each period and additions to the allowance for
loan losses which have been charged to operations.
<TABLE>
ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at
beginning of year $5,306 $5,587 $5,882 $5,263 $4,686
Charge-offs during period:
Commercial, financial and agricultural ($134) ($53) ($610) ($1,827) ($159)
Real estate 0 0 (203) (186) (40)
Installment and consumer (677) (945) (725) (661) (434)
Total ($811) ($998) ($1,538) ($2,674) ($633)
Recoveries of loans previously charged off:
Commercial, financial and agricultural $16 $69 $647 $54 $350
Real estate 13 15 37 24 159
Installment and consumer 220 168 184 118 136
Total $249 $252 $868 $196 $645
Net (charge-offs) recoveries ($562) ($746) ($670) ($2,478) $12
Provision for loan losses 535 465 375 3,097 565
Allowance for loan losses at end of year $5,279 $5,306 $5,587 $5,882 $5,263
Ratio of net charge-offs to
average net loans 0.18% 0.25% 0.23% 0.74% 0.00%
</TABLE>
Management reviews criteria such as the customer's historic loan
payment performance, financial statements, financial ratios, cash flow, net
worth, collateral and guaranties, as well as local and national economic
factors, in determining whether loans should be written off as uncollectible.
The Company records a loss if it is probable that a loss will occur and the
amount can be reasonably estimated.
The Company's risk of loan loss is dependent on many factors:
economic conditions, the extent and values of underlying collateral,
significant concentrations of loans within the portfolio, the ability and
willingness of borrowers to perform according to loan terms and management's
competence and judgement in overseeing lending, collecting and loan-
monitoring activities. The risk of loss from commercial, financial and
agricultural loans is significantly impacted by economic factors and how
these factors affect the particular industries involved. The local economy
has remained stable for the past several years.
An analysis of the allowance for loan loss adequacy is performed on
a quarterly basis by the Company's credit administration department. This
analysis is reported to executive management and discussed at a quarterly
meeting where specific allocations for problem credits, charge-offs and
monthly provisions for loan losses are reviewed and revised, as necessary.
The results are reported to the Board of Directors. The analysis includes
assessment of the allowance for loan loss adequacy based on historic loan
losses and current quality grades of specific credits reviewed, credit
concentrations, current delinquent and nonperforming loans, current economic
conditions, peer group information and results of recent audits or regulatory
examinations. A significant portion of the increased charge-offs during 1995
were a result of the emphasis placed on the early detection of problem
credits.
The following table shows the allocation of the allowance for loan
losses allocated to each category.
Page 19
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
<TABLE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Allocated:
Commercial, financial and agricultural $3,070 $3,661 $3,799 $4,235 $2,210
Real estate <F1> 180 424 503 470 895
Installment and consumer 452 478 559 706 684
Total allocated allowance $3,702 $4,563 $4,861 $5,411 $3,789
Unallocated allowances 1,577 743 726 471 1,474
Total $5,279 $5,306 $5,587 $5,882 $5,263
<FN>
<F1> Residential real estate only for 1998, 1997, 1996, and 1995.
</FN>
</TABLE>
The portion of the allowance for loan losses which was unallocated
increased to $1,577,000 at December 31, 1998 from $743,000 a year earlier.
The decreases in the dollars allocated to commercial, financial and
agricultural, residential real estate and installment and consumer loans from
December 31, 1997 to December 31, 1998 were due primarily to adjustments made
in the corresponding factors applied to each of the loan segment balances.
The revisions were made in order to more accurately reflect actual loss
history since the merger in 1995. Beginning in 1995, allocations have been
based on loan portfolio balances (commercial, financial and agricultural,
including commercial real estate; residential real estate; and installment
and consumer loans) applied to corresponding factors. The increase in the
dollar allocation to commercial, financial and agricultural loans since
December 31, 1994 and reduction in the dollar allocation to real estate was
due primarily to the inclusion of commercial real estate in the commercial
category for 1995, 1996, 1997, and 1998.
The unallocated portion of the allowance for loan losses,
$1,577,000 at December 31, 1998, represented additional reserves available to
cover losses in any of the three categories listed in the table which may
exceed the allocated amount.
Management believes that nonperforming and potential problem loans
are appropriately identified and monitored based on the extensive loan
analyses performed by the credit administration department, the internal loan
committees and the Board of Directors. Historically, there has not been a
significant amount of loans charged off which had not been previously
identified as problem loans by the credit administration department or the
loan committees.
The following table presents the aggregate amount of loans
considered to be nonperforming for the periods indicated. Nonperforming
loans include loans accounted for on a nonaccrual basis, accruing loans
contractually past due 90 days or more as to interest or principal payments
and loans which are troubled debt restructurings as defined in Statement of
Financial Accounting Standards No. 15, "Accounting by Debtors and Creditors
for Troubled Debt Restructurings."
<TABLE>
NONPERFORMING LOANS (IN THOUSANDS)
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Nonaccrual loans <F1> $1,126 <F1> $2,208 <F1> $2,135 <F1> $2,270 $2,327
Loans past due 90 days or more $415 $747 $384 $846 $144
Renegotiated loans $121 $140 $162 $179 $198
<FN>
<F1> Includes $406,000 at December 31, 1998, $415,000 at December 31, 1997,
$448,000 at December 31, 1996, and $109,000 at December 31, 1995 of
real estate and consumer loans which management does not consider
impaired as defined by the Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114).
</FN>
</TABLE>
There were no other interest earning assets which would be required
to be disclosed as being nonperforming if such other assets were loans.
At December 31, 1998, BankIllinois had approximately $3,798,000 in
potential problem loans, excluding nonperforming loans. Potential problem
loans are those loans identified by management as being worthy of special
attention, and although currently performing, may have some underlying
weaknesses. None of these potential problem loans were considered impaired
as defined in SFAS 114. Approximately $720,000 of the non-performing loans
were considered impaired as of December 31, 1998. The $3,798,000 of
potential problem loans have either had timely payments or were adequately
secured and loss of principal or interest is determined to be unlikely.
Page 20
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
Loans over 90 days past due which are not well secured and in the
process of collection are placed on nonaccrual status. The total of
$1,126,000 nonaccrual loans at December 31, 1998 was significantly lower than
the December 31, 1997 amount of $2,208,000. Loans past due 90 days or more
but still accruing were reduced by $332,000 in 1998 to a balance of $415,000
at December 31, 1998. These loans are well secured and in the process of
collection.
The following table categorizes nonaccrual loans as of December 31,
1998 based on levels of performance and also details the allocation of
interest collected during the period in 1998 in which the loans were on
nonaccrual. Substantial performance, yet contractually past due, includes
borrowers making sizable periodic payments relative to the required periodic
payments due. A borrower that is not making substantial payments but is
making some periodic payments would be included in the limited performance
category.
<TABLE>
NONACCRUAL AND RELATED INTEREST PAYMENTS
(in thousands)
CASH INTEREST PAYMENTS APPLIED AS:
AT DECEMBER 31, 1998 RECOVERY OF REDUCTION
BOOK CONTRACTUAL INTEREST PRIOR PARTIAL OF
BALANCE BALANCE INCOME CHARGE-OFFS PRINCIPAL
<S> <C> <C> <C> <C> <C>
Contractually past due with:
Substantial performance $251 $319 $9 $0 $18
Limited performance 0 0 0 0 0
No performance 875 913 0 0 0
Total $1,126 $1,232 $9 $0 $18
</TABLE>
As shown in the table above, the nonaccrual loans with no
performance at December 31, 1998 made up the largest share of the total
(78%). The difference between the book balance and the contractual balance
represents charge-offs made since the loans were funded.
Management believes that the allowance for loan losses at December
31, 1998 was adequate to absorb credit losses in the total loan portfolio and
that the policies and procedures in place to identify potential problem loans
are being effectively implemented.
PREMISES AND EQUIPMENT
Total premises and equipment increased $942,000 in 1998 from 1997.
Included in the increase was the transfer of the BankIllinois Executive
Center ("Executive Center") located adjacent to the Bank's main offices, from
other real estate to premises and equipment at its market value of
$2,500,000. Somewhat offsetting this increase was the sale of a vacant
building and the adjacent parking lot, with a combined book value of
$1,499,000.
OTHER ASSETS
Other assets decreased $2,859,000 in 1998 from 1997. The decrease
was primarily due to a decrease in other real estate. In December 1998, the
Executive Center, with a market value of $2,500,000 was transferred to
premises and equipment. Included in this amount was $309,000 of improvements
made during 1998. Also contributing to the decrease in other assets was the
sale of other repossessed real estate properties with a total book value of
$626,000. In addition, deferred taxes receivable decreased $330,000 in 1998.
The decrease in other assets was somewhat offset by a 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.
Page 21
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
DEPOSITS
The following table shows the average balance and weighted average
rate of deposits at December 31 for the years indicated:
<TABLE>
AVERAGE BALANCE AND WEIGHTED AVERAGE RATE OF DEPOSITS
(dollars in thousands)
1998 1997 1996
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
<S> <C> <C> <C> <C> <C> <C>
Demand
Noninterest bearing $55,469 0.00% $51,405 0.00% $54,229 0.00%
Interest bearing 148,492 3.49% 139,613 3.64% 118,296 3.17%
Savings 17,073 1.95% 17,557 1.90% 20,358 1.86%
Time
$100,000 and over 37,855 5.75% 36,172 5.74% 30,715 5.41%
Under $100,000 145,491 5.70% 156,081 5.80 162,771 5.80
Totals $404,380 $400,828 $386,369
</TABLE>
In analyzing its deposit activity, management has noted that
average total deposits increased $3,552,000 during 1998. Included in this
increase were shifts in the average deposit mix in 1998 versus 1997. Average
interest bearing demand deposits increased $8,879,000, or 6%, while average
noninterest bearing deposits increased 4,064,000, or 8%. Somewhat offsetting
these increases were decreases in time deposits of $8,907,000, or 5%, and a
decrease of $484,000, or 3%, in savings deposits. The Prime Investment
account (included in interest bearing demand deposits) accounted for much of
the shift in the deposit mix, increasing from $60,773,000 at December 31,
1997 to $75,136,000 at December 31, 1998.
The table below sets forth the maturity of deposits greater than
$100,000 at December 31, 1998:
<TABLE>
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
(in thousands)
TOTAL TIME
DEPOSITS OF
MATURITY AT DECEMBER 31, 1998 CDS IRAS $100,000 OR MORE
<C> <C> <C> <C>
3 months or less $11,908 $253 $12,161
3 to 6 months 3,139 0 3,139
6 to 12 months 7,516 954 8,470
Over 12 months 9,271 1,541 10,812
Total $31,834 $2,748 $34,582
</TABLE>
SHORT-TERM BORROWINGS
Short-term borrowings include federal funds purchased, which are
generally overnight transactions, and securities sold under repurchase
agreements, which mature from one day to three years from the date of sale.
The table in note 9 in the Notes to Consolidated Financial Statements shows
the balances of short-term borrowings at December 31, 1998 and 1997, the
average balance for the years ended December 31, 1998, 1997 and 1996, and the
maximum month-end value during each year.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments for which no
listed market exists and the fair values of investment securities, which are
based on listed market quotes at December 31, 1998 and 1997, are disclosed in
note 17 in the Notes to Consolidated Financial Statements.
Page 22
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
CAPITAL
Total stockholders' equity rose $3,377,000 from $57,330,000 at
December 31, 1997 to $60,707,000 at December 31, 1998. The increase
represents net income of $6,074,000, a $77,000 increase from stock
appreciation rights and a $735,000 increase in accumulated other
comprehensive income less cash dividends totaling $1,699,000, net Treasury
Stock transactions of $1,806,000 and the purchase of $4,000 in fractional
shares of common stock following the stock dividend.
Financial institutions are required by regulatory agencies to
maintain minimum levels of capital based on asset size and risk
characteristics. Currently, the Company and BankIllinois are required by
their primary regulators to maintain adequate capital based on two
measurements: the total assets leverage ratio and the risk-weighted assets
ratio.
Based on Federal Reserve guidelines, a bank holding company
generally is required to maintain a leverage ratio of 3% plus an additional
cushion of at least 100 to 200 basis points. The Company's total assets
leverage ratio at December 31, 1998 and 1997 were 11.1% and 10.9%,
respectively. The leverage ratio for BankIllinois for the same periods were
9.8% and 10.0% well above the regulatory minimum for both the Company and
BankIllinois.
The minimum risk-weighted assets ratio for bank holding companies
is 8%. The Company's total risk-weighted assets at December 31, 1998 and
1997 were 19.1% and 17.7% significantly higher than the regulatory minimum.
BankIllinois' total risk-weighted assets were also significantly higher than
the regulatory minimum 17.2% and 16.4% for the years ended December 31, 1998
and 1997.
