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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/X/ Annual Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 (FEE
REQUIRED)
/ / Transition Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1998
Commission file number 0-13343
ILLINI CORPORATION
(Name of small business issuer in its charter)
Illinois
(State of Incorporation)
(I.R.S. Employer I.D. No.)
37-1135429
3200 West Iles Avenue
Springfield, Illinois 62707
(Address of principal executive offices and zip code)
Issuer's telephone number
(217) 787-5111
Securities registered pursuant to Section
12(b) of the Exchange Act:
None
Securities registered pursuant to Section
12(g) of the Exchange Act:
Common Stock, par value $10.00 per share
(Title and Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
The Registrant's revenues for fiscal year 1998 were $13,262,000.
On March 1, 1999, 448,456 shares of common stock were outstanding. The aggregate
market value of such shares held by non-affiliates of the registrant was
approximately $13,229,452 (based on the average of the bid and asked prices of
securities traded through Dean Witter Reynolds, Inc., Springfield, Illinois).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Corporation's definitive proxy statement dated March 22, 1999,
are incorporated by reference into Part III, hereof.
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TABLE OF CONTENTS
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<TABLE>
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PART I Page
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1. Description of Business.......................................................................................2
2. Properties....................................................................................................7
3. Legal Proceedings.............................................................................................7
4. Submission of Matters to a Vote of Security Holders...........................................................8
PART II
5. Market for Common Equity and Related Stockholder Matters......................................................8
6. Management's Discussion and Analysis of Financial Condition & Results of Operations...........................9
7. Financial Statements.........................................................................................30
8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................................................................53
PART III
9. Directors and Executive Officers of the Registrant...........................................................53
10. Executive Compensation.......................................................................................53
11. Security Ownership of Certain Beneficial Owners and Management...............................................53
12. Certain Relationships and Related Transactions...............................................................53
13. Exhibits and Reports on Form 8-K.............................................................................54
Signatures.......................................................................................................55
</TABLE>
PART I
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ITEM 1. - DESCRIPTION OF BUSINESS
Illini Corporation ("Illini" or "Corporation"), a bank holding company as
defined in the Bank Holding Company Act of 1956, as amended, was incorporated
under the laws of the State of Illinois in 1983. Illini presently operates one
wholly owned subsidiary bank, Illini Bank, with 18 locations throughout five
counties in central Illinois. Illini's executive offices are located at 3200
West Iles Avenue, Springfield, Illinois 62707, and its telephone number is
217/787-5111.
Illini's management philosophy is to centralize overall corporate policies,
procedures, and administrative functions and provide operational support for the
subsidiary bank. Within these parameters, each location is allowed flexibility
in responding to local market conditions and customer and community needs.
Illini is committed to being a well managed, profitable financial institution
providing a broad range of financial services and products and contributing to
the economic and social environment of its communities.
Illini Bank (the "Bank") is an Illinois state bank, which had total assets
of $160.6 million at December 31, 1998. The Bank maintains 18 banking facilities
in the following Illinois communities: Springfield, Lincoln, Petersburg, Auburn,
Danvers, Dawson, Divernon, Elkhart, Greenview, Hudson, Mechanicsburg, Owaneco,
Sherman, Stonington, and Tallula.
The Bank offers its customers a wide variety of financial services and
products. Deposit products include a variety of checking, NOW, money market,
savings, investment sweep accounts, and certificates of deposit. Lending
products include short, intermediate, and long-term business and agricultural
loans, commercial and residential real estate loans, personal and consumer
purchase loans, home equity, and personal secured and unsecured lines of credit.
Additional product offerings include letters of credit, credit cards, notary
services, safe deposit boxes, and check imaging.
The Bank's deposit accounts are insured by the Federal Deposit Insurance
Corporation (the "FDIC") under the Bank Insurance Fund ("BIF") to the maximum
amount allowed by law. Illini is supervised and
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regulated by the Board of Governors of the Federal Reserve ("FRB") and the Bank
is supervised and regulated by the FDIC and the Office of Banks and Real Estate
of the State of Illinois.
- - COMPETITION
The activities and geographic markets in which Illini is engaged are highly
competitive. Competition among financial institutions is based upon interest
rates offered on deposit accounts, interest rates charged on loans and other
credit and service charges, the quality of services rendered, the convenience of
banking facilities and, in the case of loans to large commercial borrowers,
relative lending limits.
The Bank competes with other banks, savings and loan associations, credit
unions, industrial loan associations, securities firms, insurance companies,
small loan companies, finance companies, mortgage companies, certain
governmental agencies, and credit organizations.
- - SUPERVISION AND REGULATION - GENERAL
Various federal and state banking laws and regulations affect the business
of Illini and the Bank. They are subject to supervision, regulation, and
periodic examination by the Board of Governors of the FRB and the Commissioner
and the FDIC, respectively. The following is a summary of certain statutes and
regulations affecting Illini and the Bank. This summary is qualified in its
entirety by such statutes and regulations, which are subject to change based on
pending and future legislation and action by regulatory agencies. Proposals to
change the laws and regulations governing the operation of banks and companies
which control banks and other financial institutions are frequently raised in
Congress. The likelihood of any major legislation and the impact such
legislation might have on Illini or the Bank are, however, impossible to
predict.
- - THE BANK HOLDING COMPANY ACT
As a bank holding company, Illini is subject to regulation by the FRB under
the Bank Holding Company Act of 1956, as amended (the "BHCA"). The BHCA
restricts the product range of a bank holding company by circumscribing the
types of businesses it may own or acquire. The BHCA limits a bank holding
company to owning and managing banks or companies engaged in activities
determined by the FRB to be closely related to banking.
Among the activities that the FRB has determined are closely related to
banking are activities that are usual in connection with making, acquiring,
brokering or servicing loans, leasing personal or real property, engaging in
trust company functions, acting as investment or financial advisor, providing
securities brokerage services, certain management consulting and counseling
services, engaging in certain insurance agency activities and providing data
processing services.
The BHCA requires a bank holding company to obtain the prior approval of
the FRB before acquiring substantially all of the assets or direct or indirect
ownership or control of more than five percent of the voting shares of a bank or
a bank holding company or merging or consolidating with any other bank holding
company.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act"), since September 29, 1995, the FRB is permitted,
under specified circumstances, to approve the acquisition by a bank holding
company located in one state of a bank or a bank holding company located in
another state, without regard to any prohibition contained in state law.
The Riegle-Neal Act permits states to require that a target bank have been
in operation for a minimum period, up to five years, and to impose
non-discriminatory limits on the percentage of the total amount of deposits with
insured depository institutions in the state which may be controlled by a single
bank or bank holding company. In addition, the Riegle-Neal Act imposes federal
deposit concentration limits (10% of nationwide total deposits, and 30% of total
deposits in the host state on applications subsequent to the applicant's initial
entry to the host state), and adds new statutory conditions to FRB approval,
i.e., the applicant meets or exceeds all applicable federal regulatory capital
standards and is "adequately managed."
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The Riegle-Neal Act also authorized, effective June 1, 1997, the
responsible federal banking agency to approve applications for mergers of
depository institutions across state lines without regard to whether such
activity is contrary to state law. Any state could, however, by adoption of a
non-discriminatory law after September 29, 1994 and before June 1, 1997,
elect to opt-out of the provision. The effect of opting out is to prevent
banks chartered by, or having their main office located in, such state from
participating in any interstate branch merger. Each state was permitted to
retain a minimum age requirement of up to five years, a non-discriminatory
deposit cap, and non-discriminatory notice or filing requirements. The
responsible federal agency will apply the same federal concentration limits
and capital management adequacy requirements noted above with respect to BHCA
applications. Only Texas opted-out of the interstate merger provision.
While Illinois adopted legislation to opt-in to the interstate merger
provision, unlike some states and as permitted by federal law, Illinois law does
not authorize the establishment of de novo branches or the purchase by an
out-of-state bank of one or more branches of a bank with its main office in
Illinois. Since the laws of the various states which do authorize de novo
branches or branch purchases normally have reciprocity provisions, Illinois
state-chartered banks generally are not able to establish or acquire branches in
other states except through the merger with a bank in another state.
Branches acquired in a host state by both out-of-state state-chartered and
national banks will be subject to community reinvestment, consumer protection,
fair lending, and interstate branching laws of the host state to the same extent
as branches of a national bank having its main office in the host state. Among
other things, the Riegle-Neal Act also preserves state taxation authority,
prohibits the operation by out-of-state banks of interstate branches as deposit
production office, imposes additional notice requirements upon interstate banks
proposing to close branch offices in a low or moderate-income area, and creates
new Community Reinvestment Act evaluation requirements for interstate depository
institutions.
- - DIVIDEND RESTRICTIONS
Illini's principal source of income is the Bank's payment of dividends
on the stock of the Bank owned by Illini. Illinois law restricts the Bank's
ability to pay these dividends. Under the Illinois Banking Act, no dividend
may be declared by an Illinois state-chartered bank (i) except out of the
bank's net profits and (ii) unless the bank has transferred to surplus at
least one-tenth of its net profits since the date of the declaration of the
last preceding dividend, until the amount of its surplus is at least equal to
its capital. Net profits under the Illinois Banking Act must be adjusted for
losses and bad debts (i.e. debts owing to the bank on which interest is past
due and unpaid for a period of six months or more unless such debts are well
secured and in the process of collection).
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), no insured depository institution may declare any dividend if,
following the payment of such dividend, the institution would be under-
capitalized.
- - TRANSACTIONS WILL AFFILIATES AND INSIDERS
The Bank and Illini are affiliates of each other and, as such, are subject
to certain federal restrictions on loans and extensions of credit to Illini, on
investments in Illini's and its affiliates' securities, on acceptance of such
securities as collateral for loans to any borrower and on leases and services
and other contracts between the Bank and Illini. Additionally, regulations allow
the Bank to extend credit to the Bank's and its affiliates' executive officers,
directors, and principal shareholders or their related interests only if the
loan is made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
non-insiders. Moreover, loans to insiders must not involve more than the normal
risk or repayment or present other unfavorable features and must, in certain
circumstances, be approved in advance by a majority of the entire board of
directors of the Bank. The aggregate amount that can be lent to all insiders is
limited to the Bank's unimpaired capital and surplus. There are additional
limitations on the amount of loans that can be made to the Bank's executive
officers.
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- - DEPOSIT INSURANCE
Deposits held by the Bank are insured, to the extent permitted by law, by
the Bank Insurance Fund ("BIF") administered by the FDIC. A minimum designated
reserve ratio of 1.25 percent of insured deposits has been established for the
BIF. However, the FDIC may set a higher designated reserve ratio if
circumstances raise a significant risk of substantial future losses to the BIF.
Assessment rates are established sufficient to maintain reserves at the
designated reserve ratio or, if the ratio is less than the designated ratio, to
increase the ratio to the designated ratio within a reasonable period of time.
As required under FDICIA, the FDIC has established a system of risk-based
deposit insurance premiums. Under this system each insured institution's
assessment is based on the probability that the BIF will incur a loss related to
that institution, the likely amount of the loss, and the revenue needs of the
BIF.
Under the risk-based assessment system, currently, a depository institution
pays an assessment of between 0 cents and 27 cents per $100 of insured deposits
based on its capital level and risk classification. To arrive at a risk-based
assessment for an insured institution, the FDIC places it in one of nine risk
categories using a two step analysis based first on capital ratios and then on
relevant supervisory information. In addition, in 1996, pursuant to the Deposit
Insurance Funds Act, enacted by Congress in September, the FDIC imposed a
special assessment on bank deposits at a rate not tied to risk classification in
order to service debt on the Financing Corporation (FICO) bonds issued in
connection with the federal government's bail out of the thrift industry. Any
further significant changes in the deposit insurance assessment rate imposed by
the FDIC could have a material effect on the earnings of Illini.
- - CAPITAL REQUIREMENTS
The FRB has imposed risk-based capital guidelines applicable to Illini.
These guidelines require that bank holding companies maintain capital
commensurate with both on and off balance sheet credit and other risks of their
operations. Under the guidelines, a bank holding company must have a minimum
ratio of total capital to risk-weighted assets of 8 percent. In addition, a bank
holding company must maintain a minimum ratio of Tier 1 capital equal to 4
percent of risk-weighted assets. Tier 1 capital includes common shareholders'
equity, qualifying perpetual preferred stock and minority interests in equity
accounts of consolidated subsidiaries, less goodwill. As a supplement to
risk-based capital requirements, the FRB has also imposed leverage capital ratio
requirements. The leverage ratio requirements establish a minimum required ratio
of Tier 1 capital to total assets less goodwill of 3 percent for the most highly
rated bank holding companies. All other bank holding companies are required to
maintain additional Tier 1 capital yielding a leverage ratio of 4 percent to 5
percent, depending on the particular circumstances and risk profile of the
institution. Refer to the Capital Resources Section of Item 6 and Note 12
included under Item 7 for a summary of Illini's capital ratios as of December
31, 1998 and 1997.
The Bank is also subject to risk-weighted capital standards and leverage
measures which are similar, but in some cases not identical, to the requirements
for bank holding companies which apply to Illini. At December 31, 1998, the Bank
met all applicable capital requirements. Under FDICIA, the federal bank
regulators must take various specified prompt corrective actions based on levels
of an insured depository institution's capital that are below the adequately
capitalized level. These prescribed actions increase restrictions on the
institution as its capital declines.
- - SAFETY AND SOUNDNESS GUIDELINES
As required by federal law, the federal banking regulators have adopted
interagency guidelines (the "Guidelines") establishing standards for safety and
soundness for depository institutions on matters such as internal controls,
internal audit systems, loan documentation, credit underwriting, interest rate
risk exposure, asset growth and quality, earnings, and compensation and other
benefits. In general, the Guidelines prescribe the goals to be achieved in each
area, and each institution will be responsible for establishing its own
procedures to achieve these goals. If an institution fails to comply with any of
the standards set forth in the Guidelines, the institution's primary federal
regulator may require the institution to submit a plan for achieving and
maintaining compliance. The preamble to the Guidelines states that an
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agency expects to require a compliance plan from an institution whose failure to
meet one or more standards is of such severity that it would threaten the safe
and sound operation of the institution. Failure to submit an acceptable
compliance plan, or failure to adhere to a compliance plan that has been
accepted by the appropriate regulator, would constitute grounds for further
enforcement action.
FDIC regulations also require all depository institutions with assets
in excess of $250 million to be examined annually by the banking regulators.
Depository institutions with assets of $250 million or less which are well
capitalized, well managed, have a CAMELS rating of 1 or 2, are not subject to
a formal enforcement proceeding or order and have not undergone a change in
control in the previous twelve months are eligible to be examined every
eighteen months. FDIC regulations also require insured depository
institutions having $500 million or more in total assets to prepare annual
financial statements which are audited by an independent public accountant,
to have an audit committee comprised solely of outside directors, and to hire
outside auditors to evaluate the institution's internal control structure.
For institutions that are subsidiaries of bank holding companies, the
financial statement requirement can be satisfied by audited financial
statements of the consolidated bank holding company. Other audit related
requirements for subsidiary institutions that have total assets of less than
$5 billion or assets of $5 billion or more and a composite CAMELS rating of 1
or 2 also may be satisfied by the parent bank holding company. The FDIC, in
adopting the regulations, reiterated its belief that every depository
institution, regardless of size, should have an annual independent audit and
an independent audit committee.
- - MONETARY POLICY AND ECONOMIC CONDITIONS
The business of commercial banks, such as the Bank is affected by monetary
and fiscal policies of various regulatory agencies, including the FRB. Among the
regulatory techniques available to the FRB are open market operations in United
States Government securities, changing the discount rate for member bank
borrowings, and imposing and changing the reserve requirements applicable to
member bank deposits and to certain borrowings by member banks and their
affiliates (including parent companies). These policies influence to a
significant extent the overall growth and distribution of bank loans,
investments and deposits and the interest rates charged on loans, as well as the
interest rates paid on savings and time deposits.
The monetary policies of the FRB have had a significant effect on the
operating results of commercial banks in the past and are expected to continue
to do so in the future. In view of constantly changing conditions in the
national economy and the money market, as well as the effect of acts by the
monetary and fiscal authorities, including the FRB, no definitive predictions
can be made by Illini or the Bank as to future changes in interest rates, credit
availability, deposit levels, or the effect of any such changes on Illini's or
the Bank's operations and financial condition.
- - EMPLOYEES
As of December 31, 1998, Illini and the Bank had 99 total employees and 72
full-time employees.
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- - STATISTICAL DISCLOSURE
<TABLE>
<CAPTION>
Page(s)
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Consolidated Average Balances, Interest
Income/Expense and Yields/Rates........................................................................20 & 21
Rate/Volume Variance Analysis....................................................................................19
Investment Securities Available for Sale.........................................................................10
Investment Securities Available for Sale Maturity Schedule.......................................................12
Loan Portfolio...................................................................................................12
Selected Loan Maturity and Interest Rate Sensitivity.............................................................13
Nonperforming Assets.............................................................................................24
Summary of Loan Loss Experience..................................................................................23
Allocation of Allowance for Loan Losses..........................................................................23
Maturities of Time Deposits......................................................................................14
Return on Equity and Assets......................................................................................18
Interest Rate Sensitivity Analysis...............................................................................15
Noninterest Income...............................................................................................26
Noninterest Expense..............................................................................................27
</TABLE>
ITEM 2. - PROPERTIES
Illini's corporate offices are located at 3200 West Iles Avenue,
Springfield, Illinois. The Bank owns 15 and leases three of the banking offices
at which it operates. Operating leases are further discussed in Note 5 in Item
7. The Bank operates four banking offices in Springfield, Illinois and one each
in the following Illinois communities: Auburn, Danvers, Dawson, Divernon,
Elkhart, Greenview, Hudson, Lincoln, Mechanicsburg, Owaneco, Petersburg,
Sherman, Stonington, and Tallula. The Bank leases space for the banking offices
in Lincoln, Petersburg and 615 W. Jefferson, Springfield.
ITEM 3. - 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. This pleading was
also dismissed, but Plaintiff was granted leave to file a second amended
complaint. Illini and the directors recently answered the second amended
complaint. The second 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 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 intend to vigorously contest and oppose the
allegations made by Ida R. Noll, and the parties are just beginning discovery in
the case.
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
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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 Corporation 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.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
PART II.
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ITEM 5. - MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Illini is traded on the Nasdaq over the counter
bulletin board (OTCBB). The following table sets forth the high and low bid
prices by calendar quarter of the common stock of Illini as reported by Dean
Witter Reynolds, Inc. and A.G. Edwards & Sons, St. Louis, Missouri in 1998 and
1997. The prices shown do not reflect retail mark-ups, markdowns, or commissions
and may not represent actual transactions.
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<TABLE>
<CAPTION>
CASH
DIVIDENDS
1998 HIGH LOW DECLARED
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<S> <C> <C> <C>
1ST QUARTER $ 28.50 $ 28.00 $.25
2ND QUARTER 28.50 28.50 .25
3RD QUARTER 28.75 28.50 .25
4TH QUARTER 28.75 28.75 .25
Cash
Dividends
1997 High Low Declared
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1st Quarter $25.50 $25.50 $.25
2nd Quarter 27.00 25.50 .25
3rd Quarter 27.00 27.00 .25
4th Quarter 28.00 27.00 .25
</TABLE>
As of December 31, 1998, there were 1,495 shareholders of record of
Illini common stock.
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ITEM 6. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- - INTRODUCTION
The following discussion highlights the significant factors affecting the
operations and financial condition of Illini for the two years ended December
31, 1998. The discussion should be read in conjunction with the consolidated
financial statements, accompanying notes, and selected financial data appearing
elsewhere within this report.
