** **

**U.S.Securities and Exchange Commission**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 
| **ý** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------|

 

**For quarterly period endedSeptember 30, 2001**

 
| **o** | **TRANSITION REPORT UNDER SECTION 13 OR 15(d)  OF THE EXCHANGE ACT** |
|-------|----------------------------------------------------------------------|

 

**Commission file number 0-13343**

 

**Illini Corporation**

(Exact name of small businessissuer as specified in its charter)

 

| **Illinois**                                                   |   | **37-1135429**                      |
|----------------------------------------------------------------|--------|-------------------------------------|
| (State or other jurisdiction of incorporation or organization) |   | (I.R.S. EmployerIdentification No.) |
|                                                           |   |                                |
| **3200 West Iles Avenue, Springfield, Illinois**               |   | **62707**                           |
| (Address of principal executive offices)                       |   | (Zip code)                          |
|                                                           |   |                                |
| **(217) 787-5111**                                             |
|  (Issuer’s  telephone number)                        |

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes ý No o

 

State the number of shares outstanding of each of theissuer's classes of common equity, as of the latest practicable date:  411,701 shares of $10 par value common stockas of October 31, 2001.

 
| Transitional  Small Business Disclosure Format: |   | Yes o No ý |
|-------------------------------------------------|--------|-----------------|

 

 

**ILLINI CORPORATION**

INDEX TO FORM 10-QSB

September 30, 2001

 
| **PART I.** | **FINANCIAL INFORMATION** |   |  
 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated  Balance Sheets September  30, 2001 and December 31, 2000

 

 

 

 

 

Condensed  Consolidated Statements of Income Three  and Nine Months Ended September 30, 2001 and 2000

 

 

 

 

 

Condensed  Consolidated Statements of Cash Flows Nine  Months Ended September 30, 2001 and 2000

 

 

 

 

 

Notes  to Interim Condensed Consolidated Financial Statements

 

 

 

 

Item  2.

 

Management's  Discussion and Analysis of Operations

 

 

 

 

Item  3.

 

Quantitative  and Qualitative Disclosures About Market  Risk

 

 

 

**PART II.**

**OTHER INFORMATION**

 

 
 

 

 

**SIGNATURES**

 

 

 

 

**EXHIBIT INDEX**

 

 

 

**Information Concerning Forward-LookingStatements**

*Statements contained in this Form10-QSB which are not historical facts are “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. These statements involve important known andunknown risks, uncertainties and other factors and can be identified by phrasesusing “estimate,” “anticipate,” “believe,” “project,” “expect,” “intend,”“predict,” “potential,” “future,” “may,” “should” and similar expressions orwords.  Such forward-looking statementsare subject to risk and uncertainties which could cause actual results todiffer materially from those projected. Such risks and uncertainties include potential change in interest rates,competitive factors in the financial services industry, general economicconditions, the effect of new legislation and other risks detailed in documentsfiled by Illini Corporation with the Securities and Exchange Commission fromtime to time.*

 

**PART I.  FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

** **

**ILLINI CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**September 30, 2001 and December 31,2000**

** **

 

 

**September 30,**

 

**December 31,**

 

 

 

**2001**

 

**2000**

 

 

 

**(Unaudited)**

 

 

 

 

 

**(dollars in thousands)**

 

**ASSETS**

 

 

 

 

 

Cash and due from banks

 

**$**

**5,753**

 

$

6,993

 

Interest-bearing deposits in other banks

 

**29**

 

30

 

Cash and cash equivalents

 

**5,782**

 

7,023

 

Investment securities available for sale, at fair value

 

**58,656**

 

54,602

 

Loans, net of the allowance for loan losses

 

**190,908**

 

166,781

 

Premises and equipment

 

**7,104**

 

6,555

 

Accrued interest receivable

 

**2,851**

 

2,395

 

Other real estate owned

 

**423**

 

359

 

Other assets

 

**2,912**

 

2,316

 

Total Assets

 

**$**

**268,636**

 

$

240,031

 

**LIABILITIES AND SHAREHOLDERS' EQUITY**

 

 

 

 

 

Noninterest-bearing demand deposits

 

**29,199**

 

32,725

 

Interest-bearing deposits:

 

 

 

 

 

NOW and money market accounts

 

**60,696**

 

52,571

 

Savings deposits

 

**17,572**

 

16,651

 

Time deposits, $100,000 and over

 

**29,939**

 

26,143

 

Other time deposits

 

**95,692**

 

75,202

 

Total deposits

 

**233,098**

 

203,292

 

Short-term debt

 

**1,104**

 

8,481

 

Long-term debt

 

**8,471**

 

6,000

 

Accrued interest payable

 

**1,494**

 

1,181

 

Other liabilities

 

**1,853**

 

1,719

 

Total liabilities

 

**246,020**

 

220,673

 

**COMMITMENTS AND CONTINGENT LIABILITIES**

 

 

 

 

 

Preferred securities of subsidiary trust

 

**9,000**

 

----

 

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

 

**10,530**

 

9,948

 

Accumulated other comprehensive income

 

**1,214**

 

334

 

Less:  Treasury shares,  at cost, 160,088 shares for 2001

 

**(7,204**

**)**

----

 

Total shareholders' equity

 

**13,616**

 

19,358

 

Total Liabilities and Shareholders Equity

 

**$**

**268,636**

 

$

240,031

 

 

See accompanying notes to interim condensed consolidated financialstatements.

 
****
**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**Three Monthsand Nine Months Ended September 30, 2001 and 2000**

**(Unaudited)**

** **

 

 

**Three Months Ended**

 

**Nine Months Ended**

 

 

 

**September 30,**

 

**September 30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

 

 

**(dollars in thousands, except per share data)**

 

Interest income:

 

 

 

Interest and fees on loans

 

**$**

**3,996**

 

$

3,447

** **

**$**

**11,544**

 

$

9,525

 

Interest on investment securities:

 

 

** **

 

** **

 

** **

 

** **

Taxable

 

**570**

 

692

** **

**1,744**

 

2,201

 

Exempt from federal income taxes

 

**185**

 

169

** **

**546**

 

423

 

Interest on short term investments

 

**96**

 

75

** **

**294**

 

310

 

Total interest income

 

**4,847**

 

4,383

** **

**14,128**

 

12,459

 

Interest expense:

 

 

 

 

 

 

 

 

 

Interest on deposits:

 

 

 

 

 

 

 

 

 

NOW and money market accounts

 

**487**

 

554

** **

**1,566**

 

1,503

 

Savings deposits

 

**76**

 

90

** **

**243**

 

275

 

Time deposits, $100,000 and over

 

**368**

 

343

** **

**1,122**

 

976

 

Other time deposits

 

**1,299**

 

1,177

** **

**3,734**

 

3,286

 

Interest on short-term debt

 

**6**

 

94

** **

**70**

 

153

 

Interest on long-term debt

 

**171**

 

0

** **

**473**

 

0

 

Interest on preferred securities of subsidiary trust

 

**232**

 

0

** **

**555**

 

0

 

Total interest expense

 

**2,639**

 

2,258

** **

**7,763**

 

6,193

 

Net interest income

 

**2,208**

 

2,125

** **

**6,365**

 

6,266

 

Provision for loan losses

 

**90**

 

135

** **

**280**

 

