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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
/x/ |
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2000
/ / | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
Commission file number 0-13343
Illini Corporation
(Exact name of small business issuer as specified in its charter)
Illinois (State or other jurisdiction of incorporation or organization) |
37-1135429 (I.R.S. Employer Identification No.) |
3200 West Iles Avenue, Springfield, Illinois 62707
(Address of principal executive offices)
(217) 787-5111
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 571,789 shares of $10 par value common stock as of April 30, 2000
Transitional Small Business Disclosure Format: Yes / / No /x/
ILLINI CORPORATION
INDEX TO FORM 10-QSB
March 31, 2000
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Page |
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PART I. FINANCIAL INFORMATION | ||||
Item 1. |
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Financial Statements (Unaudited) |
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Consolidated Balance Sheets March 31, 2000 and December 31, 1999 |
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3 |
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Consolidated Statements of Income Three Months Ended March 31, 2000 and 1999 |
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4 |
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Consolidated Statements of Cash Flows Three Months Ended March 31, 2000 and 1999 |
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5 |
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Notes to Interim Consolidated Financial Statements |
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6 |
Item 2. |
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Management's Discussion and Analysis of Operations |
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9 |
Item 3. |
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Quantitative and Qualitative Disclosures About Market Risk |
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16 |
PART II. OTHER INFORMATION |
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17 |
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SIGNATURES |
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20 |
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EXHIBIT INDEX |
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21 |
2
Item 1. Financial Statements
ILLINI CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and December 31, 1999
(Unaudited)
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March 31, 2000 |
December 31, 1999 |
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(dollars in thousands) |
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ASSETS | |||||||
Cash and due from banks | $ | 6,724 | $ | 7,383 | |||
Interest-bearing deposits in other banks | 30 | 28 | |||||
Federal funds sold | 7,915 | 5,595 | |||||
Cash and cash equivalents | 14,669 | 13,006 | |||||
Debt and marketable equity securities available for sale, at fair value | 55,325 | 56,976 | |||||
Loans, net of the allowance for loan losses and unearned income | 137,436 | 134,020 | |||||
Premises and equipment | 7,351 | 7,534 | |||||
Accrued interest receivable | 1,952 | 1,908 | |||||
Other real estate owned | 613 | 618 | |||||
Other assets | 2,682 | 3,033 | |||||
$ | 220,028 | $ | 217,095 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
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Liabilities: | |||||||
Noninterest-bearing demand deposits | 30,548 | 29,549 | |||||
Interest-bearing deposits: | |||||||
NOW and money market accounts | 51,707 | 50,301 | |||||
Savings deposits | 18,650 | 18,527 | |||||
Time deposits, $100,000 and over | 18,771 | 23,552 | |||||
Other time deposits | 79,357 | 73,724 | |||||
Total deposits | 199,033 | 195,653 | |||||
Note payable |
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1,000 |
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1,000 |
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Securities sold under agreements to repurchase | 398 | 394 | |||||
Accrued interest payable | 1,038 | 1,122 | |||||
Other liabilities | 1,189 | 1,600 | |||||
Total liabilities | 202,658 | 199,769 | |||||
Shareholders' equity: | |||||||
Common stock$10 par value, authorized 800,000 shares; 571,789 shares issued and outstanding |
5,718 | 5,718 | |||||
Capital surplus | 3,358 | 3,358 | |||||
Retained earnings | 8,946 | 8,825 | |||||
Accumulated other comprehensive loss | (652 | ) | (575 | ) | |||
Total shareholders' equity | 17,370 | 17,326 | |||||
$ | 220,028 | $ | 217,095 | ||||
See accompanying notes to interim consolidated financial statements.
3
ILLINI CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2000 and 1999
(Unaudited)
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2000 |
1999 |
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(dollars in thousands) |
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Interest income: | ||||||
Interest and fees on loans | $ | 2,976 | $ | 1,885 | ||
Interest on debt and marketable equity securities: | ||||||
Taxable | 758 | 654 | ||||
Tax-exempt | 107 | 91 | ||||
Interest on short term investments | 40 | 70 | ||||
Total interest income | 3,881 | 2,700 | ||||
Interest expense: | ||||||
Interest on deposits: | ||||||
NOW and money market accounts | 461 | 341 | ||||
Savings deposits | 92 | 92 | ||||
Time deposits, $100,000 and over | 272 | 183 | ||||
Other time deposits | 989 | 599 | ||||
Interest on borrowings | 30 | 3 | ||||
Total interest expense | 1,844 | 1,218 | ||||
Net interest income | 2,037 | 1,482 | ||||
Provision for loan losses | 135 | 51 | ||||
Net interest income after provision for loan losses | 1,902 | 1,431 | ||||
Noninterest income: | ||||||
Service charges on deposit accounts | 320 | 290 | ||||
Other fee income | 72 | 45 | ||||
Mortgage loan servicing fees | 58 | 64 | ||||
Gain on sale of mortgage loans | 1 | 24 | ||||
Other | 49 | 51 | ||||
Total noninterest income | 500 | 474 | ||||
Noninterest expense: | ||||||
Salaries and employee benefits | 903 | 786 | ||||
Net occupancy expense | 211 | 208 | ||||
Equipment expense | 105 | 110 | ||||
Data processing | 184 | 206 | ||||
Supplies | 37 | 62 | ||||
Communication and transportation | 115 | 99 | ||||
Marketing and advertising | 50 | 23 | ||||
Correspondent and processing fees | 62 | 43 | ||||
Loan and other real estate owned expenses | 17 | 17 | ||||
Professional fees | 194 | 205 | ||||
Directors' and regulatory fees | 54 | 44 | ||||
Other | 92 | 58 | ||||
Total noninterest expense | 2,024 | 1,861 | ||||
Income before income tax expense | 378 | 44 | ||||
Income tax expense | 114 | 3 | ||||
Net income | $ | 264 | $ | 41 | ||
Basic and diluted earnings per share (based on weighted average common shares outstanding of 571,789 in 2000 and 448,456 in 1999) |
$ | 0.46 | $ | 0.09 | ||
See accompanying notes to interim consolidated financial statements.