INFLATION AND CHANGING PRICES
Changes in interest rates and a bank's ability to react to interest
rate fluctuations have a much greater impact on a bank's balance sheet and
net income than inflation. A review of net interest income, liquidity and
rate sensitivity should assist in the understanding of how well the Company
is positioned to react to changes in interest rates.
LIQUIDITY AND CASH FLOWS
The Company requires cash to fund loan growth and deposit
withdrawals. Cash flows fluctuate with changes in economic conditions,
current interest rate trends and as a result of management strategies and
programs. The Asset Liability Committee ("ALCO") of BankIllinois, which
includes all executive managers, meets monthly to monitor the demand for cash
and initiates programs and policies as considered necessary to meet funding
gaps.
The Company was able to adequately fund loan demand and meet
liquidity needs in 1998. A review of the consolidated statement of cash
flows in the accompanying financial statements shows that the Company's cash
and due from banks and federal funds sold (cash) decreased $22,978,000 from
December 31, 1997 to December 31, 1998. The decrease resulted from net cash
used by operating, investing and financing activities. There were
differences in sources and uses of cash during 1998 compared to 1997. More
cash was used for operating activities in 1998 mainly due to the increase in
loans originated for sale. In the area of investing activities, less cash
was used in 1998 compared to 1997. In 1998 there was a decrease in loans
while 1997 experienced rapid loan growth. Proceeds from maturities and
calls, as well as paydowns on securities, which are reflective of the current
interest rate environment, were higher in 1998. These were somewhat offset
by more cash used in purchasing investments in debt and equity securities.
Cash was used in financing activities in 1998 compared to 1997 which provided
cash in this area. This was mainly due to lower deposits in 1998 as well as
less cash provided by federal funds purchased and securities sold under
repurchase agreements. Also, cash dividends were paid in 1998 and more cash
was used in purchasing treasury stock. These were somewhat offset by an
increase in Federal Home Loan Bank advances in 1998.
The Company's future short-term requirements for cash are not
expected to significantly change and will continue to be provided by
investment maturities, sales of loans and deposits. Cash required to meet
longer-term liquidity requirements will mostly depend on future goals and
strategies of management, the competitive environment, economic factors and
changes in the needs of customers. No outside borrowing is anticipated. The
Company expects to maintain FHLB advances near the current level. These
funds are matched to seven-year balloon and ten-year fixed-rate residential
mortgage loans booked in previous years. If current sources of liquidity
cannot provide needed cash in the future, the Company can obtain funds from
several sources. The Company is able to borrow funds on a temporary basis
from the Federal Reserve Bank, the FHLB and correspondent banks to meet
short-term requirements. With no parent company debt and sound capital
levels, the Company has several options for longer-term cash needs, such as
for future expansion and acquisitions.
Management is not aware of any current recommendations by the
Company's primary regulators which if implemented would have a material
effect on the Company's liquidity, capital resources or operations.
Page 23
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
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.
The following table shows the Company's interest rate sensitivity
position at various intervals at December 31, 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 $6,500 $0 $0 $0 $0 $6,500
Debt and equity securities <F1> 8,995 22,112 19,553 21,703 118,773 191,136
Loans <F2> 74,643 18,842 15,929 41,274 152,848 303,536
Total interest earning assets $90,138 $40,954 $35,482 $62,977 $271,621 $501,172
Interest bearing liabilities:
Savings and interest bearing
demand deposits $174,800 $0 $0 $0 $0 $174,800
Time deposits 16,207 12,658 27,229 39,973 76,029 172,096
Federal funds purchased and
securities sold under
repurchase agreements 44,763 0 0 5,000 200 49,963
Federal Home Loan Bank advances 0 1,000 0 2,000 7,000 10,000
Total interest bearing
liabilities $235,770 $13,658 $27,229 $46,973 $83,229 $406,859
Net asset (liability) funding gap ($145,632) $27,296 $8,253 $16,004 $188,392 $94,313
Repricing gap 0.38 3.00 1.30 1.34 3.26 1.23
Cumulative repricing gap 0.38 0.53 0.60 0.71 1.23 1.23
<FN>
<F1> Debt and equity securities include available-for-sale securities.
<F2> Loans include held-for-sale mortgage loans.
</FN>
</TABLE>
At December 31, 1998, the Company tended to be liability sensitive
due to the levels of savings and interest bearing demand deposits, time
deposits, federal funds purchased and securities sold under repurchase
agreements. As such, the effect of a decrease in the prime rate of 100 basis
points would increase net interest income by approximately $1,456,000 in 30
days and $1,183,000 in 90 days assuming no management intervention. A rise
in interest rates would have the opposite effect for the same periods.
In addition to managing interest sensitivity and liquidity through
the use of gap reports, the Company has provided for emergency liquidity
situations with informal agreements with correspondent banks which permit the
Company to borrow federal funds on an unsecured basis and $7,489,000 from the
Federal Home Loan Bank on a secured basis.
The Company uses financial forecasting/budgeting/reporting software
packages to perform interest rate sensitivity analysis for all product
categories. Investments in debt and equity securities are analyzed by
performing duration calculations to determine price volatility for interest
rate shifts of plus or minus 300 basis points. Call criteria and prepayment
assumptions are taken into consideration. All other financial instruments
are analyzed by a software database which includes each of the different
product categories which are tied to key rates such as prime or the fed funds
rate. The relationships of each of the different products to the key rate
that the product is tied to is proportional. The software reprices the
products based on current offering rates. The current
Page 24
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE> market value of loans is computed by discounting cash flows at market
rates as the discount rate. Categories of cash, fed funds, demand deposits,
accrued receivables and payables, and other assets and other liabilities are
priced at book value regardless of the interest rate shock. The software
performs interest rate sensitivity analysis by performing rate shocks of plus
or minus 300 basis points in 100 basis point increments.
The market value volatility, risk, is a function of term. The
longer the term, the greater the volatility (risk). Balances with very short
terms, loans linked to prime or savings, have little market value risk, while
long-term balances e.g., mortgages have much greater market value risk.
Having short-term deposits and longer term assets results in a negative slope
in the change in market value i.e., decreasing market value as rates rise.
The steeper this slope, the greater the risk. Risk can be decreased by
shortening the mismatch between assets and liabilities.
The following table shows hypothetical results based on these shock
levels:
<TABLE>
(dollars in millions)
MARKET
VALUE OF PORTFOLIO
CHANGE IN INTEREST RATES EQUITY CHANGE PERCENT CHANGE
<S> <C> <C> <C>
300 basis point rise $39 ($22) (36%)
200 basis point rise 46 (15) (25%)
100 basis point rise 54 (7) (11%)
Base scenario 61 0 0%
100 basis point decline 70 9 15%
200 basis point decline 77 16 26%
300 basis point decline 86 25 41%
</TABLE>
The foregoing computations are based on numerous assumptions,
including relative levels of market interest rates, prepayments and deposit
mix. The computed estimates should not be relied upon as a projection of
actual results. Despite the limitations on preciseness inherent in these
computations, management believes that the information provided is reasonably
indicative of the effect of changes in interest rate levels on the net
earning capacity of the Bank's current mix of interest earning assets and
interest bearing liabilities. Management continues to use the results of
these computations, along with the results of its computer model projections,
in order to maximize current earnings while positioning the Bank to minimize
the effect of a prolonged shift in interest rates that would adversely affect
future results of operations.
NEW ACCOUNTING RULES AND REGULATIONS
In June 1998, the Statement on Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," was
issued, which is required to be adopted in years beginning after June 15,
1999. The Statement permits early adoption as of the beginning of any fiscal
quarter after its issuance. The Company expects to adopt the Statement
effective January 1, 2000. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings
or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. The ineffective
portion of a derivative's change in fair value will be immediately recognized
in earnings. Management does not anticipate that the adoption of the new
Statement will have a significant effect on the Company's earnings or
financial position.
In October 1998, the Statement on Financial Accounting Standards
No. 134, "Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise," was issued, which is effective for the first fiscal quarter
beginning after December 15, 1998. The Statement changes the way mortgage
banking firms account for certain securities and other interests they retain
after securitizing mortgage loans which were held for sale. The Company does
not securitize mortgages; therefore, the Statement will have no effect on its
financial statements.
YEAR 2000
The federal banking regulators recently issued guidelines
establishing minimum safety and soundness standards for achieving Year 2000
compliance. The guidelines, which took effect October 15, 1998 and apply to
all FDIC-insured depository
Page 25
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
institutions, establish standards for developing and managing Year 2000
project plans, testing remediation efforts and planning for contingencies.
The guidelines are based upon guidance previously issued by the agencies
under the auspices of the Federal Financial Institutions Examination Council
(the "FFIEC"), but are not intended to replace or supplant the FFIEC guidance
which will continue to apply to all federally insured depository
institutions.
The guidelines were issued under section 39 of the Federal Deposit
Insurance Act, as amended (the "FDIA"), which requires federal banking
regulators to establish standards for the safe and sound operation of
federally insured depository institutions. Under section 39 of the FDIA, if
an institution fails to meet any of the standards established in the
guidelines, the institution's primary federal regulator may require the
institution to submit a plan for achieving compliance. If an institution
fails to submit an acceptable compliance plan, or fails in any material
respect to implement a compliance plan that has been accepted by its primary
federal regulator, the regulator is required to issue an order directing the
institution to cure the deficiency. Such an order is enforceable in court in
the same manner as a cease and desist order. Until the deficiency cited in
the regulator's order is cured, the regulator may restrict the institution's
rate of growth, require the institution to increase its capital, restrict the
rates the institution pays on deposits or require the institution to take any
action the regulator deems appropriate under the circumstances. In addition
to the enforcement procedures established in section 39 of the FDIA,
noncompliance with the standards established by the guidelines may also be
grounds for other enforcement action by the federal banking regulators,
including cease and desist orders and civil money penalty assessments.
The Year 2000 has posed a unique set of challenges to those
industries reliant on information technology. As a result of methods
employed by earlier programmers, many software applications and operational
programs may be unable to distinguish the Year 2000 from the Year 1900. If
not effectively addressed, this problem could result in the production of
inaccurate data, or, in the worst cases, the inability of the systems to
continue to function altogether. Financial institutions are particularly
vulnerable during the industry's dependence on electronic data processing
systems.
In December 1996, the Company developed their Year 2000 Project
Plan, following the guidelines established by the FFIEC. An integral part of
the plan was to establish a Year 2000 Committee comprised of representatives
from key areas throughout the organization. The Committee's mission is to
identify issues related to the Year 2000 and to initiate remedial measures
designed to eliminate any adverse effects on the Company's operations. The
Committee has developed a comprehensive, prioritized inventory of all
hardware, software, and material third party providers that may be adversely
affected by the Year 2000 date change, and has contacted vendors requesting
their status as it relates to the Year 2000. This inventory includes both
information technology ("IT") and non-IT systems, such as alarms, building
access, elevators and heating and cooling systems, which typically contain
embedded technology such as microcontrollers. This inventory is periodically
reevaluated to ensure that previously assigned priorities remain accurate and
to track the progress each vendor is making in resolving the problems
associated with the issue. The Company relies on software purchased from
third-party vendors rather than internally-generated software. The Company
is currently in the process of upgrading systems and testing to validate Year
2000 compliance. As of March 1999, testing is 80% complete. Testing is
being done on a test server which emulates the current network and systems of
the Company. The Company will have all but one of the mission critical
systems renovated and tested prior to March 31, 1999. The remaining mission
critical system, the item capture system, is scheduled to be upgraded to a
Year 2000 compliant system with imaging capabilities by late summer, a
timeframe determined by vendor availability. The Company is currently
operating on the Year 2000 compliant releases for core systems supported by
its third party data processor.
The Year 2000 Committee has also developed a communication plan
that updates the Board of Directors, management, and employees on the
Company's Year 2000 status, and has formed a subcommittee to develop a
customer awareness program. In addition, the Company has formed a coalition
with other local financial institutions to promote Year 2000 customer
awareness in the community.
The Committee has developed a separate plan in order to manage the
Year 2000 risks posed by commercial borrowing customers. This plan will
identify material loan customers, assess their preparedness, evaluate their
credit risk to the Company, and implement appropriate controls to mitigate
the risk. As a means of creating awareness among these borrowers, the
Company has conducted a corporate customer seminar to provide customers with
information on how the Year 2000 can impact their own business and is
planning a second seminar in the second quarter.
In accordance with regulatory guidelines, the Company has developed
a comprehensive contingency plan in the event that Year 2000 related failures
are experienced. The plan lists the various strategies and resources
available to restore core business processes. These strategies include
relying on back-up systems that do not utilize computers and, in some cases,
switching vendors. In the case of utility providers, the Company has not
identified any practical, long-term alternatives to relying on these
companies for basic utility services. The Company currently utilizes a
generator for emergency power at its main office during short-term power
Page 26
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
outages. Although the generator does not supply sufficient power to allow
the main office to remain open during a power outage, the Company is
researching the possibility of the generator supplying sufficient power to
operate a branch office in case of power outages caused by Year 2000 issues.