405

 

Net interest income after provision for loan losses

 

**2,118**

 

1,990

** **

**6,085**

 

5,861

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

**338**

 

358

** **

**1,037**

 

1,021

 

Other fee income

 

**77**

 

73

** **

**225**

 

214

 

Mortgage loan servicing fees

 

**61**

 

47

** **

**199**

 

162

 

Gain on sale of mortgage loans

 

**140**

 

5

** **

**396**

 

16

 

Securities gains (losses)

 

**7**

 

0

** **

**7**

 

(13

)

Gains (losses) on sale of other real estate owned

 

**23**

 

5

** **

**33**

 

15

 

Other

 

**28**

 

40

** **

**104**

 

121

 

Total noninterest income

 

**674**

 

528

** **

**2,001**

 

1,536

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

**1,035**

 

937

** **

**3,049**

 

2,740

 

Net occupancy expense

 

**193**

 

209

** **

**581**

 

619

 

Equipment expense

 

**87**

 

104

** **

**281**

 

310

 

Data processing

 

**241**

 

173

** **

**615**

 

543

 

Supplies

 

**54**

 

45

** **

**147**

 

124

 

Communication and transportation

 

**150**

 

120

** **

**366**

 

353

 

Marketing and advertising

 

**74**

 

58

** **

**198**

 

161

 

Correspondent and processing fees

 

**79**

 

72

** **

**226**

 

199

 

Loan and other real estate owned expenses

 

**14**

 

15

** **

**88**

 

50

 

Professional fees

 

**254**

 

316

** **

**697**

 

695

 

Directors’ and regulatory fees

 

**64**

 

61

** **

**222**

 

186

 

Other

 

**134**

 

84

** **

**337**

 

275

 

Total noninterest expense

 

**2,379**

 

2,194

** **

**6,807**

 

6,255

 

Income before income tax expense

 

**413**

 

324

** **

**1,279**

 

1,142

 

Income tax expense

 

**113**

 

76

** **

**348**

 

317

 

Net income

 

**$**

**300**

 

$

248

** **

**$**

**931**

 

$

825

 

Basic earnings per share (based on weighted average common shares  outstandingof 411,701 for the three month period  and 507,754 for the Nine month period in 2001 and 571,789 in 2000)

 

**$**

**0.73**

 

$

0.43

 

**$**

**1.83**

 

$

1.44

  

 

See accompanying notes to interim condensed consolidated financialstatements.

** **
****
**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Nine Months Ended September 30, 2001and 2000**

**(Unaudited)**

** **

 

 

**2001**

 

**2000**

 

 

 

**(dollars in thousands)**

 

Cash flows from operating activities:

 

 

** **

 

 

Net income

 

**$**

**931**

** **

$

825

 

Adjustments to reconcile net income to net cash provided by  operating activities:

 

 

** **

 

 

Depreciation and amortization

 

**691**

** **

667

 

Amortization of goodwill

 

**141**

** **

123

 

Provision for loan losses

 

**280**

** **

405

 

Investment security amortization (accretion), net

 

**(63**

**)**

38

 

(Gains) losses on sales of securities, net

 

**(7**

**)**

13

 

Gains on sales of premises and equipment

 

**(4**

**)**

(2

)

Net gain on sale of loans

 

**(396**

**)**

(16

)

(Gains) losses on sale of other real estate

 

**(33**

**)**

1

 

Increase in accrued interest receivable

 

**(456**

**)**

(483

)

Increase in accrued interest payable

 

**313**

** **

237

 

Origination of secondary market mortgage loans

 

**(20,998**

**)**

(4,960

)

Proceeds from the sales of secondary market mortgage loans

 

**21,182**

** **

4,850

 

Other, net

 

**(1,093**

**)**

(62

)

Net cash provided by operating activities

 

**488**

** **

1,636

 

Cash flows from investing activities:

 

 

** **

 

 

Proceeds from sales of investment securitiesavailable for sale

 

**875**

** **

4,757

 

Proceeds from maturities and paydowns of investment securities  available for sale

 

**15,327**

** **

4,734

 

Purchases of investment securities available for sale

 

**(18,799**

**)**

(7,256

)

Net increase in loans, net

 

**(24,377**

**)**

(21,907

)

Purchases of premises and equipment

 

**(1,240**

**)**

(108

)

Proceeds from sales of premises and equipment

 

**4**

** **

2

 

Proceeds from sales of other real estate owned

 

**134**

** **

124

 

Net cash used by investing activities

 

**(28,076**

**)**

(19,654

)

Cash flows from financing activities:

 

 

** **

 

 

Net increase (decrease) in non-interest bearing demand deposits

 

**(3,526**

**)**

46

 

Net increase in NOW, money market accounts and savings deposits

 

**9,046**

** **

2,926

 

Net increase in time deposits, $100,000 and over

 

**3,796**

** **

2,609

 

Net increase in other time deposits

 

**20,490**

** **

9,613

 

Net increase (decrease) in short-term debt

 

**(7,377**

**)**

2,862

 

Proceeds from issuance of preferred securities of subsidiary  trust

 

**9,000**

** **

----

 

Purchase of treasury shares

 

**(2,730**

**)**

----

 

Proceeds of  long-term  debt

 

**236**

** **

6,000

 

Repayment of Long Term Debt

 

**(2,239**

**)**

----

 

Cash dividends paid

 

**(349**

**)**

(429

)

Net cash provided by financing activities

 

**26,347**

** **

23,627

 

Net increase (decrease) in cash and cash equivalents

 

**(1,241**

**)**

5,609

 

Cash and cash equivalents at beginning of period

 

**7,023**

** **

13,006

 

Cash and cash equivalents at end of period

 

**$**

**5,782**

** **

$

18,615

 

Supplemental Information:

 

 

** **

 

 

Income taxes paid

 

**$**

**1,013**

** **

$

448

 

Interest paid

 

**$**

**7,450**

** **

$

5,956

 

Other non-cash investing activities:

 

 

** **

 

 

Transfer of premises to other real estate owned

 

**$**

**---**

** **

$

43

 

Transfer of loans to other real estate owned

 

**$**

**182**

** **

$

15

 

 

See accompanying notes tointerim condensed consolidated financial statements.

 

**ILLINICORPORATION AND SUBSIDIARIES**

**Notes toInterim Condensed Consolidated Financial Statements (Unaudited)**

**September 30, 2001**

 

(1)           Basis of Presentation

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with the instructions to Form 10-QSB and, therefore, do not includeall of the information and notes required by generally accepted accountingprinciples for complete consolidated financial statements.  In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been included. For further information, refer to the consolidated financial statementsand footnotes included in the Illini Corporation Annual Report on Form 10-KSBfor the year ended December 31, 2000.

 

Basic earnings per shareis computed by dividing income available to common shareholders by theweighted-average number of common shares outstanding for the period.  Illini Corporation has no potential commonshares, which are dilutive.

 

Results for the three andnine months ended September 30, 2001 may not be indicative of the annualperformance of Illini Corporation (or the Banks).  Management of the Corporation has made estimates and assumptionsrelating to the reporting of assets and liabilities and the disclosure ofcontingent assets and liabilities to prepare the interim condensed consolidatedfinancial statements (unaudited) in conformity with generally acceptedaccounting principals.  Actual resultscould differ from those estimates.

