UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
Commission File Number: 33-90342
BANKILLINOIS FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 37-1338484
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
100 WEST UNIVERSITY, CHAMPAIGN, ILLINOIS 61820
(Address of principal executive offices) (Zip Code)
(217) 351-6500
(Registrant's telephone number, including area code)
Indicate by "X" whether the registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO
Indicate the number of shares outstanding of the registrant's common stock, as
of November 3, 1999:
BankIllinois Financial Corporation Common Stock 5,546,055
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TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures 27
About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
BANKILLINOIS FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1999 and December 31, 1998
(Unaudited, in thousands, except share data)
<S> <C> <C>
Sep. 30, Dec. 31,
1999 1998
ASSETS
Cash and due from banks $ 16,685 $ 19,080
Federal funds sold - 6,500
Investments in debt and equity securities:
Available-for-sale, at fair value 84,120 124,055
Held-to-maturity, at cost (fair value of $69,754 and
$65,581 at September 30, 1999 and December 31, 1998, respectively) 71,463 65,509
Non-marketable equity securities 1,613 1,572
Mortgage loans held for sale 1,958 10,951
Loans, net of allowance for loan losses of $5,110 and
$5,279 at September 30, 1999 and December 31, 1998,
respectively 337,088 287,306
Premises and equipment 12,853 12,195
Accrued interest receivable 4,587 4,865
Other assets 5,996 5,340
Total assets $ 536,363 $ 537,373
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing $ 47,784 $ 63,002
Demand, interest bearing 131,794 157,052
Savings 40,430 17,748
Time, $100 and over 37,065 34,582
Other time 137,532 137,514
Total deposits 394,605 409,898
Federal funds purchased and securities sold under
repurchase agreements 59,030 49,963
Federal Home Loan Bank advances and
other borrowings 13,207 10,000
Accrued interest payable 1,444 1,399
Other liabilities 5,534 5,406
Total liabilities 473,820 476,666
Stockholders' equity:
Preferred stock, no par value; 300,000 shares authorized - -
Common stock, $0.01 par value; 6,500,000 shares authorized;
5,739,965 shares issued 57 57
Paid in capital 35,396 35,374
Retained earnings 31,286 26,877
Accumulated other comprehensive income (426) 1,033
66,313 63,341
Less: treasury stock, at cost, 193,910 and 144,875 shares
at September 30, 1999 and December 31, 1998, respectively (3,770) (2,634)
Total stockholders' equity 62,543 60,707
Total liabilities and stockholders' equity $ 536,363 $ 537,373
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
BANKILLINOIS FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited, in thousands, except share data)
<S> <C> <C>
Interest income: 1999 1998
Loans and fees on loans $ 20,366 $ 20,974
Investments in debt and equity securities
Taxable 6,866 6,786
Tax-exempt 619 323
Federal funds sold 374 624
Total interest income 28,225 28,707
Interest expense:
Demand, savings, and other time deposits 9,648 10,595
Time deposits $100 and over 1,419 1,692
Federal funds purchased and securities sold under repurchase agreements 2,068 1,766
Federal Home Loan Bank advances and other borrowings 475 404
Total interest expense 13,610 14,457
Net interest income 14,615 14,250
Provision for loan losses 270 345
Net interest income after provision for loan losses 14,345 13,905
Non-interest income:
Trust fees 1,851 1,622
Service charges on deposit accounts 462 461
Securities transactions, net 138 46
Gain on sales of mortgage loans held-for-sale, net 382 409
Other 1,272 1,126
Total non-interest income 4,105 3,664
Non-interest expense:
Salaries and employee benefits 5,868 6,418
Occupancy 884 1,042
Equipment 728 670
Data processing 571 555
Federal deposit insurance premiums 35 37
Other 1,976 2,450
Total non-interest expense 10,062 11,172
Income before income taxes 8,388 6,397
Income taxes 2,659 2,075
Net income $ 5,729 $ 4,322
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period, net of
tax of ($719) and $363, for September 30, 1999 and 1998,
respectively (1,396) 704
Less: reclassification adjustment for gains (losses) included in
net income, net of tax of ($33) and ($11), for September 30, 1999
and 1998, respectively (63) (21)
Other comprehensive income (loss), net of tax (1,459) 683
Comprehensive income $ 4,270 $ 5,005
Per share data:
Basic earnings per share $ 1.03 $ 0.76
Weighted average shares of common stock outstanding 5,565,743 5,667,446
Diluted earnings per share $ 0.99 $ 0.74
Weighted average shares of common stock and dilutive potential
common shares outstanding 5,769,001 5,847,631
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
BANKILLINOIS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended September 30, 1999 and 1998
(Unaudited, in thousands, except share data)
<S> <C> <C>
Interest income: 1999 1998
Loans and fees on loans $ 7,281 $ 7,008
Investments in debt and equity securities
Taxable 2,054 2,211
Tax-exempt 205 120
Federal funds sold 62 258
Total interest income 9,602 9,597
Interest expense:
Demand, savings, and other time deposits 3,187 3,459
Time deposits $100 and over 512 568
Federal funds purchased and securities sold under repurchase agreements 705 620
Federal Home Loan Bank advances and other borrowings 198 165
Total interest expense 4,602 4,812
Net interest income 5,000 4,785
Provision for loan losses 90 90
Net interest income after provision for loan losses 4,910 4,695
Non-interest income:
Trust fees 631 520
Service charges on deposit accounts 158 158
Securities transactions, net 92 11
Gain on sales of mortgage loans held-for-sale, net 93 155
Other 414 455
Total non-interest income 1,388 1,299
Non-interest expenses:
Salaries and employee benefits 1,951 1,989
Occupancy 282 339
Equipment 252 222
Data processing 193 181
Federal deposit insurance premiums 11 12
Other 711 718
Total non-interest expenses 3,400 3,461
Income before income taxes 2,898 2,533
Income taxes 925 818
Net income $ 1,973 $ 1,715
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period, net of
tax of ($169) and $296, for September 30, 1999 and 1998,
respectively (328) 573
Less: reclassification adjustment for gains (losses) included in
net income, net of tax of ($32) and ($1), for September 30, 1999
and 1998, respectively (60) (1)
Other comprehensive income (loss), net of tax (388) 572
Comprehensive Income $ 1,585 $ 2,287
Per share data:
Basic earnings per share $ 0.36 $ 0.30
Weighted average shares of common stock outstanding 5,546,055 5,652,411
Diluted earnings per share $ 0.34 $ 0.29
Weighted average shares of common stock and dilutive potential
common shares outstanding 5,751,624 5,838,319
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
BANKILLINOIS FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ending September 30, 1999 and 1998
(Unaudited, in thousands)
<S> <C> <C>
Cash flows from operating activities: 1999 1998
Net income $ 5,729 $ 4,322
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 900 793
Amortization of bond premiums, net 316 12
Provision for loan losses 270 345
Gain on securities transactions (138) (46)
Gain on sales of loans, net (382) (409)
Loss on sale of premises and equipment, net - 248
Decrease (increase) in accrued interest receivable 278 (156)
Increase (decrease) in accrued interest payable 45 (294)
Increase (decrease) in other assets (247) 148
Increase in other liabilities 862 170
Stock appreciation rights 26 68
Proceeds from sales of loans originated for sale 42,005 45,870
Loans originated for sale (32,630) (49,235)
Net cash provided by operating activities 17,034 1,836
