<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 March 31, 1998
/ / 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.)
3200 West Iles Avenue, Springfield, Illinois 62707
(Address of principal executive offices)
(217) 787-5111
(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 March 31, 1998
Transitional Small Business Disclosure Format: Yes No X
----- -----
<PAGE>
ILLINI CORPORATION
INDEX TO FORM 10-QSB
March 31, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Income
Three Months Ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
PART II. OTHER INFORMATION 19
SIGNATURE PAGE 20
EXHIBIT INDEX 21
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
(dollars in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,527 $ 5,361
Interest bearing deposits in other banks 13 77
Federal funds sold 8,195 6,755
Debt and marketable equity securities
available for sale, at estimated market value 48,603 46,834
Loans, net of the allowance for loan losses
and unearned income 83,783 84,987
Premises and equipment 7,646 8,077
Accrued interest receivable 1,573 1,500
Other real estate owned 1,004 551
Other assets 598 772
-------- --------
$155,942 $154,914
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing demand deposits 21,922 25,083
Interest bearing deposits:
NOW and money market accounts 32,623 30,596
Savings deposits 18,172 17,820
Time deposits, $100,000 and over 18,099 18,659
Other time deposits 47,911 45,418
-------- --------
Total deposits 138,727 137,576
Securities sold under agreements to repurchase 290 715
Accrued interest payable 814 784
Other liabilities 1,149 861
-------- --------
Total liabilities 140,980 139,936
-------- --------
Shareholders' equity:
Common stock-authorized 800,000 shares of $10
par value; 448,456 shares issued and
outstanding 4,485 4,485
Capital surplus 1,886 1,886
Retained earnings 8,369 8,450
Accumulated other comprehensive income 222 157
-------- --------
Total shareholders' equity 14,962 14,978
-------- --------
$155,942 $154,914
-------- --------
-------- --------
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(dollars in thousands)
<S> <C> <C>
Interest income:
Interest and fees on loans $1,955 $2,048
Interest on debt and marketable equity securities:
Taxable 633 489
Tax-exempt 104 166
Interest on short term investments 77 9
------- -------
Total interest income 2,769 2,712
------- -------
Interest expense:
Interest on deposits:
NOW and money market accounts 279 175
Savings deposits 108 114
Time deposits, $100,000 and over 258 220
Other time deposits 643 610
Interest on borrowings 4 24
------- -------
Total interest expense 1,292 1,143
------- -------
Net interest income
1,477 1,569
Provision for loan losses 51 75
------- -------
Net interest income after provision for loan losses 1,426 1,494
Noninterest income:
Service charges on deposit accounts 245 249
Other fee income 38 36
Mortgage loan servicing fees 59 45
Gain on sale of mortgage loans 78 11
Securities gains 7 4
Other 23 14
------- -------
Total noninterest income 450 359
------- -------
Noninterest expense:
Salaries and employee benefits 867 847
Net occupancy expense 172 178
Equipment expense 86 79
Data processing 164 177
Supplies 54 32
Communication and transportation 98 98
Marketing and advertising 56 61
Correspondent and processing fees 32 34
Loan and other real estate owned expenses 44 24
Professional fees 213 179
Directors' and regulatory fees 48 44
Other operating expenses 78 66
------- -------
Total noninterest expense 1,912 1,819
Income (loss) before income tax benefit (36) 34
Income tax benefit (67) (82)
------- -------
Net income $ 31 $ 116
------- -------
------- -------
Basic earnings per share
(based on weighted average common shares outstanding
of 448,456 in 1998 and 1997) $ 0.07 $ 0.26
------- -------
------- -------
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 31 $ 116
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 238 161
Provision for loan losses 51 75
Securities gains, net (7) (4)
Gain on sale of premises and equipment (1) --
Gain on sale of other real estate owned (11) --
Increase in accrued interest receivable (73) (2)
(Increase) decrease in accrued interest payable 30 (70)
Origination of mortgage loans for sale (18,270) (4,005)
Proceeds from the sale of mortgage loans 17,655 3,811
Other, net 433 (275)
-------- --------
Net cash provided by operating activities 76 (193)
-------- --------
Cash flows from investing activities:
Proceeds from sales of debt and marketable equity
securities available for sale 1,502 260
Proceeds from maturities and paydowns of debt and
