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 March 31, 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 April 29, 1999:
BankIllinois Financial Corporation Common Stock 5,292,174
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<PAGE>
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 7
Item 3. Quantitative and Qualitative Disclosures 16
About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BANKILLINOIS FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1999 and December 31, 1998
(Unaudited, in thousands, except share data)
<TABLE>
<S> <C> <C>
Mar. 31, Dec. 31,
1999 1998
ASSETS
Cash and due from banks $15,952 $19,080
Federal funds sold 12,750 6,500
Investments in debt and equity securities:
Available-for-sale, at fair value 123,660 124,055
Held-to-maturity, at cost (fair value of $70,798 and
$65,581 at March 31, 1999 and December 31, 1998, respectively) 70,884 65,509
Non-marketable equity securities 1,572 1,572
Mortgage loans held for sale 1,556 10,951
Loans, net of allowance for loan losses of $4,968 and
$5,279 at March 31, 1999 and December 31, 1998,
respectively 300,956 287,306
Premises and equipment 12,544 12,195
Accrued interest receivable 4,915 4,865
Other assets 5,944 5,340
Total assets $550,733 $537,373
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing $57,872 $63,002
Demand, interest bearing 166,464 157,052
Savings 18,221 17,748
Time, $100 and over 35,962 34,582
Other time 136,059 137,514
Total deposits 414,578 409,898
Short-term borrowings 58,178 49,963
Long-term borrowings 9,207 10,000
Accrued interest payable 1,365 1,399
Other liabilities 5,982 5,406
Total liabilities 489,310 476,666
Stockholders' equity:
Preferred stock, no par value; 300,000 shares authorized - -
Common stock, $0.01 par value; 6,500,000 shares authorized;
5,466,815 shares issued 55 55
Paid in capital 28,956 28,953
Retained earnings 34,725 33,300
Accumulated other comprehensive income 617 1,033
64,353 63,341
Less: treasury stock, at cost, 149,641 and 137,976 shares
at March 31, 1999 and December 31, 1998, respectively (2,930) (2,634)
Total stockholders' equity 61,423 60,707
Total liabilities and stockholders' equity $550,733 $537,373
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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BANKILLINOIS FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1999 and 1998
(Unaudited, in thousands, except share data)
<TABLE>
<S> <C> <C>
Interest income: 1999 1998
Loans and fees on loans $6,334 $6,920
Investments in debt and equity securities
Taxable 2,387 2,319
Tax-exempt 203 85
Federal funds sold and interest-bearing deposits 256 212
Total interest income 9,180 9,536
Interest expense:
Demand, savings and other time deposits 3,259 3,623
Time deposits $100 and over 435 534
Short-term borrowings 594 555
Long-term borrowings 139 122
Total interest expense 4,427 4,834
Net interest income 4,753 4,702
Provision for loan losses 90 165
Net interest income after provision for loan losses 4,663 4,537
Non-interest income:
Trust fees 613 555
Service charges on deposit accounts 146 155
Security transactions, net 45 27
Gain on sales of mortgage loans held-for-sale, net 215 108
Other 342 332
Total non-interest income 1,361 1,177
Non-interest expense:
Salaries and employee benefits 1,970 2,483
Occupancy 310 360
Equipment 234 217
Data processing 191 192
Federal deposit insurance premiums 12 12
Other 564 927
Total non-interest expense 3,281 4,191
Income before income taxes 2,743 1,523
Income taxes 862 493
Net income $1,881 $1,030
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period, net of tax of
($213) and $14, for March 31, 1999 and December 31, 1998,
respectively (414) 28
Less: reclassification adjustment for gains included in net
income, net of tax of ($1) and ($6), for March 31, 1999
and December 31, 1998, respectively (2) (15)
Other comprehensive income, net of tax (416) 13
Comprehensive income $1,465 $1,043
Per share data:
Basic earnings per share $0.35 $0.19
Weighted average shares of common stock outstanding 5,326,233 5,403,783
Diluted earnings per share $0.34 $0.19
Weighted average shares of common stock and dilutive potential
common shares outstanding 5,508,576 5,540,507
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
BANKILLINOIS FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ending March 31, 1999 and 1998
(Unaudited, in thousands)
<TABLE>
<S> <C> <C>
Cash flows from operating activities: 1999 1998
Net income $1,881 $1,030
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 287 272
Amortization of bond premiums, net 112 (6)
Provision for loan losses 90 165
