<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 September 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 October 31, 1998.
Transitional Small Business Disclosure Format: Yes No X
--- ---
<PAGE>
ILLINI CORPORATION
INDEX TO FORM 10-QSB
September 30, 1998
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income
Nine and Three Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows
Nine Months Ended September 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 23
EXHIBIT INDEX 24
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS (dollars in thousands)
Cash and due from banks $ 3,626 $ 5,361
Interest bearing deposits in other banks 28 77
Federal funds sold 5,895 6,755
Debt and marketable equity securities
available for sale, at estimated market value 49,565 46,834
Loans, net of the allowance for loan losses and unearned income 81,813 84,987
Premises and equipment 7,186 8,077
Accrued interest receivable 1,699 1,500
Other real estate owned 1,110 551
Other assets 444 772
------------- ------------
$ 151,366 $ 154,914
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing demand deposits 19,478 25,083
Interest bearing deposits:
NOW and money market accounts 35,824 30,596
Savings deposits 16,972 17,820
Time deposits, $100,000 and over 15,691 18,659
Other time deposits 46,279 45,418
------------- ------------
Total deposits 134,244 137,576
Securities sold under agreements to repurchase 290 715
Accrued interest payable 833 784
Other liabilities 893 861
------------- ------------
Total liabilities 136,260 139,936
------------- ------------
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 8,323 8,450
Accumulated other comprehensive income 412 157
------------- ------------
Total Shareholders' Equity 15,106 14,978
------------- ------------
$ 151,366 $ 154,914
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 1,933 $ 2,076 $ 5,802 $ 6,198
Interest on debt and marketable equity securities
Taxable 635 477 1,900 1,554
Tax-exempt 103 138 312 473
Interest on short term investments 63 60 228 71
---------- ---------- ---------- ----------
Total interest income 2,734 2,751 8,242 8,296
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits:
NOW and money market accounts 339 201 930 555
Savings deposits 107 111 324 339
Time deposits, $100,000 and over 193 235 678 666
Other time deposits 644 625 1,946 1,849
Interest on borrowings 4 8 12 115
---------- ---------- ---------- ----------
Total interest expense 1,287 1,180 3,890 3,524
---------- ---------- ---------- ----------
Net interest income 1,447 1,571 4,352 4,772
Provision for loan losses 51 75 153 225
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 1,396 1,496 4,199 4,547
Noninterest income:
Service charges on deposit accounts 269 267 780 779
Other fee income 46 40 127 119
Mortgage loan servicing fees 64 52 188 144
Gain on sale of mortgage loans 25 35 163 63
Securities gains 1 64 8 61
Other income 67 19 109 53
---------- ---------- ---------- ----------
Total noninterest income 472 477 1,375 1,219
Noninterest expense:
Salaries and employee benefits 728 825 2,487 2,484
Net occupancy expense 132 168 482 485
Equipment expense 90 75 258 228
Data processing 196 136 516 437
Supplies 36 35 136 92
Communication and transportation 92 91 295 267
Marketing and advertising (96) 61 -- 194
Correspondent and processing fees 39 37 107 104
Loan and other real estate owned expenses (10) 54 69 141
Professional fees 144 170 641 480
Directors' and regulatory fees 45 37 150 125
Other expense 86 68 254 222
---------- ---------- ---------- ----------
Total noninterest expense 1,482 1,757 5,395 5,259
Income before income tax expense 386 216 179 507
Income tax expense 144 29 (31) 24
---------- ---------- ---------- ----------
Net income $ 242 $ 187 $ 210 $ 483
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings per share
(based on weighted average common shares outstanding
of 448,456 for 1998 and 1997) $ 0.54 $ 0.42 $ 0.47 $ 1.08
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities: (dollars in thousands)
Net income $ 210 $ 483
Adjustments to reconcile net income to net cash provided
by operating ctivities:
Depreciation and amortization 726 526
Provision for loan losses 153 225
Securities gains (8) (61)
Gain on sale of other real estate (18) --
(Increase) decrease in accrued interest receivable (198) 11
(Increase) decrease in accrued interest payable 49 (41)
Origination of mortgage loans for sale (34,475) (12,526)
Proceeds from the sale of mortgage loans 34,771 12,299
Other, net 157 (246)
-------- --------
Net cash provided by operating activities 1,367 670
-------- --------
Cash flows from investing activities:
Proceeds from sales of investments in debt and marketable equity
securities available for sale 2,004 17,430
Proceeds from maturities and paydowns of debt and
marketable equity securities available for sale 7,885 7,257
Purchases of debt and marketable equity Securities
available for sale (12,318) (17,901)
Net Decrease in Loans 2,651 6,362
Purchases of premises and equipment (858) (2,422)
