<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
Commission file number 0-13343
ILLINI CORPORATION
(Exact name of small business issuer as specified in its charter)
Illinois 37-1135429
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 South Chatham Road, Springfield, Illinois 62704
(Address of principal executive offices)
(217) 787-1651
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act 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
----- -----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 448,456 shares of $10 par
value common stock as of July 31, 1997.
Transitional Small Business Disclosure Format: Yes No X
------ ------
<PAGE>
ILLINI CORPORATION
INDEX TO FORM 10-QSB
June 30, 1997
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Income
Six and Three Months Ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 9
PART II. OTHER INFORMATION 23
SIGNATURE PAGE 25
EXHIBIT INDEX 26
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,495,367 $ 5,473,027
Interest bearing deposits in other banks 42,437 39,808
Federal funds sold 275,000 0
Investment in debt and marketable equity securities
available for sale, at estimated market value 44,237,437 40,385,552
Loans, net of the allowance for loan losses and unearned income 86,899,247 92,133,344
Premises and equipment 6,547,948 5,368,571
Other real estate owned 522,163 728,460
Accrued interest receivable 1,536,590 1,493,879
Other assets 741,239 860,037
-------------- --------------
$ 146,297,428 $ 146,482,678
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing demand deposits 21,023,524 20,752,203
Interest bearing deposits:
NOW and money market accounts 27,202,466 25,114,991
Savings deposits 18,464,071 18,160,206
Time deposits, $100,000 and over 15,561,859 14,921,086
Other time deposits 47,640,721 46,821,761
-------------- --------------
Total deposits 129,892,641 125,770,247
Federal funds purchased 0 1,130,000
Securities sold under agreements to repurchase 290,000 500,000
Other short-term borrowings 0 3,000,000
Accrued interest payable 630,182 692,867
Other liabilities 766,677 876,349
-------------- --------------
Total liabilities 131,579,500 131,969,463
-------------- --------------
Shareholders' equity:
Common stock-authorized 800,000 shares of $10
par value; 448,456 shares issued and outstanding 4,484,560 4,484,560
Capital surplus 1,885,913 1,885,913
Retained earnings 8,320,285 8,248,756
Net unrealized gains (losses) on investments in debt and
marketable equity securities available for sale, net 27,170 (106,014)
-------------- --------------
Total shareholders' equity 14,717,928 14,513,215
-------------- --------------
$ 146,297,428 $ 146,482,678
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30,
--------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 2,074,394 $ 2,208,421 $ 4,122,655 $ 4,468,002
Interest on investments in debt and marketable equity
Taxable 588,207 410,900 1,078,065 731,649
Exempt from federal income taxes 169,771 187,186 335,484 367,789
Interest on short term investments 87 3,836 8,406 35,465
------------ ------------ ------------ ------------
Total interest income 2,832,459 2,810,343 5,544,610 5,602,905
------------ ------------ ------------ ------------
Interest expense:
Interest on deposits:
NOW and money market accounts 179,787 179,640 354,367 366,168
Savings deposits 113,390 127,070 227,887 252,230
Time deposits, $100,000 and over 210,022 214,875 430,235 440,036
Other time deposits 614,806 678,502 1,224,505 1,406,480
Interest on borrowings 83,036 33,146 106,966 37,726
------------ ------------ ------------ ------------
Total interest expense 1,201,041 1,233,233 2,343,960 2,502,640
------------ ------------ ------------ ------------
Net interest income 1,631,418 1,577,110 3,200,650 3,100,265
Provision for possible loan losses 75,000 490,000 150,000 630,000
------------ ------------ ------------ ------------
Net interest income after provision for loan loss 1,556,418 1,087,110 3,050,650 2,470,265
Noninterest income:
Service charges on deposit accounts 262,663 242,250 511,558 470,396
Other fee income 43,527 70,173 79,380 119,642
Mortgage loan servicing fees 46,818 37,855 92,110 82,855
Gain on sale of mortgage loans 17,288 13,002 28,061 40,002
Securities gains (losses) (7,010) 13,484 (2,896) 14,734
Other 19,559 9,713 33,859 17,433
------------ ------------ ------------ ------------
Total noninterest income 382,845 386,477 742,072 745,062
Noninterest expense:
Salaries and employee benefits 813,316 829,617 1,659,901 1,666,992
Net occupancy expense 138,896 126,869 317,077 290,999
Equipment expense 73,433 73,560 152,723 149,558
Data processing 123,593 137,709 300,674 274,372
Supplies 25,323 40,710 57,380 76,721
Communication and transportation 77,685 70,971 175,853 145,527
Marketing and advertising 71,918 65,595 132,870 131,217
Correspondent and processing fees 32,666 33,298 66,625 62,631
Loan and other real estate owned expenses 62,876 20,182 86,705 32,642
Professional fees 131,620 84,268 310,544 182,197
Directors' and regulatory fees 43,983 41,273 87,752 82,632
Other operating expenses 87,782 62,784 154,117 128,320
--------- --------- --------- ---------
Total noninterest expense 1,683,091 1,586,836 3,502,221 3,223,808
Income or (loss) before income tax expense 256,172 (113,249) 290,501 (8,481)
Income tax expense (benefit) 76,176 (142,408) (5,257) (135,717)
------------ ------------ ------------ ------------
Net income $ 179,996 $ 29,159 $ 295,758 $ 127,236
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Income per common share
(based on weighted average common shares outstanding
of 448,456 for 1997 and 1996) $ 0.40 $ 0.07 $ 0.66 $ 0.28
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 295,758 $ 127,236
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 335,703 286,998
Provision for possible loan losses 150,000 630,000
Securities (gains) losses, net 2,896 (14,734)
Increase in accrued interest receivable (42,711) (67,510)
Decrease in accrued interest payable (62,685) (114,275)
Other, net (132,799) (242,212)
Origination of secondary market mortgage loans (7,681,033) (8,438,061)
Proceeds from the sale of secondary market mortgage loans 7,169,163 8,275,861
------------ ------------
Net cash provided by operating activities 34,292 443,303
------------ ------------
Cash flows from investing activities:
Proceeds from sales of debt and marketable equity securities
Available for sale 5,715,318 3,915,209
Proceeds from maturities and paydowns of debt securities
Available for sale 3,870,041 6,216,670
Purchases of debt and marketable equity securities
Available for sale (13,240,331) (16,663,164)
Net decrease in loans 5,595,967 4,530,616
Purchases of premises and equipment (1,475,657) (312,117)
Proceeds from sales of other real estate 242,174 0
------------ ------------
Net cash provided by (used in) investing activities 707,512 (2,312,786)
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in non-interest bearing deposit accounts 271,321 (2,594,729)
Net increase (decrease) in savings, NOW and money market accounts 2,391,340 (117,914)
Net increase in time deposits $100,000 and over 640,773 954,363
Net increase (decrease) in other time deposits 818,960 (1,279,411)
Net decrease in Federal funds purchased (1,130,000) 0
Net decrease in securities sold under agreements to repurchase (210,000) (400,000)
Net increase (decrease) in short-term borrowings (3,000,000 2,000,000
Dividends paid (224,229) (201,805)
------------ ------------
Net cash used in financing activities (441,835) (1,639,496)
------------ ------------
Net increase (decrease) in cash and cash equivalents 299,969 (3,508,979)
Cash and cash equivalents at beginning of period 5,512,835 8,079,146
------------ ------------
Cash and cash equivalents at end of period $ 5,812,804 $ 4,570,167
------------ ------------
------------ ------------
Supplemental Information:
Income taxes paid $ 7,000 $ 145,000
Interest paid $ 2,406,645 $ 2,616,915
------------ ------------
------------ ------------
Other non-cash investing activities:
Transfer of loans to other real estate $ 14,000 $ 0
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and, therefore,
do not include all of the information and notes required by generally
accepted accounting principles for complete consolidated financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. For further information, refer to the consolidated
financial statements and footnotes included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996.
