<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, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
Commission file number 0-13343
ILLINI CORPORATION
(Exact name of small business issuer as specified in its charter)
Illinois 37-1135429
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3200 West Iles Avenue, Springfield, Illinois 62707
(Address of principal executive offices)
(217) 787-5111
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 448,456 shares of $10 par
value common stock as of July 31, 1999
Transitional Small Business Disclosure Format:
Yes No X
--- ---
<PAGE>
ILLINI CORPORATION
INDEX TO FORM 10-QSB
June 30, 1999
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Income
Three and Six Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 22
PART II. OTHER INFORMATION 23
SIGNATURES 26
EXHIBIT INDEX 27
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, December 31,
1999 1998
----------------- ------------------
(dollars in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,076 $ 5,624
Interest-bearing deposits in other banks 20 19
Federal funds sold --- 6,675
----------------- ------------------
Cash and cash equivalents 6,096 12,318
Debt and marketable equity securities
available for sale, at fair value 46,321 53,276
Loans, net of the allowance for loan losses and unearned income 100,501 85,806
Premises and equipment 7,283 7,250
Accrued interest receivable 1,217 1,390
Other real estate owned 507 366
Other assets 885 359
----------------- ------------------
$ 162,810 $ 160,765
----------------- ------------------
----------------- ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Noninterest-bearing demand deposits 22,287 26,190
Interest-bearing deposits:
NOW and money market accounts 42,398 38,877
Savings deposits 17,264 17,102
Time deposits, $100,000 and over 13,972 15,064
Other time deposits 45,857 45,726
----------------- ------------------
Total deposits 141,778 142,959
Federal funds purchased 4,115 ----
Securities sold under agreements to repurchase 190 290
Accrued interest payable 799 827
Other liabilities 1,172 1,270
----------------- ------------------
Total liabilities 148,054 145,346
----------------- ------------------
Shareholders' equity:
Common stock-$10 par value, authorized 800,000 shares;
448,456 shares issued and outstanding 4,485 4,485
Capital surplus 1,886 1,886
Retained earnings 8,587 8,632
Accumulated other comprehensive income (loss) (202) 416
----------------- ------------------
Total shareholders' equity 14,756 15,419
----------------- ------------------
$ 162,810 $ 160,765
----------------- ------------------
----------------- ------------------
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
------ ------ ------ ------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $2,093 $1,914 $3,978 $3,869
Interest on debt and marketable equity securities
Taxable 647 632 1,301 1,265
Tax-exempt 92 104 183 209
Interest on short term investments 1 89 71 165
------ ------ ------ ------
Total interest income 2,833 2,739 5,533 5,508
------ ------ ------ ------
Interest expense:
Interest on deposits:
NOW and money market accounts 323 312 664 591
Savings deposits 87 109 179 217
Time deposits, $100,000 and over 181 227 364 485
Other time deposits 594 659 1,193 1,302
Interest on borrowings 40 4 43 8
------ ------ ------ ------
Total interest expense 1,225 1,311 2,443 2,603
------ ------ ------ ------
Net interest income 1,608 1,428 3,090 2,905
Provision for loan losses 51 51 102 102
------ ------ ------ ------
Net interest income after provision for loan losses 1,557 1,377 2,988 2,803
Noninterest income:
Service charges on deposit accounts 322 266 612 511
Other fee income 58 43 103 81
Mortgage loan servicing fees 52 65 116 124
Gain on sale of mortgage loans 7 60 31 138
Securities gains 8 --- 8 7
Other 34 19 85 42
------ ------ ------ ------
Total noninterest income 481 453 955 903
Noninterest expense:
Salaries and employee benefits 730 892 1,516 1,759
Net occupancy expense 189 178 397 350
Equipment expense 98 82 208 168
Data processing 187 156 393 320
Supplies 43 46 105 100
Communication and transportation 98 105 197 203
Marketing and advertising 14 40 37 96
Correspondent and processing fees 72 36 115 68
Loan and other real estate owned expenses 25 35 42 79
Professional fees 291 284 496 497
Directors' and regulatory fees 43 57 87 105
Other 70 90 128 168
------ ------ ------ ------
Total noninterest expense 1,860 2,001 3,721 3,913
Income (loss) before income tax expense (benefit) 178 (171) 222 (207)
Income tax expense (benefit) 39 (108) 42 (175)
------ ------ ------ ------
Net income (loss) $ 139 $ (63) $ 180 $ (32)
------ ------ ------ ------
------ ------ ------ ------
Basic and diluted earnings (loss) per share
(based on weighted average common shares outstanding
of 448,456 for 1999 and 1998) $ 0.31 $(0.14) $ 0.40 $(0.07)
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
-------- --------
(dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 180 $ (32)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 568 488
Provision for loan losses 102 102
Securities gains, net (8) (7)
(Gain) loss on sale of other real estate owned (15) 13
Decrease in accrued interest receivable 173 153
Decrease in accrued interest payable (28) (15)
Origination of mortgage loans for sale (4,300) (28,769)
Proceeds from the sale of mortgage loans 4,365 29,001
Other, net (248) 234
-------- --------
Net cash provided by operating activities 789 1,168
-------- --------
Cash flows from investing activities:
Proceeds from sales of debt and marketable equity
securities available for sale 6,223 1,479
Proceeds from maturities and paydowns of debt and
marketable equity securities available for sale 7,188 4,734
Purchases of in debt and marketable equity securities
available for sale (7,528) (11,313)
Net (increase) decrease in loans (15,070) 2,795
Purchases of premises and equipment (501) (409)
Proceeds from sale of premises and equipment ---- 1
Proceeds from sales of other real estate owned 68 106
-------- --------
Net cash used in investing activities (9,620) (2,607)
-------- --------
Cash flows from financing activities:
Net decrease in non-interest bearing demand deposits (3,903) (4,604)
Net increase in NOW, money market and savings 3,683 4,914
Net decrease in time deposits, $100,000 and over (1,092) (4,780)
Net increase in other time deposits 131 1,361
Net increase in federal funds purchased 4,115 ----
Net decrease in securities sold under agreements to repurchase (100) (425)
Cash dividends paid (225) (224)
-------- --------
Net cash provided by (used in) financing activities 2,609 (3,758)
-------- --------
Net decrease in cash and cash equivalents (6,222) (5,197)
Cash and cash equivalents at beginning of period 12,318 12,193
-------- --------
Cash and cash equivalents at end of period $ 6,096 $ 6,996
-------- --------
-------- --------
Supplemental Information:
Income taxes paid $ 146 $ 37
Interest paid $ 2,471 $ 2,618
-------- --------
-------- --------
Other non-cash investing activities:
Transfer of premises and equipment to other real estate owned $ ---- $ 533
-------- --------
-------- --------
Transfer of loans to other real estate owned $ 208 $ 74
-------- --------
-------- --------
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
(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, 1998.