Gain on security transactions (45) (27)
Gain on sales of loans, net (215) (119)
(Increase) decrease in accrued interest receivable (50) 380
Decrease in accrued interest payable (34) (192)
Increase in other assets (195) (749)
Increase in other liabilities 791 912
Stock appreciation rights 3 37
Proceeds from sales of loans originated for sale 23,409 11,938
Loans originated for sale (13,799) (13,221)
Net cash provided by operating activities 12,235 420
Cash flows from investing activities:
Net increase in loans (14,150) (924)
Proceeds from maturities and calls of investments in debt securities:
Held-to-maturity 10,315 1,515
Available-for-sale 21,672 22,050
Purchases of investments in debt and equity securities:
Held-to-maturity (15,908) (9,604)
Available-for-sale (22,811) (20,617)
Principal paydowns from mortgage-backed securities:
Held-to-maturity 248 0
Available-for-sale 807 3,442
Purchases of premises and equipment (635) (64)
Proceeds from sale of premises and equipment 0 1,380
Net cash used in investing activities (20,462) (2,822)
Cash flows from financing activities:
Net increase (decrease) in demand and savings deposits 4,755 (3,675)
Net increase in time deposits $100 and over 1,380 2,155
Net decrease in other time deposits (1,455) (3,740)
Net increase (decrease) in short-term borrowings 8,215 (11,904)
Net decrease in long-term borrowings (793) (1,000)
Cash dividends paid (426) (411)
Treasury stock transactions, net (327) 87
Net cash provided by (used in) financing
activities 11,349 (18,488)
Net increase (decrease) in cash and cash
equivalents 3,122 (20,890)
Cash and cash equivalents at beginning of year 25,580 48,558
Cash and cash equivalents at end of year $28,702 $27,668
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $4,461 $5,026
Income taxes 328 0
Disposal of equipment subject to valuation allowance 0 304
Change in unrealized gain (loss) on securities available-for-sale (630) 22
Change in deferred taxes attributable to unrealized gain (loss) on
securities available-for-sale (214) 8
Real estate acquired through or in lieu of foreclosure 410 26
Dividends declared not paid 425 412
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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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.
In the opinion of management, the condensed consolidated financial
statements of BankIllinois Financial Corporation (the "Company") and its
subsidiary, BankIllinois, as of March 31, 1999 and for the three-month
periods ended March 31, 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 period ended March 31, 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 security transactions include proceeds from sales, calls and
maturities of available-for-sale securities as well as calls and maturities
of held-to-maturity securities. Gross gains and losses are as follows:
Mar. 31, 1999 Mar. 31, 1998
Available-for-sale $3 $22
Held-to-maturity 42 5
$45 $27
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<PAGE>NOTE 3. 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. 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 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.
In February 1999, the Statement on Financial Accounting Standards No.
135, "Rescission of FASB Statement No. 75 and Technical Corrections," was
issued. The new Statement rescinds Statement 75, which deferred indefinitely
the effective date of the FASB Statement on pension plan accounting by state
and local governments, and offers a number of other technical corrections of
FASB standards. FASB Statement No. 25, "Financial Reporting for Defined
Benefit Pension Plans and Note Disclosures for Defined Contribution Plans,"
was issued November 1994, and establishes financial reporting standards for
defined benefit pension plans and for the notes to the financial statements
of defined contribution plans of state and local governmental entities.
Statement 75 is, therefore, no longer needed. The Statement is effective for
financial statements issued for fiscal years ending after February 15, 1999.
The Company is not a governmental entity; therefore the Statement will have
no effect on its financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
ASSETS AND LIABILITIES
Total assets increased $13,360,000, or 2.5%, from $537,373,000 at
December 31, 1998 to $550,733,000 at March 31, 1999. There were increases in
loans, federal funds sold, securities held-to-maturity, other assets, and
premises and equipment. These increases were offset somewhat by decreases in
mortgage loans held-for-sale, cash and due from banks, and securities
available-for-sale.