Management anticipates that the total additional out-of-pocket
expenditures required for bringing the systems into compliance for the Year
2000 will be approximately $275,000. Management believes that these required
expenditures will not have a material adverse impact on operations, cash
flow, or financial condition. This amount, including costs for upgrading
equipment specifically for the purpose of Year 2000 compliance, fees to
outside consulting firms, and certain administrative expenditures, has been
provided for in the Company's Year 2000 budget. Although management feels
confident that the Company has identified all necessary upgrades, and
budgeted accordingly, no assurance can be made that Year 2000 compliance can
be achieved without additional unanticipated expenditures. It is not
possible at this time to quantify the estimated future costs due to possible
business disruption caused by vendors, suppliers, customers or even the
possible loss of electric power or phone service; however, such costs could
be substantial. As a result of the Year 2000 project, the Company has not
had any material delay regarding its information systems projects.
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 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.
ITEM 7A. QUANTITATIVE AND QUALITITAVE DISCLOSURES ABOUT MARKET RISK
See pages 24 through 25.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements begin on page 28.
Page 27
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
BANKILLINOIS FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Page 28
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
BANKILLINOIS FINANCIAL CORPORATION
AND SUBSIDIARY
TABLE OF CONTENTS
INDEPENDENT AUDITOR'S REPORT 30
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 31
Consolidated Statements of Income 32
Consolidated Statements of Changes in Stockholders' Equity 33
Consolidated Statements of Cash Flows 34
Notes to Consolidated Financial Statements 35-50
Page 29
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
BankIllinois Financial Corporation
Champaign, Illinois
We have audited the accompanying consolidated balance sheets of BankIllinois
Financial Corporation (formerly known as Central Illinois Financial Co.,
Inc.) and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders equity, and cash
flows for each of the three years in the period ended December 31, 1998.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of BankIllinois Financial Corporation and subsidiary as of December 31, 1998
and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Champaign, Illinois
March 24, 1999
Page 30
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
BANKILLINOIS FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1998 and 1997
(in thousands, except share data)
<TABLE>
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $19,080 $28,958
Federal funds sold 6,500 19,600
Cash and cash equivalents 25,580 48,558
Investments in debt and equity securities:
Available-for-sale, at fair value 124,055 135,317
Held-to-maturity, at cost (fair value of $65,581
and $18,635 at December 31, 1998 and 1997, respectively) 65,509 18,519
Non-marketable equity securities 1,572 1,550
Total investments in debt and equity securities 191,136 155,386
Mortgage loans held for sale 10,951 1,408
Loans, net of allowance for loan losses of $5,279 and
$5,306 at December 31, 1998 and 1997, respectively 287,306 309,729
Premises and equipment 12,195 11,253
Accrued interest receivable 4,865 4,833
Other assets 5,340 8,199
Total assets $537,373 $539,366
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, non-interest bearing $63,002 $59,693
Demand, interest bearing 157,052 146,776
Savings 17,748 16,623
Time, $100 and over 34,582 41,196
Other time 137,514 152,866
Total deposits 409,898 417,154
Short-term borrowings 49,963 49,857
Federal Home Loan Bank advances 10,000 8,000
Accrued interest payable 1,399 1,736
Other liabilities 5,406 5,289
Total liabilities 476,666 482,036
Stockholders' equity:
Preferred stock, no par value; 300,000 shares authorized 0 0 Common stock, $0.01 par value;
6,500,000 shares authorized;
5,466,815 and 5,466,996 shares issued at December 31, 1998
and 1997, respectively 55 55
Paid in capital 28,953 28,880
Retained earnings 33,300 29,006
Accumulated other comprehensive income 1,033 298
63,341 58,239
Less: treasury stock, at cost, 137,976 and 69,053 shares at
December 31, 1998 and 1997, respectively (2,634) (909)
Total stockholders' equity 60,707 57,330
Total liabilities and stockholders' equity $537,373 $539,366
See accompanying notes to consolidated financial statements.
</TABLE>
Page 31
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
BANKILLINOIS FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
(in thousands, except share data)
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Interest income:
Loans and fees on loans $27,495 $26,486 $26,037
Investments in debt and equity securities:
Taxable 9,115 9,796 6,797
Tax-exempt 459 302 380
Federal funds sold and interest-bearing deposits 945 762 1,874
Total interest income 38,014 37,346 35,088
Interest expense:
Demand, savings, and other time deposits 13,810 14,466 13,558
Time deposits $100 and over 2,178 2,077 1,662
Short-term borrowings 2,401 2,275 2,006
Federal Home Loan Bank advances 573 592 599
Total interest expense 18,962 19,410 17,825
Net interest income 19,052 17,936 17,263
Provision for loan losses 535 465 375
Net interest income after provision
for loan losses 18,517 17,471 16,888
Non-interest income:
Service charges and fees 1,705 1,866 1,839
Trust fees 2,198 2,026 1,931
Security transactions, net 60 38 (4)
Gain on sales of loans, net 594 271 266
Other 378 275 259
Total non-interest income 4,935 4,476 4,291
Non-interest expense:
Salaries and employee benefits 8,283 7,742 7,795
Occupancy 1,382 1,519 1,511
Equipment 899 920 967
Data processing fees 737 733 716
Advertising and marketing 555 558 822
Office supplies 469 506 591
Federal deposit insurance premiums 49 48 2
Other 2,083 1,862 2,091
Total non-interest expense 14,457 13,888 14,495
Income before income taxes 8,995 8,059 6,684
Income taxes 2,921 2,659 2,183
Net Income $6,074 $5,400 $4,501
Per share data:
Basic earnings per share $1.13 $1.00 $0.83
Weighted average shares of common stock outstanding 5,381,720 5,400,631 5,445,294
Diluted earnings per share $1.09 $0.98 $0.81
Weighted average shares of common stock and dilutive
potential common shares outstanding 5,556,155 5,524,112 5,536,763
See accompanying notes to consolidated financial statements.
</TABLE>
Page 32
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
<TABLE>
BANKILLINOIS FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1998, 1997, and 1996
(in thousands, except share data)
ACCUMULATED
OTHER
COMPRE-
COMMON STOCK PAID IN RETAINED HENSIVE TREASURY STOCK
SHARES AMOUNT CAPITAL EARNINGS INCOME SHARES AMOUNT TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996, as
previously reported 5,207,088 $52 $23,000 $25,244 $112 - $- $48,408
Restated for 5% stock
dividend-1998 260,354 3 5,724 (5,727) - - - -
Balance, January 1, 1996, as
restated 5,467,442 55 28,724 19,517 112 - - 48,408
Comprehensive Income:
Net income - - - 4,501 - - - 4,501
Unrealized gain (loss) on
securities available-for-sale
arising this year,
net of taxes of ($113) - - - - (223) - - (223)
Reclassification adjustment,
net of tax of $1 - - - - 2 - - 2
Comprehensive Income 4,280
Fractional shares of common
stock purchased following
stock dividend (266) - (3) - - - - (3)
Stock appreciation rights - - 60 - - - - 60
Treasury stock transactions, net - - - - - 51,156 (649) (649)
Balance, December 31, 1996 5,467,176 55 28,781 24,018 (109) 51,156 (649) 52,096
Comprehensive Income:
Net income - - - 5,400 - - - 5,400
Unrealized gain (loss) on
securities available-for-sale
arising this year,
net of taxes of $215 - - - - 420 - - 420
Reclassification adjustment,
net of tax of ($7) - - - - (13) - - (13)
Comprehensive Income 5,807
Fractional shares of common
stock purchased following
stock dividend (180) - (3) - - - - (3)
Stock appreciation rights - - 108 - - - - 108
Cash dividends ($0.08
per share) - - - (412) - - - (412)
Treasury stock transactions, net - - (6) - - 17,897 (260) (266)
Balance, December 31, 1997 5,466,996 55 28,880 29,006 298 69,053 (909) 57,330
Comprehensive Income:
Net income - - - 6,074 - - - 6,074
Unrealized gain (loss) on
securities available-for-sale
arising this year,
net of taxes of $393 - - - - 765 - - 765
Reclassification adjustment,
net of tax of ($15) - - - - (30) - - (30)
Comprehensive Income 6,809
Fractional shares of common
stock purchased following
stock dividend (181) - (4) - - - - (4)
Stock appreciation rights - - 77 - - - - 77
Cash dividends ($0.32
per share) - - - (1,699) - - - (1,699)
Treasury stock transactions, net - - - (81) - 68,923 (1,725) (1,806)
Balance, December 31, 1998 5,466,815 $55 $28,953 $33,300 $1,033 137,976 ($2,634) $60,707
See accompanying notes to consolidated financial statements.
</TABLE>
Page 33
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
BANKILLINOIS FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996
(in thousands)
<TABLE> 1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $6,074 $5,400 $4,501
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,061 1,144 1,157
Amortization of bond premiums, net 77 25 140
Provision for loan losses 535 465 375
Deferred income taxes (49) (27) 417
(Gain) loss on security transactions, net (60) (38) 4
Gain on sales of loans, net (594) (271) (266)
Increase in accrued interest receivable (32) (316) (74)
(Decrease) increase in accrued interest payable (337) 160 (388)
Other, net 133 44 (203)
Stock appreciation rights 77 108 60
Proceeds from sales of loans originated for sale 67,153 24,138 17,726
Loans originated for sale (76,102) (23,998) (17,491)
Net cash provided by (used in) operating activities (2,064) 6,834 5,958
Cash flows from investing activities:
Net decrease (increase) in loans 21,862 (32,236) 38,430
Proceeds from maturities and calls of investments in debt securities:
Held-to-maturity 9,291 18,346 15,053
Available-for-sale 74,620 50,493 34,437
Proceeds from sales of investments in debt and equity securities:
Available-for-sale 0 0 2,000
Non-marketable 48 145 723
Purchases of investments in debt and equity securities:
Held-to-maturity (56,369) (15,305) (16,038)
Available-for-sale (72,989) (59,134) (94,212)
Non-marketable (70) 0 0
Principal paydowns from mortgage-backed securities:
Held-to-maturity 100 257 446
Available-for-sale 10,716 3,933 926
Purchases of premises and equipment (857) (1,642) (854)
Proceeds from sale of premises and equipment 1,380 1 15
Net cash used in investing activities (12,268) (35,142) (19,074)
Cash flows from financing activities:
Net (decrease) increase in deposits (7,256) 13,024 (15,027)
Net increase in short-term borrowings 106 5,916 7,668
Net increase (decrease) in Federal Home Loan Bank advances 2,000 (1,000) 0
Cash dividends paid (1,686) 0 (378)
Treasury stock transactions, net (1,806) (266) (649)
Fractional shares purchased following stock dividend (4) (3) (3)
Net cash provided by (used in) financing activities (8,646) 17,671 (8,389)
Net decrease in cash and cash equivalents (22,978) (10,637) (21,505)
Cash and cash equivalents at beginning of year 48,558 59,195 80,700
Cash and cash equivalents at end of year $25,580 $48,558 $59,195
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $19,299 $19,250 $18,213
Income taxes 2,949 2,060 1,748
Transfer of mortgage loans held-for-sale to loans 0 0 8,175
Disposal of property and equipment subject to valuation allowance 304 0 71
Change in unrealized gain (loss) on securities available-for-sale (1,114) (615) 333
Change in deferred taxes attributable to unrealized gain (loss) on securities
available-for-sale 379 208 (112)
Real estate acquired through or in lieu of foreclosure 26 2,323 608
Property plant and equipment transferred from other real estate 2,500 0 0
Dividends declared not paid 425 412 0
See accompanying notes to consolidated financial statements.
</TABLE>
Page 34
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
BANKILLINOIS FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) ORGANIZATION
Effective February 27, 1998, the Company changed its corporate name to
BankIllinois Financial Corporation. Prior to that date, it
operated under the name of Central Illinois Financial Co., Inc.
On September 14, 1998, BankIllinois Trust Company, a former subsidiary
of BankIllinois Financial Corporation, was merged into
BankIllinois.
The Company and its subsidiary provide a full range of banking
services to individual and corporate customers located within
Champaign, Illinois, and the surrounding communities.
BankIllinois is subject to competition from other financial
institutions and nonfinancial institutions providing financial
products. Additionally, the Company and its subsidiary are
subject to the regulations of certain regulatory agencies and
undergo periodic examinations by those regulatory agencies.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company have been
prepared in conformity with generally accepted accounting
principles and conform to predominant practices within the banking
industry. The preparation of the consolidated financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions,
including the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with
foreclosure or in satisfaction of loans, that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
The significant accounting policies used by the Company in the
preparation of the consolidated financial statements are
summarized below:
(a) PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, BankIllinois. Sig-
nificant intercompany accounts and transactions have been
eliminated in consolidation.