Illini cautions that any forward looking statements contained in this
report, in a report incorporated by reference to this report, or made by
management involve estimates and uncertainties and are subject to change based
upon various important factors. Actual results for 1999 and beyond could differ
materially from results expressed or implied by forward looking statements in
this report.
- - SUMMARY
Management views 1998 as an investment in the future of Illini Corporation.
Short term profitability was sacrificed to stabilize the organization and
prepare Illini to compete in the ever changing financial environment. Net income
for 1998 was $630,000 or $1.40 per share. This represents 3.1% decrease from
1997's net income of $650,000. A complete reengineering of the Bank's operations
began in early 1998 and will continue throughout 1999. Management believes the
new operational design will allow for future growth and help in stabilizing our
overhead structure.
The recent earnings decline has been primarily due to the intensive effort
to solidify the loan portfolio and reduce net charge-offs to an acceptable
level. Interest and fee income on loans declined slightly in 1998 due to a
falling rate environment and slow growth in the portfolio. A centralized credit
department was organized in late 1998 and management now feels we are positioned
to increase our loan volume in 1999 while maintaining an acceptable amount of
credit risk in the loan portfolio.
The increase in operating expenses was primarily in three areas. Increased
occupancy and equipment expense relating to the opening of a new main banking
facility in December 1997, increased data processing costs, and a large increase
in fees paid to outside consultants and attorneys to assist management in
strategic planning and shareholder related activities. The Bank reduced
marketing expense by $230,000 in 1998. Management will initiate a more
aggressive marketing campaign in 1999 to promote new products and services.
Non interest income rose significantly in 1998. The gain on the sale of
other real estate represented 71% of the increase. The additional increase was
associated with the refinancing of fixed rate mortgages. Management believes the
restructuring of our deposit pricing will help to increase fee income in 1999.
Management will focus on maintaining improved credit quality, controlling
operating costs, and increasing the Bank's revenues through improved sales
efforts in 1998 and beyond. Management is committed to investing in our future
by developing our team of associates and implementing the necessary technology
to become a "customer first" organization. We believe we built a foundation in
1998 to prepare our organization for growth and leverage our position as a
locally owned community bank in the markets we serve.
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The following table details changes in Illini's net income per share over
the last two fiscal years.
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CHANGE IN EARNINGS PER SHARE (EPS)
FOR 1998 AND 1997
<TABLE>
<CAPTION>
1998-97 1997-96
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<S> <C> <C>
PER SHARE
Net income prior period $ 1.45 $ 1.04
Change in EPS attributable to change in:
Net interest income (1.08) (0.12)
Provision for loan losses 0.22 1.85
Noninterest income 1.45 0.08
Noninterest expense (0.56) (1.30)
Income tax expense (0.08) (0.10)
-------- ---------
Net increase (decrease) (0.05) .41
-------- ---------
Net income current period $ 1.40 $ 1.45
-------- ---------
-------- ---------
</TABLE>
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- - OVERVIEW-BALANCE SHEET REVIEW
Average assets were $153.7 million in 1998, an increase of $7.0 million or
4.8% from 1997. Average loans were $84.0 million in 1998, a decline of $3.5
million or 4.0% from 1997. Management believes the decrease in loan volume is an
expected outcome from the reengineering of the Corporation. Efforts to
aggressively pursue new loan relationships will be the primary focus in 1999 in
both consumer and commercial loan services. Average deposits were $136.6 million
in 1998, an increase of $8.2 million or 6.4% from 1997. We believe this trend of
growth will continue as our product offerings become more sophisticated and the
level of merger and acquisition activity continues to rise.
- - SECURITIES
Total securities as of December 31, 1998 were $53.3 million, an increase of
$6.5 million or 13.8% over the prior year-end. At December 31, 1998 and 1997,
the total securities portfolio comprised 33.1% and 30.2%, respectively, of total
assets.
Illini's investment strategy is to maximize portfolio yields commensurate
with credit risk and liquidity considerations. The decision to purchase or sell
securities is based upon the current assessment of economic and financial
conditions, including the interest rate environment. Approximately $9.4 million
or 17.7% of the securities portfolio at December 31, 1998 matures or reprices
within one year. Scheduled maturities and the prepayment of mortgage-backed
securities represent a source of liquidity for the Bank as well as federal funds
sold, federal funds purchased lines, and lines of credit established at other
banks which are discussed further in the Liquidity section of this report.
Mortgage-backed securities as of December 31, 1998 totaled $25.4 million
and represent 47.6% of total securities. The distribution of mortgage-backed
securities include $16.9 million of U.S. government agency mortgage-backed pass
through securities and $8.5 million of private issue collateral mortgage
obligations, all of which are rated AAA.
At December 31, 1998, securities available for sale totaled $53.3 million.
There were no securities classified as held to maturity or trading at the end of
1998 or 1997. The securities available for sale portfolio at the end of 1998
included gross unrealized gains of $744,000 and gross unrealized losses of
$81,000, of which the combined effect, net of tax, is included as an unrealized
gain in stockholders' equity. For comparative purposes, at December 31, 1997,
gross unrealized gains of $339,000 and gross unrealized losses of $88,000 were
included in the securities available for sale portfolio. For further analysis of
the securities portfolio, see Note 2 in Item 7.
10
<PAGE>
- - MATURITIES AND DURATION
The maturities and weighted average yields of the investment portfolio at
the end of 1998 are presented in the following table. Maturities of private
mortgage-backed securities are based on their average expected lives and include
the effects of anticipated prepayments. All other securities are listed at their
actual maturity or contractual repricing interval. The amounts and yields
disclosed reflect the net carrying value, which is the same as fair value.
Taxable equivalent adjustments, using a 34% tax rate, have been made in
calculating yields on tax-exempt obligations.
The securities portfolio at December 31, 1998 contained no securities of
any issuer with an aggregate book or market value in excess of 10% of Illini's
shareholders' equity, excluding those issued by the United States government, or
its agencies or corporations.
11
<PAGE>
- --------------------------------------------------------------------------------
MATURITIES AND YIELD OF SECURITIES
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
TOTAL TAX EQUIVALENT YIELD
----- --------------------
(dollars in thousands)
<S> <C> <C>
U.S. Treasury securities:
0 to 1 year $ 1,263 5.89%
1 to 5 years 1,031 5.20
------- -----
Total $ 2,294 5.58%
------- -----
------- -----
U.S. government agencies:
1 to 5 years $11,761 6.24%
5 to 10 years 5,516 5.92
------- -----
Total $17,277 6.14%
------- -----
------- -----
Mortgage-backed securities and
Collateralized mortgage obligations:
0 to 1 year $ 1,972 5.66%
1 to 5 years 11,649 6.29
5 to 10 years 5,103 6.34
Over 10 years 6,634 5.91
------- -----
Total $25,358 6.15%
------- -----
------- -----
States of the U.S. and political subdivisions:
0 to 1 year $ 965 7.22%
1 to 5 years 878 7.22
5 to 10 years 3,366 7.32
Over 10 years 2,685 7.64
------- -----
Total $ 7,894 7.40%
------- -----
------- -----
FHLB stock and other
equity securities, no stated maturity $ 453 --
Total securities:
0 to 1 year $ 4,200 6.09%
1 to 5 years 25,319 6.25
5 to 10 years 13,985 6.41
Over 10 years 9,319 6.40
No stated maturity 453
------- -----
Total $53,276 6.31%
------- -----
------- -----
</TABLE>
- --------------------------------------------------------------------------------
- - LOANS
Illini's loan portfolio consists of a diverse variety of loan types within
the following major categories: commercial real estate, residential real estate,
consumer, commercial, and agricultural loans.
Average total loans declined $3.5 million from $87.5 million in 1997 to
$84.0 million in 1998. Contraction in the loan portfolio resulted primarily from
management's priority on evaluating and managing credit risk in existing loan
relationships over new business development.
The largest contraction was in commercial loans for which the average
balance declined $4.4 million to $10.7 million in 1998. Consumer loans declined
$3.6 million to $10.8 million and residential real estate loans declined $3.8
million to $20.8 million. Commercial real estate loans increased $6.4 million to
$31.0
12
<PAGE>
million and agricultural loans increased $1.6 million to $7.4 million.
Agricultural real estate loans at $2.7 million remained relatively stable in
1998.
All of Illini's loans are domestic. Illini does not currently engage in
foreign loans, lease financing, or loans to financial institutions.
Additionally, Illini does not have any concentration of loans exceeding 10% of
total loans, which are not otherwise disclosed under "types of loans."
Each major type of loan will normally have different risk elements. Real
estate loans and installment loans to individuals can be affected by the general
strength of the economy in a given geographical area. A wide range of economic
and other factors can impact the businesses to which commercial loans are
extended. Such things as drought, floods, U.S. and foreign market prices, and
federal government subsidies and programs can affect agricultural loans.
Illini's susceptibility to these risk elements has decreased as prior
deficiencies in overall loan portfolio management and credit risk management
systems and controls have been corrected.
- - TYPES OF LOANS
A summary of loans by type as of December 31, 1998 and 1997 is set forth in
Note 3 in Item 7.
- - MATURITIES AND INTEREST RATE SENSITIVITY OF LOANS
$27.5 million or 31.5% of the Bank's loan portfolio reprices within one
year. $82.4 million or 94.6% of the portfolio reprices within five years. The
relatively short duration of the loan portfolio requires diligence on the part
of management to replace and/or renew maturing loans more frequently. However,
it benefits the Bank by decreasing its susceptibility to rising interest rates
and by allowing management more frequent opportunities to reassess and adjust
loan agreements with borrowers and to exit deteriorating loan relationships.
62.1% of commercial, financial, and agricultural loans mature within one year.
LOANS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATURITY
------------------------------------------------------
ONE YEAR ONE TO AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural $ 12,756 $ 6,508 $ 1,289 $ 20,553
Real estate construction 5,486 1,024 594 7,104
-------- ------- -------- --------
$ 18,242 $ 7,532 $ 1,883 $ 27,657
-------- ------- -------- --------
-------- ------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
INTEREST SENSITIVITY
---------------------------------------------------------
FIXED FLOATING OR
INTEREST ADJUSTABLE
RATES INTEREST RATES TOTAL
-------- -------------- -----
(dollars in thousands)
<S> <C> <C> <C>
Loans due after one but within five years $ 5,938 $ 1,594 $ 7,532
Loans due after five years 643 1,240 1,883
------- ------- --------
$ 6,581 $ 2,834 $ 9,415
------- ------- --------
------- ------- --------
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE>
DEPOSITS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE BALANCES OF DEPOSITS AND
COST OF FUNDS
-------------------------------------------------------
1998 1997
AVERAGE AVERAGE
------------------------ -------------------
BALANCE RATE BALANCE RATE
------- ---- ------- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Noninterest bearing demand deposits $ 21,103 --- $ 20,246 ---
NOW and money market deposit accounts 35,319 3.61 % 27,311 2.92 %
Savings deposits 17,474 2.41 18,287 2.47
Time deposits 62,676 5.53 62,533 5.46
---------- ------ -------- ------
$ 136,572 3.78 % $128,377 3.63 %
---------- ------ -------- ------
---------- ------ -------- ------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATURITY OF TIME DEPOSITS GREATER THAN $100,000
AT DECEMBER 31, 1998
------------------------------------------------------
TIME OTHER
CERTIFICATES TIME
OF DEPOSIT DEPOSITS TOTAL
------------ -------- -----
(dollars in thousands)
<S> <C> <C> <C>
Three months or less $ 6,085 $ ---- $ 6,085
Three to six months 1,246 ---- 1,246
Six to twelve months 3,089 2,400 5,489
Over twelve months 2,244 ---- 2,244
------- -------- --------
$ 12,664 $ 2,400 $ 15,064
------- -------- --------
------- -------- --------
</TABLE>
- --------------------------------------------------------------------------------
Average deposits increased $8.2 million or 6.4% to $136.6 million in 1998.
Due to the reduction in deposits required to fund loan growth, management was
able to hold deposit rates steady. The Bank's overall cost of funds related to
deposits increased 15 basis points to 3.78% in 1998. Noninterest bearing
accounts increased $1.1 million to $26.2 million, NOW and Money Market accounts
were up $8.3 million to $38.9 million, and Time Deposits decreased $3.3 million
to $60.8 million in 1998. Total deposits increased $5.4 million or 3.9% to
$143.0 million in 1998.
- - LIQUIDITY
Liquidity represents the availability of funding to meet obligations to
depositors, borrowers, and creditors at a reasonable cost without adverse
consequences. Accordingly, the liquidity position is influenced by the funding
base and asset mix.
Illini requires adequate liquidity to pay its expenses and pay stockholder
dividends. Liquidity is provided to Illini from the Bank in the form of
dividends. In 1998, dividends from the Bank amounted to $0.7 million compared to
$0.9 million in 1997. The Bank's liquidity is provided by bank cash balances,
liquidation of short-term investments, loan payments, an overnight federal funds
line of credit, and borrowings on a line of credit available with the Federal
Home Loan Bank of Chicago. While the Bank is limited in the amount of dividends
it pays, as of December 31, 1998, approximately $0.2 million was available for
payment to Illini in the form of dividends without prior regulatory approval.
Cash and cash equivalents which includes federal funds remained relatively
unchanged from December
14
<PAGE>
31, 1997 to December 31, 1998.
The asset 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 portion of the balance sheet provides liquidity through
federal funds purchased, securities sold under agreements to repurchase, and
other short-term borrowings. As of December 31, 1998 Illini has established an
overnight federal funds line of credit with an unaffiliated financial
institution in the amount of $3.5 million, with the entire amount available for
borrowing. The Bank is also a member of the Federal Home Loan Bank of Chicago
and has established a line of credit of approximately $4.0 million as of
December 31, 1998, with the entire amount available for additional borrowings.
The various sources of liquidity available to the Bank provide ample long-term
as well as short-term funding alternatives.
- - INTEREST RATE SENSITIVITY
In conjunction with maintaining a satisfactory level of liquidity,
management monitors the degree of interest rate risk assumed on the balance
sheet. Illini monitors its interest rate risk by the use of static and dynamic
gap models at the one-year interval. The static gap model monitors the
difference in interest rate sensitive assets and interest rate sensitive
liabilities that mature within the specified time frame as a percentage of total
interest earning assets. The dynamic gap model goes further in that it assumes
that interest rate sensitive assets and liabilities will be reinvested. Illini
uses a computerized model to monitor its interest rate risk.
The Bank's static interest rate gap position as of December 31, 1998 is
presented below.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS
----------------------------------------------------------------
UP TO 3 4 TO TOTAL OVER
MONTHS 12 MONTHS 1 YEAR 1 YEAR TOTAL
------- --------- ------ ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 16,846 10,629 27,475 59,699 87,174
Debt and marketable equity securities 4,151 5,286 9,437 43,839 53,276
Federal funds sold 6,675 --- 6,675 --- 6,675
----------- -------- -------- --------- --------
Total interest-earning assets $ 27,672 15,915 43,587 103,538 147,125
Interest-bearing liabilities:
Savings, NOW, and money market $ 27,990 --- 27,990 27,989 55,979
Time deposits 18,355 29,826 48,181 12,609 60,790
Federal funds purchased and securities
sold under agreements to repurchase 290 --- 290 --- 290
----------- -------- -------- --------- --------
Total interest-bearing liabilities $ 46,635 29,826 76,461 40,598 117,059
Gap by period $ (18,963) (13,911) (32,874) 62,940 30,066
Cumulative gap $ (18,963) (32,874) (32,874) 30,066 30,066
Cumulative gap as a percent of earning assets -12.88% -22.33% -22.33% 20.44% 20.44%
</TABLE>
- --------------------------------------------------------------------------------
In June of 1998, Illini engaged consultants to assist in Asset/Liability
management efforts. Management believes that periodic reviews will enable Illini
to proactively react to financial conditions in our market place. An ALM policy
is currently being reviewed for implementation and will assist management in
maximizing our yields while accepting appropriate risk levels. There can be no
assurance, however, that such steps will have the desired result.
15
<PAGE>
- - 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 to extend
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. 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 is reviewed by the Asset/Liability
Committee. Interest rate risk is the potential of economic losses due to future
interest rate changes. These economic losses can be reflected as a loss of
future net interest income and/or a loss of current fair market values. The
objective is to measure the effect on net interest income and to adjust the
balance sheet to minimize the inherent risk while at the same time maximize
income. Management realizes certain risks are inherent, such as the uncertainty
of market interest rates, and that its goal is to identify and minimize the
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.
16
<PAGE>
The condensed gap report summarizing the Bank's interest rate sensitivity is as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET RISK SENSITIVE INSTRUMENTS
--------------------------------------------------------------------
OVER 1 OVER 3
YEAR THROUGH YEARS THROUGH OVER
1 YEAR 3 YEARS 5 YEARS 5 YEARS TOTAL
------ ------- ------- ------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets:
Debt and marketable equity securities $ 9,437 7,168 11,010 25,661 53,276
Loans 27,475 41,664 13,306 4,729 87,174
Federal funds sold 6,675 --- --- --- 6,675
---------- ---------- ---------- ---------- -----------
$ 43,587 48,832 24,316 30,390 147,125
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
Liabilities:
Savings, NOW and money market (1) $ 27,990 27,989 --- --- 55,979
Time deposits 48,181 12,373 236 --- 60,790
Federal funds purchased and securities
sold under agreements to repurchase 290 --- --- --- 290
---------- ---------- ---------- ---------- -----------
$ 76,461 40,362 236 --- 117,059
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE
TOTAL INTEREST RATE FAIR VALUE
----- ------------- ----------
<S> <C> <C> <C>
Assets:
Debt and marketable equity securities (2) $ 53,276 6.28 % $ 53,276
Loans (2) 87,174 9.24 85,921
Federal funds sold 6,675 5.08 6,675
Liabilities:
Savings, NOW and money market $ 55,979 3.21 % $ 55,979
Time deposits 60,790 5.53 61,197
Federal funds purchased and securities
sold under agreements to repurchase 290 5.38 290
</TABLE>
(1) Management's experience with interest bearing checking accounts, money
market and savings deposits has been that, although these deposits are
subject to immediate withdrawal or repricing, a portion of the balances has
remained relatively constant in periods of both rising and falling rates.
Therefore, a portion of these deposits is included in the over 1 year
through 3 years.
(2) Interest rates are presented on a fully taxable equivalent basis.
- --------------------------------------------------------------------------------
- - CAPITAL RESOURCES
Total shareholders' equity increased from $15.0 million at December 31,
1997 to $15.4 million at December 31, 1998. The primary source of capital of
Illini is retained earnings. Cash dividends per share were $1.00 for 1998 and
$1.00 for 1997. Illini retained 28.9% of its earnings for 1998 and 31.1% for
1997.
Regulatory guidelines require bank holding companies, commercial banks, and
thrifts to maintain certain minimum ratios and define companies as "well
capitalized" that sufficiently exceed the minimum ratios. The banking regulators
may alter minimum capital requirements as a result of revising their internal
policies and their ratings of individual institutions. To be "well capitalized,"
banks must maintain a Tier 1 leverage ratio of no less than 5.0%, a Tier 1 risk
based ratio of no less than 6.0%, and a total risk based ratio of no less than
10.0%. The Bank's ratios as of December 31, 1998 were 9.35%, 14.19%, and 15.52%,
respectively, which meet the criteria for "well capitalized." The Corporation's
ratios as of December 31,
17
<PAGE>
1998 were 9.57%, 14.53%, and 15.87%, respectively.