Cash flows from investing activities:
Net (increase) decrease in loans (50,462) 19,216
Proceeds from maturities and calls of investments in debt securities:
Held-to-maturity 14,450 3,069
Available-for-sale 47,803 54,980
Proceeds from sales of investments:
Available-for-sale 13,599 -
Purchases of investments in debt and equity securities:
Held-to-maturity (21,608) (15,406)
Available-for-sale (25,895) (57,916)
Non-marketable (41) (70)
Principal paydowns from mortgage-backed securities:
Held-to-maturity 1,214 -
Available-for-sale 2,030 9,474
Purchases of premises and equipment (1,557) (771)
Proceeds from sale of premises and equipment - 1,380
Net cash (used in) provided by investing
activities (20,467) 13,956
Cash flows from financing activities:
Net decrease in demand and savings deposits (17,794) (7,411)
Net increase (decrease) in time deposits $100 and over 2,483 (6,790)
Net increase (decrease) in other time deposits 18 (13,283)
Net increase in federal funds purchased and
securities sold under repurchase agreements 9,067 3,560
Net increase in Federal Home Loan Bank advances and other borrowings 3,207 4,000
Cash dividends paid (1,296) (1,255)
Treasury stock transactions, net (1,142) (997)
Fractional shares purchased following stock dividend (5) (4)
Net cash used in financing activities (5,462) (22,180)
Net decrease in cash and cash equivalents (8,895) (6,388)
Cash and cash equivalents at beginning of year 25,580 48,558
Cash and cash equivalents at end of period $ 16,685 $ 42,170
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 13,566 $ 12,580
Income taxes 2,948 1,858
Disposal of equipment subject to valuation allowance - 304
Change in unrealized gain (loss) on securities available-for-sale (2,211) 1,035
Change in deferred taxes attributable to unrealized gain (loss) on
securities available-for-sale (752) 352
Real estate acquired through or in lieu of foreclosure 410 26
Dividends declared not paid 444 429
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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BANKILLINOIS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and
therefore do not include all information and footnotes necessary for fair
presentation of financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles. These financial
statements should be read in conjunction with the audited consolidated
financial statements and related notes and schedules included in the
Company's Form 10-K.
In the opinion of management, the condensed consolidated financial
statements of BankIllinois Financial Corporation (the "Company") and its
subsidiary, BankIllinois, as of September 30, 1999 and for the three-month
and nine-month periods ended September 30, 1999 and 1998 include all
adjustments necessary for fair presentation of the results of those periods.
All such adjustments are of a normal recurring nature.
Results of operations for the three-month and nine-month periods ended
September 30, 1999 are not necessarily indicative of the results which may be
expected for the year ended December 31, 1999.
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.
Note 2. Gains on Securities Transactions
Gains on securities transactions include proceeds from sales, calls and
maturities of available-for-sale securities as well as calls and maturities
of held-to-maturity securities. Gross gains and losses were as follows:
<TABLE>
Nine Months Ended Three Months Ended
Sept 30, 1999 Sept 30, 1998 Sept 30, 1999 Sept 30, 1998
<S> <C> <C> <C> <C>
Available-for-sale $96 $32 $92 $2
Held-to-maturity 42 14 - 9
$138 $46 $92 $11
</TABLE>
Note 3. Stock Dividend
At its regular board meeting on May 18, 1999, the Board of Directors of
the Company declared a one-for-twenty, or five percent, common stock
dividend. The record date of the stock dividend was May 24, 1999, and the
distribution date was June 4, 1999. The accompanying unaudited condensed
consolidated financial statements have been restated to take the stock
dividend into account.
Note 4. 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, 2001. 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
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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. In July 1999 the
Statement on Financial Accounting Standards No. 137 was issued. This
Statement delayed the implementation of Statement No. 133 until fiscal years
beginning after June 15, 2000.
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 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 had no effect on its financial
statements.
Note 5. Investment Securities
The carrying value of investments in debt and equity securities was as
follows for September 30, 1999 and December 31, 1998:
CARRYING VALUE OF SECURITIES
(in thousands)
Sept. 30, 1999 Dec. 31, 1998
Available-for-sale:
U.S. Treasury $27,049 $37,526
Federal agencies 48,659 77,012
Mortgage-backed securities 4,237 5,944
Corporate and other obligations 4,175 3,573
Total available-for-sale $84,120 $124,055
Held-to-maturity:
U.S. Treasury 400 900
Federal agencies 28,994 31,828
Mortgage-backed securities 22,680 14,167
State and municipal 19,389 18,614
Total held-to-maturity $71,463 $65,509
Non-marketable equity securities 1,613 1,572
Total securities $157,196 $191,136
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The following table shows the maturities and weighted-average yields of
investment securities at September 30, 1999. Mortgage-backed securities are
placed in maturity categories based on expected payments. All other
securities are shown at their contractual maturity.
<TABLE>
MATURITIES AND WEIGHTED AVERAGE YIELDS OF DEBT SECURITIES
(dollars in thousands)
September 30, 1999
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 $13,011 $14,038 $ - $ - $27,049
Federal agencies 9,829 32,393 6,437 - 48,659
Mortgage-backed securities 2,414 1,018 487 318 4,237
Other securities 3,884 291 - - 4,175
Total $29,138 $47,740 $6,924 $318 $84,120
Average Yield (TE) 5.74% 5.65% 5.59% 7.13% 5.68%
Securities held-to-maturity
U.S. Treasury $400 $ - $ - $ - $400
Federal agencies - 22,995 5,999 - 28,994
Mortgage-backed securities 2,267 19,114 1,098 201 22,680
State and municipal 1,454 8,321 9,324 290 19,389
Total $4,121 $50,430 $16,421 $491 $71,463
Average Yield (TE) 5.27% 5.34% 5.12% 5.21% 5.28%
</TABLE>
Note 6. Loans
The following tables present the amounts and percentages of loans for
September 30, 1999 and December 31, 1998 according to the categories of
commercial, financial and agricultural; real estate; and installment and
consumer loans.
AMOUNT OF LOANS OUTSTANDING
(dollars in thousands)
Sept. 30, 1999 Dec. 31, 1998
Commercial, financial and agricultural $111,701 $112,265
Real estate 155,305 132,919
Installment and consumer 75,192 47,401
Total loans $342,198 $292,585
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PERCENTAGE OF LOANS OUTSTANDING
Sept. 30, 1999 Dec. 31, 1998
Commercial, financial and agricultural 32.64% 38.37%
Real estate 45.39% 45.43%
Installment and consumer 21.97% 16.20%
Total 100.00% 100.00%
The balance of loans outstanding as of September 30, 1999 by maturities
is shown in the following table:
<TABLE>
MATURITY OF LOANS OUTSTANDING
(dollars in thousands)
September 30, 1999
1 year 1-5 over 5
or less years years Total
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $61,357 $29,728 $20,616 $111,701
Real estate 14,642 51,688 88,975 155,305
Installment and consumer 18,738 54,310 2,144 75,192
Total $94,737 $135,726 $111,735 $342,198
Percentage of total loans outstanding 27.69% 39.66% 32.65% 100.00%
</TABLE>
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Note 7. 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.
ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
Sept. 30, 1999 Sept. 30, 1998
Allowance for loan losses at
beginning of year $5,279 $5,306
Charge-offs during period:
Commercial, financial and agricultural ($445) ($28)
Real estate - -
Installment and consumer (252) (382)
Total ($697) ($410)
Recoveries of loans previously charged off:
Commercial, financial and agricultural $154 $11
Real estate - 3
Installment and consumer 104 186
Total $258 $200
Net (charge-offs) recoveries ($439) ($210)
Provision for loan losses 270 345
Allowance for loan losses at end of year $5,110 $5,441
Ratio of net charge-offs to
average net loans 0.14% 0.07%
The following table shows the allocation of the allowance for loan losses
allocated to each category.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Sept. 30, 1999 Dec. 31, 1998
Allocated:
Commercial, financial and agricultural $2,787 $3,070
Real estate <F1> 121 180
Installment and consumer 556 452
Total allocated allowance $3,464 $3,702
Unallocated allowances 1,646 1,577
Total $5,110 $5,279
1 Residential real estate only for both periods.
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."
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NONPERFORMING LOANS (IN THOUSANDS)
Sept. 30, 1999 Dec. 31, 1998
Nonaccrual loans <F1> $8 $1,126
Loans past due 90 days or more $263 $415
Renegotiated loans $106 $121
<F1> Includes $8,000 at September 30, 1999 and $406,000 at December 31,
1998 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).
Note 8. Income per Share
Net income per common share has been computed as follows:
<TABLE>
Nine Months Ended Three Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net Income $5,729,000 $4,322,000 $1,973,000 $1,715,000
Shares:
Weighted average common shares outstanding 5,565,743 5,667,446 5,546,055 5,652,411
Dilutive effect of outstanding options, as determined
by the application of the treasury stock method 188,296 165,284 190,292 170,481
Dilutive effect of outstanding SARs, as determined
by the application of the treasury stock method 14,962 14,901 15,277 15,427
Weighted average common shares outstanding,
as adjusted 5,769,001 5,847,631 5,751,624 5,838,319
Basic earnings per share $1.03 $0.76 $0.36 $0.30
Diluted earnings per share $0.99 $0.74 $0.34 $0.29
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL CONDITION
Assets and Liabilities
Total assets remained stable at $536,363,000, at September 30, 1999,
compared to $537,373,000 at December 31, 1998. There were decreases in
securities available-for-sale, mortgage loans held-for-sale, federal funds
sold, cash and due from banks, and accrued interest receivable. These
decreases were substantially offset by increases in loans, securities held-
to-maturity, premises and equipment, and other assets.
Investments in securities available-for-sale decreased $39,935,000 or
32.2%, at September 30, 1999 compared to December 31, 1998. Investments in
securities held-to-maturity increased $5,954,000, or 9.1%, at September 30,
1999 compared to December 31, 1998. The net decrease in investments in debt
and equity securities was a result of shifting assets to fund loan growth.
Mortgage loans held-for-sale decreased $8,993,000 or 82.1%, from
December 31, 1998 to September 30, 1999. The decrease was due to lower
demand in the mortgage loan area at September 30, 1999 than at December 31,
1998 when low interest rates led to increased refinancing as well as
origination of new mortgage loans.
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The Company had no federal funds sold at September 30, 1999 compared to
$6,500,000 at December 31, 1998. This decrease was a result of excess
federal funds sold also being used to fund the increase in loans.
The decrease in cash and due from banks of $2,395,000, or 12.6%, at
September 30, 1999 compared to December 31, 1998 was attributable to a
smaller dollar amount of deposit items in process of collection at September
30, 1999 compared to December 31, 1998 offset somewhat by an increase in cash
on hand.
Loans increased $49,782,000, or 17.3%, from December 31, 1998 to
September 30, 1999. Included in this change was an increase of $27,791,000,
or 58.6%, in consumer loans and an increase of $25,058,000, or 29.0%, in
commercial real estate loans. These increases were somewhat offset by a
decrease of $2,672,000, or 5.8%, in residential real estate loans and a
decrease in commercial loans of $564,000, or 0.5%. The loan increase from
December 31, 1998 was mainly due to increased funding in the commercial real
estate area as well as increased demand in the indirect market resulting in
higher consumer loans.
Premises and equipment increased $658,000, or 5.4%, from December 31,
1998 to September 30, 1999. This increase was primarily due to the purchase
in the first quarter of 1999 of a parking lot located at the main bank
facility with a book value of $266,000 and reader sorter and imaging
equipment purchased during the third quarter at a cost of $367,000.
Other assets increased $656,000, or 12.3%, from December 31, 1998 to
September 30, 1999. Contributing to the change was an increase of $751,000
in deferred taxes caused by the change from an unrealized gain on securities
available-for-sale at December 31, 1998, to an unrealized loss at September
30, 1999. Also contributing to the increase was $90,000 of capitalized
merger costs and $212,000 of taxes receivable. Somewhat offsetting these
increases was the sale of property during 1999 that had a book value of
$613,000 at December 31,1998.
Total liabilities decreased $2,846,000, or 0.6%, from $476,666,000 at
December 31, 1998 to $473,820,000 at September 30, 1999. Decreases in
deposits were somewhat offset by increases in federal funds purchased and
securities sold under repurchase agreements and Federal Home Loan Bank
advances and other borrowings.
Total deposits decreased $15,293,000, or 3.7%, from $409,898,000 at
December 31, 1998 to $394,605,000 at September 30, 1999. Changes in deposit
detail reflect the reclassification of certain demand deposits to savings
deposits in 1999. This reclassification was not performed in 1998. Accounts
identified as transactional remained in the demand categories, while accounts
identified as non-transactional were reclassified into the savings
categories. The classification was based upon whether the account balance
was fluctuating or whether it exhibited stable balance portions which were
called non-transactional. Banks are required to hold balances at the Federal
Reserve Bank based upon transactional account balances. By identifying these
accounts as non-transactional, the bank was able to reduce the balances
required to be held at the Federal Reserve Bank in a non-interest bearing
reserve account. The decrease in deposits included a decrease of
$25,258,000, or 16.1%, in interest bearing demand deposits. Of this
decrease, $12,709,000 was attributable to the reclassification of interest
bearing deposits to savings in 1999. The deposit decrease also included a
decrease of $15,218,000, or 24.2%, in non-interest bearing demand deposits.