Property held by the Trust & Investments Division in fiduciary or
agency capacities for its customers is not included in the
accompanying consolidated balance sheets, since such items are
not assets of the Company.
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, which was issued in
June 1997. Statement No. 130 establishes new rules for the
reporting and display of comprehensive income and its
components, but has no effect on the Company's net income or
total stockholders' equity. Statement No. 130 requires
unrealized gains and losses on the Company's available-for-sale
securities which prior to adoption were reported separately in
stockholders' equity to be included in comprehensive income.
Prior year financial statements have been reclassified to
conform to the requirements of Statement No. 130.
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Statement
No. 131 requires a publicly-held entity to disclose financial
and other descriptive information about all of its reportable
operating segments. The Statement requires disclosure of net
income or loss, certain specific revenue and expense items, and
assets for each segment presented and disclosure of a
reconciliation of this information with the corresponding
amounts recognized in the financial statements of the entity.
This Statement also requires disclosure of other pertinent
segment information, including the products and services
provided by its operating segments and the method by which the
operating segments were determined.
Based on the Company's approach to decision making, it has decided
that its business is comprised of a single segment and that
Statement No. 131 therefore has no impact on its consolidated
financial statements.
(b) INVESTMENTS IN DEBT AND EQUITY SECURITIES
Debt securities classified as held-to-maturity are those
securities which the Company has the ability and intent to hold
until maturity. These securities are carried at amortized
cost, in which the amortization of premiums and accretion of
discounts, which are recognized as adjustments to interest
income, are recorded using methods which approximate the
interest method. These methods consider the timing and amount
of prepayments of underlying mortgages in estimating future
cash flows on individual mortgage-related securities.
Unrealized holding gains and losses for held-to-maturity
securities are excluded from earnings and stockholders' equity.
Debt and equity securities classified as available-for-sale are
those securities that the Company intends to hold for
Page 35
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
an indefinite period of time but not necessarily to maturity.
Any decision to sell a security classified as available-for-
sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the
Company's assets and liabilities, liquidity needs, regulatory
capital considerations, and other similar factors. Securities
available-for-sale are carried at fair value. The difference
between fair value and cost, adjusted for amortization of
premium and accretion of discounts, results in an unrealized
gain or loss. Unrealized gains or losses are reported as
accumulated other comprehensive income, net of the related
deferred tax effect. Gains or losses from the sale of
securities are determined using the specific identification
method. Premiums and discounts are recognized in interest
income using methods which approximate the interest method over
their contractual lives.
A decline in the market value of any available-for-sale or held-
to-maturity security below cost that is deemed other than
temporary is charged to earnings and results in the establish-
ment of a new cost basis for the security.
Non-marketable equity securities, including BankIllinois' required
investment in the capital stock of the Federal Home Loan Bank,
are carried at cost, as fair values are not readily
determinable.
(c) LOANS
Loans are stated at the principal amount outstanding, net of the
allowance for loan losses. Interest is credited to income as
earned, based upon the principal amount outstanding.
The accrual of interest on loans is discontinued when, in the
opinion of management, the borrower may be unable to meet
payments as they become due. Interest accrued in the current
year is reversed against interest income, and prior years'
interest is charged to the allowance for loan losses. Interest
income on impaired loans is recognized to the extent interest
payments are received and the principal is considered fully
collectible.
Loan origination fees and costs are deferred at origination and
are recognized over the life of the loan as an adjustment to
yield.
Mortgage loans held for sale are carried at the lower of aggregate
cost or estimated market value. Net unrealized losses are
recognized in a valuation allowance by charges to income.
Gains or losses on sales of loans held for sale are computed
using the specific-identification method and are reflected in
income at the time of sale.
(d) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by provisions charged
to operations and is reduced by loan charge-offs less
recoveries. Management utilizes an approach, which provides
for general and specific valuation allowances, is based on
current economic conditions, past losses, collection
experience, risk characteristics of the portfolio, assessment
of collateral values by obtaining independent appraisals for
significant properties, and such other factors which, in
management's judgment, deserve current recognition in
estimating loan losses, to determine the appropriate level of
the allowance for loan losses.
The allowance for loan losses related to impaired loans that are
identified for evaluation is based on discounted cash flow
using the loans initial effective interest rate or the fair
value, less selling costs, of the collateral for collateral
dependent loans.
Loans are categorized as "impaired" when, based on current
information or events, it is probable that the Company will be
unable to collect all amounts due, including principal and
interest, in accordance with the contractual terms of the loan
agreement.
The Company reviews all non-accrual and substantially delinquent
loans, as well as problem loans identified by management, for
impairment as defined above. A specific reserve amount will be
established for impaired loans in which the present value of
the expected cash flows to be generated is less than the amount
of the loan recorded on the Company's books. As an alternative
to discounting, the Company may use the "fair value" of any
collateral supporting a collateral-dependent loan in reviewing
the necessity for establishing a specific loan loss reserve
amount. Specific reserves will be established for accounts
having a collateral deficiency estimated to be $50,000 or more.
The Company's general reserve is maintained at an adequate
level to cover accounts having a collateral deficiency of less
than $50,000.
Loans restructured prior to December 1994 and loans evaluated as
groups or homogeneous pools of loans will be excluded from this
analysis.
Page 36
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
Management believes the allowance for loan losses is adequate to
absorb possible losses in the loan portfolio. While management
uses available information to recognize loan losses, future
additions to the allowance for loan losses may be necessary
based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination
process, periodically review the adequacy of the allowance for
loan losses. Such agencies may require the Company to recog-
nize additions to the allowance for loan losses based on their
judgments of information available to them at the time of their
examination.
(e) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization
applicable to furniture and equipment and buildings and lease-
hold improvements is charged to occupancy expense using
straight-line and accelerated methods over the estimated useful
lives of the assets. Such lives are estimated to be three to
seven years for furniture and equipment and five to fifty years
for buildings and leasehold improvements. Maintenance and
repairs are charged to operations as incurred.
(f) OTHER REAL ESTATE
Other real estate, included in other assets in the accompanying
consolidated balance sheets, is initially recorded at fair
value. If, subsequent to foreclosure, the fair value is less
than the carrying amount, the difference is recorded as a
valuation allowance through a charge to income. Subsequent
increases in fair value are recorded through a reversal of the
valuation allowance, but not below zero. Expenses incurred in
maintaining the properties are charged to operations.
(g) MORTGAGE SERVICING RIGHTS
The cost of mortgage servicing rights is amortized in proportion
to, and over the period of, estimated net servicing revenues.
Impairment of mortgage servicing rights is assessed based on
the fair value of those rights. Fair values are estimated
using discounted cash flows based on a current market interest
rate. For purposes of measuring impairment, the rights are
stratified primarily based on the contractual maturities of the
underlying mortgages. The amount of impairment recognized is
the amount by which the capitalized mortgage servicing rights
for a stratum exceed their fair value.
(h) INCOME TAXES
Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. De-
ferred tax assets and liabilities are measured using enacted
tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date.
(i) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average number of common stock shares outstanding.
Diluted earnings per share is computed by dividing net income by
the weighted average number of common stock and dilutive
potential common shares outstanding. Options to purchase
shares of the Company's common stock and stock appreciation
rights, as discussed in note 14 to the consolidated financial
statements, are the only dilutive potential common shares. The
weighted average number of dilutive potential common shares is
calculated using the treasury stock method.
(j) CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash
and cash equivalents include cash and due from banks and
federal funds sold. Generally, federal funds are sold for one-
day periods.
(k) STOCK DIVIDEND
During May 1996, 1997 and 1998, the Company effected 5% stock
dividends. All references in the accompanying financial
statements to number of shares and per share amounts have been
retroactively restated to reflect the stock dividends.
Page 37
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
(l) RECLASSIFICATION
Certain amounts in the 1997 and 1996 consolidated financial
statements have been reclassified to conform with the 1998
presentation. Such reclassifications have no effect on previ-
ously reported net income.
(m) EMERGING ACCOUNTING STANDARDS
In June 1998, the Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging
Activities," was issued, which is required to be adopted in
years beginning after June 15, 1999. The Statement permits
early adoption as of the beginning of any fiscal quarter after
its issuance. The Company expects to adopt the Statement
effective January 1, 2000. The Statement will require the
Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted
to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value
of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will
be immediately recognized in earnings.
Management does not anticipate that the adoption of the new
Statement will have a significant effect on the Company's
earnings or financial position.
(3) CASH AND DUE FROM BANKS
The compensating balances held at correspondent banks was $522,000 and
$1,086,000 at December 31, 1998 and 1997, respectively.
BankIllinois maintains such compensating balances with
correspondent banks to offset charges for services rendered by
those banks. In addition, BankIllinois was required by the
Federal Reserve Bank to maintain reserves in the form of cash on
hand or balances at the Federal Reserve Bank. The balance of
reserves required to be held was $6,975,000 and $5,465,000 at
December 31, 1998 and 1997, respectively.
(4) INVESTMENTS IN DEBT AND EQUITY SECURITIES
The amortized cost and fair values of investments in debt and equity
securities (in thousands) were as follows:
<TABLE>
AVAILABLE-FOR-SALE
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
December 31, 1998
U.S. Treasury and other
government agencies $113,129 $1,420 $11 $114,538
Mortgage-backed securities 5,954 13 23 5,944
Other 3,407 281 115 3,573
$122,490 $1,714 $149 $124,055
December 31, 1997
U.S. Treasury and other
government agencies $127,690 $470 $152 $128,008
Mortgage-backed securities 6,264 15 37 6,242
Other 912 155 0 1,067
$134,866 $640 $189 $135,317
</TABLE>
Page 38
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
<TABLE>
HELD-TO-MATURITY
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
December 31, 1998
U.S. Treasury and other
government agencies $32,728 $83 $148 $32,663
Obligations of states and
political subdivisions 18,614 204 54 18,764
Mortgage-backed securities 14,167 9 22 14,154
$65,509 $296 $224 $65,581
December 31, 1997
U.S. Treasury and other
government agencies $11,512 $36 $0 $11,548
Obligations of states and
political subdivisions 7,007 80 0 7,087
$18,519 $116 $0 $18,635
</TABLE>
Proceeds from sales of investments in debt and equity securities
during 1998, 1997 and 1996 were $48,000, $145,000 and $2,723,000,
respectively. Proceeds from maturities and calls of investments
in debt and equity securities during 1998, 1997 and 1996 were
$83,911,000, $68,839,000 and $49,490,000, respectively. Realized
gains and losses (in thousands) on sales, maturities and calls for
the years ended December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Gross gains $61 $38 $0
Gross losses (1) 0 (4)
Net gains (losses) $60 $38 ($4)
</TABLE>
Investments in debt and equity securities with a carrying value of
$109,499,000 and $91,474,000 were pledged at December 31, 1998 and
1997, respectively, to secure public deposits, securities sold
under agreements to repurchase, and for other purposes as required
by law.
The amortized cost and fair value of investments in debt and equity
securities (in thousands) at December 31, 1998, by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less $40,919 $41,226 $4,391 $4,418
Due after one year through five years 66,719 67,966 24,942 24,990
Due after five years through ten years 8,898 8,919 20,214 20,171
Due after ten years 0 0 1,795 1,848
116,536 118,111 51,342 51,427
Mortgage-backed securities 5,954 5,944 14,167 14,154
Total debt securities $122,490 $124,055 $65,509 $65,581
</TABLE>
(5) LOANS
A summary of loans (in thousands), by classification, at December 31,
1998 and 1997 is as follows:
1998 1997
Commercial, financial, and agricultural $112,265 $121,927
Real estate 132,919 141,091
Installment and consumer 47,401 52,017
292,585 315,035
Less:
Allowance for loan losses 5,279 5,306
$287,306 $309,729
Page 39
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
The Company makes commercial, financial, and agricultural; real
estate; and installment and consumer loans to customers located in
east-central Illinois and the surrounding communities. As such,
the Company is susceptible to changes in the economic environment
in east-central Illinois.
During 1998, 1997 and 1996, the Company sold approximately
$67,153,000, $24,138,000 and $17,726,000, respectively, of
residential mortgage loans in the secondary market, primarily to
the NationsBanc and Fannie Mae. Gross gains of approximately
$642,000, $275,000 and $315,000, and gross losses of approximately
$48,000, $4,000 and $49,000, were realized on the sales during
1998, 1997 and 1996, respectively.
Mortgage loans serviced for others are not included in the
accompanying consolidated financial statements. The unpaid
balances of these loans consisted of the following (in thousands)
at December 31, 1998 and 1997:
<TABLE>
1998 1997
<S> <C> <C>
Fannie Mae $68,137 $94,104
Freddie Mac 1,944 3,381
Illinois Housing Development Authority 3,146 3,848
</TABLE>
In the normal course of business, loans are made to directors,
executive officers, and principal stockholders of the Company and
to parties which the Company or its directors, executive officers,
and stockholders have the ability to significantly influence its
management or operating policies (related parties). The terms of
these loans, including interest rates and collateral, are similar
to those prevailing for comparable transactions with other custom-
ers and do not involve more than a normal risk of collectibility.