As of December 31, 1998, management is not aware of any current
recommendations by banking regulatory authorities which, if they were to be
implemented, would have, or are reasonably likely to have, a material adverse
impact on the Corporation's liquidity, capital resources, or operations.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEY RATIOS
FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on average assets 0.41 % 0.44 % 0.31 % 0.89 % 0.86 %
Return on average equity 4.19 4.44 3.25 10.08 10.77
Dividend payout ratio 71.15 69.00 91.17 29.29 26.23
Average equity to assets ratio 9.77 9.98 9.58 8.87 7.94
</TABLE>
- --------------------------------------------------------------------------------
- - NET INTEREST INCOME
Net interest income is the principal component of Illini's net income
stream and represents the difference between interest and fee income generated
from earning assets and interest expense paid on deposits and borrowed funds.
Fluctuations in interest rates as well as volume and mix changes in earning
assets and interest bearing liabilities can materially impact net interest
income. The discussion of net interest income is presented on a taxable
equivalent basis to facilitate performance comparisons among various taxable and
tax-exempt assets.
Interest income decreased marginally and interest expense increased $0.4
million from 1997 to 1998, resulting in a decline in net interest income.
Constricting interest margins plagued the banking community as a whole and
Illini was no exception. Our net interest margin fell from a three year high of
4.96% in 1997 to 4.34% in 1998. The decline in interest income was primarily the
result of a decrease of $3.5 million in average loans from 1997 to 1998. The
average yield earned on loans also decreased 18 basis points over the same
period. The slow loan growth resulted in a $5.9 million increase in our total
securities average balance. The securities portfolio has an average yield of
6.28% while our loan portfolio has an average yield of 9.24%. Management plans
to maintain our existing level of securities and utilize our funding sources to
fuel future loan growth.
The $0.4 million increase in interest expense was primarily the result
of a significant growth in the NOW and money market accounts. Our average
interest bearing liabilities grew $5.5 million while experiencing only a 13
basis point increase to our cost of funds. Management believes our demonstrated
ability to raise low cost funds together with our redesigned lending environment
will provide an excellent opportunity to increase net interest income
performance in 1999.
18
<PAGE>
- --------------------------------------------------------------------------------
NET INTEREST INCOME - RATE/VOLUME VARIANCE ANALYSIS
<TABLE>
<CAPTION>
1998-97 1997-96
----------------------------------------- --------------------------------------
Changes in Volume Rate Changes in Volume Rate
Income/expense Effect Effect Income/expense Effect Effect
-------------- ------ ------ -------------- ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Short-term investments $ 175 $ 191 $ (16) $ 126 $ 132 $ (6)
Investment securities:
Taxable 376 625 (249) 454 306 148
Nontaxable (252) (259) 7 (171) (208) 37
Loans (479) (341) (138) (652) (779) 127
-------- --------- ------- ------- --------- -------
Total interest income (180) 216 (396) (243) (549) 306
-------- --------- ------- ------- --------- -------
Savings and NOW accounts 446 214 232 22 (48) 70
Time deposits 54 6 48 (167) (111) (56)
Short-term borrowings (108) (107) (1) (14) (15) 1
Long-term borrowings 0 0 0 0 0 0
-------- --------- ------- ------- --------- -------
Total interest expense 392 113 279 (159) (174) 15
-------- --------- ------- ------- --------- -------
Net interest income $ (572) $ 103 $ (675) $ (84) $ (375) $ 291
-------- --------- ------- ------- --------- -------
-------- --------- ------- ------- --------- -------
</TABLE>
(*) Fully taxable equivalent basis
NOTE: The change in interest which can not be attributed to only a change in
volume or a change in rate, but instead represents a combination of the two
factors, has been allocated to the rate effect.
- --------------------------------------------------------------------------------
19
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELD/RATES
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------------
1998 1997
------------------------------------------ -------------------------------------
PERCENT INTEREST AVERAGE Percent Interest Average
AVERAGE OF TOTAL INCOME/ YIELD/ Average of Total Income/ Yield/
BALANCE ASSETS EXPENSE RATE Balance Assets Expense Rate
------- -------- -------- ------- ------- -------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Short-term investments $ 6,662 4.3% $ 338 5.08% $ 3,067 2.1% $ 163 5.32%
Investment securities (3)
Taxable 41,563 27.1 2,514 6.05 32,161 21.9 2,138 6.65
Tax-exempt (1) 7,873 5.1 591 7.51 11,357 7.8 843 7.43
Total securities 49,436 32.2 3,105 6.28 43,518 29.7 2,981 6.85
Loans
Commercial (1) 10,668 6.9 990 9.28 15,089 10.3 1,466 9.72
Agriculture 7,363 4.8 664 9.02 5,716 3.9 526 9.20
Real estate
Commercial 30,959 20.2 2,803 9.05 24,554 16.7 2,251 9.17
Agriculture 2,718 1.8 245 9.02 2,370 1.6 217 9.14
Residential 20,846 13.6 1,888 9.06 24,680 16.8 2,267 9.19
Consumer, net 10,797 7.0 1,060 9.82 14,439 9.9 1,404 9.73
Credit card 630 0.4 108 17.13 637 0.4 106 16.60
------ ----- ------ -----
Total loans 83,981 54.7 7,758 9.24 87,485 59.6 8,237 9.42
Allowance for loan losses (1,331) (0.9) (1,246) (0.8)
------ ----- ------
Net loans (1) (2) 82,650 53.8 7,758 9.39 86,239 58.8 8,237 9.55
------ ---- ----- ---- ------ ---- -----
Total interest
earning assets 138,748 90.3 11,201 8.07 132,824 90.6 11,381 8.57
------- ------ ------- ------
Cash and due from banks 4,224 2.8 4,570 3.1
Premises and equipment 7,695 5.0 6,512 4.4
Other real estate owned 654 0.4 583 0.4
Other assets (3) 2,356 1.5 2,183 1.5
TOTAL ASSETS $ 153,677 100.0% $ 146,672 100.0%
--------- ------ --------- ------
--------- ------ --------- ------
LIABILITIES
Deposits:
Non interest bearing
deposits $ 21,103 13.7% $ 20,246 13.8%
Interest bearing demand 35,319 23.0 $ 1,274 3.61% 27,311 18.6 $ 798 2.92 %
Savings 17,474 11.4 421 2.41 18,287 12.5 451 2.47
Time deposits less than
$100,000 46,753 30.4 2,584 5.53 46,206 31.5 2,479 5.36
------- ----- ------- -----
Total core deposits 120,649 78.5 4,279 3.55 112,050 76.4 3,728 3.33
Time deposits $100,000 and
over 15,923 10.4 885 5.56 16,327 11.1 936 5.74
------- ----- ------- -----
Total deposits 136,572 88.9 5,164 3.78 128,377 87.5 4,664 3.63
Short-term borrowings 292 0.2 16 5.38 2,103 1.4 124 5.89
----- -----
Total interest bearing
liabilities 115,761 75.4 5,180 4.47 110,234 75.1 4,788 4.34
----- -----
Other liabilities 1,792 1.1 1,556 1.1
-------- ------ -------- -----
Total liabilities 138,656 90.2 132,036 90.0
Shareholders' Equity 15,021 9.8 14,636 10.0
-------- ------ -------- -----
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $153,677 100.0% $146,672 100.0%
-------- ------ -------- ------
-------- ------ -------- ------
NET INTEREST MARGIN $ 6,021 4.34% $6,593 4.96%
-------- ----- ------ ----
-------- ----- ------ ----
</TABLE>
(1) Income amounts are presented on a fully taxable equivalent basis (FTE),
which is defined as income on earning assets that is subject to either a
reduced rate or zero rate of income tax, adjusted to give effect to the
appropriate incremental federal income tax rate and adjusted for
non-deductible carrying costs, where applicable. Where appropriate, yield
calculations include these adjustments. The federal statutory rate was
34% for all years presented.
(2) Nonaccrual loans are included in the loan balances. Interest income
includes related fee income of $246,000 in 1998 and $242,000 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.
20
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELD/RATES
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------
1996
-------------------------------------------------------------
Percent Interest Average
Average of Total Income/ Yield/
Balance Assets Expense Rate
------- -------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Short-term investments $ 679 0.5 % $ 37 5.52 %
Investment securities (3)
Taxable 27,217 18.2 1,684 6.19
Tax-exempt (1) 14,282 9.6 1,014 7.10
--------- ---------- ---------- ---------
Total securities 41,499 27.8 2,698 6.50
Loans
Commercial (1) 13,885 9.3 1,224 8.81
Agriculture 5,510 3.7 465 8.45
Real estate
Commercial 28,586 19.2 2,650 9.27
Agriculture 2,567 1.7 235 9.14
Residential 26,877 18.0 2,503 9.31
Consumer, net 17,792 11.9 1,717 9.65
Credit card 634 0.4 95 15.00
--------- ---------
Total loans 95,851 64.2 8,889 9.27
Allowance for loan losses (1,162) (0.8)
---------- ----------
Net loans (1) (2) 94,689 63.4 8,889 9.39
--------- ---------
Total interest earning assets 136,867 91.7 11,624 8.49
---------
Cash and due from banks 4,856 3.2
Premises and equipment 4,983 3.3
Other real estate owned 573 0.4
Other assets (3) 2,151 1.4
---------- -----------
TOTAL ASSETS $ 149,430 100.0 %
---------- -----------
---------- -----------
LIABILITIES
Deposits:
Non interest bearing deposits $ 18,965 12.7 %
Interest bearing demand 27,678 18.5 $ 734 2.65 %
Savings 19,802 13.3 493 2.49
Time deposits less than $100,000 48,919 32.7 2,700 5.52
--------- ---------
Total core deposits 115,364 77.2 3,927 3.40
Time deposits $100,000 and over 15,628 10.5 882 5.65
--------- ----------
Total deposits 130,992 87.7 4,809 3.67
Short-term borrowings 2,454 1.6 138 5.61
----------
Total interest bearing liabilities 114,481 76.6 4,947 4.32
----------
Other liabilities 1,664 1.1
--------- ----------
Total liabilities 135,110 90.4
Shareholders' Equity 14,320 9.6
--------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 149,430 100.0 %
---------- -----------
---------- -----------
NET INTEREST MARGIN $ 6,677 4.88 %
--------- ---------
--------- ---------
</TABLE>
(1) Income amounts are presented on a fully taxable equivalent basis (FTE),
which is defined as income on earning assets that is subject to either a
reduced rate or zero rate of income tax, adjusted to give effect to the
appropriate incremental federal income tax rate and adjusted for
non-deductible carrying costs, where applicable. Where appropriate, yield
calculations include these adjustments. The federal statutory rate was 34%
for all years presented.
(2) Nonaccrual loans are included in the loan balances. Interest income
includes related fee income of $244,000 in 1996.
(3) Average securities balances are based on amortized historical cost,
excluding SFAS 115 adjustments to fair value, which are included in other
assets.
21
<PAGE>
- - PROVISION FOR LOAN LOSSES, NET CHARGE-OFFS AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses charged to earnings was $0.2 million for
1998, a decrease of $0.1 million or 32.0% from the $0.3 million in 1997. During
1996, the provision for loan losses was $1.1 million. The ratio of net
charge-offs to average loans outstanding has improved from 1.17% to 0.29% to
0.16% for the years ended December 31, 1996, 1997 and 1998, respectively.
Provision expense decreased in 1998. While nonaccrual loans increased to
$1,029,000 at December 31, 1998 compared to $636,000 at December 31, 1997, net
loan losses and other asset quality indicators reflected continued improvement
in the overall quality of the loan portfolio. The large provision expense in
1996 had a significant effect on Illini's net income. Management detected
deficiencies in asset quality and credit processes in late 1995 and took steps
to improve asset quality. Initiatives including a new loan policy,
centralization of commercial loan underwriting, and a more proactive approach to
identifying and resolving problem loans were undertaken in late 1996 and have
resulted in improved loan loss experience and lower provision expense.
The management of Illini considers a number of factors in determining the
amount of the allowance for loan losses. These factors include, but are not
limited to, the following:
- - Historical data and trends relating to net charge-offs, average loans, and
the level of the allowance for loan losses;
- - Other historical data and trends, including the allowance as a percentage
of total loans outstanding and loan volume;
- - Borrowers identified on the Bank's watch list, borrowers with significant
credit exposure, and loans that are past due or on nonaccrual status;
- - The capability of management's credit risk management processes to
successfully underwrite credit and identify and resolve problem loans on an
ongoing basis;
- - Results of continuing reviews of individual higher risk loans by management
personnel; and
- - Consideration as to the impact of present economic conditions on the loan
portfolio.
The allowance for loan losses as a percent of total loans increased from
1.51% at December 31, 1997 to 1.57% at December 31, 1998. The allowance as a
percent of nonperforming loans decreased from 204.72% at December 31, 1997 to
132.95% at December 31, 1998 due to an increase in nonperforming loans. This
percentage has been adversely affected by several individual loans that have
large balances that have been in nonaccrual status since June 1998, and are in a
collection status. The overall quality of loans has still improved overall.
After full consideration of these factors, with particular emphasis on review of
potential problem loans identified by management, Illini's management concluded
the allowance for loan losses was adequate as of December 31, 1998.
22
<PAGE>
- - SUMMARY OF LOAN LOSS EXPERIENCE
The following summary presents the changes in the allowance for loan losses
for the years ended December 31, 1998, 1997, and 1996:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- --------------
(dollars in thousands)
<S> <C> <C> <C>
Average loans outstanding $ 83,981 $ 87,485 $ 95,851
------------ ------------ -------------
------------ ------------ -------------
Allowance for loan losses:
Balance at beginning of year $ 1,302 $ 1,258 $ 1,247
------------ ------------ -------------
Loans charged-off:
Commercial, financial, and agricultural (54) (48) (736)
Real estate (9) (136) (163)
Consumer (152) (180) (290)
------------ ------------- --------------
Total (215) (364) (1,189)
Recoveries of loans previously charged-off:
Commercial, financial, and agricultural 13 61 37
Real estate 31 8 11
Consumer 33 39 22
------------ ------------- -------------
Total 77 108 70
----------- ------------ --------------
Net charge-offs (138) (256) (1,119)
------------ ------------- --------------
Provision charged to expense 204 300 1,130
----------- ------------ --------------
Balance at end of year $ 1,368 $ 1,302 $ 1,258
----------- ------------ --------------
----------- ------------ --------------
Ratio of net charge-offs to average loans
outstanding during the period 0.16 % 0.29 % 1.17 %
----------- ------------ --------------
----------- ------------ --------------
</TABLE>
- --------------------------------------------------------------------------------
In 1998, as illustrated in the preceding chart, loan losses decreased
significantly in all areas except commercial, financial, and agricultural, which
has a slight increase. Real estate loans ended the year with net recoveries.
This decrease reflects improvement in the overall quality of the loan portfolio
resulting from decisive action Illini's management has taken to improve credit
quality over the last two years.
Efforts continue to maintain this improved quality, and to enhance credit
quality processes and controls.
- - ALLOWANCE ALLOCATION
The risk of losses inherent in the loan portfolio is not precisely
attributable to a particular loan or category of loans. However, based on its
review for adequacy, management has estimated those portions of the allowance
that could be attributable to major categories of loans as follows:
23
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
% OF TOTAL % of Total
LOANS, NET Loans, net
AMOUNT OF UED Amount of UED
---------- --------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, financial, and agriculture $ 430 23.58 % $ 124 19.20 %
Real estate 203 65.32 323 65.94
Consumer 346 11.10 421 14.86
Unallocated 389 ------ 434 ------
---------- ------ ------- ------
Total allowance for loan losses $ 1,368 100.00 % $ 1,302 100.00 %
---------- ------ ------- ------
---------- ------ ------- ------
</TABLE>
- --------------------------------------------------------------------------------
These allocation estimates do not specifically represent that loan
charge-offs of that magnitude will be incurred, nor do these allocations
restrict future loan losses attributable to a particular category from being
absorbed by the allowance attributable to other categories or the unallocated
portion of the allowance. The risk factors considered when estimating the
allocations for major loan categories are the same as the factors considered
when determining the adequacy of the overall allowance as specified in the
allowance summary.
The large increase in the commercial, financial, and agriculture category
is a result of several agricultural loans downgraded during the quarter. The
decrease in the real estate category is due mainly to improved real estate loan
performance during the last two years.
- - NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, loans with restructured
terms and other real estate owned. Loans are generally classified as nonaccrual
when there are reasonable doubts as to the collectibility of principal and
interest or when payment becomes 90 days past due, except loans which are well
secured and in the process of collection. Interest collection on nonaccrual
loans for which the ultimate collectibility of principal is uncertain is applied
as principal reduction. Otherwise, such collections are applied to interest when
received. The following table presents information concerning the aggregate
amount of nonperforming assets and loans 90 days or more past due but still
accruing interest.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1998 1997
------------- ------------
(dollars in thousands)
<S> <C> <C>
Nonaccrual $ 1,029 $ 636
Renegotiated 0 0
Other real estate owned 366 551
------------- -----------
Nonperforming assets $ 1,395 $ 1,187
------------- -----------
------------- -----------
Accruing loans past due 90 days $ 0 $ 0
------------- -----------
------------- -----------
Nonperforming loans to total loans 1.18 % 0.74 %
------------- -----------
------------- -----------
Nonperforming assets to total assets 0.87 % 0.77 %
------------- -----------
------------- -----------
Accruing loans past due 90 days to total loans 0.00 % 0.00 %
------------- -----------
------------- -----------
</TABLE>
- --------------------------------------------------------------------------------
Nonperforming assets totaled $1,395,000 as of year-end 1998, an increase of
$208,000 or 17.5% from the $1,187,000 at year-end 1997. Total nonperforming
assets represent 0.87% of total assets at December
24
<PAGE>
31, 1998, compared to 0.77% at December 31, 1997.
Nonperforming loans increased $393,000 or 61.8% to a total of $1,029,000 at
year-end 1998. This is largely the result of three large loans totaling $378,000
that are currently in the process of collection. At the current time, Illini
Bank feels that collection of these three loans should not result in any loss.
As of December 31, 1998, nonperforming loans to total loans were 1.18% compared
to 0.74 % at year-end 1997. Illini Bank did not carry any loans past due more
than 90 days and still accruing interest as of December 31, 1998 and 1997.
Individual nonaccrual loans are written down to management's estimate of the net
realizable value of collateral and/or realistic estimates of other payments from
the borrower. Additionally, specific allocations to the allowance for loan
losses are made on loans where there may be uncertainties as to the collection
of the estimated value of collateral. Because these loans have been written down
and/or allocated for, the potential impact on future net income is minimized.
Additional interest income of $61,000 in 1998 and $35,000 in 1997 would have
been recognized had these nonaccrual loans remained current.
Other real estate owned declined $185,000 or 33.6% to $366,000 at December
31, 1998, when compared to year-end 1997. One former bank property which the
Bank has entered into an option agreement to sell in 1998 comprised $298,000 or
81.4% of the total Other Real Estate Owned. In September 1998, the option to buy
was extended for an additional six month period. The Bank now expects to
complete this sale in 1999. The remaining $68,000 or 18.6% represents real
estate acquired in satisfaction of debts. Other Real Estate Owned is carried at
the lower of cost or fair value. Management is actively marketing these
properties to minimize the potential affects of market fluctuations and so that
proceeds can be deployed to earning assets as soon as possible.
As previously discussed, management has taken steps to improve credit
quality. In addition to the specific actions discussed in the PROVISION FOR LOAN
LOSSES, NET CHARGE-OFFS AND ALLOWANCE FOR LOAN LOSSES section, in late 1996,
executive management empowered the credit administration function (developed in
1995) to monitor and enforce loan policy compliance, to proactively identify and
resolve problem loans, and to perform detailed credit analyses on all
significant loan relationships. These efforts have improved the Bank's ability
to identify problem and potential problem loans, and has allowed management
opportunities to resolve problem loans while minimizing the potential loss to
the Bank.