 

(2)           Recent Developments

 

On June, 13, 2001, IlliniCorporation executed a definitive stock purchase agreement to redeem 160,088 ofits shares (27.99% of total shares outstanding) from the Noll family andrelated interests.  The agreementcontains separate non-compete and standstill agreements.  The standstill agreement prohibits certainmembers of the family from owning voting shares in Illini Corporation or directlyor indirectly exercising influence over the Company’s operations for a periodof ten years from the date of execution. The Company paid $45 per share plus$150,000 related to the non-compete and standstill agreements.  One-third of the purchase price was paid bythe Company in cash at closing, with the balance of unpaid principal due inthree equal installments on March 31, 2002, March 31, 2003, and March 31,2004.  Interest will be paid quarterlyon the unpaid principal balance at seven percent (7%) per annum.  The Company provided a letter of credit tothe sellers in lieu of pledging the purchased shares.  The buyer received physical possession of 160,088 shares as aresult of the transaction.  The Board ofDirectors will hold the purchased shares as treasury stock pending furtheraction.  The original date of issue ofthe irrevocable letter of credit was April 6, 2001 and will expire on April 6,2004.  The draws available under thisletter of credit decrease automatically with and in the amount of eachprincipal payment made under the promissory note.  Partial draws are allowed hereunder, provided, however, that theamount of any draft drawn under the letter of credit when aggregated with theamount of all prior drafts drawn under the letter of credit does not exceed theface amount of the letter of credit on the date of such draft.

 

Illini Statutory Trust Iis a wholly-owned subsidiary of the Company which was formed on January 31,2001, solely for the purpose of issuing capital and common securities.  Illini Statutory Trust I issued 9,279 sharesof preferred securities bearing an interest rate of 10.20% with a maturity dateof February 22, 2031 for net proceeds of $9.0 million, after deductingunderwriting commissions, capital, and other costs.  Also included in the agreement, after the 10th year the bank mayaccelerate payment according to the terms of the agreement.  Illini Statutory Trust I invested theproceeds in junior subordinated debentures of the Company, which also had aninterest rate of 10.20%.  The Companyused $3.0 million of the proceeds from the junior subordinated debentures toincrease the equity capital of Illini Bank. Interest on the junior subordinated debentures and distributions on thepreferred securities are payable semi-annually in arrears, with the firstpayment to be paid on August 22, 2001. Distribution on the securities is cumulative and based upon theliquidation value of $1,000 per capital security.  The Company has the right, at any time, so long as no event ofdefault has occurred and is continuing, to defer payments of interest on thejunior subordinated debentures for a period not exceeding 10 consecutivesemi-annual periods; provided, that such deferral may not extend beyond thestated maturity of the junior subordinated debentures.  The securities are subject to mandatoryredemption, in whole or in part, upon repayment of the junior subordinateddebentures at maturity or their earlier redemption.

 

(3)           Allowance for Loan Losses andImpaired Loans

 

The allowance for loanlosses is increased by provisions charged to operations and is available toabsorb loan losses.  Illini Corporationutilizes a systematic, documented approach in determining the appropriate levelof the allowance for loan losses of its subsidiary banks. Management’sapproach, which provides for general and specific allowances, is based oncurrent economic conditions, past loan losses, collection experience, riskcharacteristics of the portfolio, assessing collateral values by obtainingindependent appraisals for significant properties, and such other factorswhich, in management’s judgment, deserve current recognition in estimatingpotential loan losses.  Thedetermination of the allowance for loan losses is one of the estimates made bymanagement in the preparation of the consolidated financial statements.

 

 

 

**September 30,**

 

 

 

**2001**

 

**2000**

 

 

 

**(dollars  in thousands)**

 

Balance at  beginning of period

 

$

2,188

 

$

1,696

 

Provision  charged to expense

 

280

 

405

 

Charge-offs

 

138

 

127

 

Less:  recoveries

 

43

 

104

 

Net charge-offs

 

95

 

23

 

Balance at end  of period

 

$

2,373

 

$

2,078

 

 

Loans, except largegroups of smaller-balance homogeneous loans, for which the full collection ofprincipal and interest according to the contractual terms of the loan agreementis not probable, are evaluated for impairment. Information regarding impaired loans at September 30, 2001 and December31, 2000 is as follows:

 

 

 

**September 30,**

 

**December 31,**

 

 

 

**2001**

** **

**2000**

 

 

 

**(dollars  in thousands)**

 

Nonaccrual loans

 

$

3,287

 

$

772

 

Impaired loans continuing to accrue interest

 

1,111

 

---

 

Total impaired loans

 

$

4,398

 

$

772

 

Allowance for losses on specific impaired loans

 

$

316

 

$

115

 

Impaired loans  with no specific related allowance for loan losses

 

3,256

 

614

 

Average balance of impaired loans during the period

 

2,873

 

714

 

 

(4)           New Accounting Pronouncements

 

In June 1998, the FASBissued SFAS No. 133, *Accounting forDerivative Instruments and Hedging Activities* (SFAS 133), whichestablishes standards for derivative instruments, including certain derivativeinstruments embedded in other contracts and for hedging activities.  SFAS 133 requires an entity to recognize allderivatives as either assets or liabilities in the balance sheet and measurethose instruments at fair value.  InJune 1999, the FASB issued SFAS No. 137, *Accountingfor Derivative**Instruments andHedging Activities – Deferral of the Effective Date of FASB Statement No. 133*,which states SFAS 133 shall be effective for all fiscal quarters of all fiscalyears beginning after June 15, 2000. The adoption of the Statement did not havea material impact on the Company's financial condition or results of operation.

 

In 2000, the FASB issuedStatement of Financial Accounting Standards No. 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities*. This Statement replaces Statement of Financial Accounting Standards No.125.  This Statement is also effectivefor the recognition and reclassification of collateral and for disclosuresrelating to securitization transactions. This Statement is effective for fiscal years ending after December 15,2000.  The adoption of this Statement didnot have any impact on the Company's financial condition or results of operations.

 

In July 2001, theFinancial Accounting Standards Board issued SFAS No. 141, "BusinessCombinations" and SFAS No. 142,  "Goodwill and OtherIntangible Assets." SFAS No. 141 requires that all businesscombinations  be accounted for using thepurchase  method of accounting  and requires separate  recognition of intangible  assets that meet certain  criteria. This statement applies to all business combinations after June 30, 2001.

 

SFAS No.  142 requires that an intangible asset thatis acquired shall be initially recognized and measured based on its fairvalue.  This statement also providesthat goodwill should not be amortized, but shall be tested for impairmentannually, or more frequently if circumstances indicate potential impairment,through a comparison of fair value to its carrying amount. SFAS No. 142 iseffective for fiscal periods beginning after December 15, 2001. The Company hasgoodwill of $1,896,000 as of September 30, 2001 related to the Camp Pointacquisition.  The Company will continue toamortize the existing goodwill through the remainder of fiscal 2001.  As of January 1, 2002, identifiableintangible assets, if any will continue to be amortized while the amortizationof goodwill will cease and will be reviewed for impairment. The ultimate impactof the new accounting standards has not yet been determined.  Goodwill amortization expense for thenine-months ended September 30, 2001 was $141,000.