marketable equity securities available for sale 2,389 2,551
Purchases of in debt and marketable equity securities
available for sale (5,582) (9,141)
Net decrease in loans 1,768 4,681
Purchases of premises and equipment (295) (730)
Proceeds from sale of premises and equipment 1 --
Proceeds from sales of other real estate owned 68 106
-------- --------
Net cash used in investing activities (149) (2,273)
-------- --------
Cash flows from financing activities:
Net decrease in non-interest bearing deposit accounts (3,161) (633)
Net increase in NOW, money market accounts and savings 2,380 924
Net increase (decrease) in time deposits $100,000 and over (561) 565
Net increase (decrease) in other time deposits 2,494 (812)
Net increase in federal funds purchased -- 1,355
Net decrease in securities sold under agreements to
repurchase (425) (400)
Netincrease in other short-term borrowings -- 900
Cash dividends paid (112) (112)
-------- --------
Net cash provided by financing activities 615 1,787
-------- --------
Net increase (decrease) in cash and cash equivalents 542 (679)
Cash and cash equivalents at beginning of period 12,193 5,513
-------- --------
Cash and cash equivalents at end of period $ 12,735 $ 4,834
-------- --------
-------- --------
Supplemental Information:
Income taxes paid $ 7 $ --
Interest paid $ 1,263 $ 1,213
-------- --------
-------- --------
Other non-cash investing activities:
Transfer of premises and equipment to other real estate $ 533 $ --
-------- --------
-------- --------
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1998
(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 Illini Corporation
Annual Report on Form 10-KSB for the year ended December 31, 1997.
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding
for the period. Illini has no instruments which are dilutive.
Results for the three months ended March 31, 1998 may not be indicative of
the annual performance of Illini Corporation (Illini or the 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 Bank (the Bank),
the Corporation's wholly owned subsidiary, 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.
The 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.
Information regarding impaired loans at March 31, 1998 and December 31,
1997 is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ------------
(dollars in thousands)
<S> <C> <C>
Nonaccrual loans $594 $636
Impaired loans continuing to accrue interest 123 50
----- -----
Total impaired loans $717 $686
----- -----
----- -----
Allowance for losses on specific impaired loans $ 44 $ 26
Impaired loans with no specific related allowance
for loan losses 619 595
Average balance of impaired loans during the period 702 977
----- -----
----- -----
</TABLE>
6
<PAGE>
(3) NEW ACCOUNTING PRONOUNCEMENT
During 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 131, DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS 131 is
effective for financial statements for periods beginning after December
15, 1997, however interim period reporting is not required in 1998. An
operating segment is defined under SFAS 131 as a component of an
enterprise that engages in business activities that generate revenue and
expense for which operating results are reviewed by the chief operating
decision maker in the determination of resource allocation and
performance. Illini is currently evaluating the impact of SFAS 131 on
future financial statement disclosures.
(4) OTHER 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. Under SFAS 130, comprehensive
income is divided into net income and other comprehensive income. For the
three-month periods ended March 31, 1998 and 1997, unrealized holding
gains/losses on debt and equity securities available for sale is the
Company's only other comprehensive income component. Comprehensive income
for the three-month periods ended March 31, 1998 and 1998 is summarized as
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
----------------------
(dollars in thousands)
<S> <C> <C>
Net income $ 31 $ 116
Other comprehensive income - unrealized
holding gain (loss) on debt and equity
securities available-for-sale, net of tax 65 (257)
----- ------
Total comprehensive income $ 96 $(141)
----- ------
----- ------
</TABLE>
7
<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 1997
Illini Corporation Annual Report on Form 10-KSB (1997 Form 10-KSB). Illini
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
involve risks and uncertainties and are subject to change based on various
factors. Actual results could differ materially from those expressed or
implied.