- - POTENTIAL PROBLEM LOANS
As of December 31, 1998, approximately $300,000 of loans not included in
the above table were identified by management as having potential weaknesses
which, if not corrected, could affect the borrower's ability to comply with the
current loan repayment terms. This amount represents one loan that is currently
being handled by legal counsel. However, if weaknesses are not promptly
addressed, management believes that this loan may result in disclosure at some
future time as nonaccrual, past due or restructured. All significant potential
problem loans are analyzed on a periodic basis to ensure that adequate reserves
have been allocated to the allowance for loan losses to cover management's
estimate of the inherent loss.
25
<PAGE>
- - NONINTEREST INCOME
The following table depicts the amount of and annual changes in noninterest
income categories:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, Percent Change
--------------------------------------- ------------------------
1998 1997 1996 1998/1997 1997/1996
---- ---- ---- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 1,065 $ 1,054 $ 981 1.0 % 7.4 %
Other fee income 172 162 216 6.2 (25.0)
Mortgage loan servicing fees 264 198 183 33.3 8.2
Gain on sale of mortgage loans 216 105 64 105.7 64.1
Securities gains (losses), net 8 50 1 (84.0) 4,900.0
Gains (losses) on sale of other real estate 460 (105) (24) (538.1) 337.5
Other 90 54 144 66.7 (62.5)
------- ------- ------
$ 2,275 $ 1,518 $1,565 49.9 (3.0)
------- ------- ------
------- ------- ------
</TABLE>
- --------------------------------------------------------------------------------
Total noninterest income increased $0.7 million from 1997 to 1998.
Service charges on deposit accounts and other fee income remained
relatively steady in 1998 as compared to 1997 and 1996. Illini realized a net
gain of $50,000 in 1997 due to securities sold to shorten the duration of its
securities portfolio. Gains realized in 1998 were $8,000.
Due to declining long term rates on mortgage loans, and effective marketing
strategies, Illini experienced a significant increase in mortgage loan
originations in 1998. This, in turn, led to an increase in the gain of sale of
mortgage loans 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,
Illini completed two real estate transactions during 1998 resulting in
substantial gains. A 22,000 square foot property the Company owned in
Springfield was sold for $1,350,000 and a lot in Bloomington being held for
future expansion was sold for $556,000, resulting in a combined gain of
$482,000. The transaction for the sale of the property in Springfield is a
sale-leaseback arrangement. The carrying value of the property was $634,000 and
the Bank recognized $460,000 as a gain in 1998 and deferred $256,000 to be
recognized over the 10 year life of the lease.
26
<PAGE>
- - NONINTEREST EXPENSE
The following table depicts the amount of and annual changes in noninterest
expense categories:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, Percent Change
-----------------------------------------------------------------------
1998 1997 1996 1998/1997 1997/1996
---- ---- ---- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 3,218 $ 3,246 $ 3,281 (0.9) % (1.1)%
Net occupancy expense 692 666 540 3.9 23.3
Equipment expense 353 300 306 17.7 (2.0)
Data processing 708 614 559 15.3 9.8
Supplies 200 131 143 52.7 (8.4)
Communication and transportation 396 347 298 14.1 16.4
Marketing and advertising 19 253 238 (92.5) 6.3
Correspondent and processing fees 144 132 127 9.1 3.9
Loan and other real estate owned expenses 52 58 27 (10.3) 114.8
Professional fees 875 573 348 52.7 64.7
Directors' and regulatory fees 192 163 156 17.8 4.5
Other 328 341 301 (3.8) 13.3
--------- ------ -------
Total noninterest expense $ 7,177 $ 6,824 $ 6,324 5.2 7.9
-------- ------- ------- --- ---
-------- ------- ------- --- ---
</TABLE>
- --------------------------------------------------------------------------------
Total noninterest expense increased $0.2 million or 3.6% to $7.2 million in
1998 as compared to $6.9 million in 1997. The non-interest expense of Illini
Bank is customarily comprised of four major components. First, salaries and
benefits represents the largest portion of our noninterest expense from year to
year. In 1998, we reduced our staffing level from 97 full time equivalents to
72. While this represents a significant reduction in staff, the expense was
fairly constant from 1997 to 1998. While the reductions occurred in 1998, we
were obligated to pay severance packages and partial benefits to the employees
that decided to terminate their employment. As a result of the reengineered
staffing levels, management implemented a new salary structure for our remaining
staff. Second, our occupancy expense continues to grow. Management is closely
monitoring our net occupancy expense for ways to reduce costs. In 1998, we sold
one of our locations in Springfield and leased back the necessary space for our
branch operations. Similar alternatives will be explored in 1999 for possible
space reductions where feasible. Third, equipment and data processing costs
increased 18% and 15%, respectively, from 1997 to 1998. Technology continues to
be a primary investment for Illini Bank. We believe by utilizing the latest
technology, we can provide better customer service. Lastly, professional fees
increased $302,000 to $875,000 in 1998. This increase resulted from a large
increase in fees paid to outside consultants and attorneys to assist management
in strategic planning and shareholder related activities. The strategic plan
began to take shape in 1998 by reducing staff levels and evaluating our current
team of associates. While management does not expect the reduction in personnel
to translate into savings on the income statement, we believe our actions will
position us to take advantage of our investment in technology and gain
efficiencies from current staffing levels. As a component of our strategic
initiative to redesign our operations, marketing expense was virtually
eliminated in 1998. Management expects an increase in marketing in 1999 to
promote our reengineering and our movement to a sales and service environment
focusing on customer relationships.
27
<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 $118,000 in
expenses for the year ended December 31, 1998. 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:
o 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.
o Develop and implement a detailed plan to address Year 2000
issues as identified, particularly as they pertain to software
and hardware applications.
o Survey outside vendors to determine the degree of preparedness
for the Year 2000, to uncover potential issues arising from
such business counterparties.
o 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 began focusing on mission
critical applications in order that programming changes are largely completed,
and that testing was underway as of 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 impact of third party systems
interacting with Illini Bank systems, the planning and modification success
attained by the business counterparties of Illini Bank and similar
uncertainties.
- - NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) 130, REPORTING
COMPREHENSIVE INCOME, was issued in June 1997. Comprehensive income is defined
as net income plus certain items that are recorded directly to shareholders'
equity, such as unrealized gains and losses on available for sale securities.
Components of Illini's comprehensive income is reported in the consolidated
statements of changes in shareholders' equity. SFAS 130's disclosure
requirements have no impact on Illini's financial condition or results of
operations.
SFAS 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, is effective for financial statements for periods beginning after
December 15, 1997, but 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
28
<PAGE>
by the chief operating decision maker in the determination of resource
allocation and performance. Illini operates as a single business segment through
its subsidiary Illini Bank.
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. 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.
Illini is currently evaluating the impact of SFAS 134 on future financial
statements and disclosures, but does not currently believe such impact will be
material as Illini Bank has historically not securitized originated mortgage
loans.
- - EFFECTS OF INFLATION
The effects of inflation on financial institutions are different from the
effects on other commercial enterprises since financial institutions make few
significant capital or inventory expenditures which are directly affected by
changing prices. Because bank assets and liabilities are virtually all monetary
in nature, inflation does not affect a financial institution as much as do
changes in interest rates. The general level of inflation does, in fact,
underlie the general level of most interest rates; however, interest rates do
not increase at the rate of inflation as do the prices of goods and services.
Rather, interest rates react more to the changes in the expected rate of
inflation and to changes in monetary and fiscal policy.
Inflation, however, does have an impact on the growth of total assets
in the banking industry, often resulting in a need to increase capital at higher
than normal rates to maintain an appropriate capital-to-asset ratio.
29
<PAGE>
ITEM 7. - FINANCIAL STATEMENTS
Index to Illini's Consolidated Financial Statements.
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Independent Auditors' Report......................................................................................31
Consolidated Balance Sheets as of December 31, 1998 and 1997......................................................32
Consolidated Statements of Income for the three years ended December 31, 1998, 1997, and 1996.....................33
Consolidated Statements of Changes in
Shareholders' Equity for the three years ended December 31, 1998, 1997, and 1996.............................34
Consolidated Statements of Cash Flows for the three years ended December 31, 1998, 1997, and 1996.................35
Notes to Consolidated Financial Statements.....................................................................36-52
</TABLE>
30
<PAGE>
[GRAPHIC OMITTED]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Illini Corporation:
We have audited the consolidated balance sheets of Illini Corporation and
subsidiary (the Company) as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Illini
Corporation and subsidiary as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
St. Louis, Missouri
February 26, 1999 except
for Note 13 for which the
date is March 2, 1999
31
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
-------- --------
(dollars in thousands)
ASSETS:
<S> <C> <C>
Cash and due from banks $ 5,624 $ 5,361
Interest-bearing deposits in other banks 19 77
Federal funds sold 6,675 6,755
-------- --------
Cash and cash equivalents 12,318 12,193
Debt and marketable equity securities
available for sale, at fair value 53,276 46,834
Loans, net of allowance for loan losses 85,806 84,987
Premises and equipment 7,250 8,077
Accrued interest receivable 1,390 1,500
Other real estate owned 366 551
Other assets 359 772
-------- --------
$160,765 $154,914
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Noninterest-bearing demand deposits $ 26,190 $ 25,083
Interest-bearing deposits:
NOW and money market accounts 38,877 30,596
Savings deposits 17,102 17,820
Time deposits, $100,000 and over 15,064 18,659
Other time deposits 45,726 45,418
-------- --------
Total deposits 142,959 137,576
Securities sold under agreements to repurchase 290 715
Accrued interest payable 827 784
Other liabilities 1,270 861
-------- --------
Total liabilities 145,346 139,936
-------- --------
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 8,632 8,450
Accumulated other comprehensive income 416 157
-------- --------
Total shareholders' equity 15,419 14,978
-------- --------
$160,765 $154,914
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
32
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 7,727 $ 8,200 $ 8,871
Interest on debt and marketable equity securities:
Taxable 2,514 2,137 1,685
Exempt from federal income taxes 408 582 700
Interest on short-term investments 338 163 36
-------- -------- --------
Total interest income 10,987 11,082 11,292
-------- -------- --------
Interest expense:
Interest on deposits:
NOW and money market accounts 1,274 798 734
Savings deposits 421 451 493
Time deposits, $100,000 and over 885 936 882
Other time deposits 2,584 2,479 2,700
Interest on borrowings 16 124 138
-------- -------- --------
Total interest expense 5,180 4,788 4,947
-------- -------- --------
Net interest income 5,807 6,294 6,345
Provision for loan losses 204 300 1,130
-------- -------- --------
Net interest income after provision for loan losses 5,603 5,994 5,215
-------- -------- --------
Noninterest income:
Service charge on deposit accounts 1,065 1,054 981
Other fee income 172 162 216
Mortgage loan servicing fees 264 198 183
Gain on sale of mortgage loans 216 105 64
Securities gains 8 50 1
Gains (losses) on sale of other real estate owned 460 (105) (24)
Other 90 54 144
-------- -------- --------
Total noninterest income 2,275 1,518 1,565
-------- -------- --------
Noninterest expense:
Salaries and employee benefits 3,218 3,246 3,281
Net occupancy expense 692 666 540
Equipment expense 353 300 306
Data processing 708 614 559
Supplies 200 131 143
Communication and transportation 396 347 298
Marketing and advertising 19 253 238
Correspondent and processing fees 144 132 127
Loan and other real estate owned expenses 52 58 27
Professional fees 875 573 348
Directors' and regulatory fees 192 163 156
Other 328 341 301
-------- -------- --------
Total noninterest expense 7,177 6,824 6,324
-------- -------- --------
Income before income tax expense 701 688 456
Income tax expense (benefit) 71 38 (9)
-------- -------- --------
Net income $ 630 $ 650 $ 465
-------- -------- --------
-------- -------- --------
Basic earnings per share
(based on weighted average common
shares outstanding of 448,456 in 1998, 1997, and 1996) $ 1.40 $ 1.45 $ 1.04
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
33
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON CAPITAL RETAINED COMPREHENSIVE
STOCK SURPLUS EARNINGS INCOME TOTAL
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 4,485 $ 1,886 $ 8,209 $ 26 $ 14,606
Comprehensive income:
Net income -- -- 465 -- 465
Change in unrealized gains (losses)
on securities available for sale, net -- -- -- (132) (132)
--------
Total comprehensive income -- -- -- -- 333
--------
Cash dividends paid $.95 per share -- -- (426) -- (426)
-------- -------- -------- -------- --------
Balance at December 31, 1996 4,485 1,886 8,248 (106) 14,513
Comprehensive income:
Net income -- -- 650 -- 650
Change in unrealized gains (losses)
on securities available for sale, net -- -- -- 263 263
--------
Total comprehensive income -- -- -- -- 913
--------
Cash dividends paid $1.00 per share -- -- (448) -- (448)
-------- -------- -------- -------- --------
Balance at December 31, 1997 4,485 1,886 8,450 157 14,978
Comprehensive income:
Net income -- -- 630 -- 630
Change in unrealized gains (losses)
on securities available for sale, net -- -- -- 259 259
--------
Total comprehensive income -- -- -- -- 889
--------
Cash dividends paid $1.00 per share -- -- (448) -- (448)
-------- -------- -------- -------- --------
Balance at December 31, 1998 $ 4,485 $ 1,886 $ 8,632 $ 416 $ 15,419
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 630 $ 650 $ 465
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 978 738 543
Provision for loan losses 204 300 1,130
Securities gains, net (8) (50) (1)
Gain on sale of premises and equipment (1) -- (108)
Deferred tax expense (benefit) 6 (78) (1)
(Gains) losses on sale of other real estate owned (460) 105 24
Decrease (increase) in accrued interest receivable 110 (6) 48
Increase (decrease) in accrued interest payable 43 91 (187)
Origination of secondary market mortgage loans (44,152) (18,740) (17,629)
Proceeds from the sale of secondary market mortgage loans 44,299 18,446 17,255
Other, net 477 (474) (609)
-------- -------- --------
Net cash provided by operating activities 2,126 982 930
-------- -------- --------
Cash flows from investing activities:
Proceeds from sales of debt and marketable equity securities
available for sale 2,028 20,530 13,064
Proceeds from maturities and paydowns of debt securities
available for sale 16,109 12,764 10,037
Purchases of debt and marketable equity securities available for sale (24,307) (39,318) (28,814)
Net (increase) decrease in loans, net (1,272) 7,295 6,995
Purchases of premises and equipment (1,136) (3,346) (1,287)
Proceeds from sale of premises and equipment 1 -- 491
Proceeds from sales of other real estate 2,066 331 5
-------- -------- --------
Net cash (used in) provided by investing activities (6,511) (1,744) 491
-------- -------- --------
Cash flows from financing activities:
Net increase in non-interest bearing deposit accounts 1,107 4,330 239
Net increase (decrease) in savings, NOW and money market accounts 7,563 5,141 (4,267)
Net (decrease) increase in time deposits $100,000 and over (3,595) 3,738 171
Net increase (decrease) increase in other time deposits 308 (1,404) (3,659)
Net (decrease) increase in federal funds purchased -- (1,130) 1,130
Net (decrease) increase in securities sold under agreements to repurchase (425) 215 (175)
Net (decrease) increase in other short-term borrowings -- (3,000) 3,000
Cash dividends paid (448) (448) (426)
-------- -------- --------
Net cash provided by (used in) financing activities 4,510 7,442 (3,987)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 125 6,680 (2,566)
Cash and cash equivalents at beginning of year 12,193 5,513 8,079
-------- -------- --------
Cash and cash equivalents at end of year $ 12,318 $ 12,193 $ 5,513
-------- -------- --------
-------- -------- --------
Supplemental information:
Interest paid $ 5,137 $ 4,697 $ 5,134
Income taxes paid 77 112 145
-------- -------- --------
-------- -------- --------
Other non-cash investing activities:
Transfer of premises to other real estate $ 1,168 $ -- $ --
Transfer of loans to other real estate 102 154 260
-------- -------- --------
-------- -------- --------
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Illini Corporation ("Illini") provides a full range of banking services to
individual, corporate, and institutional customers through its 18 locations
throughout central Illinois. Illini and its banking subsidiary, Illini Bank, are
subject to competition from other financial and nonfinancial institutions
providing financial products in central Illinois. Additionally, Illini and
Illini Bank are subject to the regulations of certain federal and state agencies
and undergo periodic examinations by those regulatory authorities.
The accounting and reporting policies of Illini conform to generally
accepted accounting principles within the banking industry. The preparation of
the consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions,
including the determination of the allowance for loan losses, that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Following is a description of the more significant of these policies:
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Illini
and Illini Bank after elimination of all significant intercompany accounts
and transactions.
(b) CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of the consolidated statements of cash flows, cash and
cash equivalents include cash and due from banks, interest-bearing deposits
in other banks, and federal funds sold, all of which are considered to be
highly liquid assets.
(c) DEBT AND MARKETABLE EQUITY SECURITIES
At the time of purchase, debt and equity securities are classified into
one of two categories: held to maturity or available for sale.
Investments in debt securities classified as held to maturity whereby
management has the positive ability and intent to hold to maturity are
stated at cost, adjusted for amortization of premiums and accretion of
discounts, using the interest method, over the period to maturity of the
respective securities.
Investment securities designated as available for sale, which include
any security which Illini has no immediate plan to sell but which may be
sold in the near future under different circumstances, are stated at fair
value. Amortization of premiums and accretion of discounts on securities
available for sale are recorded using the interest method over the period
to maturity of the respective security. Unrealized holding gains and losses
for available for sale securities are excluded from earnings and reported
as a net amount in a separate component of shareholders' equity until
realized.
Mortgage-backed securities represent a significant portion of the debt
security portfolio. Amortization of premiums and accretion of discounts on
mortgage-backed securities are analyzed in relation to the corresponding
prepayment rates, both historical and estimated, using a method which
approximates the interest method.
Transfers of securities between categories are recorded at fair value
at the date of transfer. Unrealized gains and losses associated with
transfers of securities from held to maturity to available for sale are
recorded as a separate component of shareholders' equity. The unrealized
gains or losses included in the separate component of shareholders' equity
for securities transferred from available for sale to held for maturity are
maintained and amortized into earnings over the remaining life of the
security as an adjustment to yield in a manner consistent with the
amortization or accretion of premium or discount on the associated
security. Realized gains and losses for securities are included in earnings
using the specific identification method for determining the cost basis of
securities sold.
36
<PAGE>
(d) LOAN INCOME
Interest income on certain installment loans is recognized using the
sum-of-the-years' digits method.
Interest on commercial, financial, agricultural, real estate, and all
other installment loans is recognized based on the principal amounts
outstanding using the simple-interest method. It is the policy of Illini to
discontinue, generally when a loan becomes ninety days past due, the
accrual of interest when full collectibility of principal or interest on
any loan is in doubt. Subsequent interest payments received on such loans
are applied to principal if there is any doubt as to the collectibility of
such principal. Otherwise, these receipts are recorded as interest income.
Accrual of interest may be resumed on a loan when performance is in
accordance with the contract and the borrower demonstrates the ability to
pay and remain current.
Loan origination fees and certain direct loan origination costs are
deferred and recognized over the lives of the related loans as an
adjustment of the loan yield using a method approximating the interest
method on a loan-by-loan basis.