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 potential common shares which
are dilutive.
Results for the three and six months ended June 30, 1999 may not be
indicative of the annual performance of Illini Corporation (Illini or
the Corporation).
(2) ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
The allowance for loan losses is increased by provisions charged to
operations and is available to absorb loan losses. Illini Bank (the
Bank), the Corporation's wholly owned subsidiary, utilizes a
systematic, documented approach in determining the appropriate level of
the allowance for loan losses. Management's approach, which provides
for general and specific allowances, is based on current economic
conditions, past loan losses, collection experience, risk
characteristics of the portfolio, assessing collateral values by
obtaining independent appraisals for significant properties, and such
other factors which, in management's judgment, deserve current
recognition in estimating potential loan losses. The determination of
the allowance for loan losses is one of the significant estimates made
by management in the preparation of the consolidated financial
statements.
<TABLE>
<CAPTION>
June 30,
--------
1999 1998
------ ------
(dollars in thousands)
<S> <C> <C>
Balance at beginning of period $1,368 $1,302
Provision charged to expense 102 102
Charge-offs 140 123
Less: recoveries 39 24
------ ------
Net charge-offs 101 99
------ ------
Balance at end of period $1,369 $1,305
------ ------
------ ------
</TABLE>
6
<PAGE>
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, 1999
and December 31, 1998 is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(dollars in thousands)
<S> <C> <C>
Nonaccrual loans $ 892 $ 1,029
Impaired loans continuing to accrue interest ---- 300
------------ ------------
Total impaired loans $ 892 $ 1,329
------------ ------------
------------ ------------
Allowance for losses on specific impaired loans $ 16 $ 25
Impaired loans with no specific related allowance
for loan losses 871 1,268
Average balance of impaired loans during the period 1,179 1,074
------------ ------------
------------ ------------
</TABLE>
(3) NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board (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. SFAS 137, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES-DEFERRAL OF THE EFFECTIVE
DATE OF FASB STATEMENT NO. 133, AN AMENDMENT OF FASB STATEMENT NO. 133,
was issued in June 1999. SFAS 133, as amended, is now effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000.
Illini is currently evaluating the impact of SFAS 133 on future
financial statements and related 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.
Since Illini does not securitize mortgage loans held for sale,
management does not expect SFAS 134 will have any impact on its
financial condition or results of operations.
7
<PAGE>
(4) OTHER COMPREHENSIVE INCOME
For the three and six-month periods ended June 30, 1999 and 1998,
unrealized gains (losses) on debt and marketable equity securities
available for sale, net of tax, is the Company's only other
comprehensive income component. Comprehensive income for the three and
six-month periods ended June 30, 1999 and 1998 is summarized as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
------------------------- -------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net income $ 139 $ (63) $ 180 $ (32)
Other comprehensive income:
Net realized and unrealized gains (losses)
on securities available for sale, net (422) 13 (610) 85
Less adjustment for net securities gains
realized in net income, net (5) --- (5) (5)
-------- ------- --------- --------
Other comprehensive income (loss) (427) 13 (615) 80
-------- ------- --------- --------
Total comprehensive income (loss) $ (288) $ (50) $ (435) $ 48
-------- ------- --------- --------
-------- ------- --------- --------
</TABLE>
(5) PENDING ACQUISITION
On March 2, 1999, Illini announced a definitive agreement to acquire
all of the outstanding shares of Farmers State Bank of Camp Point in
exchange for 123,333 shares of Illini's common stock and cash of
$3,256,260. Farmers State Bank of Camp Point is headquartered in Camp
Point, Illinois and had assets of approximately $33 million at December
31, 1998. Illini expects to close the acquisition either late in the
third quarter or early in the fourth quarter of 1999.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
This discussion should be read in conjunction with the consolidated financial
statements, notes, and tables included elsewhere in this report and in the 1998
Illini Corporation Annual Report on Form 10-KSB (1998 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 1999 1998 Change 1999 1998 Change
- -------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Total
revenue................................. $3,314 $ 3,192 3.83% $6,488 $ 6,411 1.19%
Net income (loss) (3)................... 139 (63) N/A 180 (32) N/A
Basic earnings (loss) per share (3)..... $ 0.31 $ (0.14) N/A $ 0.40 $ (0.07) N/A
</TABLE>
<TABLE>
<CAPTION>
Quarter ended Six months ended
June 30, June 30,
------------------- Basis Point ------------------ Basis Point
KEY RATIOS 1999 1998 Change 1999 1998 Change
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Return on average assets (1)............ 0.35% (0.16)% 0.51% 0.23% (0.04)% 0.27%
Return on average equity (1)............ 3.65% (1.73)% 5.38% 2.37% (0.44)% 2.81%
Average equity to assets................ 9.44% 9.53% (0.09)% 9.58% 9.64% (0.06)%
Tier 1 leverage ratio................... 9.22% 9.35% (0.13)%
Tier 1 risk-based capital ratio......... 12.97% 14.86% (1.89)%
Total risk-based capital ratio.......... 14.17% 16.21% (2.04)%
Dividend payout ratio (2)............... 80.95% N/A N/A 124.66% N/A N/A
Net interest margin..................... 4.54% 4.27% 0.27% 4.42% 4.39% 0.04%
Efficiency ratio........................ 87.06% 103.35% (16.29)% 89.87% 99.89% (10.02)%
</TABLE>
(1) Reported on an annualized basis.