Proceeds from sale of premises and equipment 1 --
Proceeds from sales of other real estate 716 290
-------- --------
Net cash provided by investing activities 81 11,016
-------- --------
Cash flows from financing activities:
Net decrease in non-interest bearing deposit accounts (5,605) (1,145)
Net increase in NOW, money market accounts and savings 4,381 1,647
Net increase (decrease) in time deposits $100,000 and over (2,968) 2,940
Net increase (decrease) in other time deposits 861 (711)
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 (336) (337)
-------- --------
Net cash used in financing activities (4,092) (1,946)
-------- --------
Net increase (decrease) in cash and cash equivalents (2,644) 9,740
Cash and cash equivalents at beginning of period 12,193 5,513
-------- --------
Cash and cash equivalents at end of period $ 9,549 $ 15,253
-------- --------
-------- --------
Supplemental Information:
Income taxes paid $ 37 $ 52
Interest paid $ 3,842 $ 3,565
-------- --------
-------- --------
Other non-cash investing activities:
Transfer of loans to other real estate $ 74 85
-------- --------
-------- --------
Transfer of premises to other real estate $ 1,168 $ --
-------- --------
-------- --------
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 equity instruments which are dilutive.
Results for the three and nine months ended September 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 September 30, 1998 and December 31,
1997 is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(dollars in thousands)
<S> <C> <C>
Nonaccrual loans $ 1,259 $ 636
Impaired loans continuing to accrue interest -- 50
------- ------
Total impaired loans $ 1,259 $ 686
------- ------
------- ------
Allowance for losses on specific impaired loans $ 11 $ 26
Impaired loans with no specific related allowance
for loan losses 1,241 595
Average balance of impaired loans during the period 1,268 977
------- ------
------- ------
</TABLE>
6
<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.
During 1998, the FASB issued SFAS 134, ACCOUNTING FOR MORTGAGE-BACKED
SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS HELD FOR
SALE BY A MORTGAGE BANKING ENTERPRISE. SFAS 134 is effective for the
first fiscal quarter beginning after December 15, 1998. On the date the
statement is initially applied, an enterprise may reclassify
mortgage-backed securities and other beneficial interest retained after
the securitization of mortgage loans held for sale from the trading
category, except for those with sales commitments in place. Transfers
from the trading category that result from implementing this statement
shall be accounted for in accordance with paragraph 15(a) of SFAS 115.
Illini is currently evaluating the impact of SFAS 134 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 nine months ended September 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 nine months ended September 30, 1998 and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
------------------ -----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net income $ 242 $ 187 $ 210 $ 483
Other comprehensive income--unrealized
holding gain on debt and equity
securities available for sale, net of tax 177 91 255 224
------ ------ ------ ------
Total comprehensive income $ 419 $ 278 $ 465 $ 707
------ ------ ------ ------
------ ------ ------ ------
</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 Nine months ended
September 30, September 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 ................. $ 3,206 $ 3,229 (0.70)% $ 9,617 $ 9,516 1.07%
Net income .................... 242 187 29.37% 210 483 (56.51)%
Basic earnings per share ...... $ 0.54 $ 0.42 29.37% $ 0.47 $ 1.08 (56.51)%
KEY RATIOS
- ---------------------------------------------------------------------------------------------
Return on average assets ...... 0.64% 0.52% 0.12% 0.18% 0.44% (0.26)%
Return on average equity ...... 6.44% 5.01% 1.43% 1.89% 4.44% (2.55)%
Average equity to assets ...... 9.87% 10.27% (0.41)% 9.72% 10.00% (0.28)%
Tier 1 leverage ratio ......... 9.64% 10.15% (0.51)%
Tier 1 risk-based capital ratio 14.96% 14.91% 0.05%
Total risk-based capital ratio 16.35% 16.20% 0.15%
Dividend payout ratio ......... 46.33% 59.94% (13.61)% 160.16% 69.66% 90.50%
Net interest margin............ 4.35% 5.01% (0.66)% 4.38% 5.08% (0.70)%
Efficiency ratio .............. 75.09% 82.90% (7.81)% 91.59% 84.39% 7.20%
</TABLE>
8
<PAGE>
RESULTS OF OPERATION
OVERVIEW
Illini's net income for the nine months ended September 30, 1998 was $210,000
compared to $483,000 for the same period in 1997. Net income for the three
months ending September 30, 1998 increased from $187,000 to $242,000. The
decrease in income for the nine months ending September 30, 1998 was due to
planned expenditures of reengineering (including severance payments to
twenty-four employees). The increase in income for the three months ending
September 30, 1998 was due to reduced employee expenses and reductions in
overall non-interest expense.
