<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, 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, 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 July 31, 1998.
Transitional Small Business Disclosure Format: Yes No X
--- ---
<PAGE>
ILLINI CORPORATION
INDEX TO FORM 10-QSB
June 30, 1998
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Income
Six and Three Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 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 21
Market Risk
PART II. OTHER INFORMATION 22
SIGNATURE PAGE 24
EXHIBIT INDEX 25
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, December 31,
1998 1997
------------ ------------
(dollars in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,782 $ 5,361
Interest bearing deposits in other banks 14 77
Federal funds sold 2,200 6,755
Debt and marketable equity securities
available for sale, at estimated market value 51,983 46,834
Loans, net of the allowance for loan losses
and unearned income 81,784 84,987
Premises and equipment 7,573 8,077
Accrued interest receivable 1,347 1,500
Other real estate owned 1,038 551
Other assets 549 772
------------ ------------
$ 151,270 $ 154,914
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing demand deposits 20,479 25,083
Interest bearing deposits:
NOW and money market accounts 35,908 30,596
Savings deposits 17,422 17,820
Time deposits, $100,000 and over 13,879 18,659
Other time deposits 46,779 45,418
------------ ------------
Total deposits 134,467 137,576
Securities sold under agreements to repurchase 290 715
Accrued interest payable 769 784
Other liabilities 945 861
------------ ------------
Total liabilities 136,471 139,936
------------ ------------
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 8,193 8,450
Accumulated other comprehensive income 235 157
------------ ------------
Total shareholders' equity 14,799 14,978
------------ ------------
$ 151,270 $ 154,914
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 1,914 $ 2,074 $ 3,869 $ 4,123
Interest on debt and marketable equity securities
Taxable 632 588 1,265 1,078
Tax-exempt 104 169 209 336
Interest on short term investments 89 1 165 8
-------- -------- -------- --------
Total interest income 2,739 2,832 5,508 5,545
-------- -------- -------- --------
Interest expense:
Interest on deposits:
NOW and money market accounts 312 180 591 354
Savings deposits 109 113 217 228
Time deposits, $100,000 and over 227 210 485 430
Other time deposits 659 615 1,302 1,225
Interest on borrowings 4 83 8 107
-------- -------- -------- --------
Total interest expense 1,311 1,201 2,603 2,344
-------- -------- -------- --------
Net interest income 1,428 1,631 2,905 3,201
Provision for loan losses 51 75 102 150
-------- -------- -------- --------
Net interest income after provision for
loan losses 1,377 1,556 2,803 3,051
Noninterest income:
Service charges on deposit accounts 266 263 511 512
Other fee income 43 43 81 79
Mortgage loan servicing fees 65 47 124 92
Gain on sale of mortgage loans 60 17 138 28
Securities gains (loss) -- (7) 7 (3)
Other income 19 20 42 34
-------- -------- -------- --------
Total noninterest income 453 383 903 742
Noninterest expense:
Salaries and employee benefits 892 813 1,759 1,660
Net occupancy expense 178 139 350 317
Equipment expense 82 73 168 153
Data processing 156 123 320 300
Supplies 46 25 100 57
Communication and transportation 105 78 203 176
Marketing and advertising 40 72 96 133
Correspondent and processing fees 36 33 68 67
Loan and other real estate owned expenses 35 63 79 87
Professional fees 284 132 497 310
Directors' and regulatory fees 57 44 105 88
Other expense 90 88 168 154
-------- -------- -------- --------
Total noninterest expense 2,001 1,683 3,913 3,502
Income (loss) before income
tax expense (171) 256 (207) 291
Income tax expense (benefit) (108) 76 (175) (5)
-------- -------- -------- --------
Net income (loss) $ (63) $ 180 $ (32) $ 296
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings (loss) per share
(based on weighted average common shares
outstanding of 448,456 for 1998 and 1997) $ (0.14) $ 0.40 $ (0.07) $ 0.66
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (32) $ 296
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 488 336
Provision for loan losses 102 150
Securities (gains) loss (7) 3
Loss on sale of other real estate 13 --
(Increase) decrease in accrued interest receivable 153 (43)
Decrease in accrued interest payable (15) (63)
Origination of mortgage loans for sale (28,769) (7,681)
Proceeds from the sale of mortgage loans 29,001 7,169
Other, net 234 (133)
---------- ----------
Net cash provided by operating activities 1,168 34
---------- ----------
Cash flows from investing activities:
Proceeds from sales of investments in debt and marketable equity
securities available for sale 1,479 5,716
Proceeds from maturities and paydowns of debt and
marketable equity securities available for sale 4,734 3,870
Purchases of debt and marketable equity securities
available for sale (11,313) (13,240)