Activity associated with loans (in thousands) made to related
parties during 1998 was as follows:
<TABLE>
1998
<S> <C>
Balance, January 1 $11,053
New loans 1,532
Repayments (4,222)
Changes in relationship (1,862)
Balance, December 31 $6,501
</TABLE>
Activity in the allowance for loan losses (in thousands) for 1998,
1997 and 1996 was as follows:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Balance, beginning of year $5,306 $5,587 $5,882
Provision charged to expense 535 465 375
Loans charged off (811) (998) (1,538)
Recoveries on loans previously charged off 249 252 868
Balance, end of year $5,279 $5,306 $5,587
</TABLE>
The following table presents summary data on nonaccrual and other
impaired loans (in thousands) at December 31, 1998, 1997 and 1996:
<TABLE>
1998 1997
<S> <C> <C>
Impaired loans on nonaccrual $720 $1,793
Impaired loans continuing to accrue interest 0 172
Total impaired loans $720 $1,965
Other non-accrual loans not classified
as impaired 406 415
Allowance for loan losses on impaired loans 377 773
Impaired loans for which there is no related
allowance for loan losses 0 0
Average recorded investment in impaired
loans 2,240 3,129
Interest income recognized from impaired
loans 5 98
Cash basis interest income recognized from
impaired loans 18 6
</TABLE>
Page 40
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
(6) PREMISES AND EQUIPMENT
A summary of premises and equipment (in thousands) at December 31,
1998 and 1997 is as follows:
<TABLE>
1998 1997
<S> <C> <C>
Land $2,865 $3,279
Furniture and equipment 5,269 5,475
Buildings and leasehold improvements 13,762 13,390
21,896 22,144
Less accumulated depreciation and amortization 9,701 10,891
$12,195 $11,253
</TABLE>
Depreciation and amortization expense was $1,035,000, $1,105,000 and
$1,114,000 for 1998, 1997 and 1996, respectively.
The Company leases various operating facilities and equipment under
noncancellable operating lease arrangements. These leases expire
at various dates through November 2007 and have renewal options to
extend the lease terms for various dates through November 2017.
The rental expense for these operating leases was $222,000,
$199,000 and $226,000 in 1998, 1997 and 1996, respectively.
Minimum annual rental payments required under the operating leases (in
thousands), which have initial or remaining terms in excess of one
year at December 31, 1998 are as follows:
1999 $172
2000 148
2001 148
2002 148
2003 42
Thereafter 113
As a result of the merger between BankIllinois Financial Co. and
Central Illinois Financial Corporation, certain banking facilities
were deemed to be unnecessary for the ongoing operations of the
merged entity. Accordingly, premises and equipment was identified
to be disposed of and a charge of $375,000 was recorded to other
non-interest expense in 1995 to reduce the book value of these
assets. During 1996, certain data processing equipment was
disposed of. During March 1998, the remaining identified property
was sold and an additional loss of $246,000 was recognized.
(7) OTHER REAL ESTATE OWNED
On January 24, 1994, the Company entered into an agreement to sell the
BankIllinois Executive Center. During 1997, the borrower
defaulted on the loan and approximately $1,834,000 was transferred
to other real estate. Additionally, approximately $822,000 of
improvements were completed on this office building. During
December 1998, the building was written down to market value and
transferred to premises and equipment.
(8) DEPOSITS
As of December 31, 1998, the scheduled maturities of time deposits (in
thousands) were as follows:
1999 $96,067
2000 31,484
2001 42,788
2002 898
2003 859
Page 41
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
(9) SHORT-TERM BORROWINGS
A summary of short-term borrowings (in thousands) at December 31, 1998
and 1997 is as follows:
<TABLE>
1998 1997
<S> <C> <C>
Federal funds purchased $4,550 $8,400
Securities sold under agreements to repurchase:
U.S. Treasury and other government agency securities
with carrying values of $81,116,000 and $64,559,000
and market values of $81,129,000 and $64,588,000
at December 31, 1998 and 1997, respectively 45,413 41,457
$49,963 $49,857
</TABLE>
Information relating to short-term borrowings (dollars in thousands)
is as follows:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Federal funds purchased:
Average daily balance $3,881 $3,763 $4,267
Maximum balance at month-end 4,840 9,100 7,650
Weighted average interest rate at year-end 3.44% 5.15% 6.99%
Weighted average interest rate for the year 5.11% 5.35% 5.32%
Securities sold under agreements to repurchase:
Average daily balance $44,806 $39,221 $35,331
Maximum balance at month-end 53,080 41,457 38,277
Weighted average interest rate at year-end 4.38% 5.43% 5.20%
Weighted average interest rate for the year 4.92% 5.29% 5.04%
</TABLE>
The securities underlying the agreements to repurchase are under the
control of BankIllinois.
(10) FEDERAL HOME LOAN BANK ADVANCES
A summary of Federal Home Loan Bank (FHLB) advances (dollars in
thousands) at December 31, 1998 is as follows:
WEIGHTED
AVERAGE
AMOUNT RATE
Maturing in year ending:
1999 $3,000 6.51%
2000 1,000 6.57%
2001 1,000 6.76%
2008 5,000 5.40%
$10,000 5.99%
The terms of a security agreement with the FHLB require BankIllinois
to pledge as collateral for advances both qualifying first
mortgage loans in an amount equal to at least 167% of these
advances and all stock of the FHLB. Advances are subject to
restrictions or penalties in the event of prepayment.
BankIllinois had a total remaining borrowing capacity with the
FHLB of approximately $7,489,000 at December 31, 1998 at a rate
equal to the FHLB current advance rates.
(11) LINE OF CREDIT
The Company has an unsecured line of credit of $2,000,000 from a third
party lender. As of December 31, 1998, the entire line was
available.
(12) INCOME TAXES
Federal income tax expense (in thousands) for 1998, 1997 and 1996 is
summarized as follows:
Page 42
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Current $2,970 $2,686 $1,766
Deferred (49) (27) 417
Total $2,921 $2,659 $2,183
</TABLE>
Actual income tax expense (in thousands) for 1998, 1997 and 1996
differ from the "expected" income taxes (computed by applying the
maximum U.S. federal corporate income tax rate of 35% to earnings
before income taxes) as follows:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Computed "expected" income taxes $3,148 $2,821 $2,339
Tax-exempt interest income, net of
disallowed interest expense (136) (97) (116)
Other, net (91) (65) (40)
$2,921 $2,659 $2,183
</TABLE>
The tax effects of temporary differences (in thousands) that give rise
to significant portions of the deferred tax assets and deferred
tax liabilities at December 31, 1998 and 1997 are as follows:
<TABLE>
1998 1997
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $1,148 $973
Deferred compensation 955 901
Other real estate 153 0
Severance payable 157 112
Stock appreciation rights 113 87
Other 138 162
Total deferred tax assets $2,664 $2,235
Deferred tax liabilities:
Unrealized holding gain on
available-for-sale securities ($532) ($153)
Premises and equipment (925) (827)
Other real estate 0 (15)
Other (577) (280)
Total deferred tax liabilities ($2,034) ($1,275)
Net deferred tax assets $630 $960
</TABLE>
A valuation allowance would be provided when it is more likely than
not that some portion of the deferred tax assets will not be
realized. The Company has not established a valuation allowance
as of December 31, 1998 or 1997, due to management's belief that
all criteria for asset recognition have been met, including the
existence of a history of taxes paid sufficient to support the
realization of the deferred tax assets.
(13) RETIREMENT PLANS
The Company has established a profit sharing plan and a 401(k) plan
for substantially all employees who meet the eligibility
requirements. The 401(k) plan allows for participants'
contributions of up to 10% of gross salary, the first 6% of which
is available for the Company's 50% match. The profit sharing plan
is non-contributory. All contributions to the profit sharing plan
are at the discretion of the Company.
The Company has merged the profit sharing plan of the former Central
Illinois Financial Corporation and the defined contribution plan
of the former BankIllinois Financial Co., and 401(k) plans of both
companies into the respective BankIllinois Financial Corporation
profit sharing and 401(k) plans. The assets of the plans were
transferred during 1997.
Total contributions by the Company under the retirement plans
discussed above totaled $409,000, $386,000 and $379,000 for 1998,
1997 and 1996, respectively.
Page 43
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
Certain key officers and directors participate in various deferred
compensation or supplemental retirement agreements with the
Company. The Company accrues the liability for these agreements
based on the present value of the amount the employee or director
is currently eligible to receive. The Company recorded expenses
of $243,000, $236,000 and $207,000 in 1998, 1997 and 1996,
respectively, related to these agreements.
(14) STOCKHOLDERS' EQUITY
SHARE PURCHASE RIGHTS PLAN
The Company has established the BankIllinois Financial Corporation
Rights Agreement (the Rights Agreement). The Rights Agreement
gives the holder of each share of common stock of the Company a
purchase right to acquire one one-hundredth of a share of the
authorized no par value preferred stock (Purchase Right). The
Rights Agreement has the effect of substantially diluting the
percentage of ownership of certain acquirers of common stock of
the Company unless sale or merger of the Company is approved by
certain continuing directors of the Company. Each Purchase Right
trades in tandem with its respective share of common stock until
the occurrence of certain events, in which case it would separate
and entitle the registered holder, subject to the terms of the
Rights Agreement, to purchase certain equity securities at a price
below market value.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
In 1994, the former BankIllinois Financial Co. established a stock
incentive plan, which provides for the granting of both qualified
and non-qualified options of the Company's common stock to certain
key managerial employees. In 1994, the former Central Illinois
Financial Corporation established a stock option plan which
provides for the granting of non-qualified stock options and stock
appreciation rights (SARs) to certain key managerial employees.
The option price must be at least 100% of the fair market value of
the common stock on the date the option is granted and the maximum
option term cannot exceed 10 years. The plan allows for the
granting of options in tandem with SARs. Exercise of a SAR
cancels the related option and entitles the holder to receive a
payment in return, equal to the excess of the fair market value of
the shares subject to the option surrendered over the exercise
price. Payment by the Company will be made in shares of the
Company's common stock with cash paid in lieu of fractional
shares. The exercise of a SAR is subject to all of the terms and
conditions of the related option. As of December 31, 1997, all of
these options were fully vested.
In 1996, BankIllinois Financial Corporation established a stock
incentive plan, which provides for the granting of options of the
Company's common stock to certain directors, officers and
employees. This plan provides for the granting of both qualified
and non-qualified options which vest and thus become exercisable
ratably over a three-year period from the date granted. All
options granted subsequent to January 1, 1996 were issued from the
1996 plan.
The following is a summary of the changes in options outstanding under
the stock incentive and stock option plans:
<TABLE>
1998 1997 1996
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning
of year 375,650 $8.23 289,918 $6.48 290,516 $6.48
Granted ($13.94-$19.52 per share) 81,900 19.52 87,080 14.06 0 0
Exercised (20,834) 10.26 (1,348) 8.01 (598) 8.01
Options forfeited (3,599) 15.22 0 0 0 0
Options outstanding, end of year 433,117 $10.21 375,650 $8.23 289,918 $6.48
Options exercisable, end of year 380,075 $9.15 335,054 $7.54 287,146 $6.46
Weighted average fair value of
options granted $4.92 $5.49 N/A
</TABLE>
Page 44
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
<TABLE>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
<C> <C> <C> <C> <C> <C>
$6.21 244,608 5.00 $6.21 244,608 $6.21
8.01 31,602 6.00 8.01 31,602 8.01
13.94 45,187 2.74 13.94 28,472 13.94
14.29 30,870 3.25 14.29 30,870 14.29
19.52 80,850 3.47 19.52 44,523 19.52
433,117 4.43 $10.21 380,075 $9.15
</TABLE>
The fair value of the stock options granted has been estimated using
the Black-Scholes option pricing model with the following weighted
average assumptions. The Black-Scholes option pricing model was
developed for use in estimating the fair value of traded options
which have no vesting restrictions. In addition, such models
require the use of subjective assumptions, including expected
stock price volatility. In management's opinion, such valuation
models may not necessarily provide the best single measure of
option value.
<TABLE>
1998 1997 1996
<S> <C> <C> <S>
Number of options granted 81,900 87,080 N/A
Risk-free interest rate 4.59% 5.58% N/A
Expected life, in years 3.47 3.44 N/A
Expected volatility 7.57% 11.00% N/A
Expected dividend yield 1.41% 1.68% N/A
Estimated fair value per option $4.92 $5.49 N/A
</TABLE>
Grants under the stock incentive and stock option plan are accounted
for following APB Opinion No. 25 and related interpretations.