EARNING ASSETS
Average earning assets of the Corporation for the first nine months of 1998
increased 4.44% or $5.9 million to $137.9 million from $132.1 million for the
first nine 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 nine months of 1998 as a result of the
decrease in loans outstanding.
Average net loans declined to $81.8 million for the three months ended
September 30, 1998 compared to $86.3 million for the same period in 1997.
The decline of $4.5 million for the three months ended September 30, 1998 as
compared to the same period for 1997 was primarily due to a decrease of $4.1
million in residential real estate and $3.3 million in consumer loans. The
decline was partially offset by an increase of $2.1 million in commercial
loans, including commercial real estate loans. The average yield on the loan
portfolio before the allowance for loan losses decreased 18 basis points to
9.27% due to repricing commercial loans at slightly lower rates. The
commercial loan demand in Springfield, Illinois, Illini's principal market,
remains competitive.
Average net loans declined to $82.6 million for the nine months ended
September 30, 1998 compared to $87.2 million for the same period in 1997.
The decline of $4.6 million for the nine months ended September 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 $3.9 million in consumer loans. The
decline was partially offset by an increase of $1.7 million in commercial
loans, including commercial real estate loans and $1.5 million in agriculture
loans. The average yield on the loan portfolio before the allowance for
loan losses decreased 13 basis points to 9.29%.
Average investment securities increased $10.6 million and $6.5 million for
the three and nine months ended September 30, 1998, respectively, as compared
to the same period in 1997. The average yield of the investment securities
portfolio was 6.30% and 6.34% for the three and nine months ended September
30, 1998, respectively, a decrease of 60 and 61 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 nine months ended September 30, 1998 increased 7.85% or
$8.7 million to $120.1 million from $111.4 million. The Bank has incurred
increased funding costs as it has grown
9
<PAGE>
core deposits. The average rate paid on total interest bearing liabilities
increased 19 basis points for the nine months ended September 30, 1998 when
compared to the same period in 1997. The cost of time deposits less than
$100,000 was up 21 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 79 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 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
$8.4 million for the three months and nine months ended September 30, 1998,
respectively, which is consistent with the $2.8 million and $8.5 million for
same periods in 1997, respectively. Interest expense was $1.3 million and
$3.9 million for the three and nine months ended September 30, 1998,
respectively, compared to $1.2 and $3.5 million for the same periods in 1997,
respectively. A slight decline in interest income and an increase in
interest expense resulted in a $0.5 million decline in net interest income
for the nine months ended September 30, 1998. Net interest income of $4.5
million and a net interest margin of 4.38% are down when compared to the nine
months ended September 30, 1997's net interest income of $5.0 million and
margin of 5.08%. Interest income on loans was down approximately $0.4
million while investment securities increased $0.1 million for the nine
months ended September 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 September 30, 1998
and management anticipates that the net interest margin will remain lower
than preceding periods through the remainder of 1998. The decrease in net
interest margin is due primarily to management's decision to take a more
conservative approach to investing funds 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 third
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.