Results for the three and six months ended June 30, 1997 may not be
indicative of the annual performance of Illini Corporation.
(2) ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
The allowance for loan losses is increased by provisions charged to
operations and is available to absorb loan losses. Illini utilizes a
systematic, documented approach in determining the appropriate level of the
allowance for loan losses. Management's approach, which provides for
general and specific allowances, is based on current economic conditions,
past loan losses, collection experience, risk characteristics of the
portfolio, assessing collateral values by obtaining independent appraisals
for significant properties, and such other factors which, in management's
judgment, deserve current recognition in estimating potential loan losses.
Management's determination of the allowance for loan losses is one of the
significant estimates made by management in the preparation of the
consolidated financial statements.
Loans, except large groups of smaller-balance homogeneous loans, for which
the full collection of principal and interest according to the contractual
terms of the loan agreement is not probable, are evaluated for impairment.
When measuring impairment, the expected future cash flows of an impaired
loan are discounted at the loan's effective interest rate. Alternatively,
impairment is measured by reference to an observable market price, if one
exists, or the fair value of the collateral for a collateral-dependent
loan. Regardless of the measurement method used historically, Illini Bank
measures impairment based on the fair value of the collateral when
foreclosure is probable. Information regarding impaired loans at June 30,
1997 and December 31, 1996 is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- -----------
<S> <C> <C>
Nonaccrual loans $ 649,310 $ 869,625
Impaired loans continuing to accrue interest 287,258 308,707
----------- -----------
Total impaired loans $ 936,568 $ 1,178,332
----------- -----------
----------- -----------
Allowance for losses on impaired loans $ 88,233 $ 435,000
Impaired loans with no related allowance for loan losses 737,287 68,949
Average balance of impaired loans during the period 1,057,450 1,664,803
----------- -----------
----------- -----------
</TABLE>
6
<PAGE>
(3) During 1997, the Financial Accounting Standards Board (FASB) has issued a
number of Statements of Financial Accounting Standards (SFAS). Three SFAS
issued during the first six months of 1997 which will or could impact the
Company are presented below.
EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, EARNINGS PER SHARE, which
establishes standards for computing and presenting earnings per share
(EPS). SFAS No. 128 simplifies existing standards for computing EPS and
makes them comparable to international standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and
requires a reconciliation of the components of basic and diluted EPS.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the Company. SFAS No.
128 is effective for financial statement issued for periods ending after
December 15, 1997, including interim periods, and requires restatement of
all prior-period EPS data presented. The Company does not believe the
adoption of SFAS No. 128 will have a material effect on its financial
condition or results of operations.
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME,
which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full
set of general-purpose financial statements. SFAS No. 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements,
and requires an enterprise to (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is
required. The Company does not believe the adoption of SFAS No. 130 will
have a material effect on its financial condition or results of operations.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the
way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources
and in assessing performance. Generally, financial information is required
to be reported on the basis that it is used internally for evaluating
segment performance.
This Statement supersedes FASB Statement No. 14, "Financial Reporting for
Segments of a Business Enterprise," but retains the requirement to report
information about major customers. It amends FASB
7
<PAGE>
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to
remove the special disclosure requirements for previously unconsolidated
subsidiaries. This Statement does not apply to nonpublic business
enterprises or to not-for-profit organizations.
This Statement is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. This Statement need not
be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial
year of application is to be reported in financial statements for interim
periods in the second year of application. As the Company operates as a
single segment it does not believe the adoption of SFAS No. 131 will have a
material effect on its financial condition or results of operations.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
This discussion should be read in conjunction with the consolidated financial
statements, notes and tables included elsewhere in this report and in the 1996
Illini Corporation Annual Report on Form 10-KSB. Illini Corporation cautions
that any forward looking statements contained in this report, or in any report
incorporated by reference to this report or made by management of Illini
Corporation involve risks and uncertainties and are subject to change based on
various factors. Actual results could differ materially from those expressed or
implied.