(e) ACCOUNTING FOR IMPAIRED LOANS
A loan is considered impaired when it is probable Illini will be unable
to collect all amounts due, both principal and interest, according to the
contractual terms of the loan agreement. When measuring impairment, the
expected future cash flows of an impaired loan are discounted at the loan's
effective interest rate. Alternatively, impairment is measured by reference
to an observable market price, if one exists, or the fair value of the
collateral for a collateral-dependent loan. Regardless of the measurement
method used historically, Illini measures impairment based on the fair
value of the collateral when foreclosure is probable. Additionally,
impairment of a restructured loan is measured by discounting the total
expected future cash flow at the loan's effective rate of interest as
stated in the original loan agreement.
Illini uses its existing nonaccrual methods for recognizing interest on
impaired loans.
(f) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by provisions charged to
operations and is available to absorb loan losses. Illini utilizes a
systematic, documented approach in determining the appropriate level of the
allowance for loan losses. Management's approach, which provides for
general and specific allowances, is based on current economic conditions,
past loan losses, collection experience, risk characteristics of the
portfolio, assessing collateral values by obtaining independent appraisals
for significant properties, and such other factors which, in management's
judgment, deserve recognition in estimating loan losses.
Management believes the allowance for loan losses is adequate to absorb
losses in the loan portfolio. While management uses available information
to recognize losses on loans, future additions to the allowance for loan
losses may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of the
examination process, periodically review Illini's allowance for loan
losses. Such agencies may require Illini to increase the allowance for loan
losses based on their judgment about and interpretation of information
available to them at the time of their examinations.
(g) SECONDARY MORTGAGE MARKET OPERATIONS
Illini originates Federal National Mortgage Association (FNMA) mortgage
loans for sale in the secondary market to FNMA. Mortgage loans held for
sale are recorded at the lower of cost or market value on an individual
loan basis. Deferred fees on loans held for sale are not amortized. Gains
and losses on the sale of these loans and loan origination fees are
recognized upon sale of the related loans and included in the consolidated
statements of income as noninterest income. Additionally, loan
administration fees, representing income earned from servicing these loans
sold in the secondary market to FNMA, are calculated on the outstanding
principal balances of the loans serviced and recorded as noninterest income
as earned.
37
<PAGE>
(h) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using primarily the straight-line
method. The estimated useful lives are 40 years for premises and 5 to 7
years for furniture and equipment. Costs for maintenance and repairs are
expensed as incurred.
(i) INCOME TAXES
Illini and Illini Bank file a consolidated federal income tax return.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(j) INTANGIBLE ASSETS
The fair value of the individual assets acquired and liabilities
assumed through acquisitions accounted for under the purchase method of
accounting is recorded as an investment by Illini. The excess of cash or
market value of Illini's common stock over the fair value of the net assets
acquired is recorded as the excess of cost over fair value of net assets
acquired and is included in other assets on the consolidated balance
sheets. This amount is amortized on a straight-line basis over various
periods not exceeding 25 years. The premiums paid to acquire the deposits
of certain subsidiaries are being amortized over a 15-year period.
Illini assesses the recoverability of intangible assets by determining
whether the amortization of the balance over its remaining life can be
recovered through undiscounted future operation cash flows of the acquired
operation or deposits. The amount of impairment, if any, is measured based
on projected discounted future operating cash flows using a discount rate
reflecting the Illini's average cost of funds. The assessment of the
recoverability of intangibles will be impacted if estimated future
operating cash flows are not achieved.
(k) OTHER REAL ESTATE OWNED
Other real estate owned (OREO) represents property acquired through
foreclosure or deeded to the Bank in lieu of foreclosure on loans on which
the borrowers have defaulted. OREO also includes former bank premises that
management no longer intends to use as banking facilities. OREO is recorded
on an individual asset basis at the lower of fair value less estimated
disposal costs or cost. If the fair value less estimated disposal costs is
less than cost, the deficiency is recorded by a direct write down of the
individual OREO asset. Any subsequent write downs to reflect current fair
value are charged to noninterest expense.
(l) EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share gives effect to
potential common stock such as stock options or convertible notes. Illini
has no instruments which are dilutive.
(m) FINANCIAL INSTRUMENTS
Financial instruments are defined as cash, evidence of an ownership
interest in an entity, or a contract that both imposes on one entity a
contractual obligation to deliver cash or another financial instrument to a
second entity or to exchange other financial instruments on potentially
unfavorable terms with the second entity, and conveys to that second entity
a contractual right to receive cash or another financial instrument from
the first entity or to exchange other financial instruments on potentially
favorable terms with the first entity.
38
<PAGE>
(n) NEW ACCOUNTING PRONOUNCEMENTS
Illini adopted Statement of Financial Accounting Standards No. 130
(SFAS 130), REPORTING COMPREHENSIVE INCOME, during 1998. SFAS 130
establishes standards for reporting and displaying comprehensive income and
its components in a full set of general purpose financial statements.
Illini reports comprehensive income in the consolidated statements of
changes in shareholders' equity. The adoption of SFAS 130 did not have an
effect on the financial position of Illini.
SFAS 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, is effective for financial statements for periods beginning
after December 15, 1997, but 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 operates as a single business segment through its
subsidiary Illini Bank.
(o) RECLASSIFICATIONS
Certain amounts in the 1996 and 1997 consolidated financial statements
have been reclassified to conform to the 1998 presentation. Such
reclassifications have no effect on previously reported consolidated net
income or shareholders' equity.
39
<PAGE>
(2) DEBT AND MARKETABLE EQUITY SECURITIES
The amortized cost and fair value of debt and marketable equity securities
classified as available for sale at December 31, 1998 and 1997 are presented
below.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1998
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C>
United States Treasury and
United States agencies $19,397 $ 204 $ 30 $19,571
Mortgage-backed securities 16,828 69 19 16,878
Collateralized mortgage obligations 8,487 25 32 8,480
Obligations of state and
political subdivisions 7,448 446 -- 7,894
FHLB stock and other
equity securities 453 -- -- 453
------- ------- ------- -------
$52,613 $ 744 $ 81 $53,276
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------- ---------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
United States Treasury and
United States agencies $26,516 $ 121 $ 27 $26,610
Mortgage-backed securities 7,829 38 24 7,843
Collateralized mortgage obligations 2,565 3 2 2,566
Obligations of state and
political subdivisions 9,231 174 35 9,370
FHLB stock and other
equity securities 442 3 -- 445
------- ------- ------- -------
$46,583 $ 339 $ 88 $46,834
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
- -------------------------------------------------------------------------------
As a member of the Federal Home Loan Bank System administered by the
Federal Housing Finance Board, Illini Bank is required to maintain an investment
in the capital stock of the Federal Home Loan Bank of Chicago (FHLB) in an
amount equal to the greater of 1% of the aggregate outstanding balance of loans
secured by dwelling units at the beginning of each year or 0.3% of the total
assets of Illini Bank. The stock is recorded at cost which represents redemption
value, and is recalculated semi-annually. Illini Bank's portfolio of residential
real estate loans, subject to minor adjustments, is available to secure advances
from the FHLB. As of December 31, 1998, the Bank did not have any borrowings
outstanding from the FHLB.
The amortized cost and fair value of debt and marketable equity securities
classified as available for sale at December 31, 1998, by contractual maturity,
are shown below. Expected maturities may differ from contractual maturities
because certain issuers have the right to call or prepay obligations with or
without call or prepayment penalties.
40
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
------- -------
(dollars in thousands)
<S> <C> <C>
Due in one year or less $ 2,204 $ 2,228
Due after one year through five years 13,464 13,670
Due after five years through ten years 8,693 8,882
Due after ten years 2,484 2,685
------- -------
26,845 27,465
Mortgage-backed securities 16,828 16,878
Collateralized mortgage obligations 8,487 8,480
FHLB stock and other equity
securities, no stated maturity 453 453
------- -------
$52,613 $53,276
------- -------
------- -------
</TABLE>
- -------------------------------------------------------------------------------
Proceeds from sales of debt and marketable equity securities during 1998,
1997 and 1996 were $2.0 million, $20.5 million, and $13.0 million, respectively.
Gross gains of $10,000, $109,000, and $51,000 and gross losses of $2,000,
$59,000, and $50,000 for 1998, 1997, and 1996, respectively, were realized on
those sales. All sales during 1998, 1997, and 1996 were from the available for
sale category.
The market value of debt securities pledged to secure United States
government and other public deposits, securities sold under agreements to
repurchase, and for other purposes as required by law was approximately $16.7
million and $19.0 million at December 31, 1998 and 1997, respectively.
(3) LOANS
The loan portfolio at December 31, 1998 and 1997 is composed of the
following loan types:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
-------- --------
(dollars in thousands)
<S> <C> <C>
Commercial, financial, and agricultural $ 20,553 $ 16,565
Real estate:
Construction 7,104 6,537
Mortgage loans held for investment 49,592 50,069
Mortgage loans held for sale 245 295
Consumer, net of unearned income 9,680 12,823
-------- --------
Total loans 87,174 86,289
Allowance for loan losses (1,368) (1,302)
-------- --------
Net loans $ 85,806 $ 84,987
-------- --------
-------- --------
</TABLE>
- -------------------------------------------------------------------------------
Loans serviced for others totaled approximately $87.7 million and $71.7
million at December 31, 1998 and 1997, respectively.
Illini grants commercial, industrial, residential, and consumer loans to
customers in central Illinois through its network of banking offices. Illini
does not have any particular concentration of credit in any one economic sector;
however, a majority of Illini's lending occurs in and around Springfield,
Illinois, with a substantial portion of such loans secured by real estate. As
such, Illini is susceptible to changes in the economic environment in the
Springfield, Illinois area.
41
<PAGE>
A summary of impaired loans, which includes nonaccrual loans, at December
31, 1998, 1997, and 1996 is as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans $1,029 $ 636 $ 869
Impaired loans continuing to accrue interest 300 50 309
------ ------ ------
Total impaired loans $1,329 $ 686 $1,178
------ ------ ------
------ ------ ------
Allowance for losses on specific impaired loans $ 25 $ 26 $ 435
Impaired loans with no specific related allowance
for loan losses 1,268 595 69
Average balance of impaired loans during the year 1,074 977 1,665
------ ------ ------
------ ------ ------
</TABLE>
- -------------------------------------------------------------------------------
Additional interest income of $61,000 in 1998, $35,000 in 1997, and $71,000
in 1996 would have been recognized had nonaccrual loans remained current. The
amount recognized as interest income on other impaired loans continuing to
accrue interest was $29,000 in 1998, $5,000 in 1997, and $29,000 in 1996. The
amount recognized as interest income on nonaccrual loans was $9,679, $13,300,
and $19,491 for the years ended December 31, 1998, 1997, and 1996, respectively.
A summary of changes in the allowance for loan losses for the years ended
December 31, 1998, 1997, and 1996 is as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 1,302 $ 1,258 $ 1,247
Provision charged to expense 204 300 1,130
Loans charged off (215) (364) (1,189)
Recoveries of loans previously charged off 77 108 70
------- ------- -------
Net loan charge-offs (138) (256) (1,119)
------- ------- -------
Balance at end of year $ 1,368 $ 1,302 $ 1,258
------- ------- -------
------- ------- -------
</TABLE>
- -------------------------------------------------------------------------------
The following table recaps the 1998 activity for loans made by Illini Bank
to executive officers, directors, and principal shareholders (insiders) of
Illini and Illini Bank and/or their related interests. Such loans were made in
the normal course of business on substantially the same terms, including
interest rates and collateral requirements, as those prevailing at the same time
for comparable transactions with other persons and did not involve more than
normal credit risk or present other unfavorable features.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INSIDER LOANS
----------------
(dollars in thousands)
<S> <C>
Balance at December 31, 1997 $ 291
Advances on existing loans 208
Payments received (253)
----------------
Balance at December 31, 1998 $ 246
----------------
----------------
- -------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
(4) PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1998 and 1997 by major
category is as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------- -------
(dollars in thousands)
<S> <C> <C>
Land $ 1,043 $ 1,812
Bank premises 6,549 7,417
Furniture and equipment 4,771 3,695
------- -------
12,363 12,924
Less accumulated depreciation 5,113 4,847
------- -------
$ 7,250 $ 8,077
------- -------
------- -------
</TABLE>
- -------------------------------------------------------------------------------
Depreciation charged to noninterest expense amounted to $795,000, $638,000,
and $406,000 in 1998, 1997, and 1996, respectively.
Illini completed two real estate transactions during 1998 resulting in
substantial gains. A 22,000 square foot property the Company owned in
Springfield was sold for $1,350,000 and a lot in Bloomington being held for
future expansion was sold for $556,000, resulting in a combined gain of
$482,000. The transaction for the sale of the property in Springfield is a
sale-leaseback arrangement. The carrying value of the property was $634,000 and
Illini Bank recognized $460,000 as a gain in 1998 and deferred $256,000 to be
recognized over the 10 year life of the lease.
Illini leases certain premises and equipment under noncancellable operating
leases which expire at various dates through December 2008. Such noncancellable
operating leases also include options to renew on an annual basis. Minimum
rental commitments under all noncancellable operating leases at December 31,
1998 are as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Amount
------ --------
(dollars in thousands)
<S> <C>
1999 $ 108
2000 97
2001 87
2002 33
------------
$ 325
------------
------------
</TABLE>
- -------------------------------------------------------------------------------
Total rental income received in 1998, 1997, and 1996 was $104,000,
$177,000, and $182,000, respectively. Total rent expense charged to noninterest
expense in 1998, 1997, and 1996 was $155,000, $213,000, and $222,000,
respectively.
43
<PAGE>
(5) DEPOSITS
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Amount
------ --------
(dollars in thousands)
<S> <C>
1999 $48,182
2000 10,148
2001 2,224
2002 163
2003 and thereafter 73
-------
$60,790
-------
-------
</TABLE>
- -------------------------------------------------------------------------------
6) INCOME TAXES
The components of income tax expense (benefit) for the years ended December
31, 1998, 1997, and 1996 are as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(dollars in thousands)
Current income taxes:
<S> <C> <C> <C>
Federal $ 122 $ 167 $ 25
State (57) (51) (33)
Deferred income taxes 6 (78) (1)
----- ----- -----
$ 71 $ 38 $ (9)
----- ----- -----
----- ----- -----
</TABLE>
- -------------------------------------------------------------------------------
A reconciliation of expected income tax expense to federal income tax
expense, computed by applying the federal statutory rate of 34% to income before
income tax expense for the years ended December 31, 1998, 1997, and 1996 to
reported income tax expense, is as follows:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(dollars in thousands)
<S> <C> <C> <C>
Income tax expense at statutory rate $ 239 $ 234 $ 155
Increase (decrease) in income taxes resulting from:
Tax-exempt income (137) (195) (215)
Goodwill amortization 4 4 4
State income taxes, net of federal
income tax benefit (38) (34) (22)
Alternative minimum tax -- -- 60
Other, net 3 29 9
----- ----- -----
Income tax expense $ 71 $ 38 $ (9)
----- ----- -----
----- ----- -----
</TABLE>
- -------------------------------------------------------------------------------
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are presented below:
44
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----- -----
(dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Loans, principally due to allowance for loan losses $ 250 $ 224
Alternative minimum tax carryforward 284 140
Other 60 35
----- -----
Gross deferred tax assets 594 399
Less valuation allowance (60) (60)
----- -----
Deferred tax assets, net 534 339
----- -----
Deferred tax liabilities:
Available for sale securities market valuation 247 94
Premises and equipment, basis differences 233 31
Intangible assets -- 1
----- -----
Total gross deferred tax liabilities 480 126
----- -----
Net deferred tax asset $ 54 $ 213
----- -----
----- -----
</TABLE>
- -------------------------------------------------------------------------------
The alternative minimum tax carry forward has no expiration date. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. A valuation allowance is provided on deferred tax assets
when it is more likely than not that some portion of the assets will not be
realized. Illini has established a valuation allowance in the amount of $60,114
for deferred tax assets at December 31, 1998 and 1997.
(7) EMPLOYEE BENEFITS
Illini has a defined contribution 401(k) plan that covers substantially all
employees. Both Illini and the employee may contribute to the plan. Illini's
contributions are voluntary and at the discretion of the Board of Directors. All
contributions are subject to statutory restrictions. Illini made contributions
of $37,000, $48,000, and $40,000 to the plan in 1998, 1997, and 1996,
respectively.
(8) OTHER COMPREHENSIVE INCOME
Illini's other comprehensive income for the years ended December 31, 1998,
1997, and 1996 included the following components:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net realized and unrealized gains (losses)
on securities available for sale, net $ 264 $ 294 $(131)
Less adjustment for net securities gains
realized in net income, net (5) (31) (1)
----- ----- -----
Other comprehensive income (loss) $ 259 $ 263 $(132)
----- ----- -----
----- ----- -----
</TABLE>
- -------------------------------------------------------------------------------
45
<PAGE>
(9) CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Following are condensed balance sheets as of December 31, 1998 and 1997 and
the related condensed schedules of income and cash flows for each of the years
in the three-year period ended December 31, 1998 of Illini (parent company
only):
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
1998 1997
(dollars in thousands)
<S> <C> <C>
ASSETS:
Cash $ 315 $ 186
Investment in Illini Bank 14,927 14,535
Other investments -- 4
Excess of cost over fair value
of net assets acquired 124 160
Other assets 196 133
------- -------
$15,562 $15,018
------- -------
------- -------
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Other liabilities $ 143 $ 40
Shareholders' equity 15,419 14,978
------- -------
$15,562 $15,018
------- -------
------- -------
</TABLE>
CONDENSED SCHEDULES OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
REVENUE:
Dividends received from Illini Bank $ 735 $ 900 $ 601
Other 4 -- --
-------- -------- --------
739 900 601
-------- -------- --------
EXPENSES:
Professional fees 291 314 120
Other 89 140 103
-------- -------- --------
380 454 223
-------- -------- --------
Income before income tax benefit and
equity in undistributed income of Illini Bank 359 446 378
Income tax benefit 139 154 92
Equity in undistributed (distributed)
income of Illini Bank 132 50 (5)
-------- -------- --------
Net income $ 630 $ 650 $ 465
-------- -------- --------
-------- -------- --------
</TABLE>
46
<PAGE>
- -------------------------------------------------------------------------------
CONDENSED SCHEDULES OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 630 $ 650 $ 465
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 35 75 67
Equity in (undistributed) distributed
income of Illini Bank (132) (50) 5
Other, net 40 (110) (114)
------- ------- -------
Net cash provided by operating activities 573 565 423
Cash flows from investing activities:
Proceeds from sales of debt and marketable
equity securities available for sale 4 -- --
------- ------- -------
Net cash provided by investing activities 4 -- --
Cash flows from financing activities:
Dividends paid (448) (448) (426)
------- ------- -------
Net cash used in financing activities (448) (448) (426)
Net increase (decrease) in cash 129 117 (3)
Cash at beginning of year 186 69 72
------- ------- -------
Cash at end of year $ 315 $ 186 $ 69
------- ------- -------
------- ------- -------
Supplemental information:
Income taxes paid $ 77 $ 112 $ 145
------- ------- -------
------- ------- -------
</TABLE>
- -------------------------------------------------------------------------------
47
<PAGE>
(10) DISCLOSURES ABOUT FINANCIAL INSTRUMENTS
Illini 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. Such instruments may involve, to varying degrees, elements of credit
risk in excess of the amounts recognized in the consolidated balance sheets. The
contractual amounts of these instruments reflect the extent of involvement
Illini has in particular classes of financial instruments.