10
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELD/RATES
<TABLE>
<CAPTION>
Quarter ended September 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 $ 5,177 3.4% $ 63 4.80% $ 4,434 3.1% $ 60 5.41%
Investment securities (3)
Taxable 41,852 27.7 635 6.07 28,305 19.6 477 6.75
Tax-exempt (1) 7,985 5.3 150 7.51 10,975 7.7 200 7.29
--------- ----- ------- ----- --------- ------ ------- -----
Total securities 49,837 33.0 785 6.30 39,280 27.3 677 6.90
Loans
Commercial (1) 16,398 10.9 382 9.23 16,035 11.1 391 9.67
Agriculture 7,425 4.9 179 9.56 6,765 4.7 131 7.71
Real estate
Commercial 25,330 16.8 571 8.95 23,613 16.4 558 9.37
Agriculture 2,762 1.8 62 8.97 2,607 1.8 60 9.20
Residential 20,102 13.3 457 9.02 24,196 16.8 567 9.29
Consumer, net 10,463 6.9 263 9.98 13,718 9.5 352 10.17
Credit card 629 0.4 27 16.87 629 0.4 26 16.52
--------- ------- --------- -------
Total loans 83,109 55.0 1,941 9.27 87,563 60.7 2,085 9.45
Allowance for loan losses (1,330) (0.9) (1,248) (0.9)
--------- ------- ---------
Net loans (1) (2) 81,779 54.1 1,941 9.42 86,315 59.8 2,085 9.58
--------- ----- ------- --------- ------ -------
Total interest earning assets 136,793 90.5 2,789 8.09 130,029 90.2 2,822 8.61
--------- ------- --------- -------
Cash and due from banks 3,558 2.4 4,467 3.1
Premises and equipment 7,706 5.1 6,660 4.6
Other real estate owned 616 0.4 511 0.4
Other assets (3) 2,405 1.6 2,406 1.7
--------- ----- --------- ------
TOTAL ASSETS $ 151,078 100.0% $ 144,073 100.0%
--------- ----- --------- ------
--------- ----- --------- ------
LIABILITIES
Interest-bearing liabilities:
Deposits
Non-interest bearing deposits $ 20,099 13.3% $ 20,149 14.0%
Interest bearing demand 36,590 24.2 $ 339 3.67% 26,830 18.6 $ 201 2.97%
Savings 17,159 11.4 107 2.48 17,988 12.5 111 2.46
Time deposits less than $100,000 46,346 30.7 644 5.52 46,008 31.9 625 5.39
--------- ------- --------- -------
Total core deposits 120,194 79.6 1,090 3.60 110,975 77.0 937 3.35
Time deposits $100,000 and over 14,107 9.3 193 5.42 16,279 11.3 235 5.73
--------- ------- --------- -------
Total deposits 134,301 88.9 1,283 3.79 127,254 88.3 1,172 3.65
Short-term borrowings 282 0.2 4 5.30 530 0.4 8 5.95
Total interest bearing liabilities 114,484 75.8 1,287 4.46 107,635 74.7 1,180 4.35
Other liabilities 1,585 1.0 1,486 1.0
--------- ----- --------- ------
Total liabilities 136,168 90.1 129,270 89.7
Shareholders' Equity 14,910 9.9 14,803 10.3
--------- ----- --------- ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 151,078 100.0% $ 144,073 100.0%
--------- ----- --------- ------
--------- ----- --------- ------
NET INTEREST MARGIN $ 1,502 4.35% $ 1,642 5.01%
------- ---- ------- -----
------- ---- ------- -----
</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 $62,000 in 1998 and $65,000 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>
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELD/RATES
<TABLE>
<CAPTION>
Nine months ended September 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 $ 5,875 3.9% $ 228 5.19 $ 1,870 1.3% $ 71 5.04%
Investment securities (3)
Taxable 41,469 27.1 1,900 6.11 30,646 21.1 1,554 6.76
Tax-exempt (1) 8,029 5.2 452 7.51 12,366 8.5 687 7.40
-------- ----- ------- ----- -------- ----- ------ -----
Total securities 49,498 32.3 2,352 6.34 43,012 29.6 2,241 6.95
Loans
Commercial (1) 15,802 10.3 1,105 9.35 14,959 10.3 1,119 10.00
Agriculture 7,119 4.7 474 8.90 5,596 3.8 355 8.47
Real estate
Commercial 25,593 16.7 1,731 9.04 24,751 17.0 1,697 9.17
Agriculture 2,585 1.7 176 9.08 2,336 1.6 160 9.17
Residential 21,026 13.7 1,437 9.14 25,148 17.3 1,726 9.18
Consumer, net 11,124 7.3 822 9.88 15,003 10.3 1,093 9.74
Credit card 630 0.4 81 17.13 633 0.4 77 16.33
-------- ------- -------- ------
Total loans 83,879 54.8 5,826 9.29 88,426 60.7 6,227 9.42
Allowance for loan losses (1,321) (0.9) (1,235) (0.8)
-------- ------- --------
Net loans (1) (2) 82,558 53.9 5,826 9.44 87,191 59.9 6,227 9.55
-------- ----- ------- -------- ----- ------
Total interest earning assets 137,931 90.1 8,406 8.15 132,073 90.8 8,539 8.64