Loans increased $13,650,000, or 4.8%, from December 31, 1998 to March
31, 1999. Included in this change was an increase of $14,459,000, or 16.7%,
in commercial real estate loans and an increase of $2,891,000, or 6.1%, in
consumer loans. These increases were somewhat offset by a decrease of
$2,498,000, or 5.4%, in residential real estate loans and a slight decrease
in commercial loans of $1,513,000, or 1.4%. The loan increase from December
31, 1998 was mainly due to increased funding in the commercial real estate
area.
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<PAGE>
Federal funds sold increased $6,250,000, or 96.2%, at March 31, 1999
compared to December 31, 1998. This increase was a result of more funds
available for investing as a result of higher deposits and short-term
borrowings at March 31, 1999 compared to December 31, 1998.
Investments in securities held-to-maturity increased $5,375,000, or
8.2%, at March 31, 1999 compared to December 31, 1998. Investments in
securities available-for-sale decreased $395,000, or 0.3%, at March 31, 1999
compared to December 31, 1998. The net increase in investments in debt and
equity securities was a result of more funds available for investing at March
31, 1999 compared to December 31, 1998.
Other assets increased $604,000, or 11.3%, from December 31, 1998 to
March 31, 1999. This was due to the repossession of real estate with a book
value of $410,000. Subsequent to March 31, 1999, this property was sold on
contract. In addition, there was an increase of $214,000 in deferred taxes
caused by the decrease in unrealized gains on securities available-for-sale
from December 31, 1998 to March 31, 1999. These increases were offset by a
decrease of $187,000 due to the sale during the first quarter of 1999 of a
portion of property that had been acquired in the first quarter of 1998 as
part of the agreement to sell a building and parking lot. The remainder of
this property was sold in the second quarter of 1999.
Premises and equipment increased $349,000, or 2.9%, from December 31,
1998 to March 31, 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.
Mortgage loans held-for-sale decreased $9,395,000 or 85.8%, from
December 31, 1998 to March 31, 1999. The decrease was due to lower demand in
the mortgage loan area at March 31, 1999 than at December 31, 1998 when low
interest rates led to increased refinancing as well as origination of new
mortgage loans.
The decrease in cash and due from banks of $3,128,000, or 16.4%, at
March 31, 1999 compared to December 31, 1998 was attributable to a smaller
dollar amount of deposit items in process of collection at March 31, 1999
compared to December 31, 1998.
Total liabilities increased $12,644,000, or 2.7%, from $476,666,000 at
December 31, 1998 to $489,310,000 at March 31, 1999. Increases in short-term
borrowings, deposits, and other liabilities, offset somewhat by a decrease in
long-term borrowings, resulted in the increase in liabilities.
Short-term borrowings increased $8,215,000, or 16.4%, from $49,963,000
at December 31, 1998 to $58,178,000 at March 31, 1999. Included in this
change were increases in daily repurchase agreements of $8,190,000 and
federal funds purchased of $25,000.
Total deposits increased $4,680,000, or 1.1%, from $409,898,000 at
December 31, 1998 to $414,578,000 at March 31, 1999. The increase included a
$9,412,000, or 6.0%, increase in interest bearing demand deposits, a
$1,380,000, or 4.0%, increase in time deposits $100,000 and over, and a
$473,000, or 2.7%, increase in savings deposits. These increases were
somewhat offset by a decrease of $5,130,000, or 8.1%, in non-interest bearing
demand deposits and a decrease in other time deposits of $1,455,000, or 1.1%.
Other liabilities increased $576,000, or 10.7%, from $5,406,000 at
December 31, 1998 to $5,982,000 at March 31, 1999. This change was primarily
due to a $560,000 increase in federal income taxes payable because the first
installment will be paid during the second quarter of 1999.
Long-term borrowings decreased $793,000, or 7.9%, from $10,000,000 at
December 31, 1998 to $9,207,000 at March 31, 1998. The decrease was mainly
the result of a $1,000,000 Federal Home Loan Bank advance maturing
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<PAGE> during the first quarter of 1999. Somewhat offsetting this was a
$207,000 increase in other long-term borrowings due to the contract purchase
of a parking lot at the main bank facility.