SUMMARY
<TABLE>
<CAPTION>
Quarter ended
March 31,
-------------------- Percent
EARNINGS 1998 1997 Change
- --------- ------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C>
Total revenue........................ $3,219 $3,071 4.82%
Net income........................... 31 116 (73.20%)
Basic earnings per share............. $ 0.07 $ 0.26 (73.20%)
KEY RATIOS
- -----------
Return on average assets............. 0.08% 0.32% (0.24%)
Return on average equity............. 0.84% 3.22% (2.38%)
Average equity to assets............. 9.76% 10.06% (0.31%)
Tier 1 leverage ratio................ 9.50% 9.98% (0.48%)
Tier 1 risk-based capital ratio...... 14.53% 14.49% 0.04%
Total risk-based capital ratio....... 15.84% 15.70% 0.14%
Dividend payout ratio................ 361.42% 96.85% 264.58%
Net interest margin.................. 4.51% 5.09% (0.58%)
Efficiency ratio..................... 96.49% 90.57% 5.92%
</TABLE>
8
<PAGE>
RESULTS OF OPERATION
EARNING ASSETS
Average earning assets of the Corporation for the first three months of 1998
increased 4.43% or $5.84 million to $137.7 million from $131.9 million for the
first three months of 1997.
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 three months of 1998 as a result of the
decrease in loans outstanding.
Average net loans declined to $83.8 million for the three months ended March 31,
1998 compared to $88.4 million for the same period in 1997. The decline of $4.6
million for the three months ended March 31, 1998 as compared to the same period
for 1997 was primarily due to a decrease of $3.9 million in residential real
estate and $4.5 million in consumer loans. The decline was offset by an
increase of $1.4 million in commercial loans, including commercial real estate
loans and $2.3 million in agriculture loans. The average yield on the loan
portfolio before the allowance for loan losses increased 4 basis points to
9.36%.
Average investment securities increased $5.7 million for the three months ended
March 31, 1998 as compared to the same period in 1997. The average yield of the
investment securities portfolio was 6.52% for the three months ended March 31,
1998, a decrease of 36 basis points as compared to the same periods in 1997.
The decrease in yield resulted from management's efforts to shorten the duration
of the investment portfolio to minimize interest rate risk to the Bank.
FUNDING
The most important and stable source of funding is core deposits, considered by
management to include non-interest bearing demand deposits, NOW and money market
accounts, savings deposits and time deposits under $100,000. Average core
deposits for the three months ended March 31, 1998 increased 5.78% or $6.5
million to $118.6 million from $112.1 million. The Bank has incurred increased
funding costs as it has grown core deposits. The average rate paid on total
interest bearing liabilities increased 28 basis points as of March 31, 1998 when
compared to the same period in 1997. The cost of time deposits less than
$100,000 was up 32 basis points because of the Bank's decision to match local
competition on rates for existing customers. The cost of interest bearing
demand accounts was up 78 basis points primarily because of a new money market
index account which pays competitive money market rates and was introduced in
the second half of 1997.
The increase in core deposits, coupled with steady to declining loan growth has
assisted Illini in maintaining adequate liquidity. Illini has gone from a $6.4
million net purchaser of federal funds at March 31, 1997 to a $8.2 million net
seller of federal funds at March 31, 1998. In addition to federal funds sold,
Illini maintains an overnight federal funds line of credit with an unaffiliated
financial institution and an unused line of credit with the Federal Home Loan
Bank of Chicago.
NET INTEREST INCOME/NET INTEREST MARGIN
The operating results of the Corporation are highly dependent on 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.
9
<PAGE>
Interest income, on a fully taxable equivalent basis, was $2.8 million for the
three months March 31, 1998, which is consistent with the $2.8 million for same
period in 1997. Interest expense was $1.3 million for the three months ended
March 31, 1998, compared to $1.1 million for the same period in 1997.
Consistent interest income and a slight increase in interest expense resulted in
a $0.1 million decline in net interest income. Net interest income of $1.5
million and a net interest margin of 4.51% are down when compared to March 31,
1997's net interest income of $1.6 million and margin of 5.09%. See discussion
above regarding changes in yields. Interest income on investment securities was
up approximately $0.1 million offset by a decline of $0.1 million in interest on
loans when compared to the same period last year. The increase in interest
expense was primarily due to interest paid on money market demand deposit
accounts which management began actively promoting as a funding source in the
second half of 1997.