-------- ------- -------- ------
Cash and due from banks 4,253 2.8 4,575 3.1
Premises and equipment 7,855 5.1 6,125 4.2
Other real estate owned 720 0.5 610 0.4
Other assets (3) 2,333 1.5 2,103 1.5
-------- ----- -------- -----
TOTAL ASSETS $153,092 100.0% $145,486 100.0%
-------- ----- -------- -----
-------- ----- -------- -----
LIABILITIES
Interest-bearing liabilities:
Deposits
Non-interest bearing deposits $ 20,926 13.7% $ 20,042 13.8%
Interest bearing demand 34,649 22.6 $ 930 3.59 26,503 18.2 $ 555 2.80%
Savings 17,564 11.5 324 2.47 18,402 12.7 339 2.47
Time deposits less than $100,000 46,961 30.7 1,946 5.54 46,407 31.9 1,849 5.33
-------- ------ -------- ------
Total core deposits 120,100 78.5 3,200 3.56 111,354 76.6 2,743 3.29
Time deposits $100,000 and over 16,119 10.5 678 5.62 15,484 10.6 666 5.75
-------- ------ -------- ------
Total deposits 136,219 89.0 3,878 3.81 126,838 87.2 3,409 3.59
Short-term borrowings 293 0.2 12 5.38 2,600 1.8 115 5.91
Total interest bearing liabilities 115,586 75.5 3,890 4.50 109,396 75.2 3,524 4.31
Other liabilities 1,703 1.1 1,502 1.0
-------- ----- -------- -----
Total liabilities 138,215 90.3 130,940 90.0
Shareholders' Equity 14,877 9.7 14,546 10.0
-------- ----- -------- -----
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $153,092 100.0% $145,486 100.0%
-------- ----- -------- -----
-------- ----- -------- -----
NET INTEREST MARGIN $4,516 4.38 $5,015 5.08%
------ ----- ------ -----
------ ----- ------ -----
</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 $186,000 in 1998 and $184,000 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.
12
<PAGE>
NET INTEREST INCOME--RATE/VOLUME VARIANCE ANALYSIS(*)
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, 1998
AS COMPARED TO
QUARTER ENDED SEPTEMBER 30, 1997
------------------------------------
CHANGES IN VOLUME RATE
INCOME/EXPENSE EFFECT EFFECT
-------------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term investments $ 3 $ 10 $ (7)
Investment securities:
Taxable 158 230 (72)
Nontaxable (50) (55) 5
----- ---- ----
Total securities 108 175 (67)
Loans:
Commercial (9) 9 (18)
Agriculture 48 13 35
Real estate:
Commercial 13 41 (28)
Agriculture 2 4 (2)
Residential (110) (96) (14)
Consumer, net (89) (84) (5)
Credit card 1 -- 1
----- ---- ----
Total loans (144) (113) (31)
----- ---- ----
Total interest income (33) 72 (105)
----- ---- ----
Interest bearing demand 138 73 65
Savings (4) (5) 1
Time deposits less than $100,000 19 5 14
----- ---- ----
Total core deposits 153 73 80
Time deposits $100,000 and over (42) (32) (10)
----- ---- ----
Total deposits 111 41 70
Short-term borrowings (4) (4) --
----- ---- ----
Total interest expense 107 37 70
----- ---- ----
Net interest income $ (140) $ 35 (175)
----- ---- ----
----- ---- ----
</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.
13
<PAGE>
NET INTEREST INCOME--RATE/VOLUME VARIANCE ANALYSIS(*)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
AS COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------
CHANGES IN VOLUME RATE
INCOME/EXPENSE EFFECT EFFECT
-------------- ------ ------
(dollars in thousands)
<S> <C> <C> <C>
Short-term investments $ 157 $ 151 $ 6
Investment securities:
Taxable 346 547 (201)
Nontaxable (235) (240) 5
----- ---- -----
Total securities 111 307 (196)
Loans:
Commercial (14) 63 (77)
Agriculture 119 96 23
Real Estate:
Commercial 34 58 (24)
Agriculture 16 17 (1)
Residential (289) (283) (6)
Consumer, net (271) (283) 12
Credit card 4 -- 4
----- ---- -----
Total loans (401) (332) (69)
----- ---- -----
Total interest income (133) 126 (259)
----- ---- -----
Interest bearing demand 375 171 204
Savings (15) (16) 1
Time deposits less than $100,000 97 22 75
----- ---- -----
Total core deposits 457 177 280
Time deposits $100,000 and over 12 27 (15)
----- ---- -----
Total deposits 469 204 265
Short-term borrowings (103) (102) (1)
----- ---- -----
Total interest expense 366 102 264
----- ---- -----
Net interest income $ (499) $ 24 $(523)
----- ---- -----
----- ---- -----
</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.