4
ILLINI CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2000 and 1999
(Unaudited)
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2000 |
1999 |
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(dollars in thousands) |
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Cash flows from operating activities: | |||||||
Net income | $ | 264 | $ | 41 | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization | 303 | 282 | |||||
Provision for loan losses | 135 | 51 | |||||
Gains on sale of premises and equipment | (2 | ) | | ||||
Gains on sale of other real estate owned | (9 | ) | (10 | ) | |||
Increase in accrued interest receivable | (44 | ) | (81 | ) | |||
Decrease in accrued interest payable | (84 | ) | (123 | ) | |||
Origination of mortgage loans for sale | (1,802 | ) | (3,570 | ) | |||
Proceeds from the sale of mortgage loans | 1,575 | 3,579 | |||||
Other, net | (58 | ) | 338 | ||||
Net cash provided by operating activities | 278 | 507 | |||||
Cash flows from investing activities: | |||||||
Proceeds from maturities and paydowns of debt securities available for sale |
1,498 | 3,511 | |||||
Purchases of debt and marketable equity securities available for sale |
| (6,817 | ) | ||||
Net increase in loans | (3,324 | ) | (1,851 | ) | |||
Purchases of premises and equipment | (46 | ) | (340 | ) | |||
Proceeds from sale of premises and equipment | 2 | | |||||
Proceeds from sales of other real estate owned | 14 | 29 | |||||
Net cash used in investing activities | (1,856 | ) | (5,468 | ) | |||
Cash flows from financing activities: | |||||||
Net increase (decrease) in non-interest bearing deposit accounts | 999 | (4,155 | ) | ||||
Net increase in NOW, money market accounts and savings | 1,529 | 3,013 | |||||
Net decrease in time deposits $100,000 and over | (4,781 | ) | (976 | ) | |||
Net increase (decrease) in other time deposits | 5,633 | (918 | ) | ||||
Net increase in securities sold under agreements to repurchase | 4 | | |||||
Cash dividends paid | (143 | ) | (112 | ) | |||
Net cash provided by (used in) financing activities | 3,241 | (3,148 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 1,663 | (8,109 | ) | ||||
Cash and cash equivalents at beginning of period | 13,006 | 12,318 | |||||
Cash and cash equivalents at end of period | $ | 14,669 | $ | 4,209 | |||
Supplemental Information: | |||||||
Income taxes paid | $ | 125 | $ | 74 | |||
Interest paid | $ | 1,928 | $ | 1,341 | |||
Other non-cash investing activities: | |||||||
Transfer of loans to other real estate owned | $ | | $ | 29 | |||
See accompanying notes to interim consolidated financial statements.
5
ILLINI CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements (Unaudited)
March 31, 2000
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-QSB and, therefore, do not include all of the information and notes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes included in the Illini Corporation Annual Report on Form 10-KSB for the year ended December 31, 1999.
Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period.
Results for the three months ended March 31, 2000 may not be indicative of the annual performance of Illini Corporation (or the Corporation). Management of the Corporation has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the interim consolidated financial statements (unaudited) in conformity with generally accepted accounting principals. Actual results could differ from those estimates.
(2) Allowance for Loan Losses and Impaired Loans
The allowance for loan losses is increased by provisions charged to operations and is available to absorb loan losses. Illini Corporation utilizes a systematic, documented approach in determining the appropriate level of the allowance for loan losses of its subsidiary banks. Management's approach, which provides for general and specific allowances, is based on current economic conditions, past loan losses, collection experience, risk characteristics of the portfolio, assessing collateral values by obtaining independent appraisals for significant properties, and such other factors which, in management's judgment, deserve current recognition in estimating potential loan losses. The determination of the allowance for loan losses is one of the significant estimates made by management in the preparation of the consolidated financial statements.
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March 31, |
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2000 |
1999 |
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(dollars in thousands) |
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Balance at beginning of period | $ | 1,696 | $ | 1,368 | ||
Provision charged to expense | 135 | 51 | ||||
Charge-offs | 27 | 82 | ||||
Less: recoveries | 20 | 12 | ||||
Net charge-offs | 7 | 70 | ||||
Balance at end of period | $ | 1,824 | $ | 1,349 | ||
6
Loans, except large groups of smaller-balance homogeneous loans, for which the full collection of principal and interest according to the contractual terms of the loan agreement is not probable, are evaluated for impairment. Information regarding impaired loans at March 31, 2000 and December 31, 1999 is as follows:
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March 31, 2000 |
December 31, 1999 |
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(dollars in thousands) |
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Nonaccrual loans | $ | 558 | $ | 559 | ||
Impaired loans continuing to accrue interest | | | ||||
Total impaired loans | $ | 558 | $ | 559 | ||
Allowance for losses on specific impaired loans |
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$ |
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$ |
18 |
Impaired loans with no specific related allowance for loan losses |
558 |
499 |
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Average balance of impaired loans during the period | 559 | 1,033 | ||||
(3) New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), which establishes standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS 133 requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. SFAS 133 is effective for all fiscal periods beginning after June 15, 1999. Earlier application of SFAS 133 is encouraged but should not be applied retroactively to financial statements of prior periods. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging ActivitiesDeferral of the Effective Date of FASB Statement No. 133, which states SFAS 133 shall be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Corporation is currently evaluating the requirements and impact of SFAS 133.