(2) 1998's amount is not computable due to the net loss for the period.
(3) Percent change is not computable due to 1998's net loss for the period.
9
<PAGE>
RESULTS OF OPERATION
EARNING ASSETS
Management is pleased with the results of our efforts to grow earning assets.
Average earning assets of the Corporation for the first six months of 1999
increased 4.84% or $6.7 million to $145.2 million from $138.5 million for the
first six months of 1998.
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.
Average net loans increased to $94.7 million for the three months ended June 30,
1999 compared to $82.1 million for the same period in 1998. The increase of
$12.6 million for the three months ended June 30, 1999 as compared to the same
period for 1998 was primarily due to an increase of $9.2 million in commercial
loans, including commercial real estate loans, $3.5 million in residential
loans, and $1.6 million in agriculture loans, including agriculture real estate.
The increase was offset by a decline of $1.7 million in consumer loans. The
average yield on the loan portfolio, net of the allowance for loan losses,
decreased 47 basis points to 8.77% due to the competitive interest rate
environment and a change in loan mix for the three months ending June 30, 1999
compared to the three months ending June 30, 1998.
Average net loans increased to $90.0 million for the six months ended June 30,
1999 compared to $83.0 million for the same period in 1998. The increase of $7.0
million for the six months ended June 30, 1999 as compared to the same period in
1998 was primarily due to an increase of $6.3 million in commercial loans,
including commercial real estate loans, $1.7 million in agriculture loans,
including agriculture real estate, and $1.4 million in residential real estate
loans. The increase was offset by a decline of $2.3 million in consumer loans.
The average yield on the loan portfolio, net of the allowance for loan losses,
decreased 49 basis points to 8.81%.
Average investment securities increased $1.0 million and $2.6 million for the
three and six months ended June 30, 1999, respectively, as compared to the same
periods in 1998. The average yield of the investment securities portfolio was
6.05% and 6.03% for the three and six months ended June 30, 1999, respectively,
a decrease of 14 and 32 basis points as compared to the same periods in 1998.
The decrease in investments from December 31, 1998 to June 30, 1999 is a result
of the increase in loan growth. Management intends to stabilize our investment
portfolio and use alternative funding sources for future loan demand.
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, 1999 increased 5.33% or $6.4 million
to $126.5 million from $120.1 million for the six months ended June 30, 1998.
The average rate paid on total interest bearing liabilities for the six months
ended June 30, 1999 decreased 41 basis points when compared to the six months
ended June 30, 1998.
The increase in average core deposits, including noninterest bearing demand
deposits, for the six months ended June 30, 1999 as compared to the same period
in 1998 has provided a low cost funding source for the growth in the loan
portfolio. As a result of the increase in loan growth, federal funds purchased
have increased to $4.1 million at June 30, 1999 as compared to no funds
purchased at December 31, 1998. In addition to federal funds purchased, 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.
10
<PAGE>
NET INTEREST INCOME/NET INTEREST MARGIN
The operating results of the Corporation are highly dependent on net interest
income, which is the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities, consisting
primarily of deposits. Net interest income is determined by the difference
between yields earned on assets and rates paid on liabilities and the
relative amounts of interest-earning assets and interest-bearing liabilities.
Interest income, on a fully taxable equivalent basis, was $2.9 million and $5.6
million for the three and six months ended June 30, 1999, respectively, which is
consistent with the $2.8 million and $5.6 million for same periods in 1998,
respectively. Interest expense was $1.2 million and $2.4 million for the three
and six months ended June 30, 1999, respectively, compared to $1.3 million and
$2.6 million for the same periods in 1998, respectively. A slight decrease in
interest expense resulted in a $0.2 million increase in net interest income for
the six months ended June 30, 1999.
The Bank's net interest margin for the six months ended June 30, 1999 of 4.42%
was up from 4.39% reported for the same period in 1998. Management is encouraged
by the slight upward trend in net interest margin. Management will continue to
closely monitor its funding costs to maintain an acceptable spread given the
increased demand in commercial lending. Management will continue to structure
the balance sheet to provide insulation for extreme interest rate changes.
Management has begun to focus on increasing the loan portfolio without
jeopardizing the enhanced liquidity that has been gained in prior periods.
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 balances, interest income/expense and yield/rates table on page 12 and
13 and a net interest income- rate/volume variance analysis on page 14 and 15.