14
<PAGE>
NONINTEREST INCOME
<TABLE>
<CAPTION>
Three months ended Percent Nine months ended Percent
September 30, Change September 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 $269 $ 267 0.7% $ 780 $ 779 0.1%
Other fee income 46 40 15.0 127 119 6.7
Mortgage loan servicing fees 64 52 23.1 188 144 30.6
Gain on sale of mortgage loans 25 35 (28.6) 163 63 158.7
Securities gains (loss) 1 64 (98.4) 8 61 (86.9)
Other income 67 19 252.6 109 53 105.7
---- ----- ----- ------ ------ -----
$472 $ 477 (1.0)% $1,375 $1,219 12.8
---- ----- ----- ------ ------ -----
---- ----- ----- ------ ------ -----
</TABLE>
Service charges on deposit accounts and other fee income remained relatively
steady for the three and nine months ending September 30, 1998 compared to
the same periods in 1997. Illini realized a gain of $64,000 in 1997 due to
securities sold to shorten the duration of its securities portfolio. No such
activity has taken place in 1998 and thus gains realized have been
insignificant.
Due to declining long term rate on mortgage loans, and effective marketing
strategies, Illini experienced a significant increase in mortgage loan
originations in the third quarter of 1998. This, in turn, led to an increase
in the gain of sale of mortgage to the secondary market and, to a lesser
extent, increased servicing income.
Illini completed strategic planning in January, 1998 that, among other
subjects, covered the changing nature of the retail delivery systems of
financial institutions. During this planning, management identified
potentially significant opportunities for expense reductions in staffing and
occupancy achievable through more efficient use of retail bank space. As a
consequence, a lot in Bloomington being held for future expansion was sold in
July, 1998 for $602,000, resulting in a gain of $22,000 reported as other
income.
15
<PAGE>
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Three months ended Percent Nine months ended Percent
September 30, Change September 30, Change
------------------ --------- ----------------- ---------
1998 1997 1998/1997 1998 1997 1998/1997
--------- -------- --------- -------- ------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 728 $ 825 (11.8)% $2,487 $2,484 0.1%
Net occupancy expense 132 168 (21.4) 482 485 (0.6)
Equipment expense 90 75 20.0 258 228 13.2
Data processing 196 136 44.1 516 437 18.1
Supplies 36 35 2.9 136 92 47.8
Communication and 92 91 1.1 295 267 10.5
transportation
Marketing and advertising (96) 61 (257.4) -- 194 (100.0)
Correspondent and processing fees 39 37 5.4 107 104 2.9
Loan and other real estate (10) 54 (118.5) 69 141 (51.1)
owned expenses
Professional fees 144 170 (15.3) 641 480 33.5
Directors' and regulatory fees 45 37 21.6 150 125 20.0
Other expense 86 68 26.5 254 222 14.4
------ ------ ------ ------ ------ -----
$1,482 $1,757 (15.7) $5,395 $5,259 2.6
------ ------ ------ ------ ------ -----
------ ------ ------ ------ ------ -----
</TABLE>
Total non-interest expense for nine months ended September 30, 1998 increased
slightly over the same period in 1997. Non-interest expense for the third
quarter 1998 declined sharply from the third quarter 1997.
The increase in non-interest expense of $142,000 for the nine month period
was principally caused by the combined effect of increases in legal expenses,
year 2000 compliance, and implementing strategic initiatives totaling
$372,000 and reductions in occupancy expense, marketing, and loan expenses
totaling $230,000.
The decrease in non-interest expense of $275,000 during the most recent
quarter is principally the result of decreases in salaries and employee
benefits, net occupancy expense, marketing and advertising, loan expense, and
professional fees totaling $380,000, and increases in equipment and data
processing expense totaling $75,000. The recent reengineering of the
Company's sales force has shifted resources from direct marketing expense to
focused personal contact. The decrease in employee salaries and benefits is a
direct result of a twenty six percent reduction in full time equivalent
employees. Approximately $59,000 of reduced expenses were due to one-time
reversals of expense accruals made in anticipation of reengineering expense.
16
<PAGE>
YEAR 2000 ISSUES
Illini Bank is committed to taking the necessary steps to enable both new and
existing systems, applications and equipment to effectively process
transactions up to and beyond the Year 2000. To that end, Illini Bank is
well underway with its Year 2000 readiness program, having incurred $87,000
in expenses for the nine month period ending September 30, 1998. Illini Bank
estimates that the costs of its continuing Year 2000 readiness efforts will
produce an additional $30,000 in total expenses. Because of such ongoing
readiness efforts, Year 2000 processing issues and risks are not expected to
have a material adverse impact on the ability of Illini Bank to continue its
general business operations.