The Bank's net interest margin is down significantly at March 31, 1998 and
management anticipates that the net interest margin will remain lower than
preceding periods throughout the rest of 1998. The margin is down primarily
because of management's decision to take a more conservative approach to
investing funds not loaned out by shortening the investment portfolio's duration
and maintaining increased levels of short term investments. A decrease in loan
volumes also affected margin in the first quarter of 1998. The shift toward
shorter-term investments is part of management's strategy to reevaluate and
adjust the Bank's overall asset liability structure in 1998. Management will
take steps in the second quarter toward the Bank's overall objective which is to
increase portfolio yields without jeopardizing the enhanced liquidity that has
been gained thus far.
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 Corporation'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 table on page 11 and a
net interest income rate/volume variance analysis on page 12.
10
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELD/RATES
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------
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 $ 5,812 3.8% $ 77 5.35% $ 1,095 0.8% $ 9 3.27%
Investment securities (3)
Taxable 40,025 26.0 633 6.32 29,458 20.3 489 6.64
Tax-exempt (1) 8,083 5.3 151 7.49 12,958 8.9 240 7.41
-------- ----- ------ ----- -------- ----- ------ -----
Total securities 48,108 31.3 784 6.52 42,416 29.2 729 6.88
Loans
Commercial (1) 15,336 10.0 358 9.46 12,475 8.6 314 10.21
Agriculture 6,634 4.3 143 8.76 4,338 3.0 100 9.35
Real estate
Commercial 25,946 16.9 583 9.11 27,445 18.9 611 9.03
Agriculture 2,387 1.5 54 9.25 2,157 1.5 48 9.12
Residential 22,275 14.5 512 9.33 26,139 18.0 580 9.00
Consumer, net 11,890 7.7 286 9.74 16,418 11.3 380 9.39
Credit card 643 0.4 27 17.18 645 0.5 26 16.12
-------- ------ -------- ------
Total loans 85,111 55.3 1,963 9.36 89,617 61.8 2,059 9.32
Allowance for loan losses (1,305) (0.8) (1,237) (0.9)
-------- ------ --------
Net loans (1) (2) 83,806 54.5 1,963 9.50 88,380 60.9 2,059 9.45
-------- ----- ------ -------- ----- ------
Total interest 137,726 89.6 2,824 8.32 131,891 90.9 2,797 8.60
earning assets -------- ------ -------- ------
Cash and due from banks 4,870 3.2 4,792 3.3
Premises and equipment 8,211 5.3 5,554 3.8
Other real estate owned 525 0.3 719 0.5
Other assets (3) 2,483 1.6 2,098 1.5
-------- ----- -------- -----
TOTAL ASSETS $153,815 100.0% $145,054 100.0%
-------- ----- -------- -----
-------- ----- -------- -----
LIABILITIES
Deposits:
Non-interest bearing deposits $ 21,139 13.7% $ 19,654 13.5%
Interest bearing demand 32,782 21.3 $ 279 3.46% 26,455 18.2 $ 175 2.68%
Savings 17,684 11.5 108 2.47 18,745 12.9 114 2.48
Time deposits less than $100,000 46,967 30.5 643 5.55 47,239 32.6 610 5.23
-------- ------ -------- ------
Total core deposits 118,572 77.0 1,030 3.52 112,093 77.2 899 3.25
Time deposits $100,000 and over 18,241 11.9 258 5.75 15,173 10.5 220 5.89
-------- ------ -------- ------
Total deposits 136,813 88.9 1,288 3.82 127,266 87.7 1,119 3.57
Short-term borrowings 307 0.2 4 5.42 1,677 1.2 24 5.79
Total interest bearing liabilities 115,981 75.4 1,292 4.52 109,289 75.4 1,143 4.24
Other liabilities 1,687 1.1 1,512 1.0
-------- ----- -------- -----
Total liabilities 138,807 90.2 130,455 89.9
Shareholders' Equity 15,008 9.8 14,599 10.1
-------- ----- -------- -----
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $153,815 100.0% $145,054 100.0%
-------- ----- -------- -----
-------- ----- -------- -----
NET INTEREST MARGIN $1,532 4.51% $1,654 5.09%
------ ----- ------ -----
------ ----- ------ -----
</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 periods presented.