 

In July 2001, SFAS No.143, “Accounting for Asset Retirement Obligations” was issued.  SFAS No. 143 establishes standards foraccounting and reporting of obligations associated with the retirement oftangible long-lived assets and associated asset retirement costs.  SFAS No. 143 is effective beginning June 15,2002.  The adoption of this statement isnot expected to have an impact on the Company.

 

In October 2001, SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” wasissued.  Under SFAS No. 144, long-livedassets to be sold within one year must be separately identified and carried atthe lower of carrying value or fair value less costs to sell.

 

Long-lived assetsexpected to be held longer than one year are subject to depreciation and mustbe written down to fair value upon impairment. Long-lived assets no longer expected to be sold within one year, such assome foreclosed real estate, must be written down to the lower of current fairvalue or fair value at the date of foreclosure adjusted to reflect depreciationsince acquisition.  SFAS No. 144 must beimplemented by January 1, 2002.  Theadoption of this statement is not expected to have an impact on the Company.

 

(5)           Other Comprehensive Income

For the three andnine-month periods ended September 30, 2001 and 2000, unrealized gains (losses)on debt and marketable equity securities available for sale, net of tax, is theCorporation's only other comprehensive income component.  Other comprehensive income for the three andnine-month periods ended September 30, 2001 and 2000 is summarized as follows:

 

 

 

**Three Months Ended September 30,  2001**

 

 

 

**Tax**

 

 

 

**Before-Tax**

 

**(Expense)**

 

**Net-of-Tax**

 

 

 

**Amount**

 

**Benefit**

 

**Amount**

 

Net realized and unrealized gains (losses)on securities available for sale

 

$

569

  

$

(208

)

$

361

  

Less adjustment for net securities gains (losses)  realized in net income

 

7

 

(3

)

4

   

Other comprehensive  income (loss)

 

$

562

 

$

(205

)

$

357

 

 

 

 

**Three Months Ended September 30,  2000**

 

 

 

**Tax**

 

 

 

**Before-Tax**

 

**(Expense)**

 

**Net-of-Tax**

 

 

 

**Amount**

 

**Benefit**

 

**Amount**

 

Net realized and unrealized gains (losses)on securities available for sale

 

$

746

 

$

(275

)

$

471

  

Less adjustment for net securities gains (losses)  realized in net income

 

----

   

----

   

----

   

Other comprehensive  income (loss)

 

$

746

 

$

(275

)

$

471

 

 

 

 

**Nine Months Ended September 30,  2001**

 

 

 

**Tax**

 

 

 

**Before-Tax**

 

**(Expense)**

 

**Net-of-Tax**

 

 

 

**Amount**

 

**Benefit**

 

**Amount**

 

Net realized and unrealized gains (losses)on securities available for sale

 

$

1,394

  

$

(510

)

$

884

  

Less adjustment for net  securities gains (losses) realized in net income

 

7

 

(3

)

4

 

Other comprehensive  income (loss)

 

$

1,387

 

$

(507

)

$

880

 

 

 

 

**Nine Months Ended September 30,  2000**

 

 

 

**Tax**

 

 

 

**Before-Tax**

 

**(Expense)**

 

**Net-of-Tax**

 

 

 

**Amount**

 

**Benefit**

 

**Amount**

 

Net realized and  unrealized gains (losses) on securities available for sale

 

$

639

 

$

(233

)

$

406

 

Less adjustment for net  securities gains (losses) realized in net income

 

(13

)

5

 

(8

)

Other comprehensive  income (loss)

 

$

652

 

$

(238

)

$

414

 

 

(6)           Sale of MenardCounty Branches

On May 24, 2000, IlliniCorporation signed a Branch Purchase and Assumption Agreement with PetefishSkiles & Company of Virginia, Illinois, to sell Illini Corporation brancheslocated in Tallula, Greenview and Petersburg, Illinois.  The sale includes real property, personalproperty, loans and deposit liabilities. Total average loan and total average deposit liabilities for thesebranches at September 30, 2000 were $6.1 million and $14.1 million,respectively.  The transaction wascompleted in the fourth quarter of 2000 with a before tax gain of $1,071,000recorded.

 

**Item 2. Management's Discussion and Analysis of Operations**

 

This discussion should be read in conjunction with theconsolidated financial statements, notes, and tables included elsewhere in thisreport and in the 2000 Illini Corporation Annual Report on Form 10-KSB (2000Form 10-KSB).

 

**SUMMARY**

 

 

 

**Quarter ended**

 

**Percent****Change**

 

**Nine months ended**** **

 

**Percent****Change**

 

**September 30,**

**September 30,**

**Earnings**

 

**2001**

 

**2000**

 

 

**2001**

 

**2000**

 

 

 

 

**(dollars in thousands, except per share data)**

 

Total revenue 

 

**5,521**

 

$

4,911

 

12.44

%

**$**

**16,129**

 

$

13,995

 

15.25

%

Net income

 

**300**

 

248

 

21.41

%

**931**

 

825

 

12.94

%

Basic earnings per share

 

**$**

**0.73**

 

$

0.43

 

68.62

%

**$1.83**

 

$

1.44

 

27.19

%

 

 

 

**Quarter ended**

 

**Basis Point****Change**

 

**Nine months ended**

 

**Basis Point****Change**

 

 

 

**September 30,**

 

 

**September 30,**

 

 

**Key Ratios**

 

**2001**

 

**2000**

 

 

**2001**

 

**2000**

 

 

Return on average assets (1)

 

**0.48**

**%**

0.43

%

0.05

%

**0.49**

**%**

0.49

%

0.0

%

Return on average equity (1)

 

**9.11**

**%**

5.55

%

3.56

%

**7.64**

**%**

6.23

%

1.41

%

Average equity to assets

 

**5.30**

**%**

7.66

%

(2.36

)%

**6.40**

**%**

7.84

%

(1.44

)%

Tier 1 leverage ratio

 

**5.33**

**%**

7.03

%

(1.94

)%

 

** **

 

 

 

 

Tier 1 risk-based capital ratio

 

**6.73**

**%**

9.63

%

(3.27

)%

 

** **

 

 

 

 

Total risk-based capital ratio

 

**10.15**

**%**

10.86

%

(0.71

)%

 

** **

 

 

 

 

Dividend payout ratio

 

**34.25**

**%**

57.76

%

(23.51

)%

**40.89**

**%**

52.00

%

(11.11

)%

Net interest margin

 

**3.69**

**%**

4.11

%

(0.42

)%

**3.78**

**%**

4.17

%

(0.39

)%

Efficiency ratio

 

**79.93**

**%**

80.20

%

(0.27

)%

**78.80**

**%**

78.07

%

0.73

%

 

(1)  Reported on an annualizedbasis.

 

**RESULTS OFOPERATION**

 

Earning Assets

 

Average earning assets of the Corporation for thefirst nine months of 2001 increased 13.47% or $27.9 million to $235.0 millionfrom $207.1 million at September 30, 2000. Earning assets increased primarily due to planned loan growth.  On February 22, 2001, the Company issued$9.3 million of junior subordinated debentures to it's subsidiary, IlliniStatutory Trust I which completed a $9.0 million sale of trust preferred stock.

 

As discussed in the asset quality section of this Form10-QSB, management has actively pursued the improvement of the asset quality ofall earning assets, loans, and investment securities.