Currently, Illini Bank is actively engaged in completing the following Year
2000 program initiatives:
- Complete a comprehensive analysis of current functions which might be
impacted by Year 2000 issues, and document the results in a Year 2000
Assessment report.
- Develop and implement a detailed plan to address Year 2000 issues as
identified, particularly as they pertain to software and hardware
applications.
- Survey outside vendors to determine the degree of preparedness for the
Year 2000, to uncover potential issues arising from such business
counterparties.
- Raise organizational awareness not only with top management, but also
at the staff level, and involve relevant business group leaders in
reaching solutions.
The risk of failures of computer applications, systems and networks due to
improper Year 2000 data processing are substantial, not only for users of
information technologies, but also for any entities and individuals which
interact with them. Moreover, when aggregated multiple individual
malfunctions and failures relating to Year 2000 issues occur, they can
potentially cause broader, systemic disruptions across industries and
economies. The risks arising from Year 2000 issues which face many
companies, including Illini Bank, include the potential diminished ability to
respond to the needs and expectations of customers in a timely manner, and
the potential for inaccurate processing of information. In recognition of
this, Illini Bank is focusing on mission critical applications in order that
programming changes are largely completed, and that testing is underway, by
December 31, 1998.
In addition, Illini Bank has begun developing contingency plans to complement
the Year 2000 readiness efforts already in progress, including backup and
offsite processing of certain information and functions. Illini Bank
anticipates that such contingency plans will provide an additional level of
security to its Year 2000 efforts already underway.
The foregoing discussion of Year 2000 issues is based on current estimates of
the management of Illini Bank as to the amount of time and costs necessary to
remediate and test our systems. Such estimates are based on the facts and
circumstances existing at this time, and were derived utilizing multiple
assumptions of future events, including, but not limited to, the continued
availability of certain resources, third-party modification plans and
implementation success, and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual costs and results
could differ materially from the costs and results currently anticipated.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer code, the planning
and modification success attained by the business counterparties of Illini
Bank and similar uncertainties.
17
<PAGE>
CREDIT QUALITY
Gross loans totaled $83.2 million at September 30, 1998, a decline of $3.1
million, or 3.6%, from $86.3 million at December 31, 1997, while the
allowance for loan losses has increased slightly to $1.4 million at September
30, 1998 from $1.3 million at December 31, 1997. The allowance as a percent
of total loans increased from 1.51% at December 31, 1997 to 1.62% at
September 30, 1998. The allowance as a percent of nonperforming loans
decreased from 204.72% at December 31, 1997 to 107.23% at September 30, 1998
due to an increase in nonperforming loans. As previously reported, the
increase for the nine month period was caused by Illini's desire to
strengthen its position with respect to certain commercial loans, thus these
commercial loans have not yet been renewed. Declining consumer and
residential real estate loan balances have been substantially offset by
increases in commercial and agricultural loans.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period $ 1,305 $1,227 $1,302 $1,258
Provision charged to expense 51 75 153 225
Charge-offs 23 54 146 262
Less: recoveries 17 23 41 50
------- ------ ------ ------
Net charge-offs 6 31 105 212
------- ------ ------ ------
Balance at end of period $ 1,350 $1,271 $1,350 $1,271
------- ------ ------ ------
------- ------ ------ ------
NET CHARGE-OFF RATIOS (1):
Commercial (0.07)% 0.10% 0.13% 0.13%
Real Estate (0.01) 0.20 0.01 0.26
Installment 0.38 0.00 0.75 0.73
Credit Cards 0.63 0.00 3.81 1.90
Totals 0.03% 0.14% 0.17% 0.32%
</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 $153,000 for the three and
nine months ended September 30, 1998, respectively, as compared to $75,000
and $225,000 for the comparable periods in the prior year. Net charge-offs
decreased to $6,000 and $105,000 for the three and nine months ended
September 30, 1998, respectively, as compared to $31,000 and $212,000 for the
comparable periods in the prior year.
For the nine months ended September 30, 1998, the provision for loan losses
and net loan losses decreased. The net charge off ratio for the three and
nine months ended September 30, 1998 was 0.03% and 0.17% compared to 0.14%
and 0.32% for the same periods in 1997, 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. Management
believes the increase in nonaccrual loans does not reflect adversely on the
collectibility on these loans or the overall portfolio.