(2) Nonaccrual loans are included in the loan balances. Interest income
includes related fee income of $64,000 in 1998 and $53,000 in 1997.
(3) Average securities balances are based on amortized historical cost,
excluding SFAS 115 adjustments to fair value, which are included in other
assets.
11
<PAGE>
NET INTEREST INCOME - RATE/VOLUME VARIANCE ANALYSIS(*)
<TABLE>
<CAPTION>
Quarter ended March 31, 1998
as compared to
Quarter ended March 31, 1997
-----------------------------------------
Changes in Volume Rate
Income/Expense Effect Effect
--------------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Short-term investments $ 68 $ 38 $ 30
Investment securities:
Taxable 144 175 (31)
Tax-exempt (89) (90) 1
------ ------ ------
Total securities 55 85 (30)
Loans:
Commercial 44 73 (29)
Agriculture 43 54 (11)
Real Estate:
Commercial (28) (34) 6
Agriculture 6 5 1
Residential (68) (87) 19
Consumer, net (94) (106) 12
Credit card 1 0 1
------ ------ ------
Total loans (96) (95) (1)
------ ------ ------
Total interest income 27 28 (1)
------ ------ ------
Interest bearing demand 104 42 62
Savings (6) (6) 0
Time deposits less than $100,000 33 (4) 37
------ ------ ------
Total core deposits 131 32 99
Time deposits $100,000 and over 38 45 (7)
------ ------ ------
Total deposits 169 77 92
Short-term borrowings (20) (20) 0
------ ------ ------
Total interest expense 149 57 92
------ ------ ------
Net interest income $(122) $ (29) $ (93)
------ ------ ------
------ ------ ------
</TABLE>
(*) Fully taxable equivalent basis
NOTE: The change in interest which can not be attributed to only a change in
volume or a change in rate, but instead represents a combination of the
two factors, has beenallocated to the rate effect.
12
<PAGE>
NONINTEREST INCOME
<TABLE>
<CAPTION>
Three months ended Percent
March 31, Change
------------------------ -----------
1998 1997 1998/1997
----------- --------- -----------
<S> <C> <C> <C>
Service charges on deposit accounts $245 $249 (1.6)%
Other fee income 38 36 5.6
Mortgage loan servicing fees 59 45 31.1
Gain on sale of mortgage loans 78 11 609.1
Securities gains, net 7 4 75.0
Other income 23 14 64.3
----- ----- ------
$450 $359 25.3%
----- ----- ------
----- ----- ------
</TABLE>
Service charges on deposit accounts remained relatively steady for the three
months ending March 31, 1998 compared to the same period in 1997. Other fee
income was relatively unchanged. Other income was up because of increased
commission on check sales to new account customers.
The Bank experienced a significant increase in fixed rate mortgage loan
originations which are sold on the secondary market. Declining interest rates
in the first quarter, coupled with effective marketing strategies, significantly
increased the volume of residential real estate refinance loans. This, in turn,
increased the Bank's gain on sale of these loans and to a lesser extent,
increased servicing income.