Net decrease in loans 2,795 5,596
Purchases of premises and equipment (409) (1,476)
Proceeds from sale of premises and equipment 1 --
Proceeds from sales of other real estate 106 242
---------- ----------
Net cash provided by (used in) investing activities (2,607) 708
---------- ----------
Cash flows from financing activities:
Net increase (decrease) in non-interest bearing deposit accounts (4,604) 271
Net increase in NOW, money market accounts and savings 4,914 2,391
Net increase (decrease) in time deposits $100,000 and over (4,780) 641
Net increase in other time deposits 1,361 819
Net decrease in federal funds purchased -- (1,130)
Net decrease in securities sold under agreements to repurchase (425) (210)
Net decrease in other short-term borrowings -- (3,000)
Cash dividends paid (224) (224)
---------- ----------
Net cash used in financing activities (3,758) (442)
---------- ----------
Net increase (decrease) in cash and cash equivalents (5,197) 300
Cash and cash equivalents at beginning of period 12,193 5,513
---------- ----------
Cash and cash equivalents at end of period $ 6,996 $ 5,813
---------- ----------
---------- ----------
Supplemental Information:
Income taxes paid $ 37 $ 7
Interest paid $ 2,618 $ 2,407
---------- ----------
---------- ----------
Other non-cash investing activities:
Transfer of loans to other real estate $ 74 14
---------- ----------
---------- ----------
Transfer of premises to other real estate $ 533 $ --
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 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 and six months ended June 30, 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. 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. Information regarding impaired loans at June 30, 1998
and December 31, 1997 is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
(dollars in thousands)
<S> <C> <C>
Nonaccrual loans $ 1,277 $ 636
Impaired loans continuing to accrue interest -- 50
----- ----
Total impaired loans $ 1,277 $ 686
----- ----
----- ----
Allowance for losses on specific impaired loans $ -- $ 26
Impaired loans with no specific related allowance
for loan losses 1,277 595
Average balance of impaired loans during the period 997 977
----- ----
----- ----
</TABLE>
<PAGE>
(3) NEW ACCOUNTING PRONOUNCEMENTS
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, 1998, 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.
During 1998, the FASB issued SFAS 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. This
statement should not be applied retroactively to financial statements of
prior periods. This statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative (that is, gains
and losses) depends on the intended use of the derivative and the
resulting designation. Illini is currently evaluating the impact of
SFAS 133 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 and six months ended June 30, 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 and six months ended June
30, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---------------- ----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net income (loss) $ (63) $ 180 $ (32) $ 296
Other comprehensive income - unrealized
holding gain (loss) on debt and equity
securities available for sale, net of tax 13 390 78 133
------- ------- ------- -------
Total comprehensive income (loss) $ (50) $ 570 $ 46 $ 429
------- ------- ------- -------
</TABLE>
<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 Six months ended
June 30, June 30,
--------------- Percent --------------- Percent
EARNINGS 1998 1997 Change 1998 1997 Change
- --------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Total revenue.............................................. $3,192 $3,215 (0.74)% $6,411 $6,287 1.98%
Net income (loss).......................................... (63) 180 (135.16)% (32) 296 (110.91)%
Basic earnings (loss) per share............................ $(0.14) $0.40 (135.16)% $(0.07) $0.66 (110.91)%
KEY RATIOS
- ---------------------------------------------------------------------------------------------------------------------------------
Return on average assets................................... (0.16)% 0.49% (0.65)% (0.04)% 0.41% (0.45)%
Return on average equity................................... (1.73)% 5.07% (6.80)% (0.44)% 4.14% (4.58)%
Average equity to assets................................... 9.53% 9.66% (0.13)% 9.64% 9.86% (0.22)%
Tier 1 leverage ratio...................................... 9.35% 9.87% (0.52)%
Tier 1 risk-based capital ratio............................ 14.86% 14.65% 0.21%
Total risk-based capital ratio............................. 16.21% 15.89% 0.32%
Dividend payout ratio*..................................... N/A 62.29% N/A N/A 75.81% N/A
Net interest margin........................................ 4.27% 5.13% (0.86)% 4.39% 5.11% (0.72)%
Efficiency ratio........................................... 103.35% 80.18% 23.17% 99.89% 85.15% 14.74%
</TABLE>
*1998's amount is not computable due to the net loss for the period.