Illini's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of these
instruments. Illini uses the same credit policies in making commitments and
conditional obligations as it does for financial instruments recorded in the
consolidated balance sheets. The off-balance-sheet financial instruments of
Illini at December 31, 1998 and 1997 are presented below.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------- -------
(dollars in thousands)
<S> <C> <C>
Financial instruments whose contractual
amounts represent credit risk:
Commitments to extend credit $11,050 $11,588
Standby letters of credit 1,295 1,223
------- -------
$12,345 $12,811
------- -------
------- -------
</TABLE>
- -------------------------------------------------------------------------------
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Of the
total commitments to extend credit at December 31, 1998 and 1997, approximately
$6.4 million and $6.5 million, respectively, represent fixed-rate loan
commitments. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since certain of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. Illini
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained upon extension of credit is based on management's credit
evaluation of the counterparty. Collateral held varies, but generally includes
residential or income-producing commercial property, inventory, accounts
receivable, and/or equipment.
Standby letters of credit are conditional commitments issued by Illini to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing such letters of credit is essentially the same as that
involved in extending other financing arrangements with customers. Illini holds
collateral to support such commitments for which collateral is deemed necessary.
Illini has established overnight federal funds lines of credit of $3.5
million with an unaffiliated bank. As a member of the FHLB, Illini has a line of
credit of approximately $4.0 million.
48
<PAGE>
Following is a summary of the carrying amounts and fair values of Illini's
financial instruments at December 31, 1998 and 1997.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1998 CARRYING FAIR
AMOUNT VALUE
--------- -------
(dollars in thousands)
<S> <C> <C>
Balance sheet assets:
Cash and due from banks $ 5,624 $ 5,624
Interest-bearing deposits in other banks 19 19
Federal funds sold 6,675 6,675
Debt and marketable equity securities 53,276 53,276
Loans, net 85,806 85,921
Accrued interest receivable 1,390 1,390
-------- --------
$152,790 $152,905
-------- --------
-------- --------
Balance sheet liabilities:
Deposits $142,959 $143,366
Securities sold under agreements to repurchase 290 290
Accrued interest payable 827 827
-------- --------
$144,076 $144,483
-------- --------
-------- --------
DECEMBER 31, 1997 CARRYING FAIR
AMOUNT VALUE
--------- -------
Balance sheet assets:
Cash and due from banks $ 5,361 $ 5,361
Interest-bearing deposits in other banks 77 77
Federal funds sold 6,755 6,755
Debt and marketable equity securities 46,834 46,834
Loans, net 84,987 86,024
Accrued interest receivable 1,500 1,500
-------- --------
$145,514 $146,551
-------- --------
-------- --------
Balance sheet liabilities:
Deposits $137,576 $137,974
Securities sold under agreements to repurchase 715 715
Accrued interest payable 784 784
-------- --------
$139,075 $139,473
-------- --------
-------- --------
</TABLE>
- -------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
such value:
CASH AND OTHER SHORT-TERM INSTRUMENTS
For cash and due from banks, interest-bearing deposits in other banks,
federal funds sold, and securities sold under agreements to repurchase, the
carrying amount is a reasonable estimate of fair value, as such instruments
reprice in a short time period.
DEBT AND MARKETABLE EQUITY SECURITIES
Fair values of debt and marketable equity securities are based on quoted
market prices or dealer quotes.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
real estate, residential mortgage, and installment. Each loan category is
further segmented into fixed- and adjustable-rate interest terms and by
performing and
49
<PAGE>
nonperforming categories.
For certain homogeneous categories of performing loans, such as certain
residential mortgages and other consumer loans, fair value is estimated using
the quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other types of loans is
estimated by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.
Fair value for nonperforming loans is based on recent external appraisals.
If appraisals are not available, estimated cash flows are discounted using a
rate commensurate with the risk associated with the estimated cash flows.
Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific borrower
information.
ACCRUED INTEREST RECEIVABLE AND PAYABLE
For accrued interest receivable and payable, the carrying amount is a
reasonable estimate of fair value because of the short maturity for this
financial instrument.
DEPOSITS
The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, NOW and money market accounts, and savings
accounts is equal to the amounts payable on demand. The fair value of time
deposits is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for deposits of
similar remaining maturities.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit and standby letters of
credit are estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements, the
likelihood of the counterparties drawing on such financial instruments, and the
present creditworthiness of such counterparties. Illini believes such
commitments have been made on terms which are competitive in the markets in
which it operates; however, no premium or discount is offered thereon and,
accordingly, Illini has not assigned a value to such instruments for purposes of
this disclosure.
(11) LITIGATION
Various legal claims have arisen against Illini Bank, Illini's wholly owned
subsidiary, in the normal course of business, which, in the opinion of Illini
management, will not result in any material liability to Illini.
Two complaints were filed against Illini in 1998. One complaint seeks to
compel Illinois Stock Transfer Company, Illini's transfer agent, to distribute
rights certificates to Illini's shareholders and further seeks to certify all
Illini shareholders as a class. The other complaint seeks declaratory and
injunctive relief from Illini and its directors regarding an alleged triggering
of the Company's Shareholder Rights Agreement and the enforceability of an
amendment thereto. The plaintiff in the second complaint also seeks compensatory
and punitive damages arising out of the directors' alleged breach of fiduciary
duty. The plaintiffs in both actions seek to recover their attorneys' fees from
Illini.
Illini and its directors intend to vigorously contest and oppose the
allegation made in both complaints.
(12) REGULATORY RESTRICTIONS
Illini and Illini Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on Illini's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, Illini and Illini Bank must meet specific capital guidelines that
involve quantitative measures of Illini and Illini Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
principals. Illini and Illini Bank capital amounts and classification are also
subject to qualitative judgments by the regulators about components,
risk-weightings, and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require Illini and Illini Bank to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier I capital (as
50
<PAGE>
defined in the regulations) to risk-weighted assets (as defined), and of Tier I
capital to average assets (as defined). Management believes, as of December 31,
1998, Illini and Illini Bank meet all capital adequacy requirements to which
they are subject.
As of September 30, 1997, the most recent notification from regulatory
agencies categorized Illini Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
Illini Bank must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed Illini Bank's
category.
Illini and Illini Bank actual and required capital amounts and ratios as of
December 31, 1998 and 1997 are as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------------------------------
TO BE WELL CAPITALIZED
UNDER PROMPT CORRECTIVE
ACTUAL CAPITAL REQUIREMENTS ACTION PROVISIONS
---------------- ----------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-
weighted assets):
Illini $16,247 15.87% $ 8,189 8.00% -- --
Illini Bank 15,880 15.52 8,183 8.00 $ 10,229 10.00%
Tier I capital (to risk-
weighted assets):
Illini 14,878 14.53% 4,095 4.00% -- --
Illini Bank 14,511 14.19 4,091 4.00 6,137 6.00%
Tier I capital (to quarterly
average assets):
Illini 14,878 9.57% 4,663 3.00% -- --
Illini Bank 14,511 9.35 4,656 3.00 7,761 5.00%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------------------
TO BE WELL CAPITALIZED
UNDER PROMPT CORRECTIVE
ACTUAL CAPITAL REQUIREMENTS ACTION PROVISIONS
---------------- ----------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-
weighted assets):
Illini $15,985 15.67% $ 8,159 8.00% -- --
Illini Bank 15,681 15.39 8,151 8.00 $ 10,188 10.00%
Tier I capital (to risk-
weighted assets):
Illini 14,683 14.40% 4,080 4.00% -- --
Illini Bank 14,379 14.11 4,075 4.00 6,113 6.00%
Tier I capital (to quarterly
average assets):
Illini 14,683 9.78% 4,506 3.00% -- --
Illini Bank 14,379 9.59 4,498 3.00 7,497 5.00%
</TABLE>
- --------------------------------------------------------------------------------
Dividends from Illini Bank are the principal source of funds for payment of
dividends by Illini to its shareholders.
51
<PAGE>
Illini Bank is subject to certain restrictions on the amount of dividends
that may be declared without prior regulatory approval. At December 31, 1998,
approximately $176,000 of retained earnings were available for dividends without
prior regulatory approval.
At December 31, 1998 and 1997, approximately $984,000 and $1,053,000,
respectively, of cash and due from banks represented required reserves on
deposits maintained by Illini in accordance with Federal Reserve Bank
requirements.
(13) ACQUISITION ACTIVITY
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 $3,456,260. 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 during the third quarter of 1999.
52
<PAGE>
ITEM 8. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
- -------------------------------------------------------------------------------
PART III.
ITEM 9. - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information required by this item is incorporated by reference from the
sections entitled "Election of Directors", "Directors and Executive Officers",
"Executive Officers", "Business Experience of Non Director Executive Officers"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the proxy
statement for the Annual Meeting of Shareholders to be held on May 20, 1999 (the
"Proxy Statement").
ITEM 10. - EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the
section entitled "Executive Compensation", "Employment Agreement" and
"Compensation of Directors" in the Proxy Statement.
ITEM 11. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference from the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
ITEM 12. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the
section titled Transactions with Directors, Executive Officers and Associates in
the Proxy Statement.
53
<PAGE>
ITEM 13. - EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) The following exhibits have been filed with the Securities and Exchange
Commission as required:
(2) Not applicable.
(3) Articles of Incorporation. Incorporated by reference to
Illini's Form 10-KSB for the year ended December 31, 1984,
Commission File No. 0-13343. Amended and Restated Bylaws of
Illini Corporation, effective October 30, 1998 (Incorporated
by reference as Exhibit 99 to Registrant's Report on Form 8-K
filed November 6, 1998).
(4) Rights Agreement by and between Illini Corporation and
Illinois Stock Transfer Company, as rights agent. Incorporated
by reference to Illini's Form 8-K filed on June 25, 1997,
Commission File No. 0-13343. First Amendment to Rights
Agreement dated July 1, 1998 incorporated by reference to
Illini's Form 8-K filed on July 13, 1998.
(9) Not applicable.
(10) (1) Form of data processing agreement. Incorporated by
reference to Illini's Form 10- KSB for the year ended December
31, 1996, Commission File No. 0-13343. (2) Employment
agreement by and between Illini Corporation and Burnard K.
McHone dated November 24, 1998. (3) Employment agreement by
and between Illini Corporation and William B. Littreal dated
November 24, 1998. (4) Employment agreement by and between
Illini Corporation and Ronald W. Wenger dated November 24,
1998.
(11) Statement regarding computation of earnings per share is
included in note 1(L) to the financial statements which is
part of this Form 10-KSB.
(13) Not applicable.
(16) Not applicable.
(18) Not applicable.
(21) Subsidiaries of the Registrant: Illini Bank, an Illinois
state chartered bank.
(22) Not applicable.
(23) Not applicable.
(24) Not applicable.
(27) Financial data schedule.
(99) Not applicable.
(b) The Company filed a Form 8-K on November 6, 1998 in connection with certain
amendments to the Company's Bylaws.
54
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: March 25, 1999
-----------------------------
Illini Corporation, Registrant, by
/s/ Burnard K. McHone
- -------------------------------------------------------------------------------
Burnard K. McHone, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<S> <C>
/S/ THOMAS A. BLACK MARCH 25, 1999
- ---------------------------------------------------
Thomas A. Black, Chairman Date
/S/ ROBERT F. OLSON MARCH 25, 1999
---------------------------------------------------
Robert F. Olson, Director Date
/S/ RONALD E. CRAMER MARCH 25, 1999
- ---------------------------------------------------
Ronald E. Cramer, Director Date
/S/ JOHN H. PICKRELL MARCH 25, 1999
---------------------------------------------------
John H. Pickrell, Director Date
/S/ LAWRENCE B. CURTIN MARCH 25, 1999
- ---------------------------------------------------
Lawrence B. Curtin, Director Date
/S/ N. RONALD THUNMAN MARCH 25, 1999
---------------------------------------------------
N. Ronald Thunman, Director Date
/S/ KENNETH G. DEVERMAN MARCH 25, 1999
- ---------------------------------------------------
Kenneth G. Deverman, Director Date
/S/ WILLIAM G. WALSCHLEGER MARCH 25, 1999
---------------------------------------------------
William G. Walschleger, Director Date
/S/ WILLIAM N. ETHERTON MARCH 25, 1999
- ---------------------------------------------------
William N. Etherton, Director Date
/S/ PERRY WILLIAMS MARCH 25, 1999
---------------------------------------------------
Perry Williams, Director Date
/S/ WILLIAM B. MCCUBBIN MARCH 25, 1999
- ---------------------------------------------------
William B. McCubbin, Director Date
/S/ C. DEANN HAGER MARCH 25, 1999
---------------------------------------------------
C. Deann Hager, Finance Manager Date
(Principal Financial and Accounting Officer)
/S/ BURNARD K. MCHONE MARCH 25, 1999
- ---------------------------------------------------
Burnard K. McHone, Director & Pres. Date
(Principal Executive Officer)
</TABLE>
55
<PAGE>
EXHIBIT INDEX
(10)(2) Employment agreement by and between Illini Corporation and
Burnard K. McHone dated November 24, 1998.
(10)(3) Employment agreement by and between Illini Corporation
and William B. Littreal dated
November 24, 1998.
(10)(4) Employment agreement by and between Illini Corporation and
Ronald W. Wenger dated November 24, 1998.
(27) Financial data schedules.
56
<PAGE>
<TABLE>
ILLINI CORPORATION AND ILLINI BANK OFFICERS ILLINI BANK LOCATIONS
- ------------------------------------------- ----------------------------------------------------------
<S> <C> <C>
ILLINI CORPORATION 3200 West Iles Avenue 2201 Woodlawn, Ste. 100
Springfield Lincoln
Burnard K. McHone DOUG FINN, BANK MANAGER II SHARON AWE, BANK MANAGER
President
120 South Chatham Road 120 Governor Oglesby
William Littreal Springfield Elkhart
Sr. Vice President / Operations BRENDA RICH, BANK MANAGER RODNEY GOWIN, BANK MANAGER
Ronald Wenger 615 West Jefferson St. 116 East Exchange
Sr. Vice President / Credit Administration Springfield Danvers
STEVE TATE, BANK MANAGER TOM CAISLEY, BANK MANAGER
James L. Adkins
Vice President / Commercial Sales 2120 Peoria Road 103 Franklin
Springfield Hudson
Doug F. Finn TERESA JUDD, BANK MANAGER GREG BIRKY, BANK MANAGER II
Vice President / Sales & Service
375 West Andrew Road 100 East Third St.
C. Deann Hager Sherman Stonington
Finance Manager NANCY MANNING, BANK MANAGER CAROLYN WINN, BANK MANAGER
ILLINI BANK 133 Dodds Street 130 Main St.
Divernon Dawson
Burnard K. McHone VICKIE BLY, BANK MANAGER II ANGELA FLECK, BANK MANAGER
President
Route 4 and Jefferson 101 Main St.
William Littreal Auburn Tallula
Sr. Vice President / Operations MOLLY APPELT, BANK MANAGER JANE KING, BANK MANAGER
Ronald Wenger West Main St. Lincoln & Douglas
Sr. Vice President / Credit Administration Mechanicsburg Owaneco
LORI JARRETT, BANK MANAGER CAROLYN WINN, BANK MANAGER
James L. Adkins
Vice President / Commercial Sales 420 East Sangamon
Petersburg
Doug F. Finn DIANE HOPP, BANK MANAGER
Vice President / Sales & Service
106 East Washington
C. Deann Hager Greenview
Finance Manager DIANE HOPP, BANK MANAGER
Nancy Richards
Relationship Banker
Alan D. Fulk
Relationship Banker
STOCK TRANSFER AGENT
- -----------------------
Illinois Stock Transfer
209 West Jackson Blvd.
Suite 903
Chicago, IL 60606
1-800-757-5755
</TABLE>
57
<PAGE>
<PAGE>
Exhibit 10.2
MANAGEMENT CONTINUITY AGREEMENT
This Management Continuity Agreement ("Agreement") is made and entered
into as of this 24th day of November, 1998, by and between Illini Corporation,
an Illinois corporation with an office at 3200 West Iles Avenue, Springfield,
Illinois 62707 (the "Company"), and Burnard K. McHone whose address is 3800
North West Territory Drive, Springfield, Illinois 62707 (the "Officer").
W I T N E S S E T H
WHEREAS, the Officer is employed by the Company and the Company's
subsidiary, Illini Bank, an Illinois banking corporation (the "Bank"), as an
officer of the Company and the Bank, respectively, with the title and salary
current at the date of this Agreement as set forth in this Agreement; and
WHEREAS, the Company wishes to attract and retain highly qualified
executives and to achieve this goal it is in the best interests of the Company
and the Bank to secure the continued services of the Officer regardless of a
change in control of the Company; and
WHEREAS, the Company is willing, in order to provide the Officer a
measure of security with respect to his employment with the Company and the Bank
in the event of a change in control of the Company so that the Officer will be
in a position to act with respect to a possible change in control of the Company
in the best interests of the Company and its shareholders, without concern as to
the Officer's own financial security, and in order to induce the Officer to
remain in employment with the Company and the Bank, to agree that employment of
the Officer shall be terminable only for cause for a limited period after a
change in control of the Company.
NOW, THEREFORE, the Company and the Officer agree as follows:
SECTION 1
EMPLOYMENT
1.1 TERM. The Company shall continue to employ the Officer as its
President, and shall cause the Bank to continue to employ the Officer as its
President and the Officer shall remain in employment with the Company and the
Bank until December 31, 2000 (the "Term") unless terminated prior to the
expiration of the Term pursuant to Section 2.
<PAGE>
1.2 COMPENSATION. As compensation for services provided to the Company
and the Bank by the Officer pursuant to this Agreement, the Company shall cause
the Bank to pay the Officer an annual base salary of $110,000, which salary may
be increased from time to time by the Company or the Bank. The Officer shall
also be eligible to actively participate in any other compensation and benefit
plans generally available to executive employees of the Company or the Bank of
like grade and salary including, but not limited to, retirement plans, group
life, disability, accidental death and dismemberment, travel and accident, and
health and dental insurance plans, incentive compensation plans, stock
compensation plans, deferred compensation plans, supplemental retirement plans
and excess benefit plans. Such other compensation and benefit plans are
hereinafter referred to collectively as the "Compensation and Benefit Plans".
1.3 DUTIES. The Officer shall perform such duties and functions as are
assigned to him by the bylaws of the Company and the Bank, as amended or
restated, the Boards of Directors of the Company and the Bank, or by a duly
authorized committee of the Boards of Directors of the Company and the Bank. In
the event of an actual or potential Change in Control (as defined in Section
2.9), the Officer shall perform his duties and functions in a manner that is
consistent with the best interest of the Company and its shareholders, without
regard to the effect that the potential or actual Change in Control may have on
the Officer personally.
1.4 DUTY OF LOYALTY. The Officer shall work full-time for the Company
and the Bank only, provided that:
(a) he may also engage in charitable, civic and other
similar activities;
(b) with the consent of the Board of Directors of the
Company, he may serve as a director of a business
organization not competing with the Company; and
(c) he may make such investments and reinvestment in
business activities as shall not require a
substantial portion of his time.
1.5 DUTY NOT TO DISCLOSE CONFIDENTIAL INFORMATION. The Officer
acknowledges that his relationship with the Company and the Bank is one of high
trust and confidence, and that he has access to Confidential Information (as
hereinafter defined) of the Company and the Bank. The Officer shall not,
directly or indirectly, communicate, deliver, exhibit or provide any
Confidential Information to any person, firm, partnership,
<PAGE>
corporation, organization or entity, except as required in the normal course of
the Officer's duties. The duties contained in this paragraph shall be binding
upon the Officer during the time that he is employed by the Company and
following the termination of such employment. Such duties will not apply to any
such Confidential Information which is or becomes in the public domain through
no action on the part of the Officer, is generally disclosed to third parties by
the Company without restriction on such third parties, or is approved for
release by written authorization of the Board of Directors of the Company. The
term "Confidential Information" shall mean any and all confidential,
proprietary, or secret information relating to the Company's or the Bank's
business, services, customers, business operations, or activities and any and
all trade secrets, products, methods of conducting business, information,
skills, knowledge, ideas, know-how or devices used in, developed by, or
pertaining to the Company's or the Bank's business and not generally known, in
whole or in part, in any trade or industry in which the Company or the Bank is
engaged.