CAPITAL
Total stockholders' equity increased $716,000 from December 31, 1998 to
March 31, 1999. The change is summarized as follows:
(IN THOUSANDS)
Stockholders' equity, December 31, 1997 $60,707
Net income 1,881
Treasury stock transactions, net (327)
Stock appreciation rights 3
Cash dividends declared (425)
Other comprehensive income (416)
Stockholders' equity, March 31, 1998 $61,423
On March 16, 1999, the Board of Directors of the Company declared a cash
dividend of $0.08 per share of the Company's common stock. The dividend of
$425,000 was paid on April 16, 1999 to holders of record on April 5, 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 March 31, 1999, that the Company and BankIllinois meet all capital
adequacy requirements to which they are subject.
As of March 31, 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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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 March 31, 1999:
Total capital
(to risk-weighted assets)
Consolidated $65,247 18.6% $28,077 8.0% N/A
BankIllinois $58,932 17.0% $27,739 8.0% $34,674 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated $60,796 17.3% $14,039 4.0% N/A
BankIllinois $54,563 15.7% $13,870 4.0% $20,805 6.0%
Tier I capital
(to average assets)
Consolidated $60,796 11.2% $21,683 4.0% N/A
BankIllinois $54,563 10.1% $21,555 4.0% $26,944 5.0%
</TABLE>
INTEREST RATE SENSITIVITY
The concept of interest sensitivity attempts to gauge exposure of
BankIllinois' net interest income to adverse changes in market driven
interest rates by measuring the amount of interest-sensitive assets and
interest-sensitive liabilities maturing or subject to repricing within a
specified time period. Liquidity represents the ability of BankIllinois to
meet the day-to-day demands of deposit customers balanced by its investments
of these deposits. BankIllinois must also be prepared to fulfill the needs
of credit customers for loans with various types of maturities and other
financing arrangements. BankIllinois monitors its interest rate sensitivity
and liquidity through the use of static gap reports which measure the
difference between assets and liabilities maturing or repricing within
specified time periods as well as financial forecasting/budgeting/reporting
software packages.
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The following table presents the Company's interest rate sensitivity at
various intervals at March 31, 1999:
RATE SENSITIVITY OF EARNING ASSETS AND INTEREST BEARING LIABILITIES
(dollars in thousands)
<TABLE>
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 $12,750 -- -- -- -- $12,750
Debt and equity securities<F1> 8,463 15,358 12,041 19,581 140,673 196,116
Loans <F2> 67,782 14,796 15,397 49,457 160,048 307,480
Total interest earning assets 88,995 30,154 27,438 69,038 300,721 516,346
Interest bearing liabilities:
Savings and interest-bearing
demand deposits<F3> $10,642 2,916 4,557 9,114 34,341 $61,570
Money market savings deposits 123,115 -- -- -- -- 123,115
Time deposits 16,220 21,541 23,932 39,843 70,485 172,021
Short-term borrowings 52,978 -- 3,000 2,000 200 58,178
Long-term borrowings -- -- 1,000 1,023 7,184 9,207
Total interest bearing liabilities 202,955 24,457 32,489 51,980 112,210 424,091
Net asset (liability) funding gap ($113,960) 5,697 (5,051) 17,058 188,511 $92,255
Interest earning assets as a percentage
of interest bearing liabilities 0.44 1.23 0.84 1.33 2.68 1.22
Cumulative interest earning assets as
a percentage of interest bearing
liabilities 0.44 0.52 0.56 0.69 1.22 1.22
<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> 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 31-90 91-180 181-365 Over
Days Days Days Days 1 Year
Savings and
interest-bearing
demand deposits 2.7% 5.3% 8.3% 16.7% 67.0%
</FN>
</TABLE>
At March 31, 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
$1,140,000 in the 1-30 days category and $1,083,000 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.