11
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELD/RATES
<TABLE>
<CAPTION>
Quarter ended June 30,
-------------------------------------------------------------------------------------
1999 1998
------------------------------------------ --------------------------------------
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 $ 96 0.1% $ 1 4.73% $ 6,643 4.3% $ 89 5.53%
Investment securities (3)
Taxable 44,141 27.4 647 5.86 42,510 27.5 632 5.95
Tax-exempt (1) 7,410 4.6 133 7.16 8,019 5.2 150 7.49
-------- ------ ------ ---- ------- ---- ------ ----
Total securities 51,551 32.0 780 6.05 50,529 32.7 782 6.19
Loans
Commercial (1) 12,900 8.0 297 9.24 15,659 10.1 366 9.38
Agriculture 8,004 5.0 165 8.29 7,290 4.7 151 8.33
Real estate
Commercial 37,497 23.3 801 8.57 25,510 16.5 577 9.08
Agriculture 3,495 2.2 76 8.68 2,603 1.7 59 9.04
Residential 24,262 15.0 513 8.49 20,724 13.4 468 9.05
Consumer, net 9,290 5.7 220 9.50 11,035 7.2 274 9.94
Credit card 612 0.4 27 17.77 619 0.4 27 17.34
-------- ------ -------- ------
Total loans 96,060 59.6 2,099 8.77 83,440 54.0 1,922 9.24
Allowance for loan losses (1,357) (0.8) (1,329) (0.9)
-------- ------ -------- ------
Net loans (1) (2) 94,703 58.8 2,099 8.89 82,111 53.2 1,922 9.39
-------- ------ -------- ------
Total interest-earning assets 146,350 90.9 $2,880 7.89% 139,283 90.2 $2,793 8.04%
-------- ------ -------- ------
Cash and due from banks 4,947 3.1 4,345 2.8
Premises and equipment 7,360 4.6 7,654 4.9
Other real estate owned 398 0.2 1,020 0.7
Other assets (3) 1,965 1.2 2,111 1.4
-------- ------ -------- ------
TOTAL ASSETS $161,020 100.0% $154,413 100.0%
-------- ------ -------- ------
-------- ------ -------- ------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 22,629 14.1% $ 21,553 14.0%
Interest-bearing demand 41,082 25.5 $ 323 3.15% 34,534 22.4 $ 312 3.63%
Savings 17,632 10.9 87 1.97 17,854 11.6 109 2.45
Time deposits, less than $100,000 45,233 28.1 594 5.27 47,577 30.8 659 5.55
-------- ------ -------- ------
Total core deposits 126,576 78.6 1,004 3.18 121,518 78.7 1,080 3.57
Time deposits, $100,000 and over 13,841 8.6 181 5.23 16,054 10.4 227 5.67
-------- ------ -------- ------
Total deposits 140,417 87.2 1,185 3.38 137,572 89.1 1,307 3.81
Short-term borrowings 3,487 2.2 40 4.56 288 0.2 4 5.41
Total interest-bearing liabilities 121,275 75.3 1,225 4.05 116,307 75.3 1,311 4.52
Other liabilities 1,914 1.2 1,840 1.2
-------- ------ -------- ------
Total liabilities 145,818 90.6 139,700 90.5
Shareholders' equity 15,202 9.4 14,713 9.5
-------- ------ -------- ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $161,020 100.0% $154,413 100.0%
-------- ------ -------- ------
-------- ------ -------- ------
NET INTEREST MARGIN $1,655 4.54% $1,482 4.27%
------ ---- ------ ----
------ ---- ------ ----
</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 $67,000 in 1999 and $60,000 in 1998.
(3) Average securities balances are based on amortized historical cost,
excluding SFAS 115 adjustments to fair value, which are included in
other assets.
12
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELD/RATES
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------------------------------------------------------------------
1999 1998
--------------------------------------------- -------------------------------------
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 $ 3,290 2.1% $ 71 4.38% $ 6,230 4.0% $ 165 5.35%
Investment securities (3)
Taxable 44,479 27.9 1,301 5.85 41,274 26.8 1,265 6.13
Tax-exempt (1) 7,410 4.6 265 7.14 8,051 5.2 302 7.51
--------- ----- ------- ----- -------- ----- ------- -----
Total securities 51,889 32.5 1,566 6.03 49,325 32.0 1,567 6.35
Loans
Commercial (1) 11,992 7.5 546 9.19 15,499 10.1 724 9.42
Agriculture 7,757 4.9 328 8.52 6,963 4.5 295 8.53
Real estate:
Commercial 35,498 22.2 1,509 8.57 25,727 16.7 1,160 9.09
Agriculture 3,381 2.1 149 8.87 2,496 1.6 113 9.14
Residential 22,924 14.4 964 8.48 21,495 14.0 980 9.20
Consumer, net 9,197 5.8 442 9.69 11,460 7.4 559 9.84
Credit card 621 0.4 53 17.31 631 0.4 54 17.26
--------- ------- -------- -------
Total loans 91,370 57.3 3,991 8.81 84,271 54.7 3,885 9.30
Allowance for loan losses (1,360) (0.9) (1,317) (0.8)
--------- ------- --------
Net loans (1) (2) 90,010 56.4 3,991 8.94 82,954 53.9 3,885 9.44
--------- ----- ------- -------- ----- -------
Total interest-earning assets 145,189 91.0 $ 5,628 7.82% 138,509 89.9 $ 5,617 8.18%
--------- ------- -------- -------
Cash and due from banks 4,695 2.9 4,606 3.0
Premises and equipment 7,330 4.6 7,931 5.1
Other real estate owned 372 0.2 774 0.5
Other assets (3) 2,127 1.3 2,296 1.5
--------- ----- -------- -----
TOTAL ASSETS $ 159,713 100.0% $154,116 100.0%
--------- ----- -------- -----
--------- ----- -------- -----
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $ 22,565 14.1% $ 21,347 13.9%
Interest-bearing demand 41,151 25.8 $ 664 3.25% 33,663 21.8 $ 591 3.54%
Savings 17,472 10.9 179 2.06 17,769 11.5 217 2.46
Time deposits, less than $100,000 45,318 28.4 1,193 5.31 47,274 30.7 1,302 5.55
--------- ------- -------- -------
Total core deposits 126,506 79.2 2,036 3.25 120,053 77.9 2,110 3.54
Time deposits, $100,000 and over 14,069 8.8 364 5.21 17,142 11.1 485 5.71
--------- ------- -------- -------
Total deposits 140,575 88.0 2,400 3.44 137,195 89.0 2,595 3.82
Short-term borrowings 1,908 1.2 43 4.56 298 0.2 8 5.42
Total interest-bearing liabilities 119,918 75.1 2,443 4.11 116,146 75.3 2,603 4.52
Other liabilities 1,925 1.2 1,763 1.2
--------- ----- -------- -----
Total liabilities 144,408 90.4 139,256 90.4
Shareholders' equity 15,305 9.6 14,860 9.6
--------- ----- -------- -----
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 159,713 100.0% $154,116 100.0%
--------- ----- -------- -----
--------- ----- -------- -----
NET INTEREST MARGIN $ 3,185 4.42% $ 3,014 4.39%
------- ----- ------- -----
------- ----- ------- -----
</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 $119,000 in 1999 and $125,000 in 1998.