<PAGE>
RESULTS OF OPERATION
EARNING ASSETS
Average earning assets of the Corporation for the first six months of 1998
increased 4.05% or $5.4 million to $138.5 million from $133.1 million for the
first six 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 six months of 1998 as a result of the
decrease in loans outstanding.
Average net loans declined to $82.1 million for the three months ended June
30, 1998 compared to $86.9 million for the same period in 1997. The decline
of $4.8 million for the three months ended June 30, 1998 as compared to the
same period for 1997 was primarily due to a decrease of $4.4 million in
residential real estate and $3.9 million in consumer loans. The decline was
partially offset by an increase of $1.6 million in commercial loans,
including commercial real estate loans and $1.6 million in agriculture loans.
The average yield on the loan portfolio before the allowance for loan losses
decreased 24 basis points to 9.24% due to slightly lower market interest
rates, a decline in relatively higher yielding consumer loans, and increasing
competition for commercial loans in Springfield, Illinois, Illini's principal
market for commercial loans.
Average net loans declined to $83.0 million for the six months ended June 30,
1998 compared to $87.6 million for the same period in 1997. The decline of
$4.6 million for the six months ended June 30, 1998 as compared to the same
period in 1997 was primarily due to a decline of $4.1 million in residential
real estate, and $4.2 million in consumer loans. The decline was partially
offset by an increase of $1.5 million in commercial loans, including
commercial real estate loans and $2.0 million in agriculture loans. The
average yield on the loan portfolio before the allowance for loan losses
decreased 10 basis points to 9.30%.
Average investment securities increased $3.2 million and $4.4 million for the
three and six months ended June 30, 1998, respectively, as compared to the
same period in 1997. The average yield of the investment securities
portfolio was 6.19% and 6.35% for the three and six months ended June 30,
1998, respectively, a decrease of 85 and 62 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 six months ended June 30, 1998 increased 7.63% or $8.5
million to $120.1 million from $111.5 million. The Bank has incurred
increased funding costs as it has grown core deposits. The average rate paid
on total interest bearing liabilities increased 23 basis points for the six
months ended June 30, 1998 when compared to the same period in 1997. The
cost of time deposits less than $100,000 was up 25 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 83 basis
points primarily because of a new money market index account which pays
competitive money market rates which 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
<PAGE>
adequate liquidity. 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 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 $2.8 million and
$5.6 million for the three months and six months ended June 30, 1998,
respectively, which is consistent with the $2.9 million and $5.7 million for
same periods in 1997, respectively. Interest expense was $1.3 million and
$2.6 million for the three and six months ended June 30, 1998, respectively,
compared to $1.2 and $2.3 million for the same periods in 1997, respectively.
A slight decline in interest income and a slight increase in interest expense
resulted in a $0.4 million decline in net interest income for the six months
ended June 30, 1998. Net interest income of $3.0 million and a net interest
margin of 4.39% are down when compared to the six months ended June 30,
1997's net interest income of $3.4 million and margin of 5.11%. See
discussion above regarding changes in yields. Interest income on loans was
down approximately $0.3 million while investment securities remained
unchanged for the six months ended June 30, 1998 when compared to the same
period in 1997. 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 June 30, 1998 and
management anticipates that the net interest margin will remain lower than
preceding periods through the rest of 1998. The decrease in net interest
margin is due 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
second 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 continue to take steps 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
tables on pages 11 and 12 and a net interest income rate/volume variance
analysis on pages 13 and 14.