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<PAGE>
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 an additional
$8,489,000 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, 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 current
market value of loans is computed by discounting cash flows at market rates
as the discount rate. Categories of cash, federal 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:
MARKET VALUE OF PORTFOLIO
(dollars in millions)
<TABLE>
March 31, 1999 December 31, 1998
Market Market
Value of Percent Value of Percent
Change in interest rates Equity Change Change Equity Change Change
<S> <C> <C> <C> <C> <C> <C>
300 basis point rise $38 ($24) (39%) $39 ($22) (36%)
200 basis point rise 46 (16) (26%) 46 (15) (25%)
100 basis point rise 54 (8) (13%) 54 (7) (11%)
Base scenario 62 0 0% 61 0 0%
100 basis point decline 70 8 13% 70 9 15%
200 basis point decline 78 16 26% 77 16 26%
300 basis point decline 87 25 40% 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 BankIllinois to
minimize the effect of a prolonged shift in interest rates that would
adversely affect future results of operations.
Page 12
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<PAGE>
Liquidity and Cash Flows
The Company was able to meet liquidity needs during the first three
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 increased $3,122,000 from December 31,
1998 to March 31, 1999. This increase came from net cash provided by
operating and financing activities offset by net cash used in investing
activities.
There were differences in sources and uses of cash during the first
quarter of 1999 compared to the first quarter of 1998. More cash was
provided from operating activities in the first three months of 1999 mostly
due to more proceeds from sales of loans originated for sale. There were
substantially more loans in the process of funding at December 31, 1998
compared to December 31, 1997, thus causing the higher proceeds in the first
quarter of 1999. More cash was also provided from financing activities in
the first quarter of 1999 compared to the same period in 1998 in which cash
was used in financing activities. This was primarily due to an increase in
short-term borrowings as well as an increase in demand and savings deposits
compared to the first quarter of 1998 when both of these areas reflected
decreases. More cash was used in the area of investing activities in the
first quarter of 1999. This was primarily due to funding a higher dollar
amount of loans in the first quarter 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 quarter of 1999 compared to the
first quarter of 1998. The net of purchases and proceeds on debt and equity
securities during the first three months of 1999 was comparable to the same
period of 1998.
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 $4,968,000 at March 31, 1999 compared to $5,279,000 at December
31, 1998, as net charge-offs of $401,000 exceeded provisions of $90,000
during the three month period. The allowance for loan losses as a percentage
of total loans fell to 1.62% at March 31, 1999, compared to 1.74% at December
31, 1998 as gross loans, including loans held-for-sale, increased from
$304,000,000 to $307,000,000. Net charge-offs of $401,000 during the first
quarter 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 1,616% at March 31, 1999, compared to 343% at December 31, 1998.
This increase was primarily due to a $1,233,000 reduction in non-performing
loans. $838,000 of the reduction was 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 on contract subsequent to March 31,
1999. The remainder of the reduction in nonperforming loans was a decrease
in loans over 90 days past due and still accruing. Management believes that
problem assets have been effectively identified and that the allowance for
loan losses is adequate to absorb possible losses in the portfolio.
Results of Operations
Results of Operations For the Three Months Ended March 31, 1999
Net income for the first three months of 1999 was $1,881,000, an
$851,000, or 82.6%, increase from $1,030,000 during the first three months of
1998. Basic earnings per share increased $0.16, or 84.2%, to $0.35 in the
first three months of 1999 from $0.19 in the same period of 1998. Diluted
earnings per share increased $0.15, or 78.9%, to $0.34 in the first three
months of 1999 from $0.19 in the same period of 1998.
Page 13
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<PAGE>
Operating earnings for the quarter ended March 31, 1999, were $1,881,000
compared to $1,512,000 for the same period in 1998, an increase of $369,000,
or 24.4%. Basic earnings per share on operating earnings increased $0.07, or
25.0%, to $0.35 in the first three months of 1999 from $0.28 during the first
three months of 1998. Diluted earnings per share on operating earnings
increased $0.07, or 25.9%, to $0.34 in the first three months of 1999 from
$0.27 in the same period of 1998. Net income for the first quarter of 1999
and 1998 was $1,881,000 and $1,030,000, 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.