(4) Other Comprehensive Income
For the three month period ended March 31, 2000 and 1999, unrealized gains (losses) on debt and marketable equity securities available for sale, net of tax, is the Company's only other comprehensive
7
income component. Comprehensive income for the three month period ended March 31, 2000 and 1999 is summarized as follows:
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Three Months Ended March 31, |
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2000 |
1999 |
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(dollars in thousands) |
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Net income | $ | 264 | $ | 41 | |||
Other comprehensive income: | |||||||
Net realized and unrealized losses on securities available for sale, net |
(77 | ) | (188 | ) | |||
Less adjustment for net securities (gains) losses realized in net income, net |
| | |||||
Other comprehensive loss | (77 | ) | (188 | ) | |||
Total comprehensive income (loss) | $ | 187 | $ | (147 | ) | ||
(5) Acquisition of Camp Point
On November 19, 1999, Illini Corporation consummated its previously announced agreement to acquire all of the outstanding shares of Camp Point through the merger of Camp Point with a wholly-owned subsidiary of Illini Corporation. As a result of the merger, the shareholders of Camp Point received a total of 123,333 shares of Illini Corporation common stock and cash in the amount of $3,256,260. At the date of acquisition, Camp Point had total assets and deposits of $33.0 million and $28.1 million, respectively. The transaction had a total value of approximately $6.4 million, and was accounted for under the purchase method of accounting. Accordingly, the results of operations of Camp Point have been included in the consolidated financial statements of Illini Corporation since the date of acquisition. Under this method of accounting, the purchase price is allocated to the respective assets acquired and liabilities assumed based on their estimated fair values, net of applicable income tax effects. The total purchase price of approximately $6.4 million was allocated to the assets acquired and liabilities assumed as follows (in thousands):
Purchase price | $ | 6,363 | ||
Net asset value of Camp Point at acquisition | (4,306 | ) | ||
Adjustment to Camp Point's historical carrying values of premises and equipment, net of tax |
(165 | ) | ||
Excess of cost over fair value of net assets acquired | $ | 1,892 | ||
The intangible asset of approximately $1.9 million representing the excess of cost over fair value of net assets acquired is included in other assets in the consolidated balance sheets of Illini Corporation and is being amortized over 15 years on a straight-line basis.
8
Item 2. Management's Discussion and Analysis of Operations
This discussion should be read in conjunction with the consolidated financial statements, notes, and tables included elsewhere in this report and in the 1999 Illini Corporation Annual Report on Form 10-KSB (1999 Form 10-KSB). Illini Corporation cautions that any forward looking statements contained in this report, or in any report incorporated by reference to this report or made by management of Illini Corporation involve risks and uncertainties and are subject to change based on various factors. Actual results could differ materially from those expressed or implied.
SUMMARY
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Quarter ended March 31, |
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Percent Change |
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Earnings |
2000 |
1999 |
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(dollars in thousands, except per share data) |
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Total revenue | $ | 4,381 | $ | 3,174 | 38.02% | |||
Net income | 264 | 41 | 536.83% | |||||
Basic earnings per share | $ | 0.46 | $ | 0.09 | 399.47% |
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Quarter ended March 31, |
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Basis Point Change |
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Key Ratios |
2000 |
1999 |
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Return on average assets(1) | 0.49 | % | 0.11 | % | 0.38 | % | |
Return on average equity(1) | 6.12 | % | 1.09 | % | 5.03 | % | |
Average equity to assets | 8.06 | % | 9.73 | % | (1.67 | %) | |
Tier 1 leverage ratio | 7.40 | % | 9.35 | % | (1.95 | %) | |
Tier 1 risk-based capital ratio | 10.63 | % | 14.37 | % | (3.74 | %) | |
Total risk-based capital ratio | 11.85 | % | 15.68 | % | (3.83 | %) | |
Dividend payout ratio | 54.18 | % | 270.59 | % | (216.41 | %) | |
Net interest margin | 4.27 | % | 4.31 | % | (0.04 | %) | |
Efficiency ratio | 78.08 | % | 92.87 | % | (14.79 | %) |
Earning Assets
Management is pleased with the results of our efforts to grow earning assets. Average earning assets of the Corporation for the first three months of 2000 increased 36.39% or $52.4 million to $196.4 million from $144.0 million for the first three months of 1999.
As discussed in the asset quality section of this Form 10-QSB, management has actively pursued the improvement of the asset quality of all earning assets, including loans and investment securities.
Average net loans increased to $136.5 million for the three months ended March 31, 2000 compared to $85.3 million for the same period in 1999. The increase of $51.2 million for the three months ended March 31, 2000 as compared to the same period for 1999 was primarily due to an increase of $31.7 million in commercial loans, including commercial real estate loans, $10.3 million in residential loans, $7.9 million in agriculture loans, including agriculture real estate, and $1.6 million in consumer loans. The acquisition of Farmers State Bank of Camp Point ("Camp Point") contributed $14.4 million to the total increase of $51.2 million in average net loans. The average yield on the loan portfolio, net of the allowance for loan losses, decreased 23 basis points to 8.77% for the three months ended March 31, 2000, due to the
9
competitive interest rate environment and a change in loan mix for the three months ended March 31, 2000 compared to the three months ended March 31, 1999.
Average investment securities increased $4.9 million for the three months ended March 31, 2000 as compared to the same period in 1999. The average yield of the investment securities portfolio was 6.39% for the three months ended March 31, 2000, an increase of 37 basis points as compared to the same period in 1999. The acquisition of Camp Point contributed $15.4 million to the total average investments. The decrease in investments from December 31, 1999 to March 31, 2000 is a result of the increase in loan growth. Management intends to maintain a balance in the investment portfolio to support basic surplus.
Funding
The most important and stable source of funding is core deposits, considered by management to include non-interest bearing demand deposits, NOW and money market accounts, savings deposits and time deposits under $100,000. Average core deposits for the three months ended March 31, 2000 increased 36.80% or $46.5 million to $173.0 million from $126.4 million for the three months ended March 31, 1999. The acquisition of Camp Point contributed $24.2 million to the total increase of $46.5 million in average core deposits. The average rate paid on total interest bearing liabilities for the three months ended March 31, 2000 increased 30 basis points when compared to the three months ended March 31, 1999.