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELD/RATES
<TABLE>
<CAPTION>
Quarter ended June 30,
-----------------------------------------------------------------------------------
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 $ 6,643 4.3% $ 89 5.53% $ 47 0.0% $ 1 8.29%
Investment securities (3)
Taxable 42,510 27.5 632 5.95 34,186 23.2 588 6.87
Tax-exempt (1) 8,019 5.2 150 7.49 13,186 9.0 245 7.46
-------- ------ ------- ------ -------- ------ ------ ------
Total securities 50,529 32.7 782 6.19 47,372 32.2 833 7.04
Loans
Commercial (1) 15,659 10.1 366 9.38 16,326 11.1 414 10.17
Agriculture 7,290 4.7 151 8.33 5,658 3.8 123 8.71
Real estate
Commercial 25,510 16.5 577 9.08 23,237 15.8 529 9.12
Agriculture 2,603 1.7 59 9.04 2,240 1.5 51 9.19
Residential 20,724 13.4 468 9.05 25,129 17.1 579 9.25
Consumer, net 11,035 7.2 274 9.94 14,904 10.1 362 9.73
Credit card 619 0.4 27 17.34 626 0.4 25 16.34
-------- ------- -------- ------
Total loans 83,440 54.0 1,922 9.24 88,120 59.8 2,083 9.48
Allowance for loan losses (1,329) (0.9) (1,221) (0.8)
-------- ------- --------
Net loans (1) (2) 82,111 53.2 1,922 9.39 86,899 59.0 2,083 9.61
-------- ------ ------- -------- ------ ------
Total interest earning assets 139,283 90.2 2,793 8.04 134,318 91.2 2,917 8.71
-------- ------- -------- ------
Cash and due from banks 4,345 2.8 4,427 3.0
Premises and equipment 7,654 4.9 6,150 4.2
Other real estate owned 1,020 0.7 579 0.4
Other assets (3) 2,111 1.4 1,869 1.2
-------- ------ -------- ------
TOTAL ASSETS $154,413 100.0% $147,343 100.0%
-------- ------ -------- ------
-------- ------ -------- ------
LIABILITIES
Interest-bearing liabilities:
Deposits
Non-interest bearing deposits $21,553 14.0% $20,316 13.8%
Interest bearing demand 34,534 22.4 $ 312 3.63% 26,222 17.8 $ 180 2.75%
Savings 17,854 11.6 109 2.45 18,480 12.5 113 2.46
Time deposits less than $100,000 47,577 30.8 659 5.55 45,989 31.2 615 5.36
-------- ------- -------- ------
Total core deposits 121,518 78.7 1,080 3.57 111,007 75.3 908 3.28
Time deposits $100,000 and over 16,054 10.4 227 5.67 14,987 10.2 210 5.62
-------- ------- -------- ------
Total deposits 137,572 89.1 1,307 3.81 125,994 85.5 1,118 3.56
Short-term borrowings 288 0.2 4 5.41 5,606 3.8 83 5.94
Total interest bearing liabilities 116,307 75.3 1,311 4.52 111,284 75.5 1,201 4.33
Other liabilities 1,840 1.2 1,508 1.0
-------- ------ -------- ------
Total liabilities 139,700 90.5 133,108 90.3
Shareholders' Equity 14,713 9.5 14,235 9.7
-------- ------ -------- ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $154,413 100.0% $147,343 100.0%
-------- ------ -------- ------
-------- ------ -------- ------
NET INTEREST MARGIN $ 1,482 4.27% $1,716 5.13%
------- ------ ------ ------
------- ------ ------ ------
</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 $60,000 in 1998 and $66,000 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.
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELD/RATES
<TABLE>
<CAPTION>
Six Months ended June 30,
-----------------------------------------------------------------------------------
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 $ 6,230 4.0% $ 165 5.35% $ 568 0.4% $ 8 2.95%
Investment securities (3)
Taxable 41,274 26.8 1,265 6.13 31,836 21.8 1,078 6.77
Tax-exempt (1) 8,051 5.2 302 7.51 13,072 8.9 487 7.46
-------- ------ ------- ------ -------- ------ ------ ------
Total securities 49,325 32.0 1,567 6.35 44,908 30.7 1,565 6.97
Loans
Commercial (1) 15,499 10.1 724 9.42 14,412 9.9 728 10.18
Agriculture 6,963 4.5 295 8.53 5,001 3.4 223 8.98
Real estate
Commercial 25,727 16.7 1,160 9.09 25,330 17.3 1,139 9.07
Agriculture 2,496 1.6 113 9.14 2,198 1.5 100 9.15
Residential 21,495 14.0 980 9.20 25,632 17.5 1,159 9.12
Consumer, net 11,460 7.4 559 9.84 15,657 10.7 742 9.55
Credit card 631 0.4 54 17.26 635 0.4 51 16.24
-------- ------- -------- ------
Total loans 84,271 54.7 3,885 9.30 88,865 60.7 4,142 9.40
Allowance for loan losses (1,317) (0.8) (1,229) (0.8)
-------- ------- --------
Net loans (1) (2) 82,954 53.9 3,885 9.44 87,636 59.9 4,142 9.53
-------- ------ ------- -------- ------ ------
Total interest earning assets 138,509 89.9 5,617 8.18 133,112 91.0 5,715 8.66
-------- ------- -------- ------
Cash and due from banks 4,606 3.0 4,631 3.2