 

Average net loans increased to $187.5 million for thethree months ended September 30, 2001 compared to $153.1 million for the sameperiod in 2000.  The increase of $34.4million for the three months ended September 30, 2001 as compared to the sameperiod for 2000 was primarily due to an increase of $35.7 million in commercialloans, including commercial real estate loans, a decrease of $<1.8>million in residential loans, a decrease of $<1.1> million in agricultureloans, including agriculture real estate, and an increase of $1.9 million inconsumer loans.  The average yield onthe loan portfolio, net of the allowance for loan losses, decreased 47 basispoints to 8.48% for the three months ended September 30, 2001, compared to8.95% for the three months ended September 30, 2000.

 

Average net loans increased to $177.7  million for the nine months ended September30, 2001 compared to $143.6 million for the same period in 2000.  The increase of $34.1 million for the ninemonths ended September 30, 2001 as compared to the same period in 2000 wasprimarily due to an increase of $31.6 million in commercial loans, includingcommercial real estate loans, $0.2 million in residential loans, $0.6 millionin agriculture loans, including agriculture real estate, and $2.0 million inconsumer loans.  The average yield onthe loan portfolio, net of the allowance for loan losses, decreased 15 basispoints to 8.70% for the nine months ended September 30, 2001, compared to 8.85%for the nine months ended September 30, 2000.

 

Average investment securities decreased $5.8 millionand $7.0 million for the three and nine months ended September 30, 2001,respectively, as compared to the same periods in 2000.  The average yield of the investmentsecurities portfolio was 6.72% and 6.77% for the three and nine months endedSeptember 30, 2001, respectively, an decrease of 1 and an increase of 18 basispoints as compared to the same periods in 2000.  The decrease in investments from September 30, 2000 to September30, 2001 is a result of the increase in loan growth, and is consistent withmanagement's intent to maintain a balance in the investment portfolio tosupport basic surplus, which is used as a measurement of liquidity.

 

Funding

 

The most important and stable source of funding iscore deposits, considered by management to include non-interest bearing demanddeposits, NOW and money market accounts, savings deposits and time depositsunder $100,000.  Average core depositsfor the nine months ended September 30, 2001 increased 7.19% or $12.8 millionto $190.8 million from $178.0 million for the nine months ended September 30,2000.  The average rate paid on totalinterest bearing liabilities for the nine months ended September 30, 2001increased 12 basis points to 4.82% when compared to 4.70% for the nine monthsended September 30, 2000.  The average ratepaid on preferred securities of trust subsidiary for the nine months endedSeptember 30, 2001 was 9.27%.  Theaverage balance for the Corporation is based on a monthly average balanceverses a daily average balance.

 

The increase in average core deposits for the ninemonths ended September 30, 2001 as compared to the same period in 2000 hasprovided 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 creditwith an unaffiliated financial institution and a line of credit with theFederal Home Loan Bank of Chicago.

 

Net Interest Income/Net Interest Margin

 

The operating results of the Corporation are highlydependent on net interest income, which is the difference between interestincome on interest-earning assets and interest expense on interest-bearingliabilities. Net interest income is determined by the difference between yieldsearned on assets and rates paid on liabilities and the relative amounts ofinterest-earning assets and interest-bearing liabilities.

 

Interest income, on a fully taxable equivalent basis,was $4.9 million and $14.4 million for the three and nine months endedSeptember 30, 2001, respectively, compared to $4.5 million and $12.7 millionfor same periods in 2000, respectively. Interest expense was $2.6 million and $7.8 million for the three andnine months ended September 30, 2001, respectively, compared to $2.3 million and$6.2 million for the same periods in 2000, respectively.  An increase in interest income and interestexpense resulted in a $0.2 million increase in net interest income for the ninemonths ended September 30, 2001, as compared to the nine months ended September30, 2000.

 

Net interest margin for the nine months endedSeptember 30, 2001 of 3.78% down from 4.17% reported for the same period in2000.  The decrease in the net interestmargin is primarily due to interest bearing liabilities repricing at higherrates.  Management will continue to structurethe balance sheet to provide insulation for extreme interest rate changes.  Management continues to focus on increasingthe loan portfolio without jeopardizing the enhanced liquidity that has beengained in prior periods.

 

Net interest income is affected by the growth,pricing, mix, and maturity of interest earning-assets and interest- bearingliabilities, as well as other factors, including loan quality.  Also, the Corporation’s interest-rate spreadis affected by regulatory, economic, and competitive factors that influenceinterest rates, loan demand, and deposit flow. Individual components of net interest income and net interest margin arepresented in the consolidated average balances, interest income/expense andyield/rates table located elsewhere in this report under the headings;Consolidated Average Balances, Interest Income/Expense and yield/Rates, and NetInterest Income-Rate/Volume Variance Analysis.

 

**Consolidated Average Balances,Interest Income/Expense and Yield/Rates**

 

 

 

**Quarter  ended September 30,**

 

 

 

**2001**

 

**2000**

 

 

 

 

 

**Percent**

 

**Interest**

 

**Average**

 

 

 

**Percent**

 

**Interest**

 

**Average**

** **

 

 

**Average**

 

**of  Total**

 

**Income/**

 

**Yield/**

 

**Average**

 

**of  Total**

 

**Income/**

 

**Yield/**

** **

 

 

**Balance**

 

**Assets**

 

**Expense**

 

**Rate**

 

**Balance**

 

**Assets**

 

**Expense**

 

**Rate**

** **

 

 

**(dollar in thousands)**

** **
**ASSETS**  ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** **
Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term  investments

 

**$**

**9,732**

** **

**3.6**

**%**

**$**

**96**

** **

**3.93**

**%**

$

4,384

 

1.9

%

$

75

 

6.83

%

Investment  securities (3)

 

 

** **

 

** **

 

** **

 

** **

 

 

 

 

 

 

 

 

Taxable

 

**37,008**

** **

**13.9**

** **

**570**

** **

**6.16**

** **

43,571

 

18.9

 

692

 

6.35

 

Tax-exempt (1)

 

**12,855**

** **

**4.8**

** **

**267**

** **

**8.31**

** **

12,100

 

5.2

 

245

 

8.08

 

Total securities

 

**49,863**

** **

**18.7**

** **

**837**

** **

**6.72**

** **

55,671

 

24.1

 

937

 

6.73

 

Loans

 

 

** **

 

** **

 

** **

 

** **

 

 

 

 

 

 

 

 

Commercial (1)

 

**35,274**

** **

**13.2**

** **

**737**

** **

**8.29**

** **

24,751

 

10.7

 

573

 

9.19

 

Agriculture

 

**13,441**

** **

**5.0**

** **

**239**

** **

**7.04**

** **

14,138

 

6.1

 

291

 

8.16

 

Real estate:

 

 

** **

 

** **

 

** **

 

** **

 

 

 

 

 

 

 

 

Commercial

 

**87,024**

** **

**32.6**

** **

**1,860**

** **

**8.48**

** **

61,900

 

26.8

 

1,386

 

8.88

 

Agriculture

 

**7,397**

** **

**2.8**

** **

**156**

** **

**8.36**

** **

7,836

 

3.4

 

183

 

9.27

 

Residential

 

**32,342**

** **

**12.1**

** **

**681**

** **

**8.36**

** **

34,114

 