<TABLE>
<CAPTION>
SUMMARY
Quarter ended Six months ended
June 30, June 30,
---------------- Percent ------------------ Percent
EARNINGS $(thousands, except per share data) 1997 1996 Change 1997 1996 Change
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue. . . . . . . . . . . . . . . . . . . $3,215 $3,197 0.58% $6,287 $6,348 (0.97%)
Net income . . . . . . . . . . . . . . . . . . . . 180 29 517.29% 296 127 132.45%
Net income per share . . . . . . . . . . . . . . . $0.40 $0.07 517.29% $0.66 $0.28 132.45%
KEY RATIOS
- ------------------------------------------------------------------------------------------------------------------------------
Return on average assets . . . . . . . . . . . . . 0.49% 0.08% 0.41% 0.41% 0.17% 0.24%
Return on average equity . . . . . . . . . . . . . 5.07% 0.82% 4.25% 4.14% 1.76% 2.37%
Average equity to assets . . . . . . . . . . . . . 9.66% 9.48% 0.18% 9.86% 9.63% 0.23%
Tier 1 leverage ratio. . . . . . . . . . . . . . . 9.87% 9.57% 0.69%
Tier 1 risk-based capital ratio. . . . . . . . . . 14.65% 13.20% 0.23%
Total risk-based capital ratio . . . . . . . . . . 15.89% 14.24% 0.62%
Dividend payout ratio. . . . . . . . . . . . . . . 62.29% 346.04% (283.76%) 75.81% 158.61% (82.79%)
Net interest margin. . . . . . . . . . . . . . . . 5.13% 4.85% 0.27% 5.11% 4.77% 0.33%
Net funds function . . . . . . . . . . . . . . . . 4.90% 3.42% 1.48% 4.88% 3.85% 1.02%
Efficiency ratio . . . . . . . . . . . . . . . . . 80.18% 77.34% 2.84% 85.15% 80.21% 4.94%
</TABLE>
9
<PAGE>
RESULTS OF OPERATION
EARNING ASSETS
Average earning assets of the Company for the first six months of 1997 decreased
3.24% or $4.46 million to $133,112 million from $137,572 for the first six
months of 1996. The Company's primary business is making real estate, consumer
and commercial loans.
Average loans declined to $88.1 million for the three months ended June 30, 1997
compared to $96.2 million for the same period in 1996. The decline of $8.1
million for the three months ended June 30, 1997 as compared to the same period
for 1996 was primarily due to a decrease of $3.4 million in commercial loans,
including commercial real estate loans, and $3.0 million in consumer loans. The
average yield on the loan portfolio increased 26 basis points to 9.48% for the
three months ended June 30, 1997 as compared to the same period in 1996.
Average loans declined to $88.9 million for the six months ended June 30, 1997
compared to $97.5 million for the same period in 1996. The decline of $8.6
million for the six months ended June 30, 1997 as compared to the same period in
1996 was primarily due to a decline of $4.5 million in commercial loans,
including commercial real estate loans, $1.1 million in residential real estate,
and $2.3 million in consumer loans. The average yield on the loan portfolio
increased 20 basis points to 9.40% for the six months ended June 30, 1997.
Average investment securities increased $5.1 and $4.9 million for the three and
six months ended June 30, 1997 as compared to the same period in 1996. Net
investing activities (purchases, sales and maturities) resulted in an increase
in the investment portfolio of $3.7 million for the six months ended June 30,
1997. The average yield of the investment securities portfolio was 7.04% and
6.96% for the three and six months ended June 30, 1997, an increase of 60 and 63
basis points as compared to the same periods in 1996.
As discussed in the asset quality section of this Form 10-QSB, management has
actively pursued the improvement of the asset quality of all earning assets,
loans and investment securities. Management has focused on improving credit
quality which has resulted in a decline in outstanding loans. Average
investments have increased over the first two quarters of 1996 as a result of
the decrease in loans outstanding.
FUNDING
The most important and stable source of funding is core deposits, considered by
management to include demand deposits, savings deposits and time deposits under
$100,000. Average core deposits for the six months ended June 30, 997 decreased
4.46% or $5,474 million to $111,547 million from $117,021. Time deposits of
$100,000 and over, federal funds purchased, securities sold under agreements to
repurchase and other short-term borrowings round out Illini's sources of
funding. During the fourth quarter of 1996, the Company established an
overnight federal funds line of credit with an unaffiliated financial
institution and a line of credit with the Federal Home Loan Bank of Chicago. As
average core deposits have decreased for the first six months of 1997 versus the
first six months of 1996, average short-term borrowings have increased from
$1,376 million at June 30, 1996 to $3,652 million at June 30, 1997.
10
<PAGE>
NET INTEREST INCOME/NET INTEREST MARGIN
The operating results of the Company depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities, consisting
primarily of deposits. Net interest income is determined by the difference
between yields earned on assets and rates paid on liabilities and the relative
amounts of interest-earning assets and interest-bearing liabilities.
Interest income, on a fully taxable equivalent basis, was $2.9 million and $5.7
million for the three months and six months ended June 30, 1997, which is
consistent with the $2.9 million and $5.8 million for same periods in 1996.
Interest expense was $1.2 million and $2.3 million for the three and six months
ended June 30, 1997, compared to $1.2 and $2.5 million for the same periods in
1996. Consistent interest income and slightly lower interest expense, coupled
with the decline in both interest-earning assets and interest-bearing
liabilities resulted in net interest income of $3.4 million and net interest
margin of 5.11% for the six months ended June 30, 1997, increases of 2.96% and
7.13% over the same period in 1996. This net interest income and net interest
margin increase was attributed to increased rate and volume on investments and
increased rates on commercial and credit card loans, coupled with a decrease in
rate and volume of retail certificates of deposit less than $100,000.
Net interest income is affected by the growth, pricing, mix and maturity of
interest earning assets and interest bearing liabilities, as well as other
factors, including loan quality. Also, the Company's interest-rate spread is
affected by regulatory, economic and competitive factors that influence interest
rates, loan demand and deposit flow. Individual components of net interest
income and net interest margin are presented in the consolidated average
balance, interest income/expense and yield/rate tables on pages 12 and 13 and a
net interest income rate/volume variance analysis on pages 14 and 15.