Premises and equipment 7,931 5.1 5,854 4.0
Other real estate owned 774 0.5 660 0.5
Other assets (3) 2,296 1.5 1,948 1.3
-------- ------ -------- ------
TOTAL ASSETS $154,116 100.0% $146,205 100.0%
-------- ------ -------- ------
-------- ------ -------- ------
LIABILITIES
Interest-bearing liabilities:
Deposits
Non-interest bearing deposits $21,347 13.9% $19,987 13.7%
Interest bearing demand 33,663 21.8 $ 591 3.54% 26,337 18.0 $ 354 2.71%
Savings 17,769 11.5 217 2.46 18,612 12.7 228 2.47
Time deposits less than $100,000 47,274 30.7 1,302 5.55 46,611 31.9 1,225 5.30
-------- ------- -------- ------
Total core deposits 120,053 77.9 2,110 3.54 111,547 76.3 1,807 3.27
Time deposits $100,000 and over 17,142 11.1 485 5.71 15,079 10.3 430 5.75
-------- ------- -------- ------
Total deposits 137,195 89.0 2,595 3.82 126,626 86.6 2,237 3.56
Short-term borrowings 298 0.2 8 5.42 3,652 2.5 107 5.91
Total interest bearing liabilities 116,146 75.3 2,603 4.52 110,291 75.4 2,344 4.29
Other liabilities 1,763 1.2 1,511 1.0
-------- ------ -------- ------
Total liabilities 139,256 90.4 131,789 90.1
Shareholders' Equity 14,860 9.6 14,416 9.9
-------- ------ -------- ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $154,116 100.0% $146,205 100.0%
-------- ------ -------- ------
-------- ------ -------- ------
NET INTEREST MARGIN $ 3,014 4.39% $3,371 5.11%
------- ------ ------ ------
------- ------ ------ ------
</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 $125,000 in 1998 and $119,000 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.
<PAGE>
NET INTEREST INCOME - RATE/VOLUME VARIANCE ANALYSIS(*)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, 1998
AS COMPARED TO
QUARTER ENDED JUNE 30, 1997
--------------------------------------
CHANGES IN VOLUME RATE
INCOME/EXPENSE EFFECT EFFECT
-------------- ------ ------
(dollars in thousands)
<S> <C> <C> <C>
Short-term investments $ 88 $ 136 $ (48)
Investment securities:
Taxable 44 142 (98)
Nontaxable (95) (96) 1
-------- ------- --------
Total securities (51) 46 (97)
Loans:
Commercial (48) (17) (31)
Agriculture 28 35 (7)
Real Estate:
Commercial 48 52 (4)
Agriculture 8 8 --
Residential (111) (101) (10)
Consumer, net (88) (94) 6
Credit card 2 -- 2
-------- ------- --------
Total loans (161) (117) (44)
-------- ------- --------
Total interest income (124) 65 (189)
-------- ------- --------
Interest bearing demand 132 (32) 164
Savings (4) 98 (102)
Time deposits less than $100,000 44 (376) 420
-------- ------- --------
Total core deposits 172 (310) 482
Time deposits $100,000 and over 17 15 2
-------- ------- --------
Total deposits 189 (295) 484
Short-term borrowings (79) (79) --
-------- ------- --------
Total interest expense 110 (374) 484
-------- ------- --------
Net interest income $ (234) $ 439 $ (673)
-------- ------- --------
-------- ------- --------
</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 been allocated to the rate effect.
<PAGE>
NET INTEREST INCOME - RATE/VOLUME VARIANCE ANALYSIS(*)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
AS COMPARED TO
SIX MONTHS ENDED JUNE 30, 1997
--------------------------------------
CHANGES IN VOLUME RATE
INCOME/EXPENSE EFFECT EFFECT
-------------- ------ ------
(dollars in thousands)
<S> <C> <C> <C>
Short-term investments $ 157 $ 83 $ 74
Investment securities:
Taxable 187 317 (130)
Nontaxable (185) (186) 1
-------- ------- --------
Total securities 2 131 (129)
Loans:
Commercial (4) 55 (59)
Agriculture 72 87 (15)
Real Estate:
Commercial 21 18 3
Agriculture 13 13 --
Residential (179) (187) 8
Consumer, net (183) (199) 16
Credit card 3 -- 3
-------- ------- --------
Total loans (257) (213) (44)
-------- ------- --------
Total interest income (98) 1 (99)
-------- ------- --------
Interest bearing demand 237 99 138
Savings (11) (10) (1)
Time deposits less than $100,000 77 17 60
-------- ------- --------
Total core deposits 303 106 197
Time deposits $100,000 and over 55 59 (4)
-------- ------- --------
Total deposits 358 165 193
Short-term borrowings (99) (98) (1)
-------- ------- --------
Total interest expense 259 67 192
-------- ------- --------
Net interest income $ (357) $ (66) $ (291)
-------- ------- --------
-------- ------- --------
</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 been allocated to the rate effect.