Included in this decrease was $10,022,000 reclassified to savings. The
decrease in demand deposits was somewhat offset by a $22,682,000, or 127.8%,
increase in savings deposits and a $2,483,000, or 7.2%, increase in time
deposits $100,000 and over. The increase in savings was due to the
reclassification of non-transactional interest bearing and non-interest
bearing demand deposits totaling $22,731,000 into savings. The decrease in
total deposits was attributable to seasonal run-off, as experienced in prior
years. Total deposits were $389,670,000 at September 30, 1998, compared to
$394,605,000 at September 30, 1999, a 1.3% increase.
Federal funds purchased and securities sold under repurchase agreements
increased $9,067,000, or 18.2%, from $49,963,000 at December 31, 1998 to
$59,030,000 at September 30, 1999. Included in this change were increases in
term repurchase agreements of $5,000,000 and daily repurchase agreements of
$4,942,000, offset by decreases in federal funds purchased of $875,000. The
net increase was used to fund loan growth.
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<PAGE>
Federal Home Loan Bank advances and other borrowings increased
$3,207,000, or 32.1%, from $10,000,000 at December 31, 1998 to $13,207,000 at
September 30, 1999. The increase was mainly attributable to a $3,000,000 net
increase in Federal Home Loan Bank advances to fund loan growth during 1999.
Also contributing to the increase was a $207,000 increase in other borrowings
due to the contract purchase of a parking lot at the main bank facility.
Capital
Total stockholders' equity increased $1,836,000 from December 31, 1998
to September 30, 1999. The change is summarized as follows:
(in thousands)
Stockholders' equity, December 31, 1998 $60,707
Net income 5,729
Treasury stock transactions, net (1,142)
Stock appreciation rights 26
Purchase of fractional shares related to stock dividend (5)
Cash dividends declared (1,313)
Other comprehensive income (1,459)
Stockholders' equity, September 30, 1999 $62,543
The Company declared a cash dividend of $0.08 per share, or $444,000,
payable on October 18, 1999 to holders of record on October 5, 1999. A first
quarter cash dividend of $0.08 per share, or $425,000, was paid April 16,
1999 and a second quarter cash dividend of $0.08 per share, or $444,000, was
paid on July 16, 1999.
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 September 30, 1999, that the Company and BankIllinois exceeded all capital
adequacy requirements to which they are subject.
As of September 30, 1999, the most recent notification from its primary
regulatory agency categorized BankIllinois as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, BankIllinois must maintain minimum total capital to risk-
weighted assets, Tier I capital to risk-weighted assets, and Tier I capital
to average assets ratios as set forth in the table. There are no conditions
or events since that notification that management believes have changed
BankIllinois' category.
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<PAGE>
The Company's and BankIllinois' actual capital amounts and ratios are
presented in the following table (in thousands):
<TABLE>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes: action provisions:
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999:
Total capital
(to risk-weighted assets)
Consolidated $67,508 17.9% $30,236 8.0% N/A
BankIllinois $61,223 16.4% $29,929 8.0% $37,412 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated $62,751 16.6% $15,118 4.0% N/A
BankIllinois $56,512 15.1% $14,965 4.0% $22,447 6.0%
Tier I capital
(to average assets)
Consolidated $62,751 11.6% $21,587 4.0% N/A
BankIllinois $56,512 10.6% $21,416 4.0% $26,770 5.0%
</TABLE>
Interest Rate Sensitivity
The concept of interest rate 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 as well as financial forecasting/budgeting/reporting
software packages.
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<PAGE>
The following table presents the Company's interest rate sensitivity at
various intervals at September 30, 1999:
<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 $-- $-- $-- $-- $-- $--
Debt and equity securities <F1> 6,754 6,426 7,729 20,985 115,302 157,196
Loans <F2> 77,860 24,517 23,489 37,666 180,624 344,156
Total interest earning assets 84,614 30,943 31,218 58,651 295,926 501,352
Interest bearing liabilities:
Savings and interest-bearing
demand deposits <F3> $3,632 2,926 4,572 9,139 36,737 57,006
Money market savings deposits 105,196 -- -- -- -- 105,196
Time deposits 10,232 26,060 23,962 40,284 74,059 174,597
Federal funds purchased
securities sold under repurchase
agreements 50,830 -- 5,000 3,200 -- 59,030
FHLB advances and other
other borrowings 1,000 -- 23 1,000 11,184 13,207
Total interest bearing liabilities 170,890 28,986 33,557 53,623 121,980 409,036
Net asset (liability) funding gap ($86,276) $1,957 ($2,339) $5,028 $173,946 $92,316
Interest earning assets as a percentage
of interest bearing liabilities 0.50 1.07 0.93 1.09 2.43 1.23
Cumulative interest earning assets as
a percentage of interest bearing
liabilities 0.50 0.58 0.63 0.72 1.23 1.23
<FN>
<F1>Debt and equity securities include securities available-for-sale,
securities held to maturity, and non-marketable equity securities.
<F2>Loans are gross and include mortgage loans held-for-sale.
<F3>The total of savings and interest-bearing demand deposits does not
include $10,022,000 of non-transactional accounts which are savings
accounts that are non-interest bearing.
Included in the 1-30 day category of savings and interest-bearing demand
deposits is non-core deposits plus a percentage, based upon industry-
accepted assumptions, of the core deposits. "Core deposits" are the
lowest average balance of the prior twelve months for each product type
included in this category. "Non-core deposits" are the difference
between the current balance and core deposits. The time frames include a
percentage, based upon industry-accepted assumptions, of the core
deposits, as follows:
1-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year
Savings and interest-bearing
demand deposits 2.7% 5.3% 8.3% 16.7% 67.0%
</FN>
</TABLE>
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<PAGE>
At September 30, 1999, the Company was liability-sensitive due to the
levels of savings and interest bearing demand deposits, short-term time
deposits, and short-term borrowings. As such, the effect of a decrease in
the interest rate for all interest earning assets and interest bearing
liabilities of 100 basis points would increase annualized net interest income
by approximately $863,000 in the 1-30 days category and $843,000 in the 1-90
days category assuming no management intervention. An increase in interest
rates would have the opposite effect for the same time periods.
In addition to managing interest rate 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. Additionally, the
Company can borrow approximately $5,000,000 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. Previously, the Company disclosed the potential effects of
interest rate changes on the market value of equity. Effective with the
quarter ended June 30, 1999, the Company changed the primary focus of its
analysis to the effect of interest rate increases and decreases on net
interest income. Management believes that this change more directly reflects
the potential effects on current earnings of interest rate changes. Call
criteria and prepayment assumptions are taken into consideration for
investments in debt and equity securities. All of the Company's 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,
Treasury Bills, or the federal 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 software performs interest rate sensitivity analysis by
performing rate shocks of plus or minus 200 basis points in 100 basis point
increments.
The following table shows projected results at September 30, 1999 and
December 31, 1998 of the impact on net interest income from an immediate
change in interest rates. The results are shown as a percentage change in
net interest income over the next twelve months.
Basis Point Change
+200 +100 -100 -200
September 30, 1999 (0.9%) (0.5%) 0.5% 0.9%
December 31, 1998 (3.5%) (1.7%) 1.7% 2.4%
As shown in the above table, there was only a slight change on the
impact of interest rate changes on net interest income at September 30, 1999
compared to December 31, 1998. The Company continues to remain liability
sensitive, causing a projected decrease in net interest income from an
increase in interest rates, and having an opposite affect from a decrease in
interest rates.