18
<PAGE>
At September 30, 1998, impaired loans totaled $1,259,000 compared to $686,000
at December 31, 1998. At September 30, 1998, allowance for loan losses on
impaired loans totaled $11,000 compared to $26,000 at December 31, 1997. Of
the total impaired loans at September 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>
SEPTEMBER 30, December 31, September 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 $ 0
Nonaccrual 1,259 636 720
Other real estate owned 1,110 551 503
------- ------- -------
Total nonperforming assets $ 2,369 $ 1,187 $ 1,223
------- ------- -------
------- ------- -------
KEY RATIOS:
Nonperforming loans to ending loans 1.51% 0.74% 0.83%
90 days delinquent to ending loans 0.00 0.00 0.00
Allowance to ending loans 1.62 1.51 1.46
Allowance to nonperforming loans 107.23 204.72 176.53
</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 increase in other real estate owned is the result of the impending sale
by Illini Bank of a large commercial property located in Springfield. As a
result, $635,000 of bank premises was transferred to other real estate owned
until the property came out of closing. That closing was completed on
October 14, 1998.
19
<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 September 30, 1998, Tier 1 risk based capital,
total risk-based capital and leverage capital ratios were 14.96%, 16.35% and
9.64%, respectively. As of September 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. The dividend payout ratio is an indicator of the level of
earnings retained. The dividend payout ratio for the three and nine months
ended September 30, 1998 was 46.33% and 160.16%, respectively, as compared to
59.94% and 69.66% for the three and nine months ended September 30, 1997,
respectively. The total dollar amount of dividends for the three and nine
months ended September 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
September 30, 1998 the Bank's core liquidity was $28 million, or 18.8% 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 September 30, 1998 is strong.
At September 30, 1998, large liability dependence was 5.5%, compared to 6.5%
at June 30, 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 third quarter 1998. The Bank's short-term borrowings
decreased from December 31, 1997 to September 30, 1998.
20
<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.
21
<PAGE>
PART II. OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
On or about July 17, 1998, Ida R. Noll filed a 14 count complaint
against Illini Corporation and all members of Illini Corporation's
Board of Directors except William Walschleger, Jr. in the Seventh
Judicial Circuit, Sangamon County, Illinois. On September 28, 1998,
Judge Carmody dismissed the complaint and granted Plaintiff 21 days in
which to file an amended complaint. The Plaintiff filed her amended
pleading on October 19, 1998. The amended complaint arises out of
Illini Corporation's adoption of a Shareholder Rights Agreement on
June 20, 1997, Illini Corporation's subsequent adoption of a First
Amendment to the Rights Agreement on July 1, 1998, and the Plaintiff's
assertion that she become an "acquiring person" under the Rights
Agreement on April 16, 1998. The Plaintiff seeks declaratory and
injunctive relief from Illini and the directors regarding the
triggering of the Rights Agreement and the enforceability and validity
of the First Amendment to the Rights Agreement. The Plaintiff also
seeks compensatory and punitive damages against the director's arising
out of the director's alleged breaches of fiduciary duty and fraud
committed in connection with the Rights Agreement and the First
Amendment to the Rights Agreement. The Plaintiff seeks recovery of
her attorneys' fees and costs in connection with her action. Ida Noll
asserts that her attorneys' fees through October 23, 1998 are
approximately $50,000 and that her expenses are approximately $5,000.
Legal counsel is reviewing the merits of the amended complaint.
Illini and the directors intend to vigorously contest and oppose the
allegations made by Ida R. Noll.
Concerning the prior disclosure of the law suit initiated by Mary K.
Quinn against Illinois Stock Transfer Company, the Plaintiff has filed
a motion in the Seventh Judicial Circuit Court in Sangamon County,
Illinois for class certification. The parties have briefed the issue,
and the matter is under advisement by the court. Illini Corporation
is defending Illinois Stock Transfer Company in the Quinn suit. In
addition to her action for specific performance of the Rights
Agreement individually and on behalf of the purported class, Quinn
seeks recovery of her attorneys' fees from ISTC. ISTC has denied that
it is liable under the Rights Agreement for Quinn's attorneys' fees.
Item 2 CHANGES IN SECURITIES--none
Item 3 DEFAULTS UPON SENIOR SECURITIES--none
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--none
Item 5 OTHER INFORMATION--none
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
The Exhibits filed herewith are set forth in the Exhibit Index
filed as a part of this Form 10-QSB.
(b) REPORTS ON FORM 8-K:
The Company filed a report on Form 8-K dated July 13, 1998 in
connection with an amendment to its Rights Agreement.
22
<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 November 10, 1998
- --------------------------------------- -----------------
Burnard K. McHone Date signed
President
By: /s/ Deann Hager November 10, 1998
- --------------------------------------- -----------------
Deann Hager Date signed
Finance Manager
23
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
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