11
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELD/RATES
<TABLE>
<CAPTION>
Quarter ended June 30,
-----------------------------------------------------------------------------------------
1997 1996
-----------------------------------------------------------------------------------------
Percent Interest Average Percent Interest Average
Average of Total Income/ Yield/ Average of Total Income/ Yield/
Balance Assets Expense Rate Balance Assets Expense Rate
------- -------- -------- ------- ------- ------- ------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Short-term investments $ 47 0.0% $ 1 8.29% $ 265 0.2% $ 5 7.00%
Investment securities (3)
Taxable 34,186 23.2 588 6.87 27,117 18.1 410 6.05
Tax-exempt (1) 13,186 9.0 245 7.46 15,228 10.1 271 7.13
---------- -------- -------- -------- -------- -------- ------- --------
Total securities 47,372 32.2 833 7.04 42,345 28.2 681 6.44
Loans
Commercial (1) 16,326 11.1 414 10.17 14,300 9.5 304 8.53
Agriculture 5,658 3.8 123 8.71 5,481 3.7 118 8.66
Real estate
Commercial 23,237 15.8 529 9.12 28,673 19.2 654 9.15
Agriculture 2,240 1.5 51 9.19 2,733 1.8 62 9.04
Residential 25,129 17.1 579 9.25 26,531 17.7 623 9.41
Consumer, net 14,904 10.1 362 9.73 17,862 11.9 428 9.62
Credit card 626 0.4 25 16.34 622 0.4 23 15.02
---------- -------- -------- -------
Total loans 88,120 59.8 2,083 9.48 96,202 64.2 2,212 9.22
Allowance for loan losses (1,221) (0.8) (1,106) (0.7)
---------- -------- --------
Net loans (1)(2) 86,899 59.0 2,083 9.61 95,096 63.5 2,212 9.33
---------- -------- -------- -------- -------- -------
Total interest earning assets 134,318 91.2 2,917 8.71 137,706 91.9 2,898 8.44
---------- -------- -------- -------
Cash and due from banks 4,427 3.0 4,749 3.2
Premises and equipment 6,150 4.2 4,896 3.3
Other real estate owned 579 0.4 480 0.3
Other assets (3) 1,869 1.2 2,011 1.3
---------- -------- ---------- -------
TOTAL ASSETS $ 147,343 100.0% $ 149,842 100.0%
---------- -------- ---------- -------
---------- -------- ---------- -------
LIABILITIES
Deposits:
Non interest bearing deposits $ 20,316 13.8% $ % $ 18,868 12.6% $ %
Interest bearing demand 26,222 17.8 180 2.75 27,284 18.2 180 2.64
Savings 18,480 12.5 113 2.46 20,513 13.7 127 2.48
CD's less than $100,000 45,989 31.2 615 5.36 49,476 33.0 678 5.50
---------- -------- -------- -------
Total core deposits 111,007 75.3 908 3.28 116,141 77.5 985 3.40
CD's $100,000 and over 14,987 10.2 210 5.62 15,483 10.4 215 5.57
---------- -------- -------- -------
Total deposits 125,994 85.5 1,118 3.56 131,624 87.9 1,200 3.66
Short-term borrowings 5,606 3.8 83 5.94 2,446 1.6 33 5.41
Total interest bearing liabilities 111,284 75.5 1,201 4.33 115,202 76.9 1,233 4.29
Other liabilities 1,508 1.0 1,564 1.0
---------- -------- -------- -------
Total liabilities 133,108 90.3 135,634 90.5
Stockholders' Equity 14,235 9.7 14,208 9.5
---------- -------- -------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 147,343 100.0% $149,842 100.0%
---------- -------- -------- -------
---------- -------- -------- -------
NET INTEREST MARGIN $ 1,716 5.13% $ 1,665 4.85%
PROVISION FOR LOAN LOSSES (75) (0.22)% (490) (1.43)%
------- ------- --------
NET FUNDS FUNCTION 1,641 4.90% 1,175 3.42%
------- ------- ------- --------
</TABLE>
(1) Income amounts are presented on a fully taxable equivalent basis (FTE),
which is defined as income on earning assets that is subject to either a
reduced rate or zero rate of income tax, adjusted to give effect to the
appropriate incremental federal income tax rate and adjusted for non-
deductible carrying costs, where applicable. Where appropriate, yield
calculations include these adjustments. The federal statutory rate was 34%
for all years presented.
(2) Nonaccrual loans are included in the loan balances. Interest income
includes related fee income of $66,000 in 1997 and $59,000 in 1996.
(3) Average securities balances are based on amortized historical cost,
excluding SFAS 115 adjustments to fair value, which are included in other
assets.
12
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELD/RATES
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------------------------------------------------------------------------
1997 1996
-----------------------------------------------------------------------------------------
Percent Interest Average Percent Interest Average
Average of Total Income/ Yield/ Average of Total Income/ Yield/
Balance Assets Expense Rate Balance Assets Expense Rate
------- -------- -------- ------- ------- ------- ------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Short-term investments $ 568 0.4% $ 8 2.95% $ 1,316 0.9% $ 36 5.53%
Investment securities (3)
Taxable 31,836 21.8 1,078 6.77 24,729 16.5 731 5.91
Tax-exempt (1) 13,072 8.9 487 7.46 15,182 10.1 533 7.02
---------- -------- -------- -------- -------- -------- ------- --------
Total securities 44,908 30.7 1,565 6.97 39,911 26.6 1,264 6.33
Loans
Commercial (1) 14,412 9.9 728 10.18 15,052 10.0 650 8.66
Agriculture 5,001 3.4 223 8.98 5,157 3.4 212 8.23
Real estate
Commercial 25,330 17.3 1,139 9.07 29,178 19.5 1,336 9.19
Agriculture 2,198 1.5 100 9.15 2,854 1.9 129 9.03
Residential 25,632 17.5 1,159 9.12 26,734 17.8 1,249 9.37
Consumer, net 15,657 10.7 742 9.55 17,948 12.0 859 9.60
Credit card 635 0.4 51 16.24 616 0.4 42 13.53
---------- -------- -------- -------
Total loans 88,865 60.7 4,142 9.40 97,539 65.0 4,477 9.20
Allowance for loan losses (1,229) (0.8) (1,194) (0.8)
---------- -------- -------- -------
Net loans (1)(2) 87,636 59.9 4,142 9.53 96,345 64.2 4,477 9.32
---------- -------- -------- -------
Total interest earning assets 133,112 91.0 5,715 8.66 137,572 91.7 5,777 8.42
---------- -------- -------- -------
Cash and due from banks 4,631 3.2 4,997 3.3
Premises and equipment 5,854 4.0 4,884 3.3
Other real estate owned 660 0.5 482 0.3
Other assets (3) 1,948 1.3 2,171 1.4
---------- -------- -------- --------
TOTAL ASSETS $ 146,205 100.0% $150,106 100.0%
---------- -------- -------- --------
---------- -------- -------- --------
LIABILITIES
Deposits:
Non interest bearing deposits $ 19,987 13.7% $ % $ 18,810 12.5% $ %
Interest bearing demand 26,337 18.0 354 2.71 27,843 18.6 366 2.64
Savings 18,612 12.7 228 2.47 20,384 13.6 252 2.48
CD's less than $100,000 46,611 31.9 1,225 5.30 49,984 33.3 1,407 5.64
---------- -------- -------- -------
Total core deposits 111,547 76.3 1,807 3.27 117,021 78.0 2,025 3.47
CD's $100,000 and over 15,079 10.3 430 5.75 15,498 10.3 440 5.69
---------- -------- -------- -------
Total deposits 126,626 86.6 2,237 3.56 132,519 88.3 2,465 3.73
Short-term borrowings 3,652 2.5 107 5.91 1,376 0.9 38 5.50
Total interest bearing liabilities 110,291 75.4 2,344 4.29 115,085 76.7 2,503 4.36
Other liabilities 1,511 1.0 1,749 1.2
---------- -------- -------- --------
Total liabilities 131,789 90.1 135,644 90.4
Stockholders' Equity 14,416 9.9 14,462 9.6
---------- -------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 146,205 100.0% $150,106 100.0%
---------- -------- -------- --------
---------- -------- -------- --------
NET INTEREST MARGIN $ 3,371 5.11% $ 3,274 4.77%
PROVISION FOR LOAN LOSSES (150) (0.23)% (630) (0.92)%
------- ------- --------
NET FUNDS FUNCTION 3,221 4.88% 2,644 3.85%
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
(1) Income amounts are presented on a fully taxable equivalent basis (FTE),
which is defined as income on earning assets that is subject to either a
reduced rate or zero rate of income tax, adjusted to give effect to the
appropriate incremental federal income tax rate and adjusted for non-
deductible carrying costs, where applicable. Where appropriate, yield
calculations include these adjustments. The federal statutory rate was 34%
for all years presented.