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 Company'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 Company to
minimize the effect of a prolonged shift in interest rates that would
adversely affect future results of operations.
At the present time, the most significant market risk affecting the
Company is interest rate risk. Other market risks such as foreign currency
exchange risk and commodity price risk do not occur in the normal business of
the Company. The Company also is not currently using trading activities or
derivative instruments to control interest rate risk.
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<PAGE>
Liquidity and Cash Flows
The Company was able to meet liquidity needs during the first nine
months of 1999. A review of the condensed consolidated statements of cash
flows included in the accompanying financial statements shows that the
Company's cash and cash equivalents decreased $8,895,000 from December 31,
1998 to September 30, 1999. This decrease came from net cash used in
investing and financing activities offset by net cash provided by operating
activities.
There were differences in sources and uses of cash during the nine
months of 1999 compared to the first nine months of 1998. More cash was used
in the area of investing activities during the first nine months of 1999
compared to the first nine months of 1998 when cash was provided by this
area. This difference was primarily due to funding a higher dollar amount of
loans in the first nine months of 1999 due to increased loan demand.
Paydowns on securities, which are reflective of the current interest rate
environment, were also lower in the first nine months of 1999 compared to the
same period of 1998. Purchases of debt and equity securities during the
first nine months of 1999 were significantly lower than in the same period of
1998, and proceeds of debt and equity securities were slightly lower during
the first nine months of 1999 compared to the same period of 1998. The
investment portfolio was decreased to provide cash to fund the growth in
loans. Less cash was used in the area of financing activities during the
first nine months of 1999 compared to the first nine months of 1998. This
was primarily due to an increase in time deposits, somewhat offset by a
decrease in demand and savings deposits compared to the first nine months of
1998. In addition, an increase in federal funds purchased and securities
sold under repurchase agreements used to fund loan growth was a factor in
less cash being used for financing activities during the first nine months of
1999. More cash was provided by operating activities in the first nine
months of 1999 compared to the first nine months of 1998 primarily due to
less funds used for loans originated for sale, offset somewhat by less
proceeds from sales of loans originated for sale. Stronger earnings during
the first nine months of 1999, compared to the same period in 1998, also
contributed to the increase in cash provided by operating activities.
Provision and Allowance for Loan Losses
The provision for loan losses is based on management's evaluation of the
loan portfolio in light of national and local economic conditions, changes in
the composition and volume of the loan portfolio, changes in the volume of
past due and nonaccrual loans, assessment of Year 2000 credit risk, and other
relevant factors. The allowance for loan losses, which is reported as a
deduction from loans, is available for loan charge-offs. The allowance is
increased by the provision charged to expense and is reduced by loan
charge-offs net of loan recoveries. The balance of the allowance for loan
losses was $5,110,000 at September 30, 1999 compared to $5,279,000 at
December 31, 1998, as net charge-offs of $439,000 exceeded provisions of
$270,000 during the nine month period. The allowance for loan losses as a
percentage of total loans fell to 1.48% at September 30, 1999, compared to
1.74% at December 31, 1998 as gross loans, including loans held-for-sale,
increased from $304,000,000 to $344,000,000. Net charge-offs of $439,000
during the first nine months of 1999 stemmed primarily from the resolution of
a commercial credit which had been identified by management as a sensitive
asset since 1995.
The allowance for loan losses as a percentage of nonperforming loans
rose to 1,881% at September 30, 1999, compared to 343% at December 31, 1998.
This increase was primarily due to a $1,269,000 reduction in non-performing
loans. The total non-accrual loan balance was reduced by $1,118,000, with
$838,000 of the reduction due to the resolution of a nonaccrual loan, of
which $428,000 was charged off and $410,000 was transferred to other real
estate. The real estate was sold during the second quarter of 1999. Another
commercial nonaccrual credit of $162,000 was resolved during the third
quarter which resulted in a recovery to the allowance of $50,000. Also
contributing to the reduction in nonperforming loans was a $152,000 decrease
in loans over 90 days past due and still accruing. Although unforeseen
market conditions could result in significant adjustments in the future,
management believes that problem assets have been effectively identified and
that the allowance for loan losses is adequate to absorb possible losses in
the portfolio which are reasonably anticipated.
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<PAGE>
RESULTS OF OPERATIONS
Results of Operations For the Nine Months Ended September 30, 1999
Net income for the first nine months of 1999 was $5,729,000, a
$1,407,000, or 32.6%, increase from $4,322,000 during the first nine months
of 1998. Basic earnings per share increased $0.27, or 35.5%, to $1.03 in the
first nine months of 1999 from $0.76 in the same period of 1998. Diluted
earnings per share increased $0.25, or 33.8%, to $0.99 in the first nine
months of 1999 from $0.74 in the same period of 1998.
Operating earnings for the nine months ended September 30, 1999, were
$5,729,000 compared to $4,804,000 for the same period in 1998, an increase of
$925,000, or 19.3%. Basic earnings per share on operating earnings increased
$0.18, or 21.2%, to $1.03 in the first nine months of 1999 from $0.85 during
the first nine months of 1998. Diluted earnings per share on operating
earnings increased $0.17, or 20.7%, to $0.99 in the first nine months of 1999
from $0.82 in the same period of 1998. Net income for the first nine months
of 1999 and 1998 was $5,729,000 and $4,322,000, respectively. The difference
between operating and net earnings was due to non-recurring items affecting
the first quarter of 1998. The non-recurring expense items, net of tax, in
the first quarter of 1998 were $482,000. Included in these items was
$317,000 related to organizational changes implemented to improve efficiency,
including expenses related to the merger of BankIllinois Trust Company into
BankIllinois. Also included was $165,000 of expense related to a loss on
disposal of property.
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<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)
Nine Months Ended September 30,
1999 1998
Average Average
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Assets
Taxable investment
securities <F1> $162,692 $6,866 5.63% $150,754 $6,786 6.00%
Tax-exempt investment
securities <F1> (TE) 19,573 938 6.39% 9,304 489 7.01%
Federal funds sold 10,683 374 4.67% 15,184 624 5.48%
Loans <F2> <F3> (TE) 311,641 20,369 8.71% 309,230 20,979 9.05%
Total interest earning assets
and interest income (TE) $504,589 $28,547 7.54% $484,472 $28,878 7.95%
Cash and due from banks $15,900 $17,774
Premises and equipment 12,502 10,078
Other assets 10,345 12,455
Total assets $543,336 $524,779
Liabilities and Stockholders' Equity
Interest bearing demand
deposits $143,235 3,717 3.34% $146,998 $4,007 3.64%
Savings 32,180 412 1.79% 17,142 249 1.94%
Time deposits 170,782 6,938 5.42% 186,760 8,031 5.73%
Short-term borrowings 58,844 2,068 4.69% 45,653 1,766 5.16%
FHLB advances 10,532 475 6.01% 8,262 404 6.52%
Total interest bearing
liabilities and interest
expense $415,573 13,610 4.37% $404,815 $14,457 4.76%
Noninterest bearing
demand deposits $59,133 $54,167
Other liabilities 7,110 7,009
Total liabilities $481,816 $465,991
Stockholders' equity 61,520 58,788
Total liabilities and
stockholders' equity $543,336 $524,779
Interest spread (average
rate earned minus
average rate paid) (TE) 3.17% 3.19%
Net interest income (TE) $14,937 $14,421
Net yield on interest
earning assets (TE) 3.95% 3.97%
<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 $643,000 and $650,000 in 1999 and 1998,
respectively, are included in total loan income.