SECTION 2
TERMINATION
2.1 TERMINATION OF AGREEMENT. Unless sooner terminated in accordance
with the terms of this Section 2, this Agreement shall terminate at the
expiration of the Term, and all obligations hereunder shall terminate except as
specifically set forth in Section 2.5. The Officer may, with the consent of the
Company, continue in the employ of the Company and the Bank after the expiration
of the Term on such terms and conditions as may be agreed upon by the Company
and the Officer.
2.2 TERMINATION BY THE OFFICER. The Officer may voluntarily terminate
this Agreement by providing thirty days notice to the Company, in which event
the Company shall have no further obligation to the Officer hereunder from the
date of such termination and the Officer shall have no further obligation to the
Company hereunder except the duty to not disclose Confidential Information in
accordance with Section 1.5. In the event the Officer's employment with the
Company and the Bank is terminated due to the Officer's death, the Company shall
have no further obligation to the Officer, his heirs or legatees hereunder from
the date of such termination, except to pay any benefits due under the
Compensation and Benefit Plans. In the event the Officer's employment with the
Company and the Bank is terminated due to the Officer's Permanent Disability,
the Company shall have no further
<PAGE>
obligation to the Officer, hereunder from the date of such termination, except,
to pay any benefits due under the Compensation and Benefit Plans.
For purposes of this Agreement, the term "Permanent Disability" means a
physical or mental condition of the Officer which:
(a) has continued uninterrupted for six months;
(b) is expected to continue indefinitely; and
(c) is determined by the Company to render the Officer
incapable of adequately performing his duties under
Section 1.3 of this Agreement.
2.3 TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company may terminate
this Agreement without cause prior to the Firm Term (as hereinafter defined), by
providing thirty days notice to the Officer. In such event, the Officer shall
have no further obligation to the Company hereunder, except the duty to not
disclose Confidential Information in accordance with Section 1.5, and the
Company shall have no further obligation to the Officer hereunder from the date
of such termination except (i) to pay to the Officer the salary payments
described in Section 1.2, in the amount in effect on the date of termination,
for a period of six months from the date of termination, (ii) to pay to the
Officer any other benefits due under the Compensation and Benefit Plans for a
period of six months from the date of termination and (iii) to pay to the
Officer reasonable expenses of out placement within the financial institutions
industry during the six month period following the date of termination;
provided, however, out placement expenses shall be paid only upon actually
incurring such expenses and Officer's furnishing of evidence thereof to the
Company and shall not include moving or relocation expenses; and provided,
however, that any benefit to be provided by a Compensation and Benefit Plan may
be provided by the Company through cash of equivalent value or through a
nonqualified arrangement or arrangements if, in the judgment of the Company,
permitting the Officer to participate in such plan after the date of termination
would adversely affect the tax status of such plan.
2.4 TERMINATION BY THE COMPANY WITH CAUSE. Prior to or during the Firm
Term, the Company may terminate this Agreement for Cause. For purposes of this
Agreement, Cause shall mean;
(a) the Officer's willful and material breach of the
provisions of this Agreement after the
<PAGE>
Board of Directors delivers a written demand to cure
such breach, which specifically identifies the manner
in which the Board of Directors believes that the
Officer has not substantially performed his duties,
or
(b) the Officer willfully engages in illegal conduct or
gross misconduct which materially and demonstrably
injures the Company or the Bank.
For purposes of determining whether "Cause" exists, no act or failure to act, on
the Officer's part shall be considered "willful," unless it is done, or omitted
to be done, by the Officer in bad faith or without reasonable belief by the
Officer that his action or omission was in the best interests of the Company.
In the event of the Officer's termination for Cause, the Company will
have no further obligation to the Officer under the Agreement from the date of
such termination.
2.5 TERMINATION FOLLOWING CHANGE IN CONTROL. In the event there is a
Change in Control of the Company, as defined in Section 2.6, during the Term,
and:
(a) within the period commencing three months prior to
the date of a Change in Control and ending six months
following the date of the Change in Control (the
"Firm Term"), the Officer's employment hereunder is
terminated by the Company other than for Cause, as
defined in Section 2.4; or
(b) within the Firm Term, the Officer resigns from his
employment hereunder upon thirty days written notice
given to the Company within thirty days following a
material change in the Officer's title, authorities
or duties, in effect immediately prior to the Change
in Control, a reduction in the compensation or a
reduction in benefits provided pursuant to this
Agreement or the Compensation and Benefit Plans below
the amount of compensation and benefits in effect
immediately prior to the Change in Control, or a
change of the Officer's principal place of employment
without his consent to a city more than 25 miles from
Springfield, Illinois,
then the Officer shall have no further obligation to the Company hereunder,
except the duty not to disclose Confidential Information in accordance with
Section 1.5, and the Company shall have no further obligation to the Officer
hereunder from the date of termination except (i) to pay to the Officer the
salary payments described in Section 1.2, in the amount in effect on the date of
termination, for a period of twelve months from the date of termination, (ii) to
pay to the Officer any other benefits due under the Compensation and Benefit
Plans for a period of twelve months from the date of termination and (iii) to
pay to the Officer reasonable expenses of out placement
<PAGE>
within the financial institutions industry during the twelve month period
following the date of termination; provided, however, out placement expenses
shall be paid only upon actually incurring such expenses and Officer's
furnishing of evidence thereof to the Company and shall not include moving or
relocation expenses and provided, however, that any benefit to be provided by a
Compensation and Benefit Plan may be provided by the Company through cash of
equivalent value or through a nonqualified arrangement or arrangements if, in
the judgment of the Company, permitting the Officer to participate in such plan
after the date of termination would adversely affect the tax status of such
plan.
2.6 CHANGE IN CONTROL DEFINED. A Change in Control of the Company shall
have occurred:
(a) on the fifth day preceding the scheduled expiration
date of a tender offer by, or exchange offer by any
corporation, person, other entity or group (other
than the Company or any of its wholly owned
subsidiaries), to acquire Voting Stock of the Company
if:
(i) after giving effect to such offer such
corporation, person, other entity or group
would own 50% or more of the Voting Stock of
the Company;
(ii) there shall have been filed documents with
the Securities and Exchange Commission in
connection therewith (or, if no such filing
is required, public evidence that the offer
has already commenced); and
(iii) such corporation, person, other entity or
group has secured all required regulatory
approvals to own or control 50% or more of
the Voting Stock of the Company;
(b) if the shareholders of the Company approve a
definitive agreement to merge or consolidate the
Company with or into another corporation in a
transaction in which neither the Company nor any of
its wholly owned subsidiaries will be the surviving
corporation, or to sell or otherwise dispose of all
or substantially all of the Company's assets to any
corporation, person, other entity or group (other
that the Company or any of its wholly owned
subsidiaries), and such definitive agreement is
consummated;
(c) if any corporation, person, other entity or group
(other than the Company or any of its wholly owned
subsidiaries) becomes the Beneficial Owner (as that
term is defined in the Securities and Exchange
Commission's Rule 13d-3 under the Securities Exchange
Act of 1934) of stock representing 50% or more of the
Voting Stock of the Company; or
(d) if during any period of two consecutive years
Continuing Directors cease to comprise a majority of
the Company's Board of Directors.
The term "Continuing Director" means:
(a) any member of the Board of Directors of the Company
at the beginning of any period of two consecutive
years; and
<PAGE>
(b) any person who subsequently becomes a member of the
Board of Directors of the Company; if
(i) such person's nomination for election or
election to the Board of Directors of the
Company is recommended or approved by
resolution of a majority of the Continuing
Directors; or
(ii) such person is included as a nominee in a
proxy statement of the Company distributed
when a majority of the Board of Directors of
the Company consists of Continuing
Directors.
"Voting Stock" shall mean those shares of the Company entitled
to vote generally in the election of directors.
2.7 TERMINATION OF RELATED OFFICERS. The parties agree that in the
event Officer's employment by the Company is terminated for any reason, Officer
will immediately resign from all other positions or offices held with the
Company, including any directorships with the Company or the Bank.
2.8 OFFICER'S COSTS OF ENFORCEMENT. The Company shall pay all expenses
of the Officer, including but not limited to attorney's fees, incurred in
enforcing payments by the Company pursuant to this Agreement.
Section 3
MISCELLANEOUS
3.1 ASSIGNMENT OF OFFICER'S RIGHTS The Officer may not assign, pledge
or otherwise transfer any of the benefits of this Agreement either before or
after termination of employment, and any purported assignment, pledge or
transfer of any payment to be made by the Company hereunder shall be void and of
no effect. No payment to be made to the Officer hereunder shall be subject to
the claims of creditors of the Officer.
3.2 AGREEMENTS BINDING ON SUCCESSORS. This Agreement shall be binding
and inure to the benefit of the parties hereto and their respective successors,
assigns, personal representatives, heirs, legatees and beneficiaries.
3.3 NOTICES. Any notice required or desired to be given under this
Agreement shall be deemed given if in writing and sent by first class mail to
the Officer or the Company at his or its address as set forth above, or to such
other address of which either the Officer or the Company shall notify the other
in writing.
3.4 WAIVER OF BREACH. The waiver by either party of a breach of any
provision of this Agreement
<PAGE>
shall not operate or be construed as a waiver of any subsequent breach by either
the Officer or the Company.
3.5 ENTIRE AGREEMENT. This Agreement contains the entire understanding
of the parties and supersedes the Personal Service Contract between the Officer,
the Company and the Bank, which was effective October 30, 1996. It may be
modified or amended only by an agreement in writing signed by the party against
whom enforcement of any change or amendment is sought.
3.6 SEVERABILITY OF PROVISIONS. If for any reason any paragraph, term
or provision of this Agreement is held to be invalid or unenforceable, all other
valid provisions herein shall remain in full force and effect and all
paragraphs, terms and provisions of this Agreement shall be deemed to be
severable in nature.
3.7 GOVERNING LAW. This Agreement is made in, and shall be governed by,
the laws of the State of Illinois.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first set forth above.
/s/ Burnard K. Mchone
-------------------------------------------
Officer
ILLINI CORPORATION
By: /s/ Thomas A. Black
-------------------------------------------
Its: CHAIRMAN
<PAGE>
Exhibit (10)(3)
MANAGEMENT CONTINUITY AGREEMENT
This Management Continuity Agreement ("Agreement") is made and entered
into as of this 24th day of November, 1998, by and between Illini Corporation,
an Illinois corporation with an office at 3200 West Iles Avenue, Springfield,
Illinois 62707 (the "Company"), and William B. Littreal whose address is 2819
Cronin Drive, Springfield, Illinois 62707 (the "Officer").
W I T N E S S E T H
WHEREAS, the Officer is employed by the Company and the Company's
subsidiary, Illini Bank, an Illinois banking corporation (the "Bank"), as an
officer of the Company and the Bank, respectively, with the title and salary
current at the date of this Agreement as set forth in this Agreement; and
WHEREAS, the Company wishes to attract and retain highly qualified
executives and to achieve this goal it is in the best interests of the Company
and the Bank to secure the continued services of the Officer regardless of a
change in control of the Company; and
WHEREAS, the Company is willing, in order to provide the Officer a
measure of security with respect to his employment with the Company and the Bank
in the event of a change in control of the Company so that the Officer will be
in a position to act with respect to a possible change in control of the Company
in the best interests of the Company and its shareholders, without concern as to
the Officer's own financial security, and in order to induce the Officer to
remain in employment with the Company and the Bank, to agree that employment of
the Officer shall be terminable only for cause for a limited period after a
change in control of the Company.
NOW, THEREFORE, the Company and the Officer agree as follows:
SECTION 1
EMPLOYMENT
1.1 TERM. The Company shall continue to employ the Officer as its Vice
President of Operations and Administration, and shall cause the Bank to continue
to employ the Officer as its Vice President of Operations and the Officer shall
remain in employment with the Company and the Bank until December 31, 2000 (the
"Term") unless terminated prior to the expiration of the Term pursuant to
Section 2.
<PAGE>
1.2 COMPENSATION. As compensation for services provided to the Company
and the Bank by the Officer pursuant to this Agreement, the Company shall cause
the Bank to pay the Officer an annual base salary of $68,000, which salary may
be increased from time to time by the Company or the Bank. The Officer shall
also be eligible to actively participate in any other compensation and benefit
plans generally available to executive employees of the Company or the Bank of
like grade and salary including, but not limited to, retirement plans, group
life, disability, accidental death and dismemberment, travel and accident, and
health and dental insurance plans, incentive compensation plans, stock
compensation plans, deferred compensation plans, supplemental retirement plans
and excess benefit plans. Such other compensation and benefit plans are
hereinafter referred to collectively as the "Compensation and Benefit Plans".
1.3 DUTIES. The Officer shall perform such duties and functions as are
assigned to him by the bylaws of the Company and the Bank, as amended or
restated, the Boards of Directors of the Company and the Bank, or by a duly
authorized committee of the Boards of Directors of the Company and the Bank. In
the event of an actual or potential Change in Control (as defined in Section
2.9), the Officer shall perform his duties and functions in a manner that is
consistent with the best interest of the Company and its shareholders, without
regard to the effect that the potential or actual Change in Control may have on
the Officer personally.
1.4 DUTY OF LOYALTY. The Officer shall work full-time for the Company
and the Bank only, provided that:
(a) he may also engage in charitable, civic and other
similar activities;
(b) with the consent of the Board of Directors of the
Company, he may serve as a director of a business
organization not competing with the Company; and
(c) he may make such investments and reinvestment in
business activities as shall not require a
substantial portion of his time.
1.5 DUTY NOT TO DISCLOSE CONFIDENTIAL INFORMATION. The Officer
acknowledges that his relationship with the Company and the Bank is one of high
trust and confidence, and that he has access to Confidential Information (as
hereinafter defined) of the Company and the Bank. The Officer shall not,
directly or indirectly, communicate, deliver, exhibit or provide any
Confidential Information to any person, firm, partnership,
<PAGE>
corporation, organization or entity, except as required in the normal course of
the Officer's duties. The duties contained in this paragraph shall be binding
upon the Officer during the time that he is employed by the Company and
following the termination of such employment. Such duties will not apply to any
such Confidential Information which is or becomes in the public domain through
no action on the part of the Officer, is generally disclosed to third parties by
the Company without restriction on such third parties, or is approved for
release by written authorization of the Board of Directors of the Company. The
term "Confidential Information" shall mean any and all confidential,
proprietary, or secret information relating to the Company's or the Bank's
business, services, customers, business operations, or activities and any and
all trade secrets, products, methods of conducting business, information,
skills, knowledge, ideas, know-how or devices used in, developed by, or
pertaining to the Company's or the Bank's business and not generally known, in
whole or in part, in any trade or industry in which the Company or the Bank is
engaged.
SECTION 2
TERMINATION
2.1 TERMINATION OF AGREEMENT. Unless sooner terminated in accordance
with the terms of this Section 2, this Agreement shall terminate at the
expiration of the Term, and all obligations hereunder shall terminate except as
specifically set forth in Section 2.5. The Officer may, with the consent of the
Company, continue in the employ of the Company and the Bank after the expiration
of the Term on such terms and conditions as may be agreed upon by the Company
and the Officer.
2.2 TERMINATION BY THE OFFICER. The Officer may voluntarily terminate
this Agreement by providing thirty days notice to the Company, in which event
the Company shall have no further obligation to the Officer hereunder from the
date of such termination and the Officer shall have no further obligation to the
Company hereunder except the duty to not disclose Confidential Information in
accordance with Section 1.5. In the event the Officer's employment with the
Company and the Bank is terminated due to the Officer's death, the Company shall
have no further obligation to the Officer, his heirs or legatees hereunder from
the date of such termination, except to pay any benefits due under the
Compensation and Benefit Plans. In the event the Officer's employment with the
<PAGE>
Company and the Bank is terminated due to the Officer's Permanent Disability,
the Company shall have no further obligation to the Officer, hereunder from the
date of such termination, except, to pay any benefits due under the Compensation
and Benefit Plans.
For purposes of this Agreement, the term "Permanent Disability" means a
physical or mental condition of the Officer which:
(a) has continued uninterrupted for six months;
(b) is expected to continue indefinitely; and
(c) is determined by the Company to render the Officer
incapable of adequately performing his duties under
Section 1.3 of this Agreement.
2.3 TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company may terminate
this Agreement without cause prior to the Firm Term (as hereinafter defined), by
providing thirty days notice to the Officer. In such event, the Officer shall
have no further obligation to the Company hereunder, except the duty to not
disclose Confidential Information in accordance with Section 1.5, and the
Company shall have no further obligation to the Officer hereunder from the date
of such termination except (i) to pay to the Officer the salary payments
described in Section 1.2, in the amount in effect on the date of termination,
for a period of six months from the date of termination, (ii) to pay to the
Officer any other benefits due under the Compensation and Benefit Plans for a
period of six months from the date of termination and (iii) to pay to the
Officer reasonable expenses of out placement within the financial institutions
industry during the six month period following the date of termination;
provided, however, out placement expenses shall be paid only upon actually
incurring such expenses and Officer's furnishing of evidence thereof to the
Company and shall not include moving or relocation expenses; and provided,
however, that any benefit to be provided by a Compensation and Benefit Plan may
be provided by the Company through cash of equivalent value or through a
nonqualified arrangement or arrangements if, in the judgment of the Company,
permitting the Officer to participate in such plan after the date of termination
would adversely affect the tax status of such plan.
2.4 TERMINATION BY THE COMPANY WITH CAUSE. Prior to or during the Firm
Term, the Company
<PAGE>
may terminate this Agreement for Cause. For purposes of this Agreement, Cause
shall mean;
(a) the Officer's willful and material breach of the
provisions of this Agreement after the Board of
Directors delivers a written demand to cure such
breach, which specifically identifies the manner in
which the Board of Directors believes that the
Officer has not substantially performed his duties,
or
(b) the Officer willfully engages in illegal conduct or
gross misconduct which materially and demonstrably
injures the Company or the Bank.
For purposes of determining whether "Cause" exists, no act or failure to act, on
the Officer's part shall be considered "willful," unless it is done, or omitted
to be done, by the Officer in bad faith or without reasonable belief by the
Officer that his action or omission was in the best interests of the Company.
In the event of the Officer's termination for Cause, the Company will
have no further obligation to the Officer under the Agreement from the date of
such termination.
2.5 TERMINATION FOLLOWING CHANGE IN CONTROL. In the event there is a
Change in Control of the Company, as defined in Section 2.6, during the Term,
and:
(a) within the period commencing three months prior to
the date of a Change in Control and ending six months
following the date of the Change in Control (the
"Firm Term"), the Officer's employment hereunder is
terminated by the Company other than for Cause, as
defined in Section 2.4; or
(b) within the Firm Term, the Officer resigns from his
employment hereunder upon thirty days written notice
given to the Company within thirty days following a
material change in the Officer's title, authorities
or duties, in effect immediately prior to the Change
in Control, a reduction in the compensation or a
reduction in benefits provided pursuant to this
Agreement or the Compensation and Benefit Plans below
the amount of compensation and benefits in effect
immediately prior to the Change in Control, or a
change of the Officer's principal place of employment
without his consent to a city more than 25 miles from
Springfield, Illinois,
then the Officer shall have no further obligation to the Company hereunder,
except the duty not to disclose Confidential Information in accordance with
Section 1.5, and the Company shall have no further obligation to the Officer
hereunder from the date of termination except (i) to pay to the Officer the
salary payments described in Section 1.2, in the amount in effect on the date of
termination, for a period of twelve months from the date of
<PAGE>
termination, (ii) to pay to the Officer any other benefits due under the
Compensation and Benefit Plans for a period of twelve months from the date of
termination and (iii) to pay to the Officer reasonable expenses of out placement
within the financial institutions industry during the twelve month period
following the date of termination; provided, however, out placement expenses
shall be paid only upon actually incurring such expenses and Officer's
furnishing of evidence thereof to the Company and shall not include moving or
relocation expenses and provided, however, that any benefit to be provided by a
Compensation and Benefit Plan may be provided by the Company through cash of
equivalent value or through a nonqualified arrangement or arrangements if, in
the judgment of the Company, permitting the Officer to participate in such plan
after the date of termination would adversely affect the tax status of such
plan.