(3) Average securities balances are based on amortized historical cost,
excluding SFAS 115 adjustments to fair value, which are included in
other assets.
13
<PAGE>
NET INTEREST INCOME - RATE/VOLUME VARIANCE ANALYSIS(*)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, 1999
AS COMPARED TO
QUARTER ENDED JUNE 30, 1998
----------------------------------------------------
CHANGES IN VOLUME RATE
INCOME/EXPENSE EFFECT EFFECT
---------------- --------------- -------------
(dollars in thousands)
<S> <C> <C> <C>
Short-term investments $ (88) $ (90) $ 2
Investment securities:
Taxable 15 24 (9)
Tax-exempt (17) (11) (6)
---------------- --------------- -------------
Total securities (2) 13 (15)
Loans:
Commercial (69) (65) (4)
Agriculture 14 15 (1)
Real Estate:
Commercial 224 271 (47)
Agriculture 17 20 (3)
Residential 45 80 (35)
Consumer, net (54) (43) (11)
Credit card 0 0 0
---------------- --------------- -------------
Total loans 177 278 (101)
---------------- --------------- -------------
Total interest income 87 201 (114)
---------------- --------------- -------------
Interest bearing demand 11 59 (48)
Savings (22) (1) (21)
Time deposits, less than $100,000 (65) (33) (32)
---------------- --------------- -------------
Total core deposits (76) 25 (101)
Time deposits, $100,000 and over (46) (31) (15)
---------------- --------------- -------------
Total deposits (122) (6) (116)
Short-term borrowings 36 43 (7)
---------------- --------------- -------------
Total interest expense (86) 37 (123)
---------------- --------------- -------------
Net interest income $ 173 $ 164 $ 9
---------------- --------------- -------------
---------------- --------------- -------------
</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>
NET INTEREST INCOME - RATE/VOLUME VARIANCE ANALYSIS(*)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
AS COMPARED TO
SIX MONTHS ENDED JUNE 30, 1998
----------------------------------------------------
CHANGES IN VOLUME RATE
INCOME/EXPENSE EFFECT EFFECT
---------------- --------------- -------------
(dollars in thousands)
<S> <C> <C> <C>
Short-term investments $ (94) $ (78) $ (16)
Investment securities:
Taxable 36 98 (62)
Tax-exempt (37) (24) (13)
---------------- --------------- -------------
Total securities (1) 74 (75)
Loans:
Commercial (178) (164) (14)
Agriculture 33 34 (1)
Real Estate:
Commercial 349 440 (91)
Agriculture 36 40 (4)
Residential (16) 65 (81)
Consumer, net (117) (110) (7)
Credit card (1) (1) 0
---------------- --------------- -------------
Total loans 106 304 (198)
---------------- --------------- -------------
Total interest income 11 300 (289)
---------------- --------------- -------------
Interest bearing demand 73 132 (59)
Savings (38) (4) (34)
Time deposits, less than $100,000 (109) (54) (55)
---------------- --------------- -------------
Total core deposits (74) 74 (148)
Time deposits, $100,000 and over (121) (87) (34)
---------------- --------------- -------------
Total deposits (195) (13) (182)
Short-term borrowings 35 43 (8)
---------------- --------------- -------------
Total interest expense (160) 30 (190)
---------------- --------------- -------------
Net interest income $ 171 $ 270 $ 99
---------------- --------------- -------------
---------------- --------------- -------------
</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.
15
<PAGE>
NONINTEREST INCOME
<TABLE>
<CAPTION>
Three months ended Percent Six months ended Percent
June 30, Change June 30, Change
------------------------- --------------- ------------------------ ---------------
1999 1998 1999/1998 1999 1998 1999/1998
------------ ------------ --------------- ---------- ----------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts $322 $266 21.1% $612 $511 19.8%
Other fee income 58 43 34.9 103 81 27.2
Mortgage loan servicing fees 52 65 (20.0) 116 124 (6.5)
Gain on sale of mortgage loans 7 60 (88.3) 31 138 (77.5)
Securities gains 8 --- N/A 8 7 14.3
Other 34 19 78.9 85 42 102.4
------------ ------------ ----------- ------------ ----------- -----------
$481 $453 6.2% $955 $903 5.8
------------ ------------ ----------- ------------ ----------- -----------
------------ ------------ ----------- ------------ ----------- -----------
</TABLE>
The management of the Bank has concentrated efforts on restructuring our product
offerings and enhancing our noninterest income. During 1998, the Bank reviewed
service charges and introduced a new fee structure for 1999. This has been the
primary reason for the increase in service charges on deposit accounts. We
expect this trend to continue during 1999. The increase in other income is also
a result of re-engineering efforts from 1998.
Management was pleased to report the continued upward trend in our service
charge on deposit accounts and other fee income as compared with prior periods
in 1998. Overall our service charge on deposit accounts and other fee income is
up 23.0% and 20.8% for the three and six months ended June 30, 1999,
respectively, as compared to the same periods in 1998. The dramatic increase is
a direct result of our commitment to increase noninterest income.
The decrease in the gain on sale of mortgage loans is primarily due to a
dramatic decrease in volume. The volume in 1998 was significantly higher than
prior periods due to the lower rate environment during 1998. The refinancing
surge during 1998 contributed to higher gains in our mortgage area and we expect
volumes to continue to decline in 1999.