<PAGE>
NONINTEREST INCOME
<TABLE>
<CAPTION>
Three months ended Percent Six months ended Percent
June 30, Change June 30, Change
------------------ --------- ------------------- ---------
1998 1997 1998/1997 1998 1997 1998/1997
------ ------ --------- ---- ---- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts $266 $263 1.1% $511 $512 (0.2)%
Other fee income 43 43 --- 81 79 2.5
Mortgage loan servicing fees 65 47 38.3 124 92 34.8
Gain on sale of mortgage loans 60 17 252.9 138 28 392.9
Securities gains (loss) 0 (7) 100.0 7 (3) 333.3
Other income 19 20 (5.0) 42 34 23.5
---- ---- ----- ---- ---- -----
$453 $383 18.3% $903 $742 21.7
---- ---- ----- ---- ---- -----
---- ---- ----- ---- ---- -----
</TABLE>
Services charges on deposit accounts remained relatively steady for the three
and six months ending June 30, 1998 compared to the same period in 1997.
Other fee income and securities gains (loss) were 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, 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.
<PAGE>
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Three months ended Percent Six months ended Percent
June 30, Change June 30, Change
------------------ --------- ------------------- ---------
1998 1997 1998/1997 1998 1997 1998/1997
------ ------ --------- ---- ---- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 892 $ 813 9.7% $1,759 $1,660 6.0%
Net occupancy expense 178 139 28.1 350 317 10.4
Equipment expense 82 73 12.3 168 153 9.8
Data processing 156 123 26.8 320 300 6.7
Supplies 46 25 84.0 100 57 75.4
Communication and transportation 105 78 34.6 203 176 15.4
Marketing and advertising 40 72 (44.4) 96 133 (27.8)
Correspondent and processing fees 36 33 9.1 68 67 1.5
Loan and other real estate owned expenses 35 63 (44.4) 79 87 (9.2)
Professional fees 284 132 115.2 497 310 60.3
Directors' and regulatory fees 57 44 29.5 105 88 19.3
Other expense 90 88 2.3 168 154 9.1
------ ------ ----- ------ ------ -------
$2,001 $1,683 18.9 $3,913 $3,502 11.7
------ ------ ----- ------ ------ -------
------ ------ ----- ------ ------ -------
</TABLE>
Increases in salaries and employee benefits, net occupancy expense, data
processing, and supplies expense for the three and six months ended June 30,
1998 were related to Illini Bank's opening a new banking, corporate, and
operations location at 3200 West Iles in Springfield. These increases were
the result of salaries and employee benefits of new employees to staff the
new office, annual merit increases to other Bank employees, and typical new
occupancy expenses, including the relocation of operations and credit
administration from other locations, and one-time expenses for open house
activities for customers and startup.
Professional fees totaling $284,000 and $497,000 for the three and six months
ended June 30, 1998, respectively, are up $152,000 and $187,000 from the same
periods in 1997, respectively, and remain significantly above historical
levels. Approximately $348,000 or 70% of the professional fees incurred for
the six months ended June 30, 1998 represents fees paid to a national
consulting firm to reengineer the Bank's operations. An additional estimated
$19,000 of fees related to this reengineering will be incurred in the last
six months of 1998. Total professional fees are expected to return to peer
levels by January 1, 1999. Because of the reengineering, and net of
severance payments paid to departing employees, the Bank has reduced annual
employee compensation by $798,000. This part of the Bank's efforts to
substantially increase net income and return to shareholders was discussed in
greater detail in the Corporation's 1997 Form 10-KSB.
In the first six months of 1997, the Company incurred approximately $22,000
of professional fees to study and approve a Shareholder Rights Agreement
designed to protect the right of all Illini shareholders to receive a fair
price for their shares. Although minimal professional fees have been
incurred to maintain the plan since its adoption, the Company may from time
to time incur expenses to determine the market value of Illini's stock as
required by the plan and to revise the plan as circumstances may require.
<PAGE>
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. 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 incurred $35,000 in expenses for the six month period ended
June 30, 1998 and anticipates incurring an additional $60,000 for Year 2000
related expenses through the end of 1998.