14.8

 

716

 

8.32

 

Consumer, net

 

**13,473**

** **

**5.1**

** **

**298**

** **

**8.78**

** **

11,642

 

5.0

 

269

 

9.16

 

Credit card

 

**822**

** **

**0.3**

** **

**36**

** **

**17.38**

** **

711

 

0.3

 

35

 

19.34

 

Total loans

 

**189,773**

** **

**71.0**

** **

**4,007**

** **

**8.38**

** **

155,092

 

67.1

 

3,453

 

8.83

 

Allowance for loan losses

 

**(2,321**

**)**

**(0.9**

**)**

 

 

 

 

(1,997

)

(0.9

)

 

 

 

 

Net loans (1) (2)

 

**187,452**

** **

**70.2**

** **

**4,007**

** **

**8.48**

** **

153,095

 

66.2

 

3,453

 

8.95

 

Total  interest-earning assets

 

**247,047**

** **

**92.5**

** **

**$**

**4,940**

** **

**7.93**

**%**

213,150

 

92.2

 

$

4,465

 

8.31

%

Cash and due from banks

 

**5,605**

** **

**2.1**

** **

 

 

 

** **

6,185

 

2.7

 

 

 

 

 

Premises and equipment

 

**7,212**

** **

**2.7**

** **

 

 

 

** **

7,088

 

3.1

 

 

 

 

 

Other real estate owned

 

**497**

** **

**0.2**

** **

 

 

 

** **

420

 

0.2

 

 

 

 

 

Other assets (3)

 

**6,679**

** **

**2.5**

** **

 

** **

 

 

4,140

 

1.8

 

 

 

 

 

**Total  assets**

 

**$**

**267,040**

** **

**100.0**

**%**

 

 

 

 

$

230,983

 

100.0

%

 

 

 

 

 

 

 

** **

 

** **

 

** **

 

** **

 

 

 

 

 

 

 

 

**LIABILITIES AND SHAREHOLDERS’  EQUITY**

Deposits:

 

 

** **

 

** **

 

** **

 

** **

 

 

 

 

 

 

 

 

Noninterest-bearing  demand

 

**$**

**28,497**

** **

**10.7**

**%**

 

 

 

 

$

29,119

 

12.6

%

 

 

 

 

Interest-bearing  demand

 

**62,397**

** **

**23.4**

** **

**$**

**487**

** **

**3.09**

**%**

53,531

 

23.2

 

$

554

 

4.10

%

Savings

 

**17,418**

** **

**6.5**

** **

**76**

** **

**1.74**

** **

17,721

 

7.7

 

90

 

2.00

 

Time deposits,  less than $100,000

 

**94,949**

** **

**35.5**

** **

**1,299**

** **

**5.43**

** **

80,734

 

34.9

 

1,177

 

5.78

 

Total core  deposits

 

**203,261**

** **

**76.1**

** **

**1,862**

** **

**3.63**

** **

181,105

 

78.4

 

1,821

 

3.99

 

Time deposits,  $100,000 and over

 

**28,741**

** **

**10.7**

** **

**368**

** **

**5.08**

** **

24,764

 

10.7

 

343

 

5.50

 

Total deposits

 

**232,002**

** **

**86.8**

** **

**2,230**

** **

**3.81**

** **

205,869

 

89.1

 

2,164

 

4.17

 

Short-term debt

 

**482**

** **

**0.2**

** **

**6**

** **

**4.78**

** **

2,248

 

1.0

 

43

 

7.63

 

Long-term debt

 

**9,217**

** **

**3.5**

** **

**171**

** **

**7.38**

** **

2,957

 

1.3

 

51

 

6.78

 

Total  interest-bearing liabilities

 

**213,204**

** **

**79.8**

** **

**2,407**

** **

**4.48**

** **

181,955

 

78.8

 

2,258

 

4.92

 

Other liabilities

 

**3,253**

** **

**1.2**

** **

 

 

 

** **

2,216

 

0.9

 

 

 

 

 

Total  liabilities

 

**244,954**

** **

**91.7**

** **

 

 

 

** **

213,290

 

92.3

 

 

 

 

 

Preferred securities of trust subsidiary (4)

 

**9,000**

** **

**3.4**

** **

**232**

** **

**10.21**

** **

----

 

----

 

----

 

----

 

Shareholders’ equity

 

**13,086**

** **

**4.9**

** **

 

 

 

** **

17,693

 

7.7

 

 

 

 

 

**Total  liabilities and shareholders’ equity**

 

**$**

**267,040**

** **

**100.0**

**%**

 

 

 

 

$

230,983

 

100.0

%

 

 

 

 

**Net interest margin**

 

 

 

** **

 

 

**$**

**2,301**

 

**3.69**

**%**

 

 

 

 

 

$

2,207

 

4.11

%

(1)       Income amounts are presented on a fullytaxable equivalent basis (FTE), which is defined as income on earning assetsthat is subject to either a reduced rate or zero rate of income tax, adjustedto give effect to the appropriate incremental federal income tax rate andadjusted for non-deductible carrying costs, where applicable.  Where appropriate, yield calculationsinclude these adjustments.  The federalstatutory rate was 34% for all periods presented.

(2)       Nonaccrual loans are included in the loanbalances.  Interest income includesrelated fee income of $109,000 in 2001 and $94,000 in 2000.

(3)       Average securities balances are based onamortized historical cost, excluding SFAS 115 adjustments to fair value, whichare included in other assets.

(4)       The average balance for the Corporationis based on a monthly average balance verses a daily average balance.

 

**ConsolidatedAverage Balances, Interest Income/Expense and Yield/Rates**

 

 

 

**Nine  months ended September 30,**

 

 

 

**2001**

 

**2000**

 

 

 

 

 

**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)**

** **
**ASSETS**                 
Interest-earning  assets:

 

 

** **

 

** **

 

** **

 

** **

 

 

 

 

 

 

 

 

Short-term  investments

 

**$**

**7,365**

** **

**2.9**

**%**

**$**

**294**

** **

**5.34**

**%**

$

6,601

 

2.9

%

$

310

 

6.26%

 

Investment  securities (3)

 

 

** **

 

** **

 

** **

 

** **

 

 

 

 

 

 

 

 

Taxable

 

**37,184**

** **

**14.6**

** **

**1,744**

** **

**6.25**

** **

46,348

 

20.6

 

2,201

 

6.33

 

Tax-exempt (1)

 

**12,769**

** **

**5.0**

** **

**792**

** **

**8.27**

** **

10,566

 

4.7

 

613

 

7.73

 

Total securities

 

**49,953**

** **

**19.6**

** **

**2,536**

** **

**6.77**

** **

56,914

 

25.3

 

2,814

 

6.59

 

Loans

 

 

** **

 

** **

 

** **

 

** **

 

 

 

 

 

 

 

 

Commercial (1)

 

**31,923**

** **

**12.6**

** **

**2,071**

** **

**8.68**

** **

23,048

 

10.3

 

1,586

 

9.17

 

Agriculture

 

**13,538**

** **

**5.3**

** **

**774**

** **

**7.65**

** **

12,885

 

5.7

 

816

 

8.44

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

**80,768**

** **

**31.7**

** **

**5,222**

** **

**8.64**

** **

58,005

 