Net interest income was $51,000, or 1.1% higher for the first three
months of 1999 compared to 1998. Total interest income was $356,000, or 3.7%
lower in 1999 compared to 1998, and interest expense decreased $407,000, or
8.4%. 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 included a decrease of $586,000,
or 8.5%, on loan interest income. This decrease was primarily due to the
decrease in average loans outstanding as well as lower interest rates during
the first quarter of 1999 compared to the first quarter of 1998. Somewhat
offsetting this decrease was an increase of $118,000, or 138.8%, on tax-
exempt investments in debt and equity securities. This increase was mainly
attributable to an increase in tax-exempt investments offset partially by a
decrease in interest rates during the first quarter of 1999 compared to the
first quarter of 1998.
The provision for loan losses recorded was $90,000 during the first
three months of 1999. This was $75,000, or 45.5%, lower than the $165,000
recorded during the first three months of 1998. The provision during the
first three months of 1999 was based on management's analysis of the loan
portfolio.
Total non-interest income increased $184,000, or 15.6%, during the first
three months of 1999 compared to the first three months of 1998. Included in
this increase was a $107,000, or 99.1% increase in gains on sales of mortgage
loans held-for-sale. This increase reflected an $11,256,000, or 94.3%,
increase in mortgage loans held-for-sale which were sold during the first
quarter of 1999 compared to the first quarter of 1998. There was also an
increase of $58,000, or 10.5%, 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. Also contributing to the increase in
non-interest income was an $18,000, or 66.7%, increase in security
transactions. 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 prior to maturity date during the first
quarter of 1999 which resulted in a gain being recognized.
Total non-interest expense decreased $910,000, or 21.7%, during the
first three months of 1999 compared to the first three months of 1998.
Included in the decrease was a decrease in salaries and employee benefits of
$513,000, or 20.7%. 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 $363,000, or 39.2%. Included in this decrease was a loss
on disposal of property of $248,000 in 1998 compared to none in 1999. Net
occupancy expense decreased $50,000, or 13.9%, during the first three 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 $369,000, or 74.8%, during the first
quarter of 1999 compared to the first 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.
Page 14
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<PAGE>
Year 2000
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 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
is currently in the process of upgrading systems and testing to validate Year
2000 compliance. Testing is being done on a test server which emulates the
current network and systems of the Company. As of March 31, 1999, testing
was 85% complete and the Company had renovated and tested all but one of the
mission critical systems. 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
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 $230,000. 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
Page 15
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<PAGE> 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 3. Quantitative and Qualitative Disclosures about Market Risk
See pages 10 through 12.
Page 16
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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
None
Page 17
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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: May 4, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 15,952
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,750
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 125,232
<INVESTMENTS-CARRYING> 70,884
<INVESTMENTS-MARKET> 70,798
<LOANS> 302,512<F1>
<ALLOWANCE> 4,968
<TOTAL-ASSETS> 550,733
<DEPOSITS> 414,578
<SHORT-TERM> 58,178
<LIABILITIES-OTHER> 7,347
<LONG-TERM> 9,207
0
0
<COMMON> 55
<OTHER-SE> 61,368
<TOTAL-LIABILITIES-AND-EQUITY> 550,733
<INTEREST-LOAN> 6,334
<INTEREST-INVEST> 2,590
<INTEREST-OTHER> 256
<INTEREST-TOTAL> 9,180
<INTEREST-DEPOSIT> 3,694
<INTEREST-EXPENSE> 4,427
<INTEREST-INCOME-NET> 4,753
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 45
<EXPENSE-OTHER> 3,281
<INCOME-PRETAX> 2,743
<INCOME-PRE-EXTRAORDINARY> 2,743
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,881
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.34
<YIELD-ACTUAL> 7.40
<LOANS-NON> 233
<LOANS-PAST> 75
<LOANS-TROUBLED> 117
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,279
<CHARGE-OFFS> 474
<RECOVERIES> 73
<ALLOWANCE-CLOSE> 4,968
<ALLOWANCE-DOMESTIC> 4,968
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Includes mortgages available-for-sale and net of allowance
for
loan losses of $4,968.
</FN>
</TABLE>