<PAGE>
CREDIT QUALITY
Gross loans totaled $83.1 million at June 30, 1998, a decline of $3.2
million, or 3.7%, from $86.3 million at December 31, 1997, while the
allowance for loan losses has remained relatively consistent at $1.3 million
at June 30, 1998 and December 31, 1997, respectively. The allowance as a
percent of total loans and nonperforming loans decreased from 164.70% at June
30, 1997 to 102.19% at June 30, 1998 due to an increase in nonperforming
loans. Approximately 48% of the increase in nonperforming loans was the
result of management's decision to delay the renewal of two commercial loans
to allow the Bank to enhance its security position. The remaining increase
in nonperforming assets is primarily attributable to the Bank's reclassifying
a property from Bank premises to available for sale, a decision based on
conclusions reached during strategic planning regarding the desired level of
the Bank's investment in real estate devoted to the retail delivery of its
products and services. Declining consumer and residential real estate loan
balances have been substantially offset by increases in commercial and
agricultural loans.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- ------ ------
ALLOWANCE FOR LOAN LOSSES: (dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $1,324 $1,216 $1,302 $1,258
Provision charged to expense 51 75 102 150
Charge-offs 81 74 123 207
Less: recoveries 11 10 24 26
------ ------ ------ ------
Net charge-offs 70 64 99 181
------ ------ ------ ------
Ending allowance for loan losses $1,305 $1,227 $1,305 $1,227
------ ------ ------ ------
------ ------ ------ ------
NET CHARGE-OFF RATIOS (1):
Commercial 0.28% (0.02)% 0.24% 0.15%
Real Estate 0.03 0.18 0.01 0.29
Installment 1.64 1.00 0.92 1.06
Credit Cards 3.24 3.20 5.43 2.86
Totals 0.34% 0.29% 0.24% 0.41%
</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 and $102,000 for the three and
six months ended June 30, 1998, respectively, as compared to $75,000 and
$150,000 for the comparable periods in the prior year. Net charge-offs
increased to $70,000 and decreased to $99,000 for the three and six months
ended June 30, 1998, respectively, as compared to $64,000 and $181,000 for
the comparable periods in the prior year.
For the six months ended June 30, 1998, provision expense and net loan losses
decreased. The net charge off ratio for the three and six months ended June
30, 1998 was 0.34% and 0.24% compared to 0.29% and 1.17% for years ended
December 31, 1997 and 1996, respectively.
Despite an increase in nonperforming loans for the reasons given above,
management believes that credit quality systems of loan review and default
risk management implemented in 1996 and 1997 have resulted in an overall
improvement in the credit quality of the Bank's loan portfolio. As noted
above, the increase in nonaccrual loans in the three months ended June 30,
1998 was the result of the management's decision to delay the renewal of two
<PAGE>
commercial credits to allow the Bank to enhance its security position.
Management believes the increase in nonaccrual loans does not reflect
adversely on the collectibility on either of these loans or the overall
portfolio.
At June 30, 1998, impaired loans totaled $1,277,000 for which no allowance
for loan losses has been allocated compared to December 31, 1997 impaired
loans of $686,000 for which an allowance for loan losses of $26,000 had been
allocated. Of the total impaired loans at June 30, 1998 there were no loans
still accruing interest, and at December 31, 1997 loans totaling $50,000 were
continuing to accrue interest.
<TABLE>
<CAPTION>
JUNE 30, December 31, June 30,
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 1,277 636 649
Other real estate owned 1,038 551 522
------ ------ ------
Total nonperforming assets $2,315 $1,187 $1,267
------ ------ ------
------ ------ ------
KEY RATIOS:
Nonperforming loans to ending loans 1.54% 0.74% 0.85%
90 days delinquent to ending loans 0.00 0.00 0.11
Allowance to ending loans 1.57 1.51 1.39
Allowance to nonperforming loans 102.19 204.72 164.70
</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 include 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 abandoned its plans to build a facility on this site. In
July 1998, the Bank sold this property at a gain and continues to
aggressively market the remaining other real estate properties. Management
expects no losses will be incurred on the disposition of the remaining other
real estate properties.
<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.
Despite the minimal loss from operations in the first six months of 1998,
management believes earnings will be an adequate source of capital to fund
future growth. At June 30, 1998, Tier 1 risk based capital, total risk-based
capital and leverage capital ratios were 14.86%, 16.21% and 9.35%,
respectively. As of June 30, 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. 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 six months of 1998 and consequently
the dividend payout ratio is elevated. The total dollar amount of dividends
for the three and six months ended June 30, 1998 is unchanged from the same
periods 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
accounts. Short-term borrowings are an additional source of liquidity and
represent Illini's incremental borrowing capacity.