(2) Nonaccrual loans are included in the loan balances. Interest income
includes related fee income of $119,000 in 1997 and $118,000 in 1996.
(3) Average securities balances are based on amortized historical cost,
excluding SFAS 115 adjustments to fair value, which are included in other
assets.
13
<PAGE>
NET INTEREST INCOME - RATE/VOLUME VARIANCE ANALYSIS
QUARTER ENDED JUNE 30, 1997-1996
-----------------------------------------
CHANGES IN VOLUME RATE
INCOME/EXPENSE EFFECT EFFECT
-------------- ------ -------
(dollars in thousands)
Short-term investments $ (4) $ (5) $ 1
Investment securities:
Taxable 178 116 62
Nontaxable (26) (39) 13
-------- -------- --------
Total securities 152 77 75
Loans:
Commercial 110 47 63
Agriculture 5 4 1
Real Estate:
Commercial (125) (123) (2)
Agriculture (11) (12) 1
Residential (44) (33) (11)
Consumer, net (66) (71) 5
Credit card 2 0 2
-------- -------- --------
Total loans (129) (188) 59
-------- -------- --------
Total interest income 19 (116) 135
-------- -------- --------
Interest bearing demand 0 (2) 2
Savings (14) (13) (1)
CD's less than $100,000 (63) (47) (16)
-------- -------- --------
Total core deposits (77) (62) (15)
CD's $100,000 and over (5) (7) 2
-------- -------- --------
Total deposits (82) (69) (13)
Borrowed funds:
Short-term borrowings 50 47 3
Long-term borrowings 0 0 0
-------- -------- --------
Total borrowed funds 50 47 3
-------- -------- --------
Total interest expense (32) (22) (10)
-------- -------- --------
Net interest income $ 51 $ (94) $ 145
-------- -------- --------
-------- -------- --------
14
<PAGE>
NET INTEREST INCOME - RATE/VOLUME VARIANCE ANALYSIS
SIX MONTHS ENDED JUNE 30, 1997-1996
-----------------------------------------
CHANGES IN VOLUME RATE
INCOME/EXPENSE EFFECT EFFECT
-------------- ------ -------
(dollars in thousands)
Short-term investments $ (28) $ (16) $ (12)
Investment securities:
Taxable 347 230 117
Nontaxable (46) (82) 36
-------- -------- --------
Total securities 299 148 151
Loans:
Commercial 78 (24) 102
Agriculture 11 (6) 17
Real Estate:
Commercial (197) (180) (17)
Agriculture (29) (31) 2
Residential (90) (55) (35)
Consumer, net (117) (112) (5)
Credit card 9 1 8
-------- -------- --------
Total loans (335) (407) 72
-------- -------- --------
Total interest income (62) (275) 213
-------- -------- --------
Interest bearing demand (12) (25) 13
Savings (24) (23) (1)
CD's less than $100,000 (182) (96) (86)
-------- -------- --------
Total core deposits (218) (144) (74)
CD's $100,000 and over (10) (16) 6
-------- -------- --------
Total deposits (228) (160) (68)
Borrowed funds:
Short-term borrowings 69 66 3
Long-term borrowings 0 0 0
-------- -------- --------
Total borrowed funds 69 66 3
-------- -------- --------
Total interest expense (159) (94) (65)
-------- -------- --------
Net interest income $ 97 $ (181) $ 278
-------- -------- --------
-------- -------- --------
15
<PAGE>
<TABLE>
<CAPTION>
NONINTEREST INCOME
Three months ended Percent Six Months ended Percent
June 30, Change June 30, Change
----------------------- ---------- ----------------------- ---------
1997 1996 1997/1996 1997 1996 1997/1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts $262,663 $242,250 8.4% $511,558 $470,396 8.8%
Other fee income 43,527 70,173 (38.0) 79,380 119,642 (33.7)
Mortgage loan servicing fees 46,818 37,855 23.7 92,110 82,855 11.2
Gain on sale of mortgage loans 17,288 13,002 33.0 28,061 40,002 (29.9)
Securities gains (losses) (7,010) 13,484 (152.0) (2,896) 14,734 (119.7)
Other income 19,559 9,713 101.4 33,859 17,433 94.2
-------- -------- -------- -------- -------- --------
$382,845 $386,477 (0.9)% $742,072 $745,062 (0.4)
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
Despite a decline in average deposits during the three and six months ended June
30, 1997 compared with the same period in 1996, service charges on deposit
accounts increased slightly as a result of non balance related increases in fees
for insufficient funds, automatic teller machine usage and check charge backs.
The increase in fees for insufficient funds was due to a new method of check
processing which was implemented when the Bank converted to a new in-house data
processing system in February 1997.
The declines in other fee income year to date and quarter to date were primarily
due to a reduction in fees for account research. A new in-house data processing
system was installed by the Bank in February 1997 which provides imaging of all
check documents. Since the conversion, fees for balance inquiry and research
have been waived.
The decline in the year to date gain on the sale of mortgage loans was due to a
reduced margin between mortgage rates offered to customers and those realized at
the time of sale. This strategy was implemented in order allow the Company to
be more competitive, increase volume and expand market share. The effectiveness
of this strategy is exhibited in the year to date and quarter to date increases
in mortgage loan servicing fees.