Accordingly, no compensation cost has been recognized for
incentive stock option grants under the plan. Had compensation
cost for all of the stock-based compensation plan been determined
based on the fair values of awards (the method described by
Statement No. 123), on the grant date, reported income and
earnings per common share would have been reduced to the pro forma
amounts shown below:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Net income on common stock:
As reported $6,074 $5,400 $N/A
Pro forma 5,861 5,232 N/A
Basic earnings per share:
As reported $1.13 $1.00 N/A
Pro forma 1.09 0.97 N/A
Diluted earnings per share:
As reported $1.09 $0.98 N/A
Pro forma 1.05 0.95 N/A
</TABLE>
At December 31, 1998, 12,876 SARs remained outstanding.
(15) DIVIDEND RESTRICTIONS
Banking regulations and capital guidelines limit the amount of
dividends that may be paid by banks. Retained earnings of
BankIllinois available for payment of dividends, subject to
maintenance of minimum capital requirements, was $4,631,000 at
December 31, 1998.
Page 45
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
(16) CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Following are the condensed balance sheets as of December 31, 1998 and
1997 and the related condensed statements of income and cash flows
for 1998, 1997 and 1996 for BankIllinois Financial Corporation:
<TABLE>
CONDENSED BALANCE SHEETS
(in thousands)
1998 1997
<S> <C> <C>
Assets:
Cash $4,179 $4,409
Investment in BankIllinois 53,629 52,579
Investment in equity securities 3,179 696
Organization costs, net 0 11
Other assets 337 261
$61,324 $57,956
Liabilities and stockholders' equity:
Dividends payable $425 $412
Other liabilities 192 214
Stockholders' equity 60,707 57,330
$61,324 $57,956
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
(in thousands)
1998 1997 1996
<S> <C> <C> <C>
Revenue:
Dividends received from subsidiary $6,000 $5,200 $1,000
Interest income on deposits 126 48 1
Dividend income on securities 14 2 0
6,140 5,250 1,001
Expenses:
Amortization of organization costs 11 11 11
Other 481 502 471
492 513 482
Income before applicable income tax
benefit and equity in undistributed
income of subsidiary 5,648 4,737 519
Applicable income tax benefit 119 158 163
Equity in undistributed income of
subsidiary 307 505 3,819
Net income $6,074 $5,400 $4,501
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
1998 1997 1996
<S> <C> <C> <C>
Net income $6,074 $5,400 $4,501
Unrealized gain (loss) on securities available-for-
sale arising this year net of tax of $393, $215
and ($113) in 1998, 1997 and 1996,
respectively 765 420 (223)
Less: reclassification adjustment for gains
included in net income, net of tax of ($15),
($7) and $1 in 1998, 1997 and 1996,
respectively (30) (13) 2
735 407 (221)
Comprehensive income $6,809 $5,807 $4,280
</TABLE>
Page 46
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $6,074 $5,400 $4,501
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed (income) of
subsidiary (307) (505) (3,819)
Amortization of organization costs 11 11 11
Stock appreciation rights 0 108 60
Other, net (18) (12) 46
Net cash provided by operating
activities 5,760 5,002 799
Cash flows from investing activities:
Purchases of equity securities (2,496) (495) (91)
Net cash used in investing
activities (2,496) (495) (91)
Cash flows from financing activities:
Treasury stock transactions, net (1,806) (266) (649)
Fractional shares purchased following
stock dividend (4) (3) (3)
Cash dividends paid (1,684) 0 (378)
Net cash used in financing
activities (3,494) (269) (1,030)
Cash at beginning of year 4,409 171 493
Cash at end of year $4,179 $4,409 $171
</TABLE>
(17) DISCLOSURES ABOUT FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include commitments
to extend credit and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate
risk in excess of amounts recognized in the consolidated balance
sheets. The contractual amounts of those instruments reflect the
extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the
contractual amount of those instruments. The Company uses the
same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
Management does not anticipate any significant losses as a result
of these transactions.
The following table summarizes these financial instruments and
commitments (in thousands) at December 31, 1998 and 1997:
1998 1997
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $66,927 $63,913
Standby letters of credit 4,328 3,379
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments, principally variable interest rates,
generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total com-
mitment amounts do not necessarily represent future cash
requirements. For commitments to extend credit, the Company
evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by
the Company upon extension of credit, is based on management's
credit evaluation. Collateral held varies, but may include ac-
counts receivable; inventory; property, plant and equipment; and
income-producing commercial properties.
Page 47
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third
party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to
customers. The standby letters of credit are unsecured.
The Company does not engage in the use of interest rate swaps,
futures, forwards or options contracts.
Following is a summary of the carrying amounts and fair values of the
Company's financial instruments at December 31, 1998 and 1997:
<TABLE>
1998 1997
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $25,580 $25,580 $48,558 $48,558
Investments in debt and equity securities 191,136 191,208 155,386 155,502
Mortgage loans held-for-sale 10,951 10,953 1,408 1,408
Loans 287,306 290,227 309,729 308,078
Accrued interest receivable 4,865 4,865 4,833 4,833
Liabilities:
Deposits $409,898 $411,915 $417,154 $417,735
Short-term borrowings 49,963 49,976 49,857 49,869
FHLB advances 10,000 10,069 8,000 8,083
Accrued interest payable 1,399 1,399 1,736 1,736
</TABLE>
Management's fair value estimates, methods, and assumptions are set
forth below for the Company's financial instruments.
CASH AND CASH EQUIVALENTS
The carrying value of cash and cash equivalents approximates fair
value due to the relatively short period of time between the
origination of the instrument and its expected realization.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
The fair value of investments in debt and equity securities is
estimated based on bid prices received from securities dealers.
LOANS
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential mortgage, and
consumer. Each loan category is further segmented into fixed and
adjustable rate interest terms and by performing and nonperforming
categories. The fair value of performing loans is calculated by
discounting scheduled cash flows through the estimated maturity
using estimated market discount rates equal to rates at which
loans, similar in type, would be originated at December 31, 1998
and 1997. Estimated maturities are based upon the average
remaining contractual lives for each loan classification. Fair
value for nonperforming loans is based on the use of discounted
cash flow techniques.
ACCRUED INTEREST RECEIVABLE
The carrying value of accrued interest receivable approximates fair
value due to the relatively short period of time between the
origination of the instrument and its expected realization.
DEPOSIT LIABILITIES
The fair value of deposits with no stated maturity, such as non-
interest-bearing and interest-bearing demand deposits and savings
deposits is the amount payable on demand. The fair value of time
deposits is based on the discounted value of contractual cash
flows. The discount rate is estimated using rates currently
offered for deposits of similar remaining maturities. The fair
value estimates do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to
the cost of borrowing funds in the market nor the benefit derived
from the customer relationship inherent in existing deposits.
SHORT-TERM BORROWINGS
The fair value of federal funds purchased and securities sold under
agreements to repurchase is based on the discounted value of
contractual cash flows. The discount rate is estimated using
current rates on federal funds purchased and securities sold under
agreements to repurchase with similar remaining maturities.
Page 48
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
FEDERAL HOME LOAN BANK (FHLB) ADVANCES
The fair value of FHLB advances is based on the discounted value of
contractual cash flows. The discount rate is estimated using
rates on current FHLB advances with similar remaining maturities.
ACCRUED INTEREST PAYABLE
The carrying value of accrued interest payable approximates fair value
due to the relatively short period of time between the origination
of the instrument and its expected realization.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit is generally estimated
using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed rate
loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The
fair value of letters of credit is based on fees currently charged
for similar agreements or on the estimated cost to terminate them
or otherwise settle the obligations with the counterparties. The
estimated fair value of commitments to extend credit and standby
letters of credit approximates the balances of such commitments.
(18) LITIGATION
Various legal claims have arisen in the normal course of business,
which, in the opinion of Company management, will not result in
any material liability to the Company.
(19) REGULATORY CAPITAL
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 December 31,
1998, that the Company and BankIllinois meet all capital adequacy
requirements to which they are subject.
As of December 31, 1998, the most recent notification from the 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.
The Company's and BankIllinois' actual capital amounts and ratios as
of December 31, 1998 and 1997 are presented in the following
tables:
Page 49
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
<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 December 31, 1998:
Total capital
(to risk-weighted assets)
Consolidated $63,933 19.1% $26,754 8.0% N/A
BankIllinois $56,835 17.2% $26,496 8.0% $33,119 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated $59,664 17.8% $13,377 4.0% N/A
BankIllinois $52,650 15.9% $13,248 4.0% $19,872 6.0%
Tier I capital
(to average assets)
Consolidated $59,664 11.1% $21,488 4.0% N/A
BankIllinois $52,650 9.8% $21,416 4.0% $26,770 5.0%
</TABLE>
<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 December 31, 1997:
Total capital
(to risk-weighted assets)
Consolidated $61,340 17.7% $27,746 8.0% N/A
BankIllinois $56,664 16.4% $27,699 8.0% $34,624 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated $56,993 16.4% $13,873 4.0% N/A
BankIllinois $52,324 15.1% $13,850 4.0% $20,775 6.0%
Tier I capital
(to average assets)
Consolidated $56,993 10.9% $20,974 4.0% N/A
BankIllinois $52,324 10.0% $20,950 4.0% $26,188 5.0%
</TABLE>
Page 50
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Page 51
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
POSITION WITH THE COMPANY AND
NAME DIRECTOR BANK AND OCCUPATION FOR THE
(AGE) SINCE <F1> LAST FIVE YEARS
CLASS I
(TERM EXPIRES 1999)
David J. Downey 1992 Director of the Company; President, The
(Age 57) Downey Group, Inc. (estate planning,
wealth transfer and executive
compensation organization)
(1963-present)
Van A. Dukeman 1994 Director, President and Chief Executive
(Age 40) Officer of the Company and the Bank;
Director and President of BIFC and
BankIllinois (1994-1995)
Gene A. Salmon 1991 Director of the Company; President,
(Age 54) Cross Construction, Inc. (1979-present)
James A. Sullivan 1984 Director of the Company; Retired Chief
(Age 71) Executive Officer, Sullivan Chevrolet
Company (1976-1997)
CLASS II
(TERM EXPIRES 2000)
Gregory B. Lykins 1994 Director, Chairman of the Board of the
(Age 51) Company and the Bank; Director, Chairman
of the Board and Chief Executive Officer
of BIFC and BankIllinois (1994-1995)
August C. Meyer, Jr. 1962 Director of the Company; President,
(Age 61) Midwest Television Inc. (1976-present)
CLASS III
(TERM EXPIRES 2001)
Roy V. VanBuskirk 1991 Director of the Company; Retired, Chief
(Age 68) Executive Officer, Bacon and VanBuskirk
Glass Company and Danville Bacon and
VanBuskirk Glass Company, Inc.
(1968-1997)
George T. Shapland 1994 Director of the Company; President,
(Age 68) Shapland Management Co. (1990-present)
Dean R. Stewart 1984 Director of the Company; Chairman of the
(Age 70) Board, CIF (1991-1995); Chairman and
Chief Executive Officer, Tri Star
Marketing, Inc. (1974-present)
[FN]
<F1> Indicates year first elected to the board of directors of the Company,
the Bank or their predecessors.
</FN>
Page 52
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
All of the Company's directors will hold office for the terms
indicated, or until their respective successors are duly elected and
qualified, and all executive officers hold office for a term of one year.
There are no arrangements or understandings between any of the directors,
executive officers or any other person pursuant to which any of the Company's
directors or executive officers have been selected for their respective
positions. Non-employee directors of the Company received fully vested
options to purchase 4,000 shares of Common Stock for serving on the Boards of
Directors and committees of the Company and certain of the subsidiaries in
1998. It is anticipated that options will be granted to the directors as
compensation in the future on an annual basis. Directors of the Company who
are also employees of the Company were not separately compensated for service
on such Boards or committees.
Page 53
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
BOARD COMMITTEES AND MEETINGS
A total of eleven regularly scheduled and special meetings were
held by the Board of Directors of the Company during 1998. The Board of
Directors of the Company has established an Audit Committee, a Compensation
Committee and an Executive Committee. During 1998, all directors attended at
least 75 percent of the meetings of the Board and the committees on which
they served, except Messrs. Sullivan and VanBuskirk, who attended 70% of such
meetings.
Members of the Audit Committee are Messrs. Stewart (Chair), Meyer,
VanBuskirk and Sullivan, and Messrs. Lykins and Dukeman serve ex officio.
The Audit Committee reports to the Board of Directors and has the
responsibility to review and approve internal control procedures, accounting
practices and reporting activities of the Bank. The committee also has the
responsibility for establishing and maintaining communications between the
Board and the independent auditors and regulatory agencies. The Audit
Committee reviews with the independent auditors the scope of their
examinations, with particular emphasis on the areas to which either the Audit
Committee or the auditors believe special attention should be directed. It
also reviews the examination reports of regulatory agencies and reports to
the full Board regarding matters discussed therein. Finally, it oversees the
establishment and maintenance of effective controls over the business
operations of the Bank. The Audit Committee met four times in 1998.