16
<PAGE>
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Three months ended Percent Six months ended Percent
June 30, Change June 30, Change
--------------------------- -------------- ------------------------ -----------
1999 1998 1999/1998 1999 1998 1999/1998
---------- --------------- -------------- ----------- ------------ -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $730 $892 (18.2)% $1,516 $1,759 (13.8)%
Net occupancy expense 189 178 6.2 397 350 13.4
Equipment expense 98 82 19.5 208 168 23.8
Data processing 187 156 19.9 393 320 22.8
Supplies 43 46 (6.5) 105 100 5.0
Communication and transportation 98 105 (6.7) 197 203 (3.0)
Marketing and advertising 14 40 (65.0) 37 96 (61.5)
Correspondent and processing fees 72 36 100.0 115 68 69.1
Loan and other real estate owned expenses 25 35 (28.6) 42 79 (46.8)
Professional fees 291 284 2.5 496 497 (0.2)
Directors' and regulatory fees 43 57 (24.6) 87 105 (17.1)
Other 70 90 (22.2) 128 168 (23.8)
---------- --------------- -------------- ----------- ------------ ---------
$1,860 $2,001 (7.0) $3,721 $3,913 (4.9)
---------- --------------- -------------- ----------- ------------ ---------
---------- --------------- -------------- ----------- ------------ ---------
</TABLE>
Salaries and employee benefits decreased $162,000 and $243,000 for the three
and six months ended June 30, 1999, respectively, when compared to the same
periods in 1998. This decrease resulted primarily from reduced full time
equivalent costs relating to the reorganization of the Bank. Net occupancy
expense increased slightly for the three and six months ended June 30, 1999
when compared to the same periods in 1998. The increase in occupancy expense
is a result of an increase in expenses at the West Iles facility and some
branch changes in 1999.
The upward trend in equipment expense will continue as the bank continues to
invest in new technology to gain operational efficiencies. Data processing
increased $31,000 and $73,000 for the three and six months ended June 30,
1999, respectively, when compared to the same periods in 1998. This increase
is primarily related to year 2000 compliance efforts. The increase in
correspondent and processing fees is the result of an increase in the number
of merchants in our credit card program and an increase in the costs
associated with processing.
Loan and other real estate owned expenses decreased for the three and six
months ended June 30, 1999, respectively, from the same periods in 1998 due
to the improved performance in our loan portfolio combined with an extensive
collection effort. Marketing and advertising decreased 65.0% and 61.5% for
the three and six months ended June 30, 1999, respectively, when compared to
the same periods in 1998.
Professional fees totaling $497,000 for the six months ended June 30, 1998
were significantly above average. Approximately $348,000 or 70% of this
amount represents fees paid to a consulting firm that was engaged in late
1997 to reengineer the Bank's operations. In 1999, fees totaling $496,000
remain significantly above average. Approximately 40% of these fees were
directly related to shareholder litigation matters.
Other operating expenses were down $20,000 and $40,000 for the three and six
months ended June 30, 1999, respectively, as compared to the same periods in
1998. Management believes our reorganization contributed to a reduction in
other operating expenses by gaining increased efficiencies with our new
staffing levels.
17
<PAGE>
YEAR 2000 ISSUES
The 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, the Bank has made
satisfactory progress with respect to its Year 2000 readiness program. Expenses
for the six months ended June 30, 1999 relating to Year 2000 compliance were
$69,650. 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
the Bank to continue its general business operations.
The Bank has completed 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 the 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, the Bank began focusing on mission critical
applications in order that programming changes are largely completed. As of June
30, 1999, Illini has successfully tested all mission critical systems.
In addition, the 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. The 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 the 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 impact of third-party systems
interacting with the Bank systems, the planning and modification success
attained by the business counterparties of the Bank, and similar uncertainties.
18
<PAGE>
CREDIT QUALITY
Gross loans totaled $101.9 million at June 30, 1999, an increase of $14.7
million, or 16.86%, from $87.2 million at December 31, 1998, while the allowance
for loan losses has remained relatively consistent at $1.4 million at June 30,
1999 and December 31, 1998, respectively. The allowance as a percent of total
loans and nonperforming loans decreased as management has maintained the
allowance for loan losses at a steady balance and loans and nonperforming loans
have increased. Declining consumer loan balances have been substantially offset
by increases in commercial, agricultural, and residential loans.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
-----------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period $1,349 $1,324 $1,368 $1,302
Provision charged to expense 51 51 102 102
Charge-offs 58 81 140 123
Less: recoveries 27 11 39 24
------------ ------------- ------------- ------------
Net charge-offs 31 70 101 99
------------ ------------- ------------- ------------
Balance at end of period $1,369 $1,305 $1,369 $1,305
------------ ------------- ------------- ------------
------------ ------------- ------------- ------------
NET CHARGE-OFF RATIOS (1):
Commercial 0.06% 0.28% 0.29% 0.24%
Real Estate 0.17 0.03 0.12 0.01
Installment (0.18) 1.64 0.53 0.92
Credit Cards 3.08 3.24 2.29 5.43
Totals 0.13% 0.34% 0.22% 0.24%
</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 has remained unchanged at $51,000 and $102,000 for the
three and six months ended June 30, 1999, respectively, as compared to the
comparable periods in the prior year. Net charge-offs decreased to $31,000 and
increased to $101,000 for the three and six months ended June 30, 1999,
respectively, as compared to $70,000 and $99,000 for the comparable periods in
the prior year.
Management feels that credit quality systems and controls implemented in 1996
and 1997, along with the creation of a formalized credit administration function
in 1998, have resulted in significantly improved credit quality. Illini has a
1.34% allowance to ending loans ratio as of June 30, 1999 and 1.57% as of
December 31, 1998 and June 30, 1998, respectively. The net charge-off ratio for
the three and six months ended June 30, 1999 was 0.13% and 0.22% compared to
0.16% and 0.29% for years ended December 31, 1998 and 1997, respectively.
At June 30, 1999, impaired loans totaled $892,000 compared to $1,329,000 at
December 31, 1998. At June 30, 1999, allowance for loan losses on impaired loans
totaled $16,000 compared to $25,000 at December 31, 1998. Of the total impaired
loans at June 30, 1999, there were no loans still accruing interest, and at
December 31, 1998, impaired loans totaling $300,000 were continuing to accrue
interest.