Securities losses for the three and six months ended June 30, 1997 resulted from
slight losses management accepted in restructuring its investment portfolio. In
June 1996, management sold a number of tax exempt municipal securities to create
liquidity and minimize alternative minimum tax.
The increase in other noninterest income was primarily due to an increase in
income from checks sold to depositors. In the first quarter of 1997, Illini
renegotiated its contract with Deluxe check printers which resulted in Illini
receiving higher commissions for Deluxe checks sold to its customers.
16
<PAGE>
<TABLE>
<CAPTION>
NONINTEREST INCOME
Three months ended Percent Six Months ended Percent
June 30, Change June 30, Change
----------------------- ---------- ----------------------- ---------
1997 1996 1997/1996 1997 1996 1997/1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $813,316 $829,617 (2.0)% $1,659,901 $1,666,992 (0.4)%
Net occupancy expense 138,896 126,869 9.5 317,077 290,999 9.0
Equipment expense 73,433 73,560 (0.2) 152,723 149,558 2.1
Data processing 123,593 137,709 (10.3) 300,674 274,372 9.6
Supplies 25,323 40,710 (37.8) 57,380 76,721 (25.2)
Communication and transportation 77,685 70,971 9.5 175,853 145,527 20.8
Marketing and advertising 71,918 65,595 9.6 132,870 131,217 1.3
Correspondent and processing fees 32,666 33,298 (1.9) 66,625 62,631 6.4
Loan and other real estate owned expenses 62,876 20,182 211.5 86,705 32,642 165.6
Professional Fees 131,620 84,268 56.2 310,544 182,197 70.4
Directors' and regulatory fees 43,983 41,273 6.6 87,752 82,632 6.2
Other operating expenses 87,782 62,784 39.8 154,117 128,320 20.1
-------- -------- -------- -------- -------- --------
$1,683,091 $1,586,836 6.1 $3,502,221 $3,223,808 8.6
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
Salaries and employee benefits expense has declined slightly for the six months
ended June 30, 1997 compared to the same period in 1996 in part due to
management generating employee benefit statements internally rather than
employing their actuary to prepare the annual statements, coupled with employee
moving expenses for the chief financial officer which were incurred during the
first six month of 1996 but not in 1997. For the three months ended June 30,
1997 compared to 1996, management is no longer recording monthly an estimate of
accrued vacation. Rather, management is performing a quarterly analysis of
actual accrued vacation and making an adjustment at quarter end as needed. At
the end of the three months ended June 30, 1997, management's analysis indicated
no adjustment was necessary, whereas for the three months ended June 30, 1996, a
monthly accrual was automatically recorded based on a beginning of the year
estimate.
Data processing expense increased $40,000 for the six months ended June 30, 1997
compared to the same period in the prior year due to non reoccurring costs
associated with the conversion of the Bank's data processing system from a third
party provider to an in-house system. Since conversion, the Company has
experienced a reduction in external data processing fee expense offset by the
recognition of depreciation and amortization expense for the equipment and
supplies. The decline in the second quarter of 1997 in data processing expense
represents the cost savings expected as a result of the conversion.
Supplies expense declined both year to date and quarter to date due to an
increased emphasis on controlling these types of expenses and centralizing the
purchasing function. Additionally, during the first six months of 1996, the
Company changed it logo and letter head. Therefore, 1996 saw significantly
higher expenditures as a result of replacing outdated supplies.
Communication and transportation expense increased $30,000 for the six months
ended June 30, 1997 compared to the same period in the prior year primarily due
to an increase in telephone voice and data line expense related to training for
the new computer system and linking all branches to the operations center.
Though not as significant as the year to date increase, the quarter to date
increase reflects increased usage of data transmitting lines because
17
<PAGE>
of the need for each branch to be networked to operations. Additionally,
included in communication and transportation are courier costs which are now
necessary for Illini to transport its own cash letters, whereas their data
processor and servicer provided this service prior to conversion.
Loan and other real estate owned expenses increased $56,000 for the six months
ended June 30, 1997 as compared to the same period in the prior year due to
expenses of holding and disposing of other real estate owned. During the first
two quarters of 1997, management has aggressively pursued the disposition of
other real estate properties and been more willing to accept what they perceive
the best bid rather then hold out for trying to obtain a higher return on a non
earning asset. Other real estate owned has decreased from $728,000 at December
31, 1996 to $522,000 at June 30, 1997.
Professional fees increased $129,000 for the six months ended June 30, 1997 and
$47,000 for the three month quarter ended June 30, 1997 compared to the same
periods last year, of which $106,000 and $31,000, respectively was due to legal
and financial advisory expenses connected with establishing and issuing a
shareholders rights plan and defending Illini Bank and Illini Corporation in
various legal matters.
Other operating expenses increased when the Bank installed additional security
and surveillance equipment at various locations. Additionally, recognition of
other operating losses and charge-offs, as a result of forgeries, stop payment
items, etc. have been greater during the first six months of 1997 that the same
period last year.
18
<PAGE>
CREDIT QUALITY
Gross loans totaled $88.1 million at June 30, 1997, a decline of $5.3 million,
or 5.7%, from $93.4 million at December 31, 1996, while the allowance for loan
losses has remained relatively consistent at $1.2 million and $1.3 million at
June 30, 1997 and December 31, 1996, respectively. The decline in the gross
loan balance has resulted in an increase in the allowance to ending loans to
1.39% from 1.35%, at June 30, 1997 and December 31, 1996, respectively. The
decline in loans has been spread across all loan types as Illini continues its
efforts to improve the credit quality of the portfolio.
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
------- ------ ------ ------
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period $1,217 $1,096 $1,258 $1,246
Provision charged to expense 75 490 150 630
Gross charge-offs 75 484 207 803
Less: recoveries 10 20 26 49
------- ------ ------ ------
Net charge-offs 65 464 181 754
------- ------ ------ ------
Ending allowance for loan losses $1,227 $1,122 $1,227 $1,122
------- ------ ------ ------
------- ------ ------ ------
NET CHARGE-OFF RATIOS (1):
Commercial (0.02)% 8.09% 0.15% 3.56%
Real Estate 0.18 (0.01) 0.29 0.26
Installment 1.00 0.90 1.06 1.20
Credit Cards 3.20 11.78 2.86 7.99
Totals 0.29% 1.93% 0.41% 1.17%
(1) Ratios to average loans are presented on an annualized basis
The Company's primary business of making commercial, real estate and consumer
loans entails potential losses, the magnitude of which depend on a variety of
economic factors affecting borrowers which are beyond the control of the
Company. Accordingly, a significant factor in the Company's past and future
operating results is the level of the provision for loan losses. The provision
for loan losses decreased to $75,000 and $150,000 for the three and six months
ended June 30, 1997 as compared to $490,000 and $630,000 for the comparable
periods in the prior year. Net charge-offs decreased to $65,000 and $181,000
for the three and six months ended June 30, 1997 as compared to $464,000 and
$754,000 for the comparable periods in the prior year.