2.6 CHANGE IN CONTROL DEFINED. A Change in Control of the Company shall
have occurred:
(a) on the fifth day preceding the scheduled expiration
date of a tender offer by, or exchange offer by any
corporation, person, other entity or group (other
than the Company or any of its wholly owned
subsidiaries), to acquire Voting Stock of the Company
if:
(i) after giving effect to such offer such
corporation, person, other entity or group
would own 50% or more of the Voting Stock of
the Company;
(ii) there shall have been filed documents with
the Securities and Exchange Commission in
connection therewith (or, if no such filing
is required, public evidence that the offer
has already commenced); and
(iii) such corporation, person, other entity or
group has secured all required regulatory
approvals to own or control 50% or more of
the Voting Stock of the Company;
(b) if the shareholders of the Company approve a
definitive agreement to merge or consolidate the
Company with or into another corporation in a
transaction in which neither the Company nor any of
its wholly owned subsidiaries will be the surviving
corporation, or to sell or otherwise dispose of all
or substantially all of the Company's assets to any
corporation, person, other entity or group (other
that the Company or any of its wholly owned
subsidiaries), and such definitive agreement is
consummated;
(c) if any corporation, person, other entity or group
(other than the Company or any of its wholly owned
subsidiaries) becomes the Beneficial Owner (as that
term is defined in the Securities and Exchange
Commission's Rule 13d-3 under the Securities Exchange
Act of 1934) of stock representing 50% or more of the
Voting Stock of the Company; or
(d) if during any period of two consecutive years
Continuing Directors cease to comprise a majority of
the Company's Board of Directors.
<PAGE>
The term "Continuing Director" means:
(a) any member of the Board of Directors of the Company
at the beginning of any period of two consecutive
years; and
(b) any person who subsequently becomes a member of the
Board of Directors of the Company; if
(i) such person's nomination for election or
election to the Board of Directors of the
Company is recommended or approved by
resolution of a majority of the Continuing
Directors; or
(ii) such person is included as a nominee in a
proxy statement of the Company distributed
when a majority of the Board of Directors of
the Company consists of Continuing
Directors.
"Voting Stock" shall mean those shares of the Company entitled
to vote generally in the election of directors.
2.7 TERMINATION OF RELATED OFFICERS. The parties agree that in the
event Officer's employment by the Company is terminated for any reason, Officer
will immediately resign from all other positions or offices held with the
Company, including any directorships with the Company or the Bank.
2.8 OFFICER'S COSTS OF ENFORCEMENT. The Company shall pay all expenses
of the Officer, including but not limited to attorney's fees, incurred in
enforcing payments by the Company pursuant to this Agreement.
Section 3
MISCELLANEOUS
3.1 ASSIGNMENT OF OFFICER'S RIGHTS The Officer may not assign, pledge
or otherwise transfer any of the benefits of this Agreement either before or
after termination of employment, and any purported assignment, pledge or
transfer of any payment to be made by the Company hereunder shall be void and of
no effect. No payment to be made to the Officer hereunder shall be subject to
the claims of creditors of the Officer.
3.2 AGREEMENTS BINDING ON SUCCESSORS. This Agreement shall be binding
and inure to the benefit of the parties hereto and their respective successors,
assigns, personal representatives, heirs, legatees and beneficiaries.
3.3 NOTICES. Any notice required or desired to be given under this
Agreement shall be deemed given
<PAGE>
if in writing and sent by first class mail to the Officer or the Company at his
or its address as set forth above, or to such other address of which either the
Officer or the Company shall notify the other in writing.
3.4 WAIVER OF BREACH. The waiver by either party of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by either the Officer or the Company.
3.5 ENTIRE AGREEMENT. This Agreement contains the entire understanding
of the parties and supersedes the Personal Service Contract between the Officer,
the Company and the Bank, which was effective October 30, 1996. It may be
modified or amended only by an agreement in writing signed by the party against
whom enforcement of any change or amendment is sought.
3.6 SEVERABILITY OF PROVISIONS. If for any reason any paragraph, term
or provision of this Agreement is held to be invalid or unenforceable, all other
valid provisions herein shall remain in full force and effect and all
paragraphs, terms and provisions of this Agreement shall be deemed to be
severable in nature.
3.7 GOVERNING LAW. This Agreement is made in, and shall be governed by,
the laws of the State of Illinois.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first set forth above.
/s/ William B. Littreal
------------------------------------------------
Officer
ILLINI CORPORATION
By: /s/ Thomas A. Black
------------------------------------------------
Its: CHAIRMAN
<PAGE>
Exhibit (10)(4)
MANAGEMENT CONTINUITY AGREEMENT
This Management Continuity Agreement ("Agreement") is made and entered
into as of this 24th day of November, 1998, by and between Illini Corporation,
an Illinois corporation with an office at 3200 West Iles Avenue, Springfield,
Illinois 62707 (the "Company"), and Ronald E. Wenger whose address is 2613
Parsifal, Springfield, Illinois 62704 (the "Officer").
W I T N E S S E T H
WHEREAS, the Officer is employed by the Company and the Company's
subsidiary, Illini Bank, an Illinois banking corporation (the "Bank"), as an
officer of the Company and the Bank, respectively, with the title and salary
current at the date of this Agreement as set forth in this Agreement; and
WHEREAS, the Company wishes to attract and retain highly qualified
executives and to achieve this goal it is in the best interests of the Company
and the Bank to secure the continued services of the Officer regardless of a
change in control of the Company; and
WHEREAS, the Company is willing, in order to provide the Officer a
measure of security with respect to his employment with the Company and the Bank
in the event of a change in control of the Company so that the Officer will be
in a position to act with respect to a possible change in control of the Company
in the best interests of the Company and its shareholders, without concern as to
the Officer's own financial security, and in order to induce the Officer to
remain in employment with the Company and the Bank, to agree that employment of
the Officer shall be terminable only for cause for a limited period after a
change in control of the Company.
NOW, THEREFORE, the Company and the Officer agree as follows:
SECTION 1
EMPLOYMENT
1.1 TERM. The Company shall continue to employ the Officer as its Vice
President of Credit Administration, and shall cause the Bank to continue to
employ the Officer as its Vice President of Credit Administration and the
Officer shall remain in employment with the Company and the Bank until December
31, 2000 (the "Term") unless terminated prior to the expiration of the Term
pursuant to Section 2.
1.2 COMPENSATION. As compensation for services provided to the Company
and the Bank by the
<PAGE>
Officer pursuant to this Agreement, the Company shall cause the Bank to pay the
Officer an annual base salary of $63,000, which salary may be increased from
time to time by the Company or the Bank. The Officer shall also be eligible to
actively participate in any other compensation and benefit plans generally
available to executive employees of the Company or the Bank of like grade and
salary including, but not limited to, retirement plans, group life, disability,
accidental death and dismemberment, travel and accident, and health and dental
insurance plans, incentive compensation plans, stock compensation plans,
deferred compensation plans, supplemental retirement plans and excess benefit
plans. Such other compensation and benefit plans are hereinafter referred to
collectively as the "Compensation and Benefit Plans".
1.3 DUTIES. The Officer shall perform such duties and functions as are
assigned to him by the bylaws of the Company and the Bank, as amended or
restated, the Boards of Directors of the Company and the Bank, or by a duly
authorized committee of the Boards of Directors of the Company and the Bank. In
the event of an actual or potential Change in Control (as defined in Section
2.9), the Officer shall perform his duties and functions in a manner that is
consistent with the best interest of the Company and its shareholders, without
regard to the effect that the potential or actual Change in Control may have on
the Officer personally.
1.4 DUTY OF LOYALTY. The Officer shall work full-time for the Company
and the Bank only, provided that:
(a) he may also engage in charitable, civic and other
similar activities;
(b) with the consent of the Board of Directors of the
Company, he may serve as a director of a business
organization not competing with the Company; and
(c) he may make such investments and reinvestment in
business activities as shall not require a
substantial portion of his time.
1.5 DUTY NOT TO DISCLOSE CONFIDENTIAL INFORMATION. The Officer
acknowledges that his relationship with the Company and the Bank is one of high
trust and confidence, and that he has access to Confidential Information (as
hereinafter defined) of the Company and the Bank. The Officer shall not,
directly or indirectly, communicate, deliver, exhibit or provide any
Confidential Information to any person, firm, partnership, corporation,
organization or entity, except as required in the normal course of the Officer's
duties. The duties
<PAGE>
contained in this paragraph shall be binding upon the Officer during the time
that he is employed by the Company and following the termination of such
employment. Such duties will not apply to any such Confidential Information
which is or becomes in the public domain through no action on the part of the
Officer, is generally disclosed to third parties by the Company without
restriction on such third parties, or is approved for release by written
authorization of the Board of Directors of the Company. The term "Confidential
Information" shall mean any and all confidential, proprietary, or secret
information relating to the Company's or the Bank's business, services,
customers, business operations, or activities and any and all trade secrets,
products, methods of conducting business, information, skills, knowledge, ideas,
know-how or devices used in, developed by, or pertaining to the Company's or the
Bank's business and not generally known, in whole or in part, in any trade or
industry in which the Company or the Bank is engaged.
SECTION 2
TERMINATION
2.1 TERMINATION OF AGREEMENT. Unless sooner terminated in accordance
with the terms of this Section 2, this Agreement shall terminate at the
expiration of the Term, and all obligations hereunder shall terminate except as
specifically set forth in Section 2.5. The Officer may, with the consent of the
Company, continue in the employ of the Company and the Bank after the expiration
of the Term on such terms and conditions as may be agreed upon by the Company
and the Officer.
2.2 TERMINATION BY THE OFFICER. The Officer may voluntarily terminate
this Agreement by providing thirty days notice to the Company, in which event
the Company shall have no further obligation to the Officer hereunder from the
date of such termination and the Officer shall have no further obligation to the
Company hereunder except the duty to not disclose Confidential Information in
accordance with Section 1.5. In the event the Officer's employment with the
Company and the Bank is terminated due to the Officer's death, the Company shall
have no further obligation to the Officer, his heirs or legatees hereunder from
the date of such termination, except to pay any benefits due under the
Compensation and Benefit Plans. In the event the Officer's employment with the
Company and the Bank is terminated due to the Officer's Permanent Disability,
the Company shall have no further obligation to the Officer, hereunder from the
date of such termination, except, to pay any benefits due under the
<PAGE>
Compensation and Benefit Plans.
For purposes of this Agreement, the term "Permanent Disability" means a
physical or mental condition of the Officer which:
(a) has continued uninterrupted for six months;
(b) is expected to continue indefinitely; and
(c) is determined by the Company to render the Officer
incapable of adequately performing his duties under
Section 1.3 of this Agreement.
2.3 TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company may terminate
this Agreement without cause prior to the Firm Term (as hereinafter defined), by
providing thirty days notice to the Officer. In such event, the Officer shall
have no further obligation to the Company hereunder, except the duty to not
disclose Confidential Information in accordance with Section 1.5, and the
Company shall have no further obligation to the Officer hereunder from the date
of such termination except (i) to pay to the Officer the salary payments
described in Section 1.2, in the amount in effect on the date of termination,
for a period of six months from the date of termination, (ii) to pay to the
Officer any other benefits due under the Compensation and Benefit Plans for a
period of six months from the date of termination and (iii) to pay to the
Officer reasonable expenses of out placement within the financial institutions
industry during the six month period following the date of termination;
provided, however, out placement expenses shall be paid only upon actually
incurring such expenses and Officer's furnishing of evidence thereof to the
Company and shall not include moving or relocation expenses; and provided,
however, that any benefit to be provided by a Compensation and Benefit Plan may
be provided by the Company through cash of equivalent value or through a
nonqualified arrangement or arrangements if, in the judgment of the Company,
permitting the Officer to participate in such plan after the date of termination
would adversely affect the tax status of such plan.
2.4 TERMINATION BY THE COMPANY WITH CAUSE. Prior to or during the Firm
Term, the Company may terminate this Agreement for Cause. For purposes of this
Agreement, Cause shall mean;
(a) the Officer's willful and material breach of the
provisions of this Agreement after the Board of
Directors delivers a written demand to cure such
breach, which specifically
<PAGE>
identifies the manner in which the Board of Directors
believes that the Officer has not substantially
performed his duties, or
(b) the Officer willfully engages in illegal conduct or
gross misconduct which materially and demonstrably
injures the Company or the Bank.
For purposes of determining whether "Cause" exists, no act or failure to act, on
the Officer's part shall be considered "willful," unless it is done, or omitted
to be done, by the Officer in bad faith or without reasonable belief by the
Officer that his action or omission was in the best interests of the Company.
In the event of the Officer's termination for Cause, the Company will
have no further obligation to the Officer under the Agreement from the date of
such termination.
2.5 TERMINATION FOLLOWING CHANGE IN CONTROL. In the event there is a
Change in Control of the Company, as defined in Section 2.6, during the Term,
and:
(a) within the period commencing three months prior to
the date of a Change in Control and ending six months
following the date of the Change in Control (the
"Firm Term"), the Officer's employment hereunder is
terminated by the Company other than for Cause, as
defined in Section 2.4; or
(b) within the Firm Term, the Officer resigns from his
employment hereunder upon thirty days written notice
given to the Company within thirty days following a
material change in the Officer's title, authorities
or duties, in effect immediately prior to the Change
in Control, a reduction in the compensation or a
reduction in benefits provided pursuant to this
Agreement or the Compensation and Benefit Plans below
the amount of compensation and benefits in effect
immediately prior to the Change in Control, or a
change of the Officer's principal place of employment
without his consent to a city more than 25 miles from
Springfield, Illinois,
then the Officer shall have no further obligation to the Company hereunder,
except the duty not to disclose Confidential Information in accordance with
Section 1.5, and the Company shall have no further obligation to the Officer
hereunder from the date of termination except (i) to pay to the Officer the
salary payments described in Section 1.2, in the amount in effect on the date of
termination, for a period of twelve months from the date of termination, (ii) to
pay to the Officer any other benefits due under the Compensation and Benefit
Plans for a period of twelve months from the date of termination and (iii) to
pay to the Officer reasonable expenses of out placement within the financial
institutions industry during the twelve month period following the date of
termination;
<PAGE>
provided, however, out placement expenses shall be paid only upon actually
incurring such expenses and Officer's furnishing of evidence thereof to the
Company and shall not include moving or relocation expenses and provided,
however, that any benefit to be provided by a Compensation and Benefit Plan may
be provided by the Company through cash of equivalent value or through a
nonqualified arrangement or arrangements if, in the judgment of the Company,
permitting the Officer to participate in such plan after the date of termination
would adversely affect the tax status of such plan.
2.6 CHANGE IN CONTROL DEFINED. A Change in Control of the Company shall
have occurred:
(a) on the fifth day preceding the scheduled expiration
date of a tender offer by, or exchange offer by any
corporation, person, other entity or group (other
than the Company or any of its wholly owned
subsidiaries), to acquire Voting Stock of the Company
if:
(i) after giving effect to such offer such
corporation, person, other entity or group
would own 50% or more of the Voting Stock of
the Company;
(ii) there shall have been filed documents with
the Securities and Exchange Commission in
connection therewith (or, if no such filing
is required, public evidence that the offer
has already commenced); and
(iii) such corporation, person, other entity or
group has secured all required regulatory
approvals to own or control 50% or more of
the Voting Stock of the Company;
(b) if the shareholders of the Company approve a
definitive agreement to merge or consolidate the
Company with or into another corporation in a
transaction in which neither the Company nor any of
its wholly owned subsidiaries will be the surviving
corporation, or to sell or otherwise dispose of all
or substantially all of the Company's assets to any
corporation, person, other entity or group (other
that the Company or any of its wholly owned
subsidiaries), and such definitive agreement is
consummated;
(c) if any corporation, person, other entity or group
(other than the Company or any of its wholly owned
subsidiaries) becomes the Beneficial Owner (as that
term is defined in the Securities and Exchange
Commission's Rule 13d-3 under the Securities Exchange
Act of 1934) of stock representing 50% or more of the
Voting Stock of the Company; or
(d) if during any period of two consecutive years
Continuing Directors cease to comprise a majority of
the Company's Board of Directors.
The term "Continuing Director" means:
(a) any member of the Board of Directors of the Company
at the beginning of any period of two consecutive
years; and
(b) any person who subsequently becomes a member of the
Board of Directors of the Company; if
<PAGE>
(i) such person's nomination for election or
election to the Board of Directors of the
Company is recommended or approved by
resolution of a majority of the Continuing
Directors; or
(ii) such person is included as a nominee in a
proxy statement of the Company distributed
when a majority of the Board of Directors of
the Company consists of Continuing
Directors.
"Voting Stock" shall mean those shares of the Company entitled
to vote generally in the election of directors.
2.7 TERMINATION OF RELATED OFFICERS. The parties agree that in the
event Officer's employment by the Company is terminated for any reason, Officer
will immediately resign from all other positions or offices held with the
Company, including any directorships with the Company or the Bank.
2.8 OFFICER'S COSTS OF ENFORCEMENT. The Company shall pay all expenses
of the Officer, including but not limited to attorney's fees, incurred in
enforcing payments by the Company pursuant to this Agreement.
Section 3
MISCELLANEOUS
3.1 ASSIGNMENT OF OFFICER'S RIGHTS The Officer may not assign, pledge
or otherwise transfer any of the benefits of this Agreement either before or
after termination of employment, and any purported assignment, pledge or
transfer of any payment to be made by the Company hereunder shall be void and of
no effect. No payment to be made to the Officer hereunder shall be subject to
the claims of creditors of the Officer.
3.2 AGREEMENTS BINDING ON SUCCESSORS. This Agreement shall be binding
and inure to the benefit of the parties hereto and their respective successors,
assigns, personal representatives, heirs, legatees and beneficiaries.
3.3 NOTICES. Any notice required or desired to be given under this
Agreement shall be deemed given if in writing and sent by first class mail to
the Officer or the Company at his or its address as set forth above, or to such
other address of which either the Officer or the Company shall notify the other
in writing.
3.4 WAIVER OF BREACH. The waiver by either party of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by either the Officer or the Company.
<PAGE>
3.5 ENTIRE AGREEMENT. This Agreement contains the entire understanding
of the parties and supersedes the Personal Service Contract between the Officer,
the Company and the Bank, which was effective October 30, 1996. It may be
modified or amended only by an agreement in writing signed by the party against
whom enforcement of any change or amendment is sought.
3.6 SEVERABILITY OF PROVISIONS. If for any reason any paragraph, term
or provision of this Agreement is held to be invalid or unenforceable, all other
valid provisions herein shall remain in full force and effect and all
paragraphs, terms and provisions of this Agreement shall be deemed to be
severable in nature.
3.7 GOVERNING LAW. This Agreement is made in, and shall be governed by,
the laws of the State of Illinois.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first set forth above.
/s/ Ronald E. Wengeer
-------------------------------------------------
Officer
ILLINI CORPORATION
By: /s/ Thomas A. Black
-------------------------------------------------
Its: CHAIRMAN
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