</FN>
</TABLE>
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<PAGE>
The following table presents, on a tax 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.
ANALYSIS OF VOLUME AND RATE CHANGES
(in thousands)
Nine Months Ended September 30, 1999
Increase
(Decrease)
from
Previous Due to Due to
Year Volume Rate
Interest Income
Taxable investment securities $80 $676 ($596)
Tax-exempt investment
securities (TE) 449 523 (74)
Federal funds sold (250) (167) (83)
Loans (TE) (610) 252 (862)
Total interest income (TE) ($331) $1,284 ($1,615)
Interest Expense
Interest bearing demand deposits ($290) ($72) ($218)
Savings 163 197 (34)
Time deposits (1,093) (663) (430)
Federal funds purchased and securities
sold under repurchase agreements 302 556 (254)
FHLB advances and other borrowings 71 121 (50)
Total interest expense ($847) $139 ($986)
Net Interest Income (TE) $516 $1,145 ($629)
Net interest income on a tax equivalent basis was $516,000, or 3.6%
higher for the first nine months of 1999 compared to 1998. Total tax-
equivalent interest income was $331,000, or 1.1% lower in 1999 compared to
1998, and interest expense decreased $847,000, or 5.9%. The decrease in
interest income was primarily due to lower interest rates offset somewhat by
an increase in average earning assets. The decrease in interest expense was
primarily due to lower interest rates.
The decrease in total interest income was mainly due to a decrease in
interest income from loans and federal funds sold, offset somewhat by
increases in taxable and tax-exempt investment interest. The decrease in
interest income from loans was due to lower interest rates, offset somewhat
by an increase in average loans outstanding during the first nine months of
1999 compared to the first nine months of 1998. The decrease in interest
from federal funds sold was primarily due to a decrease in average federal
funds sold during the period caused by shifting assets to fund loan growth.
The increase in investment interest income was mainly due to an increase in
total average investments, somewhat offset by lower yields. The increase in
the total average investment portfolio included an increase in investments
held-to-maturity of $43,361,000, or 162.7%, offset somewhat by a decrease in
average investments available-for-sale of $21,154,000, or 15.9%, during the
first nine months of 1999 compared to 1998.
The decrease in total interest expense was mainly due to a decrease in
interest on time deposits and interest bearing demand deposits, offset
somewhat by an increase in interest expense on federal funds purchased and
securities sold under repurchase agreements as well as interest expense on
savings deposits. Interest expense on time deposits
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<PAGE>
decreased during the first nine months of 1999 compared to the first nine
months of 1998 mainly because of lower volume as well as lower rates.
Interest expense on interest bearing demand deposits was lower in 1999
primarily due to lower interest rates and somewhat due to lower volume in
this category. There was an increase in interest expense on federal funds
purchased and securities sold under repurchase agreements in the first nine
months of 1999 compared to 1998 due to an increased amount of borrowings,
mostly in the areas of federal funds purchased and daily repurchase
agreements, used to fund loan growth in 1999. This was somewhat offset by
lower rates on these borrowings. Interest expense on savings deposits also
increased, primarily due to increased volume in this area. The lower volume
of interest bearing demand deposits and the higher volume of savings deposits
was mainly caused by reclassifying non-transactional interest bearing demand
deposits into the savings category during 1999, as described in the financial
condition section above.
The provision for loan losses recorded was $270,000 during the first
nine months of 1999. This was $75,000, or 21.7%, lower than the $345,000
recorded during the first nine months of 1998. The provision during both
periods was based on management's analysis of the loan portfolio, as
discussed in the provision and allowance for loan losses section above.
Total non-interest income increased $441,000, or 12.0%, during the first
nine months of 1999 compared to the first nine months of 1998. Included in
this increase was an increase of $229,000, or 14.1%, in trust fees. This was
due to both an increase in the number of accounts as well as an increase in
the market value of the portfolio under management, somewhat offset by a
decrease in farm management fees of $63,000, or 28.0%, resulting from the
declining farm economy. In addition, there was an increase of $146,000, or
13.0%, in other non-interest income. This increase included $159,000 of
consulting revenue in 1999. Also contributing to the change in other non-
interest income in 1999 was $104,000 recognized in September 1998 from the
sale of the Visa portfolio. Non-interest income was also positively affected
by a $92,000, or 200.0%, increase in income from securities transactions.
This was mainly the result of selling an equity investment during August 1999
for a gain of $100,000. Somewhat offsetting these increases in total non-
interest income was a decrease of $27,000, or 6.6% from gains on sales of
mortgage loans held-for-sale. This decrease reflected a $3,837,000, or 8.4%,
decrease in funded mortgage loans held-for-sale during the first nine months
of 1999 compared to the first nine months of 1998 when significant growth
occurred in this area due to lower interest rates.
Total non-interest expense decreased $1,110,000, or 9.9%, during the
first nine months of 1999 compared to the first nine months of 1998.
Included in the decrease was a decrease in salaries and employee benefits of
$550,000, or 8.6%. Of this decrease, $472,000 was due to organizational
changes implemented during the first quarter of 1998 to improve efficiency,
including the merger of BankIllinois Trust Company into BankIllinois. Other
expenses decreased $474,000, or 19.3%. Included in this decrease was a loss
on disposal of property of $248,000 in 1998 compared to none in 1999, a gain
on disposal of other real estate of $39,000 in 1999, and an $82,000 decrease
in Visa credit card expenses due to selling the portfolio in September 1998.
Also contributing to the decrease in other expenses was a decrease in legal
expenses in 1999 compared to 1998 when expenses related to organizational
changes in connection with the merger of the Company's two subsidiaries,
BankIllinois and BankIllinois Trust Company, were incurred. Net occupancy
expense decreased $158,000, or 15.2%, during the first nine months of 1999
compared to the same period in 1998. Included in occupancy expense in 1999
was rental income on the Executive Center, which was net of maintenance and
depreciation expenses. This property was moved to premises and equipment
from other assets on December 31, 1998. Also affecting the decrease in
occupancy expense was the sale of a vacant building and the adjacent parking
lot in March 1998.
Income tax expense increased $584,000, or 28.1%, during the first nine
months of 1999 compared to the first nine months of 1998, due to higher
income in 1999 resulting in more taxable income. The Company's effective tax
rate was comparable for both periods.