19
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, December 31, June 30,
CREDIT QUALITY 1999 1998 1998
- ----------------------------------------------------- -------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
NONPERFORMING ASSETS:
Loans delinquent over 90 days, still accruing interest $ 0 $ 0 $ 0
Nonaccrual 892 1,029 1,277
Other real estate owned 507 366 1,038
----------------- ------------------ -------------------
Total nonperforming assets $1,399 $1,395 $2,315
----------------- ------------------ -------------------
----------------- ------------------ -------------------
KEY RATIOS:
Nonperforming loans to ending loans 0.88% 1.18% 1.54%
90 days delinquent to ending loans 0.00 0.00 0.00
Allowance to ending loans 1.34 1.57 1.57
Allowance to nonperforming loans 153.48 132.99 102.19
</TABLE>
Illini's loan underwriting guidelines and 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 nonperforming 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 1998 Form 10-KSB and previous Form 10-QSB
reports, management has implemented several initiatives to improve credit
quality. These steps included a new officer driven problem loan identification
system, a revamped allowance for loan losses 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 1999 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's loan quality systems and controls.
20
<PAGE>
CAPITAL RESOURCES
The current economic and regulatory environment places increased emphasis on
capital strength. A strong capital position, which is vital to the continued
profitability of Illini, also promotes depositor and investor confidence and
provides a solid foundation for the future growth of the organization. Illini
has satisfied its capital requirements principally through the retention of
earnings. At March 31, 1999, Tier 1 risk based capital, total risk-based capital
and leverage capital ratios were 12.97%, 14.17% and 9.22%, respectively. As of
June 30, 1999, 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 Board of Directors of the Corporation considers the capital
strength of the Corporation and the Bank in determining the appropriate level of
cash dividends to be paid to shareholders. The dividend payout ratio for the
three and six months ended June 30, 1999 was 80.95% and 124.66%, respectively.
The total dollar amount of dividends for the three and six months ended June 30,
1999 is unchanged from the same periods in 1998.
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 1998 Form 10-KSB, beginning on page 14. Interest rate risk
management at Illini is executed through the use of on-balance sheet investment
products.
The assets portion of the balance sheet provides liquidity primarily through
loan principal repayments, maturities of investment securities, and sales of
investment securities available for sale. The liability side of the balance
sheet provides liquidity through various customers' interest-bearing and
noninterest-bearing deposit 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, 1999, the most
recent calculation, the Bank's core liquidity was $20 million, or 12.3% of total
assets.
Management believes the new formula provides an accurate measurement of
liquidity and provides management with a comprehensible and consistent tool to
develop pricing and profitability strategies. Based on the new measurement and
as compared to peer banks, management believes the liquidity position of the
Bank is strong.
At June 30, 1999, large liability dependence was 11.54%, an increase from 4.76%
at December 31, 1998. The increase in large liability dependence is due to a
decrease in short-term investments of $7.4 million to $1.5 million at June 30,
1999 compared to $8.9 million at December 31, 1998, and an increase in federal
funds purchased of $4.1 million at June 30, 1999 compared to $0.0 million at
December 31, 1998.
21
<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, 1998. Please refer to the Corporation's 1998 Form
10-KSB for further discussion of the Corporation's market and interest rate
risk.
22
<PAGE>
PART II. OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
MARY QUINN V. ILLINI CORPORATION AND ILLINOIS STOCK TRANSFER CO.,
Sangamon County Case No. 98 CH 240
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.
On June 9, 1998, Quinn filed a Motion to Certify the Class, which
was granted on December 29, 1998. On January 13, 1999, Quinn filed an Amended
Complaint adding Illini as a defendant to her action. Illini is represented
in the litigation by Howard & Howard. Both Illini and ISTC have answered the
Amended Complaint and have denied that Ida R. Noll is an acquiring person.
Quinn asserts that she is entitled to recover her attorneys' fees from Illini
and ISTC, which the defendants deny. The parties are currently engaged in
discovery. Quinn filed a Motion for Summary Judgment that asks the Court to
determine as a matter of law that Ida R. Noll became an acquiring person on
April 16, 1998 and that the Rights Agreement was triggered as a result and
that Illini and ISTC have a duty to distribute rights certificates to all
shareholders as of April 16, 1998 except for Ida R. Noll. Illini opposed
Quinn's Motion for Summary Judgment, which was heard by the Court on June 18,
1999.
On June 29, 1999, the Court entered an Opinion and Order denying
Quinn's Motion for Summary Judgment. Illini intends to file its own Motion for
Summary Judgment as soon as possible that will ask the Court to rule as a matter
of law that Ida R. Noll is not an acquiring person, that the Rights Agreement
has not been triggered, and that Illini and ISTC have no duty to distribute
rights certificates to Illini's shareholders.
On or about May 6, 1999, counsel for Mary Quinn advised Illini's
counsel of their intent to seek an injunction that would preclude Illini from
completing its acquisition of the Farmers Bank of Camp Point, an Illinois
corporation, pending further order of the Court. Quinn subsequently filed a
Motion for Preliminary Injunction and a Memorandum of Law in Support of her
Motion. Quinn argued that the class (consisting of all Illini's shareholders as
of April 16, 1998 except for Ida R. Noll) would be irreparably harmed if the
Camp Point merger closed prior to there being a determination on the merits of
her suit. Illini filed extensive briefs in opposition to the Motion for
Preliminary Injunction, and the Court heard the Motion on July 1. The Court
ruled from the bench at that hearing that the Motion was denied, and the Court
subsequently entered a written Order on July 13, 1999 denying the Motion for
Preliminary Injunction.
Quinn's counsel has filed a Motion for Reconsideration of the Orders
denying her Motion for Summary Judgment and her Motion for Preliminary
Injunction. Illini believes that it is unlikely that the Court will reconsider
either order. The Motion for Reconsideration has not yet been scheduled for
hearing.
23
<PAGE>
IDA R NOLL V. ILLINI CORPORATION, ET AL.,
Sangamon County Case No. 98 MR 226
On or about July 17, 1998, Ida R. Noll filed a 14 count complaint
against Illini and all members of Illini's Board of Directors serving at that
time 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. This pleading was also
dismissed, but Plaintiff was granted leave to file a second amended complaint.