The members of the Compensation Committee are Messrs. VanBuskirk
(Chair), Meyer and Stewart, and Messrs. Lykins and Dukeman serve ex officio.
The Compensation Committee reports to the Board of Directors and has
responsibility for all matters related to compensation of executive officers
of the Company, including review and approval of base salaries, review of
salaries of executive officers compared to other financial services holding
companies in the region, fringe benefits, including modification of the
retirement plan, and incentive compensation. The Compensation Committee met
two times in 1998.
The members of the Executive Committee are Messrs. Lykins (Chair),
VanBuskirk, Downey, Shapland and Stewart, and Mr. Dukeman serves ex officio.
The Executive Committee reviews compensation to be paid to the Company's
directors for service on the Board of Directors and attendance at Board and
committee meetings, reviews the Company's dividend policy and nominates
persons to serve on the Company's Board of Directors. The Executive
Committee will consider nominations to the Board of Directors submitted by
stockholders if such nominations are made in writing to the committee and
otherwise comply with Article 2, Section 14 of the Company's bylaws. The
Executive Committee met two times in 1998.
EXECUTIVE OFFICERS
The term of office for the executive officers of the Company is
from the date of election until the next annual organizational meeting of the
Board of Directors. The names and ages of the executive officers of the
Company as of December 31, 1998, as well as the offices held by these
officers on that date, other positions held with the Company and its
subsidiary and principal occupations for the past five years are set forth
below.
POSITION WITH THE COMPANY AND
NAME AGE BANK AND PRINCIPAL OCCUPATION
Gregory B. Lykins 51 Chairman of the Board of the Company and
BankIllinois. Prior to the Merger, Mr.
Lykins served as Chairman of the Board and
Chief Executive Officer of BankIllinois
Financial Co. and BankIllinois.
Van A. Dukeman 40 Director, President and Chief Executive
Officer of the Company and BankIllinois.
Prior to the Merger, Mr. Dukeman served as
President and director of BankIllinois
Financial Co.
David B. White 47 Executive Vice President and Chief Financial
Officer of the Company and BankIllinois.
Prior to the Merger, Mr. White served as
Executive Vice President and Chief Financial
Officer of BankIllinois.
Page 54
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
Charles R. Eyman 52 Executive Vice President of BankIllinois.
Prior to the Merger, Mr. Eyman served as
Senior Vice President of The Champaign
National Bank.
Robert F. Plecki, Jr. 38 Executive Vice President of BankIllinois.
Prior to his current position, Mr. Plecki
served as Senior Vice President and Vice
President of BankIllinois.
Leanne C. Heacock 33 Senior Vice President of BankIllinois. Prior
to her current position, Ms. Heacock served
as Vice President of BankIllinois. Prior to
the merger, Ms. Heacock served as Assistant
Vice President and Operations Officer for the
Champaign National Bank.
Mark J. Wisniewski 35 Senior Vice President of BankIllinois. Prior
to his current position, Mr. Wisniewski
served as Vice President of BankIllinois.
Mr. Wisniewski was Vice President and
Assistant Vice President of First of America
prior to joining the Company.
Page 55
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows the compensation earned during the three
most recently completed fiscal years by the Chief Executive Officer and the
three other most highly compensated executive officers of the Company
(including those employed by the Company's subsidiaries) whose 1998 salary
and bonus exceeded $100,000:
<TABLE>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
(A) (B) (C) (D) (E) (G) (I)
SECURITIES
UNDERLYING ALL OTHER
NAME AND <F1> OPTIONS/ COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OTHER($) SARS <F2> ($) <F3>
<S> <C> <C> <C> <C> <C> <C>
Gregory B. Lykins, 1996 $180,000 $35,000 -- 3,150 $17,177
Chairman of the Board 1997 180,000 40,000 -- 3,150 18,550
1998 134,307 50,000 3,792 5,250 17,329
Van A. Dukeman, 1996 $127,000 $30,000 -- -- $12,540
President and Chief 1997 127,000 40,000 -- 3,150 13,445
Executive Officer 1998 151,346 60,000 1,729 5,250 14,207
David B. White, 1996 $95,000 $12,000 -- -- $9,080
Executive Vice President 1997 95,000 15,000 -- 3,150 9,395
and Chief Financial Officer 1998 107,115 22,000 1,625 3,150 10,639
Charles R. Eyman, 1996 $95,000 $12,000 -- -- $9,208
Executive Vice President 1997 95,000 15,000 -- 3,150 10,107
1998 107,115 22,000 4,119 3,150 11,115
_______________
<FN>
<F1> Includes amounts deferred and, with respect to Mr. Lykins, includes
amounts received for service as Chairman of the Board of the Company.
<F2> As adjusted for stock dividends.
<F3> The total amounts in this column reflect the Company's contributions
under its 401(K) Plan, Non-Qualified Retirement Plan, Profit Sharing
Plan and amounts paid for premiums on insurance policies with respect
to each named executive officer. These amounts were $3,238, $3,189,
$7,500 and $3,250 for Mr. Lykins for 1996, $3,200, $3,400, $8,000 and
$3,950 for 1997, and $1,590, $2,329, $8,800 and $4,610 for 1998;
$3,162, $1,493, $7,500 and $385 for Mr. Dukeman for 1996, $3,200,
$1,810, $8,000 and $435 for 1997, and $1,787, $3,140, $8,800 and $480
for 1998; $2,248, $1,510, $5,045 and $277 for Mr. White for 1996,
$2,200, $1,705, $5,200 and $290 for 1997, and $1,570, $2,072, $6,695
and $302 for 1998; and $2,254, $1,300, $5,268 and $386 for Mr. Eyman
for 1996, $2,200, $1,705, $5,200 and $1,002 for 1997, and $1,570,
$2,072, $6,695 and $778 for 1998.
</FN>
</TABLE>
PAGE 56
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
STOCK OPTION INFORMATION
The following table sets forth certain information concerning the
number and value of stock options granted in the last fiscal year to the
individuals named in the Summary Compensation Table:
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
FOR OPTION TERM
(A) (B) (C) (D) (E) (F) (G)
% OF TOTAL
OPTIONS
OPTIONS GRANTED TO
GRANTED EMPLOYEES IN EXERCISE OR BASE EXPIRATION
NAME (#) <F1><F2> FISCAL YEAR <F2> PRICE ($/Sh)<F2> DATE 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Gregory B. Lykins 5,250 10.0% $19.52 03/01/08 $64,449 $163,326
Van A. Dukeman 5,250 10.0% 19.52 03/01/08 64,449 163,326
David B. White 3,150 6.0% 19.52 03/01/08 38,669 97,996
Charles R. Eyman 3,150 6.0% 19.52 03/01/08 38,669 97,996
<FN>
<F1> Such options vest over a three-year period.
<F2> As adjusted for stock dividends.
</FN>
</TABLE>
The following table sets forth certain information concerning the
exercisable and nonexercisable stock options at December 31, 1998, held by
the individuals named in the Summary Compensation Table:
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION VALUES
SHARES NUMBER OF SECURITIES
ACQUIRED UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
ON VALUE OPTIONS AT FY-END THE-MONEY OPTIONS
NAME EXERCISE REALIZED (#)(D) AT FY-END ($)(E)
(#)(A) (#)(B) ($)(C) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <S> <C> <C> <C> <C> <C>
Gregory B. Lykins --- $--- 120,216 5,145 1,939,239 23,120
Van A. Dukeman --- --- 120,216 5,145 1,939,239 23,120
David B. White 680 11,162 13,858 3,599 200,746 18,320
Charles R. Eyman --- --- 5,854 3,599 63,967 18,320
</TABLE>
Page 57
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of
its executive officers, including each of the executive officers named in the
Summary Compensation Table. Employment agreements for two former executive
officers, Mr. Robert J. Cochran and Mr. Larry J. Kallembach, terminated upon
their resignations, effective April 30, 1998 and March 17, 1998,
respectively. Each employment agreement provides for an initial term of one
year and, at the end of its initial term as well as any subsequent term, is
automatically extended for one year until either the Company or the employee
gives written notice to the contrary. Each agreement terminates upon the
employee's death, disability, discharge for cause or in the event of
"constructive discharge" or a change of control (as defined in the employment
agreements). The employment agreements are also terminable by the employee
upon 90 days' notice to the Company.
The employment agreements set forth the salaries, bonuses and
benefits to be provided to the respective officer and provide for severance
payments in the event employment is terminated by the Company without cause
or in the event of "constructively discharge" (as defined in the employment
agreements). The "severance payment" each officer would be entitled to
receive in such a case equals the sum of the applicable base salary, the
officer's most recent performance bonus and the value of contributions under
retirement and employee benefit plans that would have been made through the
term of the agreement. Mr. Lykins and Mr. Dukeman (or their estates) are
also entitled to receive such severance payment in the event of termination
because of disability or death.
In the event employment is terminated within one year of a change
of control (as defined in the agreements), or at any time by the Company or
its successor for any reason other than death or disability, the affected
officer would be entitled to receive similar amounts. The amounts payable
upon a change of control are subject to reduction, if necessary, to prevent
certain adverse tax treatment.
The employment agreements also provide that the respective officer
may not compete within a 50-mile radius of the Company's main office, or
against the Company or any successor, for one year following the termination
of their employment agreement. Each employment agreement also requires the
Company to indemnify and to advance certain legal expenses to the covered
employee to the maximum extent permitted by law.
In 1998, Mr. Robert J. Cochran received $45,121 in regular
compensation. Also in connection with his resignation, the Company has
expensed $305,566 which Mr. Cochran will receive in full by September 2000.
Mr. Larry J. Kallembach received $23,356 in regular compensation in 1998, and
in connection with his resignation, the Company expensed an additional amount
of $133,170, which Mr. Kallembach will receive in full by July 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company establishes compensation
and benefits for the Chief Executive Officer and reviews and recommends
compensation and benefits for other officers and employees of the Bank.
During 1998, no executive officer of the Company served as a member of
(i) the compensation committee of another entity in which one of the
executive officers of such entity served on the Bank's Compensation
Committee, (ii) the Board of Directors of another entity in which one of the
executive officers of such entity served on the Bank's Compensation Committee
or (iii) the compensation committee of another entity in which one of the
executive officers of such entity served as a member of the Company's Board
of Directors.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's compensation program is administered by the
Compensation Committee (the "Committee"). The Chief Executive Officer serves
on this and all committees ex-officio, but on none as Chairman.
In determining appropriate levels of executive compensation, the
Committee has at its disposal independent reference information regarding
compensation ranges and levels for executive positions in comparable
companies. In determining compensation to be paid to executive officers,
primary consideration is given to quality, long-term earnings growth
accomplished by achieving both financial and non-financial goals such as
earnings per share, return on assets and return on equity. The objectives of
this philosophy are to: (i) encourage consistent and competitive return to
stockholders; (ii) reward Company and individual performances; (iii) provide
financial rewards for performance by those having a significant impact on
corporate profitability; and (iv) provide competitive compensation in order
to attract and retain key personnel.
Page 58
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
There are three basic components to the total compensation of all
key executives -- base salary, incentive bonus and long-term incentive
compensation. The salary component is reflective of levels of
responsibility, authority and performance, relative to similar positions in
the banking industry. The incentive portion is directly related to financial
performance, as measured by net income, return on average assets, and other
financial factors. The long-term incentive compensation component is
currently composed of the 1996 Stock Option Plan adopted by the Company. The
Company maintains the stock option plan to reward senior executives of the
Company for outstanding performance and to help the Company attract and
retain qualified personnel in key positions. The stock option plan is
further designed to give key employees a proprietary interest in the Company
as an incentive to contribute to the success of the Company. Awards under
the plan are determined by the Compensation Committee based on each
respective officer's level of responsibility, overall performance and
significance to the Company's future growth and profitability.
Members of the Compensation Committee are Messrs. VanBuskirk
(Chair), Meyer and Stewart, and Messrs. Lykins and Dukeman serve ex officio.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
Company's Common Stock beneficially owned on March 15, 1999 with respect to
all persons known to the Company to be the beneficial owner of more than five
percent of the Company Common Stock, each director and nominee and all
directors and executive officers of the Company as a group.