Results of Operations For the Three Months Ended September 30, 1999
Net income for the third quarter of 1999 was $1,973,000, a $258,000, or
15.0%, increase from $1,715,000 during the third quarter of 1998. Basic
earnings per share increased $0.06, or 20.0%, to $0.36 in the third quarter
of 1999 from $0.30 in the same period of 1998. Diluted earnings per share
increased $0.05, or 17.2%, to $0.34 in the third quarter of 1999 from $0.29
in the same period of 1998.
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<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)
Three Months Ended September 30,
1999 1998
Average Average
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Assets
Taxable investment
securities <F1> $146,440 $2,054 5.61% $150,664 $2,211 5.87%
Tax-exempt investment
securities <F1> (TE) 19,611 310 6.37% 10,467 181 6.95%
Federal funds sold 4,884 62 5.00% 18,780 258 5.47%
Loans <F2> <F3> (TE) 330,770 7,282 8.81% 306,603 7,009 9.14%
Total interest earning assets
and interest income (TE) $501,705 $9,708 7.74% $486,514 $9,659 7.94%
Cash and due from banks $15,066 $17,115
Premises and equipment 12,660 9,700
Other assets 9,855 12,601
Total assets $539,286 $525,930
Liabilities and Stockholders' Equity
Interest bearing demand
deposits $137,544 1,229 3.45% $145,712 $1,317 3.62%
Savings 31,773 137 1.81% 17,180 85 1.98%
Time deposits 171,752 2,333 5.43% 183,603 2,625 5.72%
Short-term borrowings 57,511 705 4.90% 48,701 620 5.09%
FHLB advances 12,991 198 6.07% 10,441 165 6.32%
Total interest bearing
liabilities and interest
expense $411,571 4,602 4.47% $405,637 $4,812 4.75%
Noninterest bearing
demand deposits $58,961 $53,773
Other liabilities 6,741 6,958
Total liabilities $477,273 $466,368
Stockholders' equity 62,013 59,562
Total liabilities and
stockholders' equity $539,286 $525,930
Interest spread (average
rate earned minus
average rate paid) (TE) 3.27% 3.19%
Net interest income (TE) $5,106 $4,847
Net yield on interest
earning assets (TE) 4.07% 3.99%
<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 $178,000 and $252,000 in 1999 and 1998,
respectively, are included in total loan income.
</FN>
</TABLE>
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<PAGE>
The following table presents, on a tax 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.
ANALYSIS OF VOLUME AND RATE CHANGES
(in thousands)
Three Months Ended September 30, 1999
Increase
(Decrease)
from
Previous Due to Due to
Year Volume Rate
Interest Income
Taxable investment securities ($157) ($60) ($97)
Tax-exempt investment
securities (TE) 129 229 (100)
Federal funds sold (196) (175) (21)
Loans (TE) 273 1,597 (1,324)
Total interest income (TE) $49 $1,591 ($1,542)
Interest Expense
Interest bearing demand deposits ($88) ($48) ($40)
Savings 52 101 (49)
Time deposits (292) (165) (127)
Federal funds purchased and securities
sold under repurchase agreements 85 223 (138)
FHLB advances and other borrowings 33 75 (42)
Total interest expense ($210) $186 ($396)
Net Interest Income (TE) $259 $1,405 ($1,146)
Net interest income on a tax equivalent basis was $259,000, or 5.3%,
higher for the third quarter of 1999 compared to the third quarter of 1998.
Total tax-equivalent interest income was $49,000, or 0.5%, higher in 1999
compared to 1998, and interest expense decreased $210,000, or 4.4%. The
increase in interest income was due to an increase in average earning assets,
offset somewhat by lower interest rates. The decrease in interest expense
was primarily due to lower interest rates, offset somewhat by an increase in
average interest bearing liabilities.
The increase in total interest income was due to an increase in interest
income from loans and tax-exempt investments, somewhat offset by decreases in
interest from federal funds sold and taxable investment interest income. The
increase in interest income from loans was due to an increase in average
loans outstanding in the third quarter of 1999 compared to the third quarter
of 1998, somewhat offset by lower interest rates in 1999. The increase in
tax-exempt investment income was due to the higher average balance of state
and municipal securities held during the third quarter of 1999 compared to
the third quarter of 1998, somewhat offset by lower yields on these
investments. The decrease in interest from federal funds sold was primarily
due to a decrease in average federal funds sold during the period caused by
shifting assets to fund loan growth. Income from taxable investment
securities decreased due to lower rates as well as a somewhat lower average
balance of these securities during the third quarter of 1999 compared to the
third quarter of 1998. The decrease in the average balance of the investment
portfolio included a decrease of $38,707,000, or 29.2%, in investments
available-for-sale and a somewhat offsetting increase of $34,483,000, or
188.2%, increase in average investments held-to-maturity .
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<PAGE>
The decrease in total interest expense was primarily due to a decrease
in interest expense on time deposits and interest bearing demand deposits,
somewhat offset by an increase in interest expense on federal funds purchased
and securities sold under repurchase agreements as well as interest expense
on savings deposits. Interest expense on time deposits and interest bearing
demand deposits decreased during the third quarter of 1999 compared to the
third quarter of 1998 mainly due to lower volume as well as lower rates for
both of these categories. Interest expense on federal funds purchased and
securities sold under repurchase agreements increased in the third quarter of
1999 compared to the third quarter of 1998 due to an increased amount of
borrowings, mainly in the area of term repurchase agreements and federal
funds purchased, used to fund loan growth in the third quarter of 1999. This
was somewhat offset by lower rates on these borrowings. Interest expense on
savings deposits also increased, primarily due to increased volume in this
area. The lower volume of interest bearing demand deposits and the higher
volume of savings deposits was mainly caused by reclassifying non-
transactional interest bearing demand deposits into the savings category
during 1999 as described in the financial condition section above.
The provision for loan losses recorded was $90,000 during both the third
quarter of 1999 and the third quarter of 1998. The provision during both of
these periods was based on management's analysis of the loan portfolio, as
discussed in the provision and allowance for loan losses section above.
Total non-interest income increased $89,000, or 6.9%, during the third
quarter of 1999 compared to the third quarter of 1998. Included in this
increase was an $111,000, or 21.3%, increase in trust fees which was due to
both an increase in the number of accounts as well as an increase in the
market value of the portfolio under management, somewhat offset by a decrease
in farm management fees of $21,000, or 28.0%, due to the declining farm
economy. Also contributing to the increase in non-interest income was an
$81,000, or 736.4%, increase in income from securities transactions. This
was mainly the result of selling an equity investment during August 1999 for
a gain of $100,000. These increases to non-interest income were somewhat
offset by a decrease of $62,000, or 40.0%, from gains on sales of mortgage
loans held-for-sale. This decrease reflected a $9,318,000, or 52.4%,
decrease in funded mortgage loans held-for-sale during the third quarter of
1999 compared to the third quarter of 1998 when significant growth occurred
in this area due to lower interest rates. A decrease in other non-interest
income of $41,000, or 9.0%, was an additional offset to the increases in
total non-interest income. This decrease was due to $104,000 booked in
September 1998 from the sale of the Visa portfolio. This was somewhat offset
by an increase of $23,000 in brokerage income in the third quarter of 1999
compared to the third quarter of 1998 and $20,000 of consulting income in the
third quarter of 1999.