The increase in average core deposits, including noninterest bearing demand deposits, for the three months ended March 31, 2000 as compared to the same period in 1999 has provided a low cost funding source for the growth in the loan portfolio. In addition to federal funds purchased, Illini Bank and Camp Point maintain an overnight federal funds line of credit with an unaffiliated financial institution and an unused line of credit with the Federal Home Loan Bank of Chicago.
Net Interest Income/Net Interest Margin
The operating results of the Corporation are highly dependent on net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities, consisting primarily of deposits. Net interest income is determined by the difference between yields earned on assets and rates paid on liabilities and the relative amounts of interest-earning assets and interest-bearing liabilities.
Interest income, on a fully taxable equivalent basis, was $3.9 million for the three months ended March 31, 2000 compared to $2.7 million for the same period in 1999. Interest expense was $1.8 million for the three months ended March 31, 2000 compared to $1.2 million for the same periods in 1999. An increase in interest income and interest expense resulted in a $0.6 million increase in net interest income for the three months ended March 31, 2000.
Net interest margin for the three months ended March 31, 2000 of 4.27% was down from 4.31% reported for the same period in 1999. The decrease in the net interest margin is primarily due to increases in rates of core time deposits. Management will continue to closely monitor its funding costs to maintain an acceptable spread given the increased demand in commercial lending. Management will continue to structure the balance sheet to provide insulation for extreme interest rate changes. Management continues to focus on increasing the loan portfolio without jeopardizing the enhanced liquidity that has been gained in prior periods.
Net interest income is affected by the growth, pricing, mix, and maturity of interest earning-assets and interest-bearing liabilities, as well as other factors, including loan quality. Also, the Corporation's interest-rate spread is affected by regulatory, economic, and competitive factors that influence interest rates, loan demand, and deposit flow. Individual components of net interest income and net interest margin are presented in the consolidated average balances, interest income/expense and yield/rates table on page 11 and a net interest income-rate/volume variance analysis on page 12.
10
Consolidated Average Balances, Interest Income/Expense and Yield/Rates
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Three months ended March 31, |
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2000 |
1999 |
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Average Balance |
Percent of Total Assets |
Interest Income/ Expense |
Average Yield/ Rate |
Average Balance |
Percent of Total Assets |
Interest Income/ Expense |
Average Yield/ Rate |
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(dollars in thousands) |
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ASSETS | |||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||
Short-term investments | $ | 2,872 | 1.3 | % | $ | 40 | 5.63 | % | $ | 6,519 | 4.1 | % | $ | 70 | 4.37 | % | |||||
Investment securities (3) | |||||||||||||||||||||
Taxable | 48,458 | 22.6 | 758 | 6.26 | 44,838 | 28.3 | 654 | 5.83 | |||||||||||||
Tax-exempt (1) | 8,655 | 4.0 | 155 | 7.14 | 7,393 | 4.7 | 132 | 7.14 | |||||||||||||
Total securities | 57,113 | 26.6 | 913 | 6.39 | 52,231 | 33.0 | 786 | 6.02 | |||||||||||||
Loans | |||||||||||||||||||||
Commercial (1) | 20,592 | 9.6 | 471 | 9.18 | 11,074 | 7.0 | 249 | 9.13 | |||||||||||||
Agriculture | 11,933 | 5.6 | 253 | 8.51 | 7,507 | 4.7 | 162 | 8.77 | |||||||||||||
Real estate: | |||||||||||||||||||||
Commercial | 55,707 | 25.9 | 1,187 | 8.54 | 33,477 | 21.1 | 709 | 8.58 | |||||||||||||
Agriculture | 6,780 | 3.2 | 148 | 8.77 | 3,266 | 2.1 | 73 | 9.07 | |||||||||||||
Residential | 31,845 | 14.8 | 653 | 8.22 | 21,571 | 13.6 | 450 | 8.46 | |||||||||||||
Consumer, net | 10,687 | 5.0 | 243 | 9.12 | 9,104 | 5.8 | 222 | 9.89 | |||||||||||||
Credit card | 669 | 0.3 | 28 | 16.97 | 630 | 0.4 | 26 | 16.87 | |||||||||||||
Total loans | 138,213 | 64.4 | 2,983 | 8.66 | 86,629 | 54.7 | 1,891 | 8.85 | |||||||||||||
Allowance for loan losses | (1,765 | ) | (0.8 | ) | (1,363 | ) | (0.9 | ) | |||||||||||||
Net loans (1) (2) | 136,448 | 63.6 | 2,983 | 8.77 | 85,266 | 53.8 | 1,891 | 9.00 | |||||||||||||
Total interest-earning assets | 196,433 | 91.5 | $ | 3,936 | 8.04 | % | 144,016 | 90.9 | $ | 2,747 | 7.74 | % | |||||||||
Cash and due from banks | 6,389 | 3.0 | 4,439 | 2.8 | |||||||||||||||||
Premises and equipment | 7,465 | 3.5 | 7,300 | 4.6 | |||||||||||||||||
Other real estate owned | 613 | 0.3 | 345 | 0.2 | |||||||||||||||||
Other assets (3) | 3,680 | 1.7 | 2,293 | 1.5 | |||||||||||||||||
Total assets | $ | 214,580 | 100.0 | % | $ | 158,393 | 100.0 | % | |||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
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Deposits: | |||||||||||||||||||||
Noninterest-bearing demand | $ | 29,131 | 13.6 | % | $ | 22,500 | 14.2 | % | |||||||||||||
Interest-bearing demand | 51,679 | 24.1 | $ | 461 | 3.58 | % | 41,220 | 26.0 | $ | 341 | 3.35 | % | |||||||||