25.8

 

3,796

 

8.72

 

Agriculture

 

**7,382**

** **

**2.9**

** **

**475**

** **

**8.61**

** **

7,398

 

3.3

 

486

 

8.75

 

Residential

 

**32,740**

** **

**12.9**

** **

**2,075**

** **

**8.47**

** **

32,539

 

14.5

 

2,016

 

8.25

 

Consumer, net

 

**12,841**

** **

**5.0**

** **

**850**

** **

**8.85**

** **

10,933

 

4.9

 

753

 

9.18

 

Credit card

 

**796**

** **

**0.3**

** **

**103**

** **

**17.24**

** **

685

 

0.3

 

92

 

17.87

 

Total loans

 

**179,988**

** **

**70.7**

** **

**11,570**

** **

**8.59**

** **

145,493

 

64.8

 

9,545

 

8.74

 

Allowance for  loan losses

 

**(2,258**

**)**

**(0.9**

**)**

 

 

 

 

(1,879

)

(0.8

)

 

 

 

 

Net loans (1)  (2)

 

**177,730**

** **

**69.8**

** **

**11,570**

** **

**8.70**

** **

143,614

 

64.0

 

9,545

 

8.85

 

Total  interest-earning assets

 

**235,048**

** **

**92.3**

** **

**$**

**14,400**

** **

**8.19**

**%**

207,129

 

92.2

 

$

12,669

 

8.15

%

Cash and due  from banks

 

**5,967**

** **

**2.3**

** **

 

 

 

 

6,100

 

2.7

 

 

 

 

 

Premises and  equipment

 

**6,925**

** **

**2.7**

** **

 

 

 

 

7,278

 

3.2

 

 

 

 

 

Other real  estate owned

 

**465**

** **

**0.2**

** **

 

 

 

 

548

 

0.2

 

 

 

 

 

Other assets (3)

 

**6,253**

** **

**2.5**

** **

 

 

 

 

3,778

 

1.7

 

 

 

 

 

**Total assets**

 

**$**

**254,658**

** **

**100.0**

**%**

 

 

 

 

$

224,833

 

100.0

%

 

 

 

 

 

 

 

** **

 

** **

 

** **

 

** **

 

** **

 

** **

 

** **

 

** **

**LIABILITIES AND SHAREHOLDERS’  EQUITY**

** **

Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing  deposits

 

**$**

**27,762**

** **

**10.9**

**%**

 

 

 

 

$

29,382

 

13.1

%

 

 

 

 

Interest-bearing  demand

 

**58,623**

** **

**23.0**

** **

**$**

**1,566**

** **

**3.57**

**%**

52,340

 

23.3

 

$

1,503

 

3.82

%

Savings

 

**17,089**

** **

**6.7**

** **

**243**

** **

**1.90**

** **

18,330

 

8.2

 

275

 

2.00

 

Time deposits,  less than $100,000

 

**87,369**

** **

**34.3**

** **

**3,734**

** **

**5.71**

** **

77,992

 

34.7

 

3,286

 

5.61

 

Total core  deposits

 

**190,843**

** **

**74.9**

** **

**5,543**

** **

**3.88**

** **

178,044

 

79.3

 

5,064

 

3.79

 

Time deposits,  $100,000 and over

 

**27,894**

** **

**11.0**

** **

**1,122**

** **

**5.38**

** **

24,059

 

10.7

 

976

 

5.40

 

Total deposits

 

**218,737**

** **

**85.9**

** **

**6,665**

** **

**4.07**

** **

202,103

 

90.0

 

6,040

 

3.98

 

Short-term  borrowings

 

**1,298**

** **

**0.5**

** **

**70**

** **

**7.22**

** **

1,765

 

0.8

 

102

 

7.73

 

Long-term debt

 

**7,707**

** **

**3.0**

** **

**473**

** **

**8.21**

** **

993

 

0.4

 

51

 

6.78

 

Total  interest-bearing liabilities

 

**199,980**

** **

**78.5**

** **

**7,208**

** **

**4.82**

** **

175,479

 

78.1

 

6,193

 

4.70

 

Other  liabilities

 

**2,621**

** **

**1.1**

** **

 

 

 

 

2,345

 

1.0

 

 

 

 

 

Total  liabilities

 

**230,363**

** **

**90.5**

** **

 

 

 

 

207,206

 

92.2

 

 

 

 

 

Preferred  securities of trust subsidiary (4)

 

**8,000**

** **

**3.1**

** **

**555**

** **

**9.27**

** **

----

 

----

 

----

 

----

 

Shareholders’  equity

 

**16,295**

** **

**6.4**

** **

 

 

 

 

17,627

 

7.8

 

 

 

 

 

**Total liabilities and shareholders’  equity**

 

**$**

**254,658**

** **

**100.0**

**%**

 

 

 

 

$

224,833

 

100.0

%

 

 

 

 

**Net interest margin**

 

 

 

 

 

**$**

**6,637**

** **

**3.78**

**%**

 

 

 

 

$

6,476

 

4.17

%

(1)       Income amounts are presented on a fullytaxable equivalent basis (FTE), which is defined as income on earning assetsthat is subject to either a reduced rate or zero rate of income tax, adjustedto give effect to the appropriate incremental federal income tax rate andadjusted for non-deductible carrying costs, where applicable.  Where appropriate, yield calculationsinclude these adjustments.  The federalstatutory rate was 34% for all periods presented.

(2)       Nonaccrual loans are included in the loanbalances.  Interest income includesrelated fee income of $277,000 in 2001 and $266,000 in 2000.

(3)       Average securities balances are based onamortized historical cost, excluding SFAS 115 adjustments to fair value, whichare included in other assets.

(4)       The average balance for the Corporationis based on a monthly average balance verses a daily average balance.

 
****
**Net InterestIncome – Rate/Volume Variance Analysis(*)**

** **

 

 

**Quarter ended September 30, 2001**

 

 

 

**as compared to**

** **

 

 

**quarter ended September 30, 2000**

** **

 

 

**Changes in**

 

**Volume**

 

**Rate**

** **

 

 

**Income/Expense**

 

**Effect**

 

**Effect**

 

 

 

**(dollars in thousands)**

 

Short-term investments

 

$

21

 

$

92

 

$

(71

)

Investment securities:

 

 

 

 

 

 

 

Taxable

 

(122

)

(105

)

(17

)

Tax-exempt

 

22

 

15

 

7

 

Total securities

 

(100

)

(90

)

(10

)

Loans:

 

 

 

 

 

 

 

Commercial

 

164

 

244

 

(80

)

Agriculture

 

(52

)

(14

)

(38

)

Real Estate:

 

 

 

 

 

 

 

Commercial

 

474

 

562

 

(88

)

Agriculture

 

(27

)

(10

)

(17

)

Residential

 

(35

)

(37

)

2

 

Consumer, net

 

29

 

42

 

(13

)

Credit card

 

1

 

5

 

(4

)

Total loans

 

554

 

792

 

(238

 

Total interest income

 

475

 

794

 

(319

)

 

 

 

 

 

 

 

 

Interest bearing demand

 

(67

)

916

 

(983

)

Savings

 

(14

)

(1

)

(13

)

Time deposits, less than $100,000

 

122

 

207

 

(85

)

Total core deposits

 

41

 

1,122

 

(1,081

)

Time deposits, $100,000 and over

 

25

 

55

 

(30

)

Total deposits

 

66

 

1,177

 

(1,111

)

Short-term debt

 

(37

)

(340

)

303

 

Long-term debt

 

352

 

1,070

 

(718

)

Total borrowed funds

 

315

 

730

 

(415

)

Total interest expense

 

381

 

1,907

 

(1,526

)

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

94

 

$

(1,113

)

$

1,207

 

 

(*)  Fully taxable equivalentbasis

NOTE:  The change in interest which can not beattributed to only a change in volume or a change in rate, but insteadrepresents a combination of the two factors, has been allocated to the rateeffect.