13
<PAGE>
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Three months ended Percent
March 31, Change
------------------------ -----------
1998 1997 1998/1997
----------- --------- -----------
<S> <C> <C> <C>
Salaries and employee benefits $ 867 $ 847 2.44%
Net occupancy expense 172 178 (3.4)
Equipment expense 86 79 8.9
Data processing 164 177 (7.3)
Supplies 54 32 68.8
Communication and transportation 98 98 0.0
Marketing and advertising 56 61 (8.2)
Correspondent and processing fees 32 34 (5.9)
Loan and other real estate owned expenses 44 24 83.3
Professional fees 213 179 19.0
Directors' and regulatory fees 48 44 9.1
Other operating expenses 78 66 18.2
------- ------- -----
$1,912 $1,819 5.1
------- ------- -----
------- ------- -----
</TABLE>
Salaries and employee benefits increased slightly for the three months ending
March 31, 1998 when compared to the same period in 1997. This increase resulted
primarily from increased staffing costs relating to the opening of the Bank's
new headquarters facility which opened in December 1997. The former main
banking facility remains open as a full service branch. Equipment and supply
expenses are up for this same reason. However, net occupancy expense remained
relatively consistent for the three months ending March 31, 1998 when compared
to the same period in 1997. The increase in occupancy expense relating to the
new headquarters was offset by a decrease in lease expense. Leases for space
formerly occupied by holding company offices and the Operations Center expired
in the fourth quarter of 1997.
Loan and other real estate owned expenses totaling $44,000 is up $20,000 from
the same period in 1997. The majority of the increase is the result of one time
costs relating credit bureau hook up fees at the new main banking facility.
Professional fees totaling $213,000 are up $34,000 from the same period in 1997
and remain significantly above average. Approximately $141,000 or 66% of this
amount represents fees paid to a consulting firm that was engaged in late 1997
to reengineer the Bank's operations. This is part of the Bank's efforts to
substantially increase net income and return to shareholders which were
discussed in greater detail in the Corporation's 1997 Form 10-KSB. The increase
in other operating expense results from a $15,000 write off on a check forgery.
YEAR 2000 ISSUES
In 1998, Illini will complete a comprehensive review of its computer systems to
identify those systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve any potential problems revealed.
The Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of Illini's programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a major system failure or
miscalculations.
14
<PAGE>
Management presently believes that, with modifications to existing software
and by converting to new software, the Year 2000 problem will not pose
significant operational problems for the Bank's computer systems as so
modified and converted. However, if such modifications and conversions are
not completed timely, the Year 2000 problem may have a material impact on the
operations of Illini. The Corporation spent $15,000 in the period ending
March 31, 1998 and anticipates incurring an additional $40,000 for Year 2000
related expenses through the end of 1998.
CREDIT QUALITY
Gross loans totaled $85.1 million at March 31, 1998, a decline of $1.2 million,
or 1.39%, from $86.3 million at December 31, 1997, while the allowance for loan
losses has remained relatively consistent at $1.3 million at March 31, 1998 and
December 31, 1997, respectively. The allowance as a percent of total loans and
nonperforming loans continues to increase as management has maintained the
reserve at a steady balance and reduced nonperforming loans. Declining consumer
and residential real estate loan balances have been substantially offset by
increases in commercial and agricultural loans.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
---------- ----------
(dollars in thousands)
<S> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period $1,302 $1,258
Provision charged to expense 51 75
Charge-offs 42 133
Less: recoveries 13 16
------- -------
Net charge-offs 29 117
------- -------
Ending allowance for loan losses $1,324 $1,216
------- -------
------- -------
NET CHARGE-OFF RATIOS (1):
Commercial 0.20% 0.36%
Real Estate (0.01) 0.39
Installment 0.25 1.11
Credit Cards 6.14 2.52
Totals 0.14% 0.53%
</TABLE>
(1) Ratios to average loans are presented on an annualized basis
Illini's primary business of making commercial, real estate and consumer loans
entails potential losses, the magnitude of which depends on a variety of
economic factors affecting borrowers which are beyond the control of the
Corporation. Accordingly, a significant factor in the Corporation's past and
future operating results is the level of the provision for loan losses. The
provision for loan losses decreased to $51,000 for the three months ended March
31, 1998 as compared to $75,000 for the comparable period in the prior year.
Net charge-offs decreased to $29,000 for the three months ended March 31, 1998
as compared to $117,000 for the comparable period in the prior year.
Management feels that credit quality systems and controls implemented in 1996
and 1997 have resulted in significantly improved credit quality. This
improvement has resulted in decreased provision expense and net loan losses.