Savings | 18,704 | 8.7 | 92 | 1.98 | 17,310 | 10.9 | 92 | 2.16 | |||||||||||||
Time deposits, less than $100,000 | 73,449 | 34.2 | 989 | 5.40 | 45,405 | 28.7 | 599 | 5.35 | |||||||||||||
Total core deposits | 172,963 | 80.6 | 1,542 | 3.58 | 126,435 | 79.8 | 1,032 | 3.31 | |||||||||||||
Time deposits, $100,000 and over | 20,180 | 9.4 | 272 | 5.41 | 14,301 | 9.0 | 183 | 5.20 | |||||||||||||
Total deposits | 193,143 | 90.0 | 1,814 | 3.77 | 140,736 | 88.8 | 1,215 | 3.50 | |||||||||||||
Short-term borrowings | 1,602 | 0.7 | 30 | 7.51 | 310 | 0.2 | 3 | 4.56 | |||||||||||||
Total interest-bearing liabilities | 165,614 | 77.1 | 1,844 | 4.47 | 118,546 | 74.8 | 1,218 | 4.17 | |||||||||||||
Other liabilities | 2,538 | 1.2 | 1,937 | 1.3 | |||||||||||||||||
Total liabilities | 197,283 | 91.9 | 142,983 | 90.3 | |||||||||||||||||
Shareholders' equity | 17,297 | 8.1 | 15,410 | 9.7 | |||||||||||||||||
Total liabilities and shareholders' equity | $ | 214,580 | 100.0 | % | $ | 158,393 | 100.0 | % | |||||||||||||
Net interest margin | $ | 2,092 | 4.27 | % | $ | 1,529 | 4.31 | % | |||||||||||||
11
Net Interest IncomeRate/Volume Variance Analysis(*)
|
Quarter ended March 31, 2000 as compared to quarter ended March 31, 1999 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Changes in Income/Expense |
Volume Effect |
Rate Effect |
|||||||
|
(dollars in thousands) |
|||||||||
Short-term investments | $ | (30 | ) | $ | (40 | ) | $ | 10 | ||
Investment securities: | ||||||||||
Taxable | 104 | 53 | 51 | |||||||
Tax-exempt | 23 | 22 | 1 | |||||||
Total securities | 127 | 75 | 52 | |||||||
Loans: | ||||||||||
Commercial | 222 | 217 | 5 | |||||||
Agriculture | 91 | 97 | (6 | ) | ||||||
Real Estate: | ||||||||||
Commercial | 478 | 475 | 3 | |||||||
Agriculture | 75 | 79 | (4 | ) | ||||||
Residential | 203 | 217 | (14 | ) | ||||||
Consumer, net | 21 | 39 | (18 | ) | ||||||
Credit card | 2 | 2 | 0 | |||||||
Total loans | 1,092 | 1,126 | (34 | ) | ||||||
Total interest income | 1,189 | 1,161 | 28 | |||||||
Interest bearing demand |
|
|
120 |
|
|
87 |
|
|
33 |
|
Savings | 0 | 8 | (8 | ) | ||||||
Time deposits, less than $100,000 | 390 | 374 | 16 | |||||||
Total core deposits | 510 | 469 | 41 | |||||||
Time deposits, $100,000 and over | 89 | 76 | 13 | |||||||
Total deposits | 599 | 545 | 54 | |||||||
Short-term borrowings | 27 | 15 | 12 | |||||||
Total interest expense | 626 | 560 | 66 | |||||||
Net interest income | $ | 563 | $ | 601 | $ | (38 | ) | |||
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.
12
Noninterest Income
|
Three months ended March 31, |
Percent Change |
|
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2000 |
1999 |
2000/1999 |
|
||||||
Service charges on deposit accounts | $ | 320 | $ | 290 | 10.3 | % | ||||
Other fee income | 72 | 45 | 60.0 | |||||||
Mortgage loan servicing fees | 58 | 64 | (9.4 | ) | ||||||
Gain on sale of mortgage loans | 1 | 24 | (95.8 | ) | ||||||
Other | 49 | 51 | (3.9 | ) | ||||||
$ | 500 | $ | 474 | 5.5 | % | |||||
The 10.3% increase in service charge income is a direct result of increased numbers of fee based transaction accounts opened, and the new fee structure for transaction accounts that went into effect in January 1, 1999. Other fee income also increased as a direct result of fee based services used by bank customers.
Mortgage loan servicing fees declined 9.4% for the three months ending March 31, 2000. The decline is due to management's decision to retain mortgage loans as part of the strategy to increase loan balances. The decrease in the gain on sale of mortgage loans is also due to a decrease in sales volume.
Noninterest Expense
|
Three months ended March 31, |
Percent Change |
|
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2000 |
1999 |
2000/1999 |
|
||||||
Salaries and employee benefits | $ | 903 | $ | 786 | 14.9 | % | ||||
Net occupancy expense | 211 | 208 | 1.4 | |||||||
Equipment expense | 105 | 110 | (4.5) | |||||||
Data processing | 184 | 206 | (10.7) | |||||||
Supplies | 37 | 62 | (40.3) | |||||||
Communication and transportation | 115 | 99 | 16.2 | |||||||
Marketing and advertising | 50 | 23 | 117.4 | |||||||
Correspondent and processing fees | 62 | 43 | 44.2 | |||||||
Loan and other real estate owned expenses | 17 | 17 | 0.0 | |||||||
Professional fees | 194 | 205 | (5.4) | |||||||
Directors' and regulatory fees | 54 | 44 | 22.7 | |||||||
Other | 92 | 58 | 58.6 | |||||||
$ | 2,024 | $ | 1,861 | 8.8 | % | |||||
Total non-interest expense increased $163,000 to $2,024 million for the three months ended March 31, 2000. The net increases in these expenses are influenced by several factors. Salaries and employee benefits increased $117,000 and was a direct result of incentive pay programs that were established in April of 1999, increased costs of employee benefit plans, and cost of living increases to base salaries. Communication and Transportation expenses increased $16,000 as a result of cost increased from service providers. Marketing and advertising increased $27,000 to support bank strategies for growth. Correspondent and processing fees increased $19,000, Regulatory fees increased $10,000, and other expenses increased $34,000. These increases were a result of growth and Y2K related costs. Management continues to explore opportunities to reduce non-interest expenses.