The significant provisions and charge-offs during the three and six months ended
June 30, 1996 were in large part the result of a single, large agricultural
credit identified by management as a potential problem loan in late December
1995. This single credit contributed $505,000 to commercial, financial and
agricultural charge-offs during the first six months of 1996. Also contributing
to the increase in net charge-offs for the six months ended June 30, 1996 were
suspected irregularities by a former branch manager with limited opportunity for
recovery. While management believes the majority of these charge-offs were
taken in 1995 and 1996, some of the continuing real estate and installment
credit charge-offs may be the result of these suspected irregularities coupled
with losses in these portfolio which the industry as a whole is still
experiencing. Management feels that recently implemented credit quality systems
and controls, including a new comprehensive loan policy, will contribute to
continued improved credit quality. This improvement has resulted in decreasing
loan losses. The net charge-off ratio for the
19
<PAGE>
three months ended June 30, 1997 is 0.29% compared to 0.41% for the three months
ended March 31, 1997 and 1.17% for 1996.
At June 30, 1997, impaired loans totaled $936,568, for which an allowance for
loan losses of $88,233 has been allocated compared to December 31, 1996 impaired
loans of $1,178,332, for which an allowance for loan losses of $435,000 had been
allocated. The decrease in the amount of the allowance allocated to impaired
loans is partially attributable to a change in management's methodology for
analyzing the adequacy of the allowance for loan losses. Of the total impaired
loans at June 30, 1997 and December 31, 1996, $287,258 and $308,707 were loans
continuing to accrue interest.
<TABLE>
<CAPTION>
CREDIT QUALITY $(dollars in thousands) JUNE 30, 1997 June 30, 1996 December 31, 1996
- ---------------------------------------- ------------ ------------- -----------------
<S> <C> <C> <C>
NONPERFORMING ASSETS:
Nonaccrual $649 $1,291 870
other real estate owned 522 542 725
------ ------ ------
Total nonperforming assets $1,171 $1,833 $1,598
------ ------ ------
------ ------ ------
Loans delinquent over 90 days 96 314 151
KEY RATIOS:
Allowance to ending loans 1.39% 1.17% 1.35%
Nonperforming loans to ending loans 0.85 1.68 1.09
Allowance to nonperforming loans 164.70 69.91 123.20
90 days delinquent to ending loans 0.11 0.33 0.16
</TABLE>
The Company's loan underwriting guidelines, credit review procedures and
policies are designed to protect the Company from avoidable credit losses.
Illini's process for monitoring loan quality includes detailed monthly trend
analysis of delinquencies and non-performing assets. Management and the board
of directors monitors potential problem loans, changes to the watchlist and
extensions of credit outside of the loan policy. Management extensively
monitors specific credit relationships through appraisals, assessment of the
financial condition of borrowers, restrictions of out-of-area lending, and
avoidance of loan concentrations.
The Company has actively taken steps to improve asset quality during the first
six months of 1997. Management continues to refine its process for reviewing
significant credit exposures and large problem loans by stressing the need for
loan officers to downgrade credits as soon as the officer becomes aware of any
situation warranting a downgrade. Although, officers are responsible for
initiated downgrades, credit review still exercises control over the process and
has full authority to assign final grades on all credits. Also, management has
adopted a migration based analysis of the allowance for loan loss adequacy which
allows for historical and judgmental allocation of allowance percentages to
significant segments of the portfolio. Other initiatives during the first six
months of 1997 have been implemented, including the adoption of a new loan
policy, centralization of commercial loan underwriting, and lending officers
meeting once every two weeks to discuss the progress of collection efforts and
status of nonaccural loans and other real estate owned. Management's more
proactive approach to identifying and resolving past due and problem loans were
undertaken in order to improve Illini's future loan loss experience and has
proven effective as evidenced by the reduction of nonperforming assets at June
30, 1997. Nonaccrual loans, other real estate owned and loans delinquent more
than 90 days have all declined since June 30 and December 31, 1996.
20
<PAGE>
CAPITAL RESOURCES
The current economic and regulatory environment places increased emphasis on
capital strength. A strong capital position, which is vital to the continued
profitability of Illini, also promotes depositor and investor confidence and
provides a solid foundation for the future growth of the organization. Illini
has satisfied its capital requirements principally through the retention of
earnings. At June 30, 1997, risk based Tier 1 capital, total risk based capital
and leverage capital ratios were 14.65%, 15.89% and 9.87%, respectively. As of
June 30, 1997, Illini Bank met the criteria to be classified as "well
capitalized."
Earnings retention is affected by the board of director's declaration of cash
dividends. The dividend payout ratio is an indicator of the level of earnings
retained. The dividend payout ratio for the three and six months ended June 30,
1997 was 62.29% and 75.81%, respectively, versus 346.04% and 158.61% for the
three and six months ended June 30, 1996, respectively. The unusually high
dividend payout ratio during the first two quarters of 1996 was due to increased
loan losses which significantly reduced net income for these periods.
LIQUIDITY
Illini's policy is to manage interest rate risk to a level which places limits
on the sensitivity of its earnings to changes in market interest rates. An
explanation of the asset/liability management process is found in the Annual
Report on Form 10-KSB for the year ended December 31, 1996, beginning on page
12. Interest rate risk management at Illini is executed by the use of on-
balance sheet investment products.
The assets portion of the balance sheet provides liquidity primarily through
loan principal repayments, maturities of investment securities and sales of
investment securities available for sale. The liability side of the balance
sheet provides liquidity through various customers' interest bearing and non
interest bearing deposit accounts. Short term borrowings are an additional
source of liquidity and represent Illini's incremental borrowing capacity.
At June 30, 1997, large liability dependence was 11.2%, a decline from 14.9% at
March 31, 1997 and 13.68% at December 31, 1996. The decrease in large liability
dependence is due to a decrease in short-term borrowings of $4.3 million to
$290,000 at June 30, 1997 compared to $6.5 million at March 31, 1997 and $4.6
million at December 31, 1996. Illini manages the large liability position to be
no greater than 20% of net interest-earning assets.