The net charge off ratio for the three months ended March 31, 1998 was 0.14%
compared to 0.29% and 1.17% for years ended December 31, 1997 and 1996,
respectfully.
15
<PAGE>
Total impaired loans remained relatively unchanged totaling $0.7 million at
March 31, 1998 and December 31, 1997. At March 31, 1998, allowance for loan
losses on impaired loans totaled $44,000 compared to $26,000 at December 31,
1997. Of the total impaired loans at March 31, 1998 and December 31, 1997,
$123,000 and $50,000 were loans continuing to accrue interest.
<TABLE>
<CAPTION>
March 31, December 31, March 31,
Credit Quality 1998 1997 1997
- ------------------------------- -------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
NONPERFORMING ASSETS:
Loans delinquent over 90 days,
still accruing interest $ 0 $ 0 $ 96
Nonaccrual 594 636 1,039
Other real estate owned 1,004 551 709
------- ------- ------
Total nonperforming assets $1,598 $1,187 $1,844
------- ------- ------
------- ------- ------
KEY RATIOS:
Nonperforming loans to ending loans 0.70% 0.74% 1.28%
90 days delinquent to ending loans 0.00 0.00 0.11
Allowance to ending loans 1.56 1.51 1.37
Allowance to nonperforming loans 222.90 204.72 107.14
</TABLE>
Illini's loan underwriting guidelines, credit review procedures and policies are
designed to protect the Corporation 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
monitor potential problem loans, changes to the watchlist and extensions of
credit outside of the loan policy. Management extensively monitors significant
credit relationships through appraisals, assessment of the financial condition
of borrowers, restrictions on out-of-area lending, and avoidance of loan
concentrations.
As discussed in the Corporation's 1997 Form 10-KSB and previous 10-QSB reports,
management has implemented several initiatives to improve credit quality. These
steps included a new officer driven problem loan identification system, a
revamped allowance adequacy determination process, a new loan policy, and
improved reporting systems (credit quality and production). Management is
committed to continuing these initiatives and is supplementing these efforts in
1998 by engaging an outside firm to perform a comprehensive review of the Bank's
loan portfolio to assess its credit quality and the effectiveness of management
loan quality systems and controls.
The sharp increase in other real estate owned results from the transfer of a
$533,000 property from bank premises. The property was acquired in 1995 and was
held for potential future expansion in the Bloomington/Normal, Illinois market.
Management has since abandoned its plans to build a facility on this specific
site. Management is aggressively marketing the sale of this and other real
properties.
16
<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 March 31, 1998, Tier 1 risk based capital, total
risk-based capital and leverage capital ratios were 14.53%, 15.84% and 9.50%,
respectively. As of March 31, 1998, the 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 months ended March 31, 1998
was 361.42%, versus 96.85% for the three months ended March 31, 1997,
respectively. As previously discussed, the Bank has recognized significant
expense relating to the overall reengineering process. Management expects these
efforts to enhance long term performance. However, in the short term, net
income was depressed for the first three months of 1998 and consequently the
dividend payout ratio is elevated. The total dollar amount of dividends through
March 31, 1998 is unchanged from the same period in 1997.
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
Corporation's 1997 Form 10-KSB, beginning on page 13. 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 March 31, 1998, large liability dependence was 6.2%, a decline from 8.2% at
December 31, 1997. The decrease in large liability dependence is due to an
increase in short-term investments of $1.4 million to $8.2 million at March 31,
1998 compared to $6.8 million at December 31, 1998. Illini manages the large
liability position to be no greater than 20% of net interest-earning assets.
In 1997 management restructured its available for sale securities portfolio by
selling a number of higher risk long-term fixed rate securities. Additionally
in 1997, management shifted its position from a net borrower of short-term funds
to a net seller of short-term funds. This shift was made in order to improve
the Bank's liquidity and to minimize interest rate risk. This conservative
approach has continued through the first quarter of 1998. The Bank did not have
any federal funds purchased or other short term borrowings as of December 31,
1997 or March 31, 1998. Federal funds sold increased from $6.8 million at
December 31, 1998 to $8.2 million at March 31, 1998.