13
Year 2000 Issues
During 1999, the Corporation took the necessary steps to enable both new and existing systems, applications, and equipment to effectively process transactions up to and beyond Year 2000. The Corporation upgraded or replaced all mission critical applications and equipment that were not Year 2000 compliant prior to year-end to ensure that all applications would function in the Year 2000 and beyond. All regulatory testing dates were met during the year. Operational contingency plans were developed and tested to ensure that services could still be provided to our customers in the event of Year 2000 failure or problems. The Corporation has not experienced any Year 2000 failures or disruptions in services to our customers, nor is the Corporation aware of any significant Year 2000 issues incurred by borrowers or significant vendors used by the Corporation. The Corporation will continue to monitor its information systems to assess whether its systems are at risk of misinterpreting future dates.
CREDIT QUALITY
Gross loans totaled $139.3 million at March 31, 2000, an increase of $3.9 million, or 2.88%, from $135.4 million at December 31, 1999. The provision for loan losses has increased to $135,000 for the three months ended March 31, 2000 as compared to $51,000 for the same period in 1999. At March 31, 2000 the allowance as a percent of total loans and nonperforming loans increased to 1.31% as compared to 1.25% at December 31, 1999. The increase is a result of the growth in the loan portfolio. Management believes this percentage is adequate to support any unexpected losses, and is consistent with peer group ratios.
|
Three Months Ended March 31 |
||||||
---|---|---|---|---|---|---|---|
|
2000 |
1999 |
|||||
|
(dollars in thousands) |
||||||
Allowance for Loan Losses: | |||||||
Balance at beginning of period | $ | 1,696 | $ | 1,368 | |||
Provision charged to expense | 135 | 51 | |||||
Charge-offs | 27 | 82 | |||||
Less: recoveries | 20 | 12 | |||||
Net charge-offs | 7 | 70 | |||||
Balance at end of period | $ | 1,824 | $ | 1,349 | |||
Net Charge-Off Ratios(1): | |||||||
Commercial | (0.09 | )% | 0.54 | % | |||
Real Estate | 0.00 | 0.06 | |||||
Installment | 0.19 | 1.26 | |||||
Credit Cards | 4.16 | 1.51 | |||||
Totals | 0.02 | % | 0.33 | % |
Illini Corporation's primary business of making commercial, real estate, and consumer loans entails potential losses, the magnitude of which depends on a variety of economic factors affecting borrowers which are beyond the control of the Corporation. Accordingly, a significant factor in the Corporation's past and future operating results is the level of the provision for loan losses. The provision for loan losses is up 165% for the three months ended March 31, 2000 as compared to the comparable period in the prior year. The increase in the provision is consistent with the growth in the loan portfolio. Net charge-offs decreased to $7,000 for the three months ended March 31, 2000 as compared to $70,000 for the comparable period in the prior year.
Management feels that credit quality systems and controls implemented in 1996 and 1997, along with the creation of a formalized credit administration function in 1998, have resulted in significantly improved
14
credit quality. Illini Corporation has a 1.31% allowance to gross loans ratio as of March 31, 2000 compared to 1.25% and 1.52% as of December 31, 1999 and March 31, 1999, respectively. The net charge-off ratio for the three months ended March 31, 2000 was 0.02% compared to 0.09% and 0.16% for years ended December 31, 1999 and 1998, respectively.
At March 31, 2000, impaired loans totaled $558,000 compared to $559,000 at December 31, 1999. At March 31, 2000, there was no allowance for loan losses on impaired loans compared to $18,000 at December 31, 1999. Of the total impaired loans at March 31, 2000 and December 31, 1999, there were no loans still accruing interest.
Credit Quality |
March 31, 2000 |
December 31, 1999 |
March 31, 1999 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(dollars in thousands) |
|||||||||
Nonperforming assets: | ||||||||||
Loans delinquent over 90 days, still accruing interest | $ | 0 | $ | 1 | $ | 0 | ||||
Nonaccrual | 558 | 559 | 1,215 | |||||||
Renegotiated | 32 | 32 | 0 | |||||||
Other real estate owned | 613 | 618 | 341 | |||||||
Total nonperforming assets | $ | 1,203 | $ | 1,210 | $ | 1,556 | ||||
Key ratios: | ||||||||||
Nonperforming loans to ending loans | 0.40 | % | 0.41 | % | 1.37 | % | ||||
90 days delinquent to ending loans | 0.00 | 0.00 | 0.00 | |||||||
Allowance to total loans | 1.31 | 1.25 | 1.52 | |||||||
Allowance to nonperforming loans | 309.15 | 286.58 | 111.03 |
Illini Corporation's loan underwriting guidelines and credit review procedures and policies are designed to protect the Corporation from credit losses. Illini Corporation's process for monitoring loan quality includes detailed monthly trend analysis of delinquencies and nonperforming assets. Management and the board of directors monitor potential problem loans, changes to the watchlist, and extensions of credit outside of the loan policy. Management extensively monitors significant credit relationships through appraisals, assessment of the financial condition of borrowers, restrictions on out-of-area lending, and avoidance of loan concentrations.
As discussed in the Corporation's 1999 Form 10-KSB and previous Form 10-QSB reports, management has implemented several initiatives to improve credit quality. These steps included a new officer driven problem loan identification system, a revamped allowance for loan losses adequacy determination process, a new loan policy, and improved reporting systems (credit quality and production). Management is committed to continuing these initiatives and has supplemented these efforts in 2000 by engaging an outside firm to perform a comprehensive review of each bank's loan portfolio to assess its credit quality and the effectiveness of management's loan quality systems and controls.