Illini and the directors answered the second amended complaint. The second
amended complaint arises out of Illini's adoption of a Shareholder Rights
Agreement on June 20, 1997, Illini's subsequent adoption of a First Amendment to
the Rights Agreement on July 1, 1998, and the Plaintiff's assertion that she
became 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 alleged 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 directors arising out of the
directors' alleged breaches of fiduciary duty 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 asserted that her attorneys' fees through October 23, 1998 were
approximately $50,000 and that her expenses at that time were approximately
$5,000. Illini and the directors have vigorously contested and opposed the
allegations made by Ida R. Noll, and the parties are engaged in discovery in the
case.
The presiding judge in this case is the same judge that presides in the
QUINN case. On July 6, 1999, Illini adopted a Second Amendment to its
Shareholder Rights Agreement. Illini will move to dismiss the Second Amended
Complaint in the near future. If the motion is granted, the counts against
Illini will be dismissed, but dismissal of the counts against Illini will not
necessarily affect the individual directors.
IDA R. NOLL V. ERNEST H. HULS, ILLINI CORPORATION, ET AL,
Sangamon County Case No. 99 CH 196
On or about April 22, 1999, Ida R. Noll filed a new lawsuit against
Illini, Illinois Stock Transfer Company, Ernest H. Huls and Farmers State Bank
of Camp Point in the Seventh Judicial Circuit Court, Sangamon County, Illinois.
The suit seeks specific performance of the Rights Agreement, alleging that
Ernest Huls became an acquiring person under the Rights Agreement by reason of
his right to receive shares of Illini common stock pursuant to an Agreement and
Plan of Reorganization between Illini and the Farmers State Bank of Camp Point.
Ida Noll seeks to compel Illini and ISTC to distribute rights certificates to
all shareholders of Illini except for Mr. Huls. Illini strongly disputes Ida
Noll's assertion that Ernest Huls has become an acquiring person under the
Rights Agreement. Illini was served with this complaint on April 27, 1999.
In June 1999, Illini and ISTC filed a joint Motion to Dismiss Noll's
Complaint on the grounds that the alleged acquiring person, Ernest Huls, is not
a beneficial owner of a substantial block of Illini common stock. The Motion to
Dismiss was scheduled for hearing on July 20, but on July 16, Plaintiff's
counsel moved for a substitution of judges. Illini and ISTC have opposed
substitution, and Plaintiff's Motion for Substitution will be heard on August
25, 1999. Illini intends to have its Motion to Dismiss heard as soon after the
Motion for Substitution is heard as is possible.
Item 2 CHANGES IN SECURITIES - none
Item 3 DEFAULTS UPON SENIOR SECURITIES - none
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
24
<PAGE>
The Annual Meeting of Shareholders of the Company was held on May 20,
1999, for the purpose of electing four directors each to serve a term
of three years and ratifying the appointment of KPMG LLP as the
Company's auditors for the fiscal year ending December 31, 1999.
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 four 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>
Charles H. Delano III 787,354 3,369 0
Kenneth G. Deverman 265,326 3,369 0
William N. Etherton 264,154 3,369 0
John H. Pickrell 259,673 3,369 0
</TABLE>
The following persons continued their terms of office as directors of
the Company following the Annual Meeting: Thomas A. Black, Ronald E.
Cramer, Lawrence B. Curtin, Willaim B. McCubbin, Burnard K. McHone,
Robert F. Olson, N. Ronald Thunman, William G. Walschleger, Jr., and
Perry Williams.
The appointment of KPMG LLP as the Company's auditors for the fiscal
year ending December 31, 1999, was ratified. The results of the vote
were as follows:
<TABLE>
<CAPTION>
"FOR" "AGAINST" "ABSTAIN"
------- --------- ---------
<S> <C> <C> <C>
Ratification of KPMG LLP 353,636 25,027 18,833
</TABLE>
The shareholder proposal recommending that Illini's Board of Directors
rescind or otherwise terminate the Company's Shareholder Rights
Agreement was approved. The results of the vote were as follows:
<TABLE>
<CAPTION>
"FOR" "AGAINST" "ABSTAIN"
------- --------- ---------
<S> <C> <C> <C>
179,388 173,403 17,353
</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:
Illini filed a Form 8-K on May 20, 1999 containing as an
exhibit Illini's amended and restated Bylaws.
25
<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 11, 1999
- --------------------------------------------- ----------------
Burnard K. McHone Date signed
President
By: /s/ Deann Hager August 11, 1999
- --------------------------------------------- ----------------
Deann Hager Date signed
Controller
26
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,076
<INT-BEARING-DEPOSITS> 119,491
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 46,321
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 101,870
<ALLOWANCE> 1,369
<TOTAL-ASSETS> 162,810
<DEPOSITS> 141,778
<SHORT-TERM> 4,305
<LIABILITIES-OTHER> 1,971
<LONG-TERM> 0
0
0
<COMMON> 4,485
<OTHER-SE> 10,271
<TOTAL-LIABILITIES-AND-EQUITY> 162,810
<INTEREST-LOAN> 3,978
<INTEREST-INVEST> 1,484
<INTEREST-OTHER> 71
<INTEREST-TOTAL> 5,533
<INTEREST-DEPOSIT> 2,400
<INTEREST-EXPENSE> 2,443
<INTEREST-INCOME-NET> 3,090
<LOAN-LOSSES> 102
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 3,721
<INCOME-PRETAX> 222
<INCOME-PRE-EXTRAORDINARY> 222
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 180
<EPS-BASIC> 0.40
<EPS-DILUTED> 0.40
<YIELD-ACTUAL> 4.42
<LOANS-NON> 892
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 263
<ALLOWANCE-OPEN> 1,368
<CHARGE-OFFS> 140
<RECOVERIES> 39
<ALLOWANCE-CLOSE> 1,369
<ALLOWANCE-DOMESTIC> 470
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 899
</TABLE>