17
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative financial instruments include futures, forwards, interest rate swaps,
option contracts, and other financial instruments with similar characteristics.
The Bank currently does not enter into futures, forwards, swaps, or options.
However, the Bank is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. Commitments generally have fixed expiration dates
and require collateral from the borrower if deemed necessary by the Bank.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party up to a stipulated
amount and within specified terms and conditions. Commitments to extend credit
and standby letters of credit are not recorded as an asset or liability by the
Bank until and unless the instrument is exercised.
The Bank's exposure to market risk and interest rate risk is reviewed by the
Asset/Liability Committee. Management realizes certain risks are inherent, such
as the uncertainty of market interest rates, and that its goal is to identify
and manage such risks. The primary tool management uses to monitor and manage
interest rate risk is a static gap report. The Bank has no market risk
sensitive instruments held for trading purposes.
The bank's interest rate and market risk profile has not materially changed from
the year ended December 31, 1997. Please refer to the Corporation's 1997 Form
10-KSB for further discussion of the Corporation's market and interest rate
risk.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS - none
Item 2 CHANGES IN SECURITIES - none
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 April
16, 1998, for the purpose of electing six directors each to serve 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, 1998. 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 six of Management's nominees for director listed in the proxy
statement were elected. The results of the vote were as follows:
<TABLE>
<CAPTION>
Shares Broker
Voted Shares Non
"For" "Withheld" Votes
----------- ---------- ----------
<S> <C> <C> <C>
William B. McCubbin 215,718 13,054 0
Burnard K. McHone 214,293 13,054 0
Robert F. Olson 217,182 11,583 0
N. Ronald Thunman 214,154 13,054 0
William G. Walschleger 217,114 11,583 0
Perry Williams 217,000 11,583 0
</TABLE>
The following persons continued their terms of office as directors of
the Company following the Annual Meeting: Thomas A. Black, John H.
Pickrell, Ronald E. Cramer, Lawrence B. Curtin, Kenneth Deverman
and William N. Etherton.
The appointment of KPMG Peat Marwick LLP as the Company's auditors
for the fiscal year ending December 31, 1998, was ratified. The
results of the vote were as follows:
<TABLE>
<CAPTION>
"For" "Against" "Abstain"
--------- ----------- -----------
<S> <C> <C> <C>
Ratification of KPMG
Peat Marwick LLP 222,346 2,770 3,113
</TABLE>
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:
There were no reports on Form 8-K filed for the quarter ended
March 31, 1998.
19
<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 May 14, 1998
- ---------------------------------- ------------
Burnard K. McHone Date signed
President
By: /s/ Deann Hager May 14, 1998
- ---------------------------------- ------------
Deann Hager Date signed
Controller
20
<PAGE>
EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
27 Financial Data Schedule
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 4,527
<INT-BEARING-DEPOSITS> 116,805
<FED-FUNDS-SOLD> 8,195
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,603
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 85,107
<ALLOWANCE> 1,324
<TOTAL-ASSETS> 155,942
<DEPOSITS> 138,727
<SHORT-TERM> 290
<LIABILITIES-OTHER> 1,963
<LONG-TERM> 0
0
0
<COMMON> 4,485
<OTHER-SE> 10,477
<TOTAL-LIABILITIES-AND-EQUITY> 155,942
<INTEREST-LOAN> 1,955
<INTEREST-INVEST> 737
<INTEREST-OTHER> 77
<INTEREST-TOTAL> 2,769
<INTEREST-DEPOSIT> 1,288
<INTEREST-EXPENSE> 1,292
<INTEREST-INCOME-NET> 1,477
<LOAN-LOSSES> 51
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 1,912
<INCOME-PRETAX> (36)
<INCOME-PRE-EXTRAORDINARY> (36)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
<YIELD-ACTUAL> 4.51
<LOANS-NON> 594
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 312
<ALLOWANCE-OPEN> 1,302
<CHARGE-OFFS> 42
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 1,324
<ALLOWANCE-DOMESTIC> 864
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 460
</TABLE>