CAPITAL RESOURCES
The current economic and regulatory environment places increased emphasis on capital strength. A strong capital position, which is vital to the continued profitability of Illini Corporation, also promotes depositor and investor confidence and provides a solid foundation for the future growth of the organization. Illini Corporation has satisfied its capital requirements principally through the retention of earnings. At March 31, 2000, Tier 1 risk-based capital, total risk-based capital and leverage capital ratios were 10.63%, 11.85% and 7.40%, respectively, as compared to 10.86%, 12.03% and 7.32% for the period ending December 31, 1999. As of March 31, 2000, the Corporation's subsidiary banks met the criteria to be classified as "well capitalized."
15
Earnings retention is affected by the board of director's declaration of cash dividends. The dividend payout ratio is an indicator of the level of earnings retained. The Board of Directors of the Corporation considers the capital strength of the Corporation and the banks in determining the appropriate level of cash dividends to be paid to shareholders. The dividend payout ratio for the three months ended March 31, 2000 was 54.18% as compared to 270.59% for the three months ended March 31, 1999. The dividend per share for the three months ended March 31, 2000 is unchanged from the same period in 1999.
LIQUIDITY
Illini Corporation's policy is to manage interest rate risk to a level which places limits on the sensitivity of its earnings to changes in market interest rates. An explanation of the asset/liability management process is found in the Corporation's 1999 Form 10-KSB, beginning on page 15. Interest rate risk management at Illini Corporation is executed through the use of on-balance sheet investment products.
The assets portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities of investment securities, and sales of investment securities available for sale. The liability side of the balance sheet provides liquidity through various customers' interest-bearing and noninterest-bearing deposit accounts. Short-term borrowings are an additional source of liquidity and represent Illini Corporation's incremental borrowing capacity.
During the second quarter of 1998, Illini Corporation completed a comprehensive analysis of its asset/ liability function, including a review of its funds management policy and its principal measure of liquidity. The Corporation implemented a new measure of liquidity measurement, called "Basic Surplus," which redefines liquid assets as the total assets held by the Corporation which can be converted to cash in thirty days or less, reduced by short term liabilities. As of March 31, 2000, the most recent calculation, Illini Corporation's core liquidity was $22.8 million, or 10.61% of total average assets.
Management believes the new formula provides an accurate measurement of liquidity and provides management with a comprehensible and consistent tool to develop pricing and profitability strategies. Based on the new measurement and as compared to peer banks, management believes the liquidity position of the banks is strong.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Derivative financial instruments include futures, forwards, interest rate swaps, option contracts, and other financial instruments with similar characteristics. The bank subsidiaries currently do not enter into futures, forwards, swaps, or options. However, they are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Commitments generally have fixed expiration dates and require collateral from the borrower if deemed necessary by the banks. Standby letters of credit are conditional commitments issued by the banks 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 banks until and unless the instrument is exercised.
The bank subsidiaries exposure to market risk and interest rate risk is reviewed by their individual Asset/Liability Committees. Management realizes certain risks are inherent, such as the uncertainty of market interest rates, and that its goal is to identify and manage such risks. The primary tool management uses to monitor and manage interest rate risk is a static gap report. The bank subsidiaries have no market risk sensitive instruments held for trading purposes.
The Corporation's interest rate and market risk profile has not materially changed from the year ended December 31, 1999. Please refer to the Corporation's 1999 Form 10-KSB for further discussion of the Corporation's market and interest rate risk.
16
Item 1 Legal Proceedings
Mary Quinn v. Illini Corporation and Illinois Stock Transfer Co.,
Sangamon County Case No. 98 CH 240
Illini Corporation adopted a Shareholder Rights Agreement on June 20, 1997, and named Illinois Stock Transfer Company ("ISTC") as its rights agent thereunder. Illini Corporation was notified in May 1998 of a threatened complaint against ISTC by an Illini Corporation shareholder. The shareholder, Mary K. Quinn ("Quinn"), who owns 21 shares of stock in Illini Corporation, filed suit against ISTC on June 9, 1998 in the Seventh Judicial Circuit Court, Sangamon County, Illinois. Quinn sought to compel ISTC to distribute rights certificates to Illini Corporation's shareholders and further sought to certify all Illini Corporation shareholders as a class. Quinn asserted 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 contested Quinn's assertions that Ida R. Noll was an acquiring person, that the Rights Agreement had been triggered, and that ISTC had 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 Corporation is represented in the litigation by Howard & Howard. Both Illini Corporation and ISTC answered the Amended Complaint and denied that Ida R. Noll was an acquiring person. Quinn asserted that she was entitled to recover her attorneys' fees from Illini Corporation and ISTC.
Quinn filed a Motion for Summary Judgment that asked the Court to determine as a matter of law that Ida R. Noll became an acquiring person on April 16, 1998, that the Rights Agreement was triggered as a result and that Illini Corporation and ISTC had a duty to distribute rights certificates to all shareholders as of April 16, 1998, except for Ida R. Noll. Illini Corporation opposed Quinn's Motion for Summary Judgment, which was heard by the Court on June 18, 1999. On June 29, 1999, the Court entered an Opinion and Order denying Quinn's Motion for Summary Judgment.
On or about May 6, 1999, counsel for Quinn advised Illini Corporation's counsel of their intent to seek an injunction that would preclude Illini Corporation from completing its acquisition of the Farmers State Bank of Camp Point (Camp Point), pending further order of the Court. Quinn subsequently filed a Motion for Preliminary Injunction and a Memorandum of Law in Support of her Motion. Quinn argued that the class (consisting of all Illini Corporation's shareholders as of April 16, 1998, except for Ida R. Noll) would be irreparably harmed if the Camp Point merger closed prior to a determination on the merits of her suit. Illini Corporation filed extensive briefs in opposition to the Motion for Preliminary Injunction, and the Court heard the Motion on July 1, 1999. The Court entered a written Order on July 13, 1999, denying the Motion for Preliminary Injunction.