Total non-interest expense decreased $61,000, or 1.8%, during the third
quarter of 1999 compared to the third quarter of 1998. Included in this
decrease was a decrease in occupancy expenses of $57,000, or 16.8%.
Occupancy expenses in 1999 included the net income (rental income less
building expenses) for the Executive Center which was transferred to premises
and equipment from other assets on December 31, 1998. Also contributing to
the decrease in non-interest expense was a decrease in salaries and employee
benefits expense of $38,000, or 1.9%. These decreases were somewhat offset
by an increase in equipment expense of $30,000, or 13.5%, in the third
quarter of 1999 compared to the third quarter of 1998. This was primarily
due to a $24,000 increase in depreciation expense on furniture and equipment
in the third quarter of 1999 compared to the same period in 1998, primarily
due to purchases of computer equipment, including imaging technology.
Income tax expense increased $107,000, or 13.1%, during the third
quarter of 1999 compared to the third quarter of 1998, due to higher income
in 1999 resulting in more taxable income. The Company's effective tax rate
was comparable for both periods.
RECENT MERGER DEVELOPMENTS
On August 12, 1999, the Company, First Decatur Bancshares, Inc., and
Main Street Trust, Inc., entered into an Agreement and Plan of Merger. The
consummation of the merger is subject to certain conditions and the
occurrence of certain events, such as the approval of the Company's
stockholders and the receipt of required regulatory approvals. The parties
currently anticipate that the merger will close during the first quarter of
2000.
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<PAGE>
YEAR 2000
In December 1996, the Company developed its 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
has tested 100% of its systems on a test server that emulates the current
network and systems of the Company. The Company has renovated all of the
mission critical systems. 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. A subcommittee was formed to develop and implement the
Company's Y2K Customer Awareness Program. The program outlines a strategy
for communicating with customers, determining key information to be
communicated to both customers and employees, and training employees to
respond appropriately to customer inquiries. In addition, the Company was
instrumental in forming a coalition with other local financial institutions
and a county-wide task force 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 provides additional
information in the quarterly Commercial Division newsletter.
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
outages. Since the generator does not supply sufficient power to allow the
main office to remain open during a power outage, the Company has ordered a
diesel generator capable of supplying sufficient power to operate a branch
office in case of power outages caused by Year 2000 issues.
Management anticipates that there will be no additional out-of-pocket
expenditures required for bringing the systems into compliance for the Year
2000. 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.
RECENT REGULATORY DEVELOPMENTS
Pending Legislation. On November 4, 1999, the United States Congress
approved legislation that would allow bank holding companies to engage
in a wider range of nonbanking activities, including greater authority
to engage in
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<PAGE>
securities and insurance activities. Under the Gramm-Leach-Bliley Act (the
"Act"), a bank holding company that elects to become a financial holding
company may engage in any activity that the Board of Governors of the
Federal Reserve System (the "Federal Reserve"), in consultation with the
Secretary of the Treasury, determines by regulation or order is (i) financial
in nature, (ii) incidental to any such financial activity, or
(iii) complementary to any such financial activity and does not pose a
substantial risk to the safety or soundness of depository institutions or the
financial system generally. The Act specifies certain activities that
are deemed to be financial in nature, including lending, exchanging,
transferring, investing for others, or safeguarding money or securities;
underwriting and selling insurance; providing financial, investment, or
economic advisory services; underwriting, dealing in or making a market in,
securities; and any activity currently permitted for bank holding companies
by the Federal Reserve under section 4(c)(8) of the Bank Holding Company Act.
A bank holding company may elect to be treated as a financial holding company
only if all depository institution subsidiaries of the holding company are
well-capitalized, well-managed and have at least a satisfactory rating under
the Community Reinvestment Act.
National banks are also authorized by the Act to engage, through
"financial subsidiaries," in any activity that is permissible for a financial
holding company (as described above) and any activity that the Secretary of
the Treasury, in consultation with the Federal Reserve, determines is
financial in nature or incidental to any such financial activity, except (i)
insurance underwriting, (ii) real estate development or real estate
investment activities (unless otherwise permitted by law), (iii) insurance
company portfolio investments and (iv) merchant banking. The authority of a
national bank to invest in a financial subsidiary is subject to a number of
conditions, including, among other things, requirements that the bank must be
well-managed and well-capitalized (after deducting from capital the bank's
outstanding investments in financial subsidiaries). The Act provides that
state banks may invest in financial subsidiaries (assuming they have the
requisite investment authority under applicable state law) subject to the
same conditions that apply to national bank investments in financial
subsidiaries.
The Act must be signed by the President before it will take effect.
At this time, the Company is unable to predict the impact the Act may
have on the Company and its subsidiary.
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
Page 27
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<PAGE>
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 3. Quantitative and Qualitative Disclosures about Market Risk
See pages 15 through 17.
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<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The are no material pending legal proceedings to which the Company or its
subsidiaries is a party other than ordinary routine litigation incidental to
their respective businesses.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
27. Financial Data Schedule
b. Reports
A Form 8-K was filed on August 17, 1999, which reported under Item 5 that an
Agreement and Plan of Merger by and between the Company, First Decatur
Bancshares, Inc., and Main Street Trust, Inc., had been executed on August
12, 1999.
Page 29
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
BANKILLINOIS FINANCIAL CORPORATION
Date: November 5, 1999
By: /s/ David B. White
Executive Vice President
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 16,685
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 85,733
<INVESTMENTS-CARRYING> 71,463
<INVESTMENTS-MARKET> 69,754
<LOANS> 339,046<F1>
<ALLOWANCE> 5,110
<TOTAL-ASSETS> 536,363
<DEPOSITS> 394,605
<SHORT-TERM> 59,030
<LIABILITIES-OTHER> 6,978
<LONG-TERM> 13,207
0
0
<COMMON> 57
<OTHER-SE> 62,486
<TOTAL-LIABILITIES-AND-EQUITY> 536,363
<INTEREST-LOAN> 20,366
<INTEREST-INVEST> 7,485
<INTEREST-OTHER> 374
<INTEREST-TOTAL> 28,225
<INTEREST-DEPOSIT> 11,067
<INTEREST-EXPENSE> 13,610
<INTEREST-INCOME-NET> 14,615
<LOAN-LOSSES> 270
<SECURITIES-GAINS> 138
<EXPENSE-OTHER> 10,062
<INCOME-PRETAX> 8,388
<INCOME-PRE-EXTRAORDINARY> 8,388
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,729
<EPS-BASIC> 1.03
<EPS-DILUTED> 0.99
<YIELD-ACTUAL> 7.54
<LOANS-NON> 8
<LOANS-PAST> 263
<LOANS-TROUBLED> 106
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,279
<CHARGE-OFFS> 697
<RECOVERIES> 258
<ALLOWANCE-CLOSE> 5,110
<ALLOWANCE-DOMESTIC> 5,110
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Includes mortgages available-for-sale and net of allowance
for loan losses of $5,110.
</FN>
</TABLE>