The decrease in short-term borrowings occurred during June of 1997 when
management restructured its available for sale investment securities portfolio
by selling a number of higher risk, long-term, fixed rate securities. Some of
the proceeds from the sale of these securities was used to paydown the existing
$4.3 million in short-term borrowings. The remainder of the proceeds was used
to restructure the investment securities portfolio to more evenly spread
investment security maturities throughout the next five years to match the
liquidity needs of the Company's borrowers and depositors. Management's
philosophy toward asset/liability management is to utilize less risky,
continually maturing investment securities to meet lending and borrower
requirements. To the extent investment securities available for sale at any
given time are not sufficient to meet lending and borrower needs, management
will utilize their federal funds line of credit or Federal Home Loan Bank line.
21
<PAGE>
In November 1996, Illini entered into a contract for construction of a new
banking center which will serve as the Company's headquarters in Springfield,
Illinois. The cost of the center is $2.5 million, of which $1.2 million has
been incurred to date. Construction has been underway throughout the first six
months of 1997 with completion expected on or before October 31, 1997. Illini
is funding the purchase and construction internally and has increased their
investment securities available for sale portfolio to provide a source of
funding, if needed.
22
<PAGE>
PART II. OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
Neither the Company nor Illini Bank is a party to any pending legal
proceedings other than ordinary routine litigation incidental to
its business.
Item 2 CHANGES IN SECURITIES
On June 20, 1997, the Board of Directors of the Company adopted a
Stockholder Rights Plan and, in connection therewith, declared a
dividend distribution of one common stock purchase right for each
outstanding share of common stock, $10.00 par value per share, of the
Company. Each right entitles the registered holder to purchase from
the Company one share of common stock at a price of $80.00 per share.
Upon the occurrence of certain events, the purchase price for the
common stock is adjusted and the common stock purchase right becomes
void in the hands of certain holders, all in accordance with the terms
of theStockholders Rights Plan. A copy of the Stockholder Rights Plan
was filed as an exhibit to the Company's Registration Statement on
Form 8-A filed with the Securities and Exchange Commission on June 25,
1997.
Item 3 DEFAULTS UPON SENIOR SECURITIES - NONE
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May 30,
1997, for the purpose of electing three directors each to serve
for a term of three years and ratifying the appointment of KPMG Peat
Marwick LLP as the Company's auditors for the fiscal year ending
December 31, 1997. Proxies for the meeting were solicited by
management pursuant to Regulation 14A under the Securities Exchange
Act of 1934, and there was no solicitation in opposition to
Management's solicitation.
All three of Management's nominees for director listed in the proxy
statement were elected. The results of the vote were as follows:
Shares Broker
Voted Shares Non
"For" "Withhled" Votes
------- --------- ------
Thomas A. Black 233,444 2,686 0
Ronald E. Cramer 233,108 2,851 0
Lawrence B. Curtin 232,073 2,686 0
The following persons continued their terms of office as directors of
the Company following the Annual Meeting: William B. McCubbin,
Burnard K. McHone, Robert F. Olson, William G. Walshleger, Jr., Perry
Williams, Kenneth G. Deverman, William N. Etherton and John H.
Pickrell.
The appointment of KPMG Peat Marwick LLP as the Company's auditors for
the fiscal year ending December 31, 1997, was ratified. The results
of the vote were as follows:
"For" "Against" "Abstain"
------- -------- ---------
Ratification of KPMG
Peat Marwick LLP 229,585 2,306 3,725
23
<PAGE>
Item 5 OTHER INFORMATION - NONE
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
The Exhibits filed herewith are set forth in the Exhibit Index
filed as a part of these Form 10-QSB.
(b) REPORTS ON FORM 8-K:
The Company filed a Report on From 8-K dated June 22, 1997 in
connection with the adoption by the Company of a Stockholder
Rights Plan and the adoption of amended and restated bylaws for
the Company.
24
<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.
Illini Corporation
(Registrant)
By: /s/ Burnard K. McHone August 13, 1997
- ----------------------------------------- -----------------
Burnard K. McHone Date signed
President
By: /s/ Deann Hager August 13, 1997
- -------------------------------------- ------------------
C. Deann Hager Date signed
Controller
25
<PAGE>
EXHIBIT INDEX
Number Description
------ -----------
3 Amended and Restated Bylaws of Illini Corporation, effective June
20, 1997 (Incorporated by reference to Exhibit 3 to Registrant's
Report on Form 8-K dated June 20, 1997).
4 Rights Agreement dated June 20, 1997 between Illini Corporation
and Illinois Stock Transfer Company, as Rights Agent
(Incorporated by reference to Exhibit 4 to Registrant's Report on
Form 8-K dated June 20, 1997).
27 Financial Data Schedule
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,495,367
<INT-BEARING-DEPOSITS> 42,437
<FED-FUNDS-SOLD> 275,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 44,237,437
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 88,126,441
<ALLOWANCE> 1,227,194
<TOTAL-ASSETS> 146,297,428
<DEPOSITS> 129,892,641
<SHORT-TERM> 290,000
<LIABILITIES-OTHER> 1,396,859
<LONG-TERM> 0
0
0
<COMMON> 4,484,560
<OTHER-SE> 10,233,368
<TOTAL-LIABILITIES-AND-EQUITY> 14,717,928
<INTEREST-LOAN> 4,122,655
<INTEREST-INVEST> 1,413,549
<INTEREST-OTHER> 8,406
<INTEREST-TOTAL> 5,544,610
<INTEREST-DEPOSIT> 2,236,994
<INTEREST-EXPENSE> 2,343,960
<INTEREST-INCOME-NET> 3,200,650
<LOAN-LOSSES> 150,000
<SECURITIES-GAINS> (2,896)
<EXPENSE-OTHER> 3,502,221
<INCOME-PRETAX> 290,501
<INCOME-PRE-EXTRAORDINARY> 290,501
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 295,758
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
<YIELD-ACTUAL> 5.11
<LOANS-NON> 649,000
<LOANS-PAST> 96,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 936,568
<ALLOWANCE-OPEN> 1,258,000
<CHARGE-OFFS> 207,000
<RECOVERIES> 26,000
<ALLOWANCE-CLOSE> 1,227,000
<ALLOWANCE-DOMESTIC> 1,039,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 188,000
</TABLE>