Quinn's counsel filed a Motion for Reconsideration of the Orders denying Quinn's Motion for Summary Judgment and Motion for Preliminary Injunction. Illini Corporation and ISTC filed a Motion for Summary Judgment on August 25, 1999. At a hearing held on October 18, 1999, the Court granted Illini Corporation and ISTC's Motion for Summary Judgment and denied Quinn's Motion for Reconsideration. An Order was subsequently entered on January 12, 2000.
Quinn's counsel announced on October 18, 1999, the intention to petition the Court for an order directing Illini Corporation and ISTC to pay Quinn's attorneys' fees pursuant to the attorney fee provision of the Rights Agreement. Quinn's fee petition was heard and denied. Quinn has filed a pending appeal as to all adverse orders. The Corporation is vigorously contesting the appeal.
17
Ida R Noll v. Illini Corporation, et al.,
Sangamon County Case No. 98 MR 226
On or about July 17, 1998, Ida R. Noll ("Noll") filed a 14 count complaint against Illini Corporation and all members of Illini Corporation's Board of Directors serving at that time, except William Walschleger, Jr., in the Seventh Judicial Circuit, Sangamon County, Illinois. On September 28, 1998, Judge Carmody dismissed the complaint and granted Noll 21 days to file an Amended Complaint. Noll filed an Amended Complaint on October 19, 1998. The Amended Complaint was also dismissed, but Noll was granted leave to file a Second Amended Complaint. Illini Corporation and the directors answered the Second Amended Complaint.
The Second Amended Complaint arose 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 Noll's assertion that she became an "acquiring person" under the Rights Agreement on April 16, 1998. Noll sought declaratory and injunctive relief from Illini Corporation and the directors regarding the alleged triggering of the Rights Agreement. Noll also challenged the enforceability and validity of the First Amendment to the Rights Agreement. Noll sought 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. Noll sought recovery of her attorneys' fees and costs in connection with her action, alleging attorneys' fees through October 23, 1998 of approximately $50,000 and expenses of approximately $5,000. Illini Corporation and the directors vigorously contested and opposed the allegations.
On July 6, 1999, Illini Corporation adopted a Second Amendment to its Shareholder Rights Agreement. Illini Corporation moved on August 31, 1999, for summary judgment as to the counts of the Second Amended Complaint directed against it. Illini Corporation's motion argued that the adoption of the Second Amendment rendered the case against it moot. The Defendant directors also filed on or about September 15, 1999, a Joint Motion for Summary Judgment as to the counts directed against them. On October 18, 1999, after denying Noll's motion to continue the hearing, the Court granted both motions. Counsel for the Defendants submitted written orders granting the Defendants' summary judgment motions, which were entered by the Court on January 12, 2000.
Noll's counsel filed a petition for payment of her attorneys' fees by Illini Corporation, which was heard on December 9, 1999. The Court denied Noll's fee petition. Noll filed a Motion for Reconsideration of the Orders granting the Defendants' Motions for Summary Judgment and denying attorneys' fees. Hearing on that Motion will be held on April 11, 2000, and the Court denied the Motion. It is anticipated that Noll will appeal.
Ida R. Noll v. Ernest H. Huls, Illini Corporation, et al,
Sangamon County Case No. 99 CH 196
On or about April 22, 1999, Ida R. Noll ("Noll") filed a new lawsuit against Illini Corporation, Illinois Stock Transfer Company, Ernest H. Huls and Farmers State Bank of Camp Point in the Seventh Judicial Circuit Court, Sangamon County, Illinois. The Complaint sought specific performance of the Rights Agreement alleging that Ernest Huls became an acquiring person under the Rights Agreement by reason of his right to receive shares of Illini Corporation common stock pursuant to an Agreement and Plan of Reorganization between Illini Corporation and the Farmers State Bank of Camp Point. Noll sought to compel Illini Corporation and ISTC to distribute rights certificates to all shareholders of Illini Corporation, except for Mr. Huls. Illini Corporation strongly disputes Noll's assertion that Ernest Huls has become an acquiring person under the Rights Agreement.
In June 1999, Illini Corporation and ISTC filed a joint Motion to Dismiss Noll's Complaint on the grounds that the alleged acquiring person, Ernest Huls, was not a beneficial owner of a substantial block of Illini Corporation common stock. The Motion to Dismiss was scheduled for hearing on July 20, 1999, but
18
on July 16, 1999, Noll's counsel moved for a substitution of judges. Illini Corporation and ISTC opposed substitution, but the court granted the motion.
The case has been reassigned to Judge Tim Olson. Briefing of the Motion to Dismiss was completed, but the Court continued the hearing on the Motion to Dismiss. Judge Olson recused himself just prior to a scheduled case management conference on March 9, 2000. The case has been reassigned and a case management conference is scheduled for June 1, 2000.
Item 2 Changes in Securities
none
Item 3 Defaults Upon Senior Securities
none
Item 4 Submission of Matters to a Vote of Security Holders
none
Item 5 Other Information
none
Item 6 Exhibits and Reports on Form 8-K
The Exhibits filed herewith are set forth in the Exhibit Index filed as a part of these Form 10-QSB.
19
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Illini
Corporation
(Registrant)
By: /s/ BURNARD K. MCHONE Burnard K. McHone President |
|
May 10, 2000 Date Signed |
By: /s/ DEANN HAGER Deann Hager Finance Manager |
|
May 10, 2000 Date signed |
20
Number |
Description |
|
---|---|---|
27 | Financial Data Schedule |
21
|