<TABLE>
NAME OF INDIVIDUAL AND AMOUNT AND NATURE OF PERCENT
NUMBER OF PERSONS IN GROUP BENEFICIAL OWNERSHIP<F1> OF CLASS
DIRECTORS AND NOMINEES
<S> <C> <C>
David J. Downey 318,792<F2> 6.0%
Van A. Dukeman 178,542<F3> 3.3%
Gregory B. Lykins 402,834<F4> 7.4%
August C. Meyer, Jr. 1,612,063<F5> 30.2%
Gene A. Salmon 90,355 1.7%
George T. Shapland 302,627 5.7%
Dean R. Stewart 28,339<F6> *
James A. Sullivan 29,906 *
Roy V. VanBuskirk 33,882 *
NAMED EXECUTIVE OFFICERS
Charles R. Eyman 14,238 *
David B. White 16,027 *
All directors and executive
officers as a group
(14 persons) 3,032,321<F7> 53.6%
_____________
* Less than one percent.
<FN>
<F1> The information contained in this column is based upon information
furnished to the Company by the persons named above and the members of
the designated group. The nature of beneficial ownership for shares
shown in this column is sole voting and investment power, except as
set forth in the footnotes below. Pursuant to the rules of the
Securities and Exchange Commission, shares obtainable through the
exercise of options which are currently exercisable, or which will
become exercisable within 60 days of the date of the information
contained in this table, and are included as beneficially owned. The
number of shares obtainable through options and included in this table
are as follows: 6,644 shares for Mr. Eyman; 8,610 shares for Messrs.
Downey, Meyer and Salmon, Shapland, Stewart, Sullivan and VanBuskirk;
14,648 shares for Mr. White; and 121,263 shares for Messrs. Dukeman
and Lykins. Each director and officer has no voting and sole
investment power over such shares. Inclusion of shares shall not
constitute an admission of beneficial ownership or voting or
investment power over such shares.
<F2> Includes 15,913 shares over which Mr. Downey has shared voting and
sole investment power.
Page 59
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
<F3> Includes 2,000 shares over which Mr. Dukeman has shared voting and
sole investment power.
<F4> Includes 18,338 shares over which Mr. Lykins has shared voting and
sole investment power.
<F5> Includes 1,354,237 shares held by certain trusts for which Mr. Meyer
serves as trustee. Mr. Meyer exercises sole voting and investment
power over such shares. Also includes 58,401 shares held by Mr.
Meyer's spouse. Mr. Meyer disclaims beneficial ownership over all
such shares.
<F6> Includes 10,195 shares held jointly with Mr. Stewart's spouse, over
which shares Mr. Stewart has shared voting and investment power.
<F7> Includes 329,956 shares obtainable through the exercise of options
considered presently exercisable.
</FN>
</TABLE>
AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT
Certain principal stockholders of the Company have executed an Amended
and Restated Shareholders' Agreement (the "Shareholders' Agreement"). The
Shareholders' Agreement affects the purchase and sale of the capital stock of
the Company owned by the parties thereto. The parties to the agreement are
August C. Meyer, Jr. and certain related entities, David J. Downey, George T.
Shapland, Gregory B. Lykins and Van A. Dukeman (the "Parties").
The Shareholders' Agreement provides that the Parties to the
Shareholders' Agreement may not make voluntary transfers of their shares of
Company stock except for transfers to each other, family transfers, certain
pledges and certain open market sales. In addition, involuntary transfers
occurring upon death are permitted. Parties to the Shareholders' Agreement
are permitted to sell shares on the open market, but only after the other
Parties have elected not to exercise a right of first refusal to purchase the
shares. Also, in the event any Party to the Shareholders' Agreement
purchases shares from any third party, the purchasing stockholder must allow
the other Parties the right to purchase a proportionate amount of such
shares.
Each Party to the Shareholders' Agreement other than August C. Meyer
Jr. has the right to put his shares to Mr. Meyer, in which event Mr. Meyer
will be obligated to purchase all such shares subject to the rights of the
other Parties to join in the purchase on a proportionate basis. Puts may be
exercised prior to the expiration of the three-year period following the
Merger only in the event of the death of a Party. In any case, if a put is
exercised, and within 18 months thereafter there is a sale of the Company,
any profits realized on the sale of the put shares must be repaid to the
Party that previously exercised the put.
The Shareholders' Agreement will terminate ten years after it becomes
effective. It also will terminate upon a sale, dissolution or liquidation of
the Company or upon the written agreement of the Parties.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors and officers of the Company and the Bank and their
associates were customers, of and had transactions with, the Company and the
Bank during 1998. Additional transactions may be expected to take place in
the future. All outstanding loans, commitments to loan, transactions in
repurchase agreements and certificates of deposit and depository
relationships, in the opinion of management, were made in the ordinary course
of business, on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and did not involve more than the normal risk of collectibility
or present other unfavorable features. During 1998, the Company incurred
approximately $190,000 in construction costs for services provided by Cross
Construction, Inc. Mr. Salmon, a director of the Company, serves as the
President of Cross Construction. An estimated additional $100,000 is
expected to be paid in 1999 for the remainder of the construction.
Management believes that the terms of these services were no less favorable
to the Company than would have been obtained from non-affiliated parties.
Page 60
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Index to Financial Statements
See page 29.
(a)(2) Financial Statement Schedules
N/A
(a)(3) Schedule of Exhibits
The Exhibit Index which immediately follows the signature pages
to this Form 10-K is incorporated by reference.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during
the fourth quarter of 1998.
(c) Exhibits
The exhibits required to be filed with this Form 10-K are
included with this Form 10-K and are located immediately following
the Exhibit Index to this Form 10-K.
(d) Financial Data Schedule
Exhibit 27.1
Page 61
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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 March 30, 1999.
By: ____________________________ By: ____________________________
Gregory B. Lykins David B. White
Chairman Executive Vice President and
Principal Financial and
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 30, 1999.
/S/ GREGORY B. LYKINS Chairman and Director
/S/ VAN A. DUKEMAN President, CEO and Director
/S/ DAVID J. DOWNEY Director
/S/ AUGUST C. MEYER, JR. Director
/S/ GENE A. SALMON Director
/S/ GEORGE T. SHAPLAND Director
/S/ DEAN R. STEWART Director
/S/ JAMES A. SULLIVAN Director
/S/ ROY V. VANBUSKIRK Director
/S/ DAVID B. WHITE Executive Vice President and Chief
Financial Officer
Page 62
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
BANKILLINOIS FINANCIAL CORPORATION
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
INCORPORATED
EXHIBIT HEREIN BY FILED SEQUENTIAL
NO. DESCRIPTION REFERENCE TO HEREWITH PAGE NO.
3.1 Amended and Restated Exhibit 3.1 to the Form 10-K
Certificate of Incorporation filed with the Commission
April 1, 1996 (SEC File No.
33-90342)
3.2 Amendment to Amended Exhibit 3.2 to the Form 10-K
and Restated Certificate filed with the Commission
of Incorporation March 30, 1998 (SEC File No.
33-90342)
3.3 Bylaws Exhibit 3.2 to the Form 10-K
filed with the Commission
April 1, 1996 (SEC File No.
33-90342)
4.1 Amended and Restated Exhibit 4.1 to the Registration
Shareholders' Statement on Form S-4 filed with
Agreement, dated as of the Commission March 15, 1995,
December 13, 1994 as amended (SEC File No. 33-90342)
10.1 Employment Agreement for Exhibit 10.3 to the Registration
Gregory B. Lykins Statement on Form S-4 filed
with the Commission March 15, 1995,
as amended (SEC File No. 33-90342)
10.2 Employment Agreement for Exhibit 10.4 to the Registration
Van A. Dukeman Statement on Form S-4 filed
with the Commission March 15, 1995,
as amended (SEC File No. 33-90342)
10.3 Employment Agreement for Exhibit 10.5 to the Registration
David B. White Statement on Form S-4 filed
with the Commission March 15, 1995,
as amended (SEC File No. 33-90342)
10.4 Employment Agreement for Exhibit 10.8 to the Form 10-K
Charles R. Eyman filed with the Commission on
April 1, 1996 (SEC File No. 33-90342)
21.1 Subsidiaries of the Registrant X
23.1 Consent of McGladrey & Pullen, LLP X
Page 63
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
27.1 Financial Data Schedule X
27.2 Financial Data Schedule
Restated for 1997 X
27.3 Financial Data Schedule
Restated for 1996 X
Page 64
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
SUBSIDIARIES OF THE REGISTRANT
1. BankIllinois, an Illinois chartered bank located in Champaign, Illinois.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 33-94096) of our report, dated February 5, 1999 on the
consolidated balance sheets of BankIllinois Financial Corporation as of
December 31, 1998 and 1997 and the related statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ending December 31, 1998, appearing in the Annual Report on Form 10-K for the
year ended December 31, 1998.
Champaign, Illinois
March 24, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 19,080
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 125,627
<INVESTMENTS-CARRYING> 65,509
<INVESTMENTS-MARKET> 65,581
<LOANS> 298,257<F1>
<ALLOWANCE> 5,279
<TOTAL-ASSETS> 537,373
<DEPOSITS> 409,898
<SHORT-TERM> 49,963
<LIABILITIES-OTHER> 6,805
<LONG-TERM> 10,000
0
0
<COMMON> 55
<OTHER-SE> 60,652
<TOTAL-LIABILITIES-AND-EQUITY> 537,373
<INTEREST-LOAN> 27,495
<INTEREST-INVEST> 9,574
<INTEREST-OTHER> 945
<INTEREST-TOTAL> 38,014
<INTEREST-DEPOSIT> 15,988
<INTEREST-EXPENSE> 18,962
<INTEREST-INCOME-NET> 19,052
<LOAN-LOSSES> 535
<SECURITIES-GAINS> 60
<EXPENSE-OTHER> 14,457
<INCOME-PRETAX> 8,995
<INCOME-PRE-EXTRAORDINARY> 8,995
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,074
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 7.84
<LOANS-NON> 1,126
<LOANS-PAST> 415
<LOANS-TROUBLED> 121
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,306
<CHARGE-OFFS> 811
<RECOVERIES> 249
<ALLOWANCE-CLOSE> 5,279
<ALLOWANCE-DOMESTIC> 5,279
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>New of allowance for loan losses of $5,279.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 28,958
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 19,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 136,867
<INVESTMENTS-CARRYING> 18,519
<INVESTMENTS-MARKET> 18,635
<LOANS> 311,137<F1>
<ALLOWANCE> 5,306
<TOTAL-ASSETS> 539,366
<DEPOSITS> 417,154
<SHORT-TERM> 49,857
<LIABILITIES-OTHER> 7,025
<LONG-TERM> 8,000
0
0
<COMMON> 55
<OTHER-SE> 57,275
<TOTAL-LIABILITIES-AND-EQUITY> 539,366
<INTEREST-LOAN> 26,486
<INTEREST-INVEST> 10,098
<INTEREST-OTHER> 762
<INTEREST-TOTAL> 37,346
<INTEREST-DEPOSIT> 16,543
<INTEREST-EXPENSE> 19,410
<INTEREST-INCOME-NET> 17,936
<LOAN-LOSSES> 465
<SECURITIES-GAINS> 38
<EXPENSE-OTHER> 13,888
<INCOME-PRETAX> 8,059
<INCOME-PRE-EXTRAORDINARY> 8,059
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,400
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 0.98
<YIELD-ACTUAL> 7.93
<LOANS-NON> 2,208
<LOANS-PAST> 747
<LOANS-TROUBLED> 140
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,587
<CHARGE-OFFS> 998
<RECOVERIES> 252
<ALLOWANCE-CLOSE> 5,306
<ALLOWANCE-DOMESTIC> 5,306
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>New of allowance for loan losses of $5,306.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 31,195
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 28,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 131,622
<INVESTMENTS-CARRYING> 21,870
<INVESTMENTS-MARKET> 21,945
<LOANS> 281,558<F1>
<ALLOWANCE> 5,587
<TOTAL-ASSETS> 515,440
<DEPOSITS> 404,130
<SHORT-TERM> 43,941
<LIABILITIES-OTHER> 6,273
<LONG-TERM> 9,000
0
0
<COMMON> 55
<OTHER-SE> 52,041
<TOTAL-LIABILITIES-AND-EQUITY> 515,440
<INTEREST-LOAN> 26,037
<INTEREST-INVEST> 7,177
<INTEREST-OTHER> 1,874
<INTEREST-TOTAL> 35,088
<INTEREST-DEPOSIT> 15,220
<INTEREST-EXPENSE> 17,825
<INTEREST-INCOME-NET> 17,263
<LOAN-LOSSES> 375
<SECURITIES-GAINS> (4)
<EXPENSE-OTHER> 14,495
<INCOME-PRETAX> 6,684
<INCOME-PRE-EXTRAORDINARY> 6,684
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,501
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.81
<YIELD-ACTUAL> 7.84
<LOANS-NON> 2,135
<LOANS-PAST> 384
<LOANS-TROUBLED> 162
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,882
<CHARGE-OFFS> 1,538
<RECOVERIES> 868
<ALLOWANCE-CLOSE> 5,587
<ALLOWANCE-DOMESTIC> 5,587
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>New of allowance for loan losses of $5,587.
</FN>
</TABLE>