During the second quarter of 1998, Illini completed a comprehensive analysis
of its asset liability function, including a review of its funds management
policy and its principal measure of liquidity. The Bank implemented a new
measure of liquidity measurement, called "Basic Surplus," which redefines
liquid assets as the total assets held by the Bank which can be converted to
cash in thirty days or less, reduced by short term liabilities. As of April
30, 1998, the first measurement date using the new basic surplus method, the
Bank's core liquidity was $27 million, or 17.6% of total assets.
Management believes the new formula provides an accurate measurement of
liquidity and provides management with a comprehensible and consistent tool
to plan pricing and profitability strategies. Based on the new measurement
and as compared to peer banks, management believes the liquidity position of
the Bank at June 30, 1998 is strong.
At June 30, 1998, large liability dependence was 6.5%, compared to 6.2% at
March 31, 1998 and 8.2% at December 31, 1997. Short-term borrowings, reduced
significantly during 1997, and continue to decrease during 1998. In 1997
management restructured its available for sale securities portfolio by
selling a selected 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, a shift designed to
improve the Bank's liquidity. Management's conservative approach has
continued through the second quarter 1998. The Bank's short-term borrowings
decreased from December 31, 1997 to June 30, 1998.
<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.
<PAGE>
PART II. OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
The Company adopted a Shareholder Rights Agreement on June 20, 1997
and named Illinois Stock Transfer Company ("ISTC") as its rights agent
thereunder. The Company was notified in May, 1998 of a threatened
complaint against ISTC by an Illini shareholder. The shareholder,
Mary K. Quinn, who owns 21 shares of stock in Illini, filed suit
against ISTC on June 9, 1998 in the Seventh Judicial Circuit Court,
Sangamon County, Illinois. Quinn seeks to compel ISTC to distribute
rights certificates to Illini's shareholders and further seeks to
certify all Illini shareholders as a class. Ms. Quinn asserts that
Ida R. Noll became an acquiring person under the Rights Agreement on
April 16, 1998, and that the Rights Agreement was triggered. ISTC is
being represented in the litigation by Howard & Howard, which
vigorously contests Quinn's assertions that Ida R. Noll is an
acquiring person, that the Rights Agreement has been triggered, and
that ISTC has a duty to distribute rights certificates.
Ida R. Noll has filed a 14-count Complaint for Declaratory Judgment,
Injunctive Relief, and money damages against Illini Corporation and
the following members of the Board of Directors of Illini: Thomas A.
Black, Ronald E. Cramer, Lawrence B. Curtin, Kenneth Deverman, William
Etherton, William McCubbin, Burnard K. McHone, Robert F. Olson, John
H. Pickrell, N. Ronald Thunman and Perry Williams. The Action was
filed in the 7th Judicial Circuit Court of Sangamon County, Illinois,
on or about July 27, 1998, and the Complaint was served upon Illini
Corporation on July 27, 1998. Illini's responsive pleading is due on
or before August 26, 1998.
The Complaint arises out of Illini's enactment of a Shareholder Rights
Agreement on June 20, 1997 and the subsequent Amendment of that
Agreement on June 30, 1998. The Plaintiff seeks relief against Illini
Corporation only in Counts I and II of the Complaint, in which she
seeks declaratory judgment and injunctive relief with respect to the
Rights Agreement. Count I seeks a declaration that the Rights
Agreement was Triggered by the Plaintiff on April 16, 1998 and that
Illini's subsequent Amendment is void. The Plaintiff seeks attorneys'
fees and costs from Illini in Count I. Count II seeks a permanent
injunction against Illini from implementing the First Amendment of the
Rights Agreement, as well as attorneys' fees and costs.
The Plaintiff seeks money damages in Counts III through XIV against
the Directors of Illini individually for breaching their fiduciary
with regard to the enactment of the Rights Agreement and its
subsequent Amendment. Count XIV seeks relief against all Defendants
except Illini Corporation for conspiracy.
Illini and the Directors intend to vigorously contest and oppose the
allegations of the Noll Complaint and the relief sought therein.
Item 2 CHANGES IN SECURITIES - none
Item 3 DEFAULTS UPON SENIOR SECURITIES - none
<PAGE>
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
June 30, 1998.
<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 6, 1998
- ----------------------------------- --------------
Burnard K. McHone Date signed
President
By: /s/ Deann Hager August 6, 1998
- ----------------------------------- --------------
Deann Hager Date signed
Finance Manager
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<PAGE>
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