 
****
**Net InterestIncome – Rate/Volume Variance Analysis(*)**

** **

 

 

**Nine months ended September 30, 2001**

 

 

 

**as compared to**

** **

 

 

**nine months ended September 30, 2000**

** **

 

 

**Changes in**

 

**Volume**

** **

**Rate**

** **

 

 

**Income/Expense**

 

**Effect**

 

**Effect**

 

 

 

**(dollars in thousands)**

 

Short-term investments

 

$

(16

)

$

36

 

$

(52

)

Investment securities:

 

 

 

 

 

 

 

Taxable

 

(457

)

(434

)

(23

)

Tax-exempt

 

179

 

127

 

52

 

Total securities

 

(278

)

(307

)

29

 

Loans:

 

 

 

 

 

 

 

Commercial

 

485

 

609

 

(124

)

Agriculture

 

(42

)

41

 

(83

)

Real Estate:

 

 

 

 

 

 

 

Commercial

 

1,426

 

1,485

 

(59

)

Agriculture

 

(11

)

(1

)

(10

)

Residential

 

59

 

12

 

47

 

Consumer, net

 

97

 

131

 

(34

)

Credit card

 

11

 

15

 

(4

)

Total loans

 

2,025

 

2,292

 

(267

)

Total interest income

 

1,731

 

2,021

 

(290

)

 

 

 

 

 

 

 

 

Interest bearing demand

 

63

 

180

 

(117

)

Savings

 

(32

)

(186

)

154

 

Time deposits, less than $100,000

 

448

 

393

 

55

 

Total core deposits

 

479

 

387

 

92

 

Time deposits, $100,000 and over

 

146

 

155

 

(9

)

Total deposits

 

625

 

542

 

83

 

Short-term debt

 

(32

)

(27

)

(5

)

Long-term debt

 

977

 

341

 

636

 

Total borrowed funds

 

945

 

314

 

631

 

Total interest expense

 

1,570

 

856

 

714

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

161

 

$

1,165

 

$

(1,004

)

 

(*)  Fully taxable equivalentbasis

NOTE:    The change in interest which can not beattributed to only a change in volume or a change in rate, but insteadrepresents a combination of the two factors, has been allocated to the rateeffect.

 

**Noninterest Income**

 

 

 

**Three months ended**

 

**Percent**

 

**Nine months ended**

 

**Percent**

** **

 

 

**September 30,**

 

**Change**

 

**September 30,**

 

**Change**

 

 

 

**2001**

 

**2000**

 

**2001/2000**

 

**2001**

 

**2000**

 

**2001/2000**

** **

 

 

**(dollars in thousands)**

 

Service charges on deposit accounts

 

**$**

**338**

 

$

358

** **

**(5.6**

**)%**

**$**

**1,037**

 

$

1,021

** **

**1.6**

**%**

Other fee income

 

**77**

 

73

** **

**5.5**

** **

**225**

 

214

** **

**5.1**

** **

Mortgage loan servicing fees

 

**61**

 

47

** **

**29.8**

** **

**199**

 

162

** **

**22.8**

** **

Gain on sale of mortgage loans

 

**140**

 

5

** **

**2,700.0**

** **

**396**

 

16

** **

**2,375.0**

** **

Securities gains (losses)

 

**7**

 

---

** **

**N.M.**

** **

**7**

 

(13

)

**153.8**

** **

Gains on sales of other real estate

 

**23**

 

5

** **

**360.0**

** **

**33**

 

15

** **

**120.0**

** **

Other

 

**28**

 

40

** **

**(30.0**

**)**

**104**

 

121

** **

**(14.0**

**)**

 

 

**$**

**674**

 

$

528

** **

**27.7**

**%**

**$**

**2,001**

 

$

1,536

** **

**30.3**

** **

 

The noninterest income increased $146,000 and $465,000 for the threeand nine months ended September 30, 2001, respectively, when compared to thesame periods in 2000.  The increase innoninterest income is due to continued growth in transaction accounts, and thegain on sale of mortgage loans due to increased refinancing in the residentialreal estate market, caused by lower interest rates.

 

**Noninterest Expense**

 

 

 

**Three months ended**

 

**Percent**

** **

**Nine months****Ended**

** **

**Percent**

** **

 

 

**September 30,**

 

**Change**

 

**September 30,**

 

**Change**

 

 

 

**2001**

 

**2000**

 

**2001/2000**

 

**2001**

 

**2000**

 

**2001/2000**

 

 

 

**(dollars in thousands)**

 

Salaries and employee benefits

 

**$**

**1,035**

 

$

937

** **

**10.5**

**%**

**$**

**3,049**

 

$

2,740

** **

**11.3**

**%**

Net occupancy expense

 

**193**

 

209

** **

**(7.7**

**)**

**581**

 

619

** **

**(6.1**

**)**

Equipment expense

 

**87**

 

104

** **

**(16.3**

**)**

**281**

 

310

** **

**(9.4**

**)**

Data processing

 

**241**

 

173

** **

**39.3**

** **

**615**

 

543

** **

**13.3**

** **

Supplies

 

**54**

 

45

** **

**20.0**

** **

**147**

 

124

** **

**18.5**

** **

Communication and transportation

 

**150**

 

120

** **

**25.0**

** **

**366**

 

353

** **

**3.7**

** **

Marketing and advertising

 

**74**

 

58

** **

**27.6**

** **

**198**

 

161

** **

**23.0**

** **

Correspondent and processing fees

 

**79**

 

72

** **

**9.7**

** **

**226**

 

199

** **

**13.6**

** **

Loan and other real estate owned expenses

 

**14**

 

15

** **

**(6.7**

**)**

**88**

 

50

** **

**76.0**

** **

Professional fees

 

**254**

 

316

** **

**(19.6**

**)**

**697**

 

695

** **

**0.3**

** **

Regulatory fees

 

**22**

 

22

** **

**0.0**

** **

**100**

 

77

** **

**29.9**

** **

Other

 

**176**

 

123

** **

**43.1**

** **

**459**

 

384

** **

**19.5**

** **

 

 

**$**

**2,379**

 

$

2,194

** **

**8.4**

**%**

**$**

**6,807**

 

$

6,255

** **

**8.8**

**%**

 

Salaries and employee benefits increased $98,000 and $309,000 for thethree and nine months ended September 30, 2001, respectively, when compared tothe same periods in 2000.  This increaseis a result of increased incentive pay, increased insurance benefits foremployees, and normal cost of living increases to overall base salaries.

 

Net occupancy expense decreased $16,000 and $38,000 for the three andnine months ended September 30, 2001 when compared to the same periods in2000.  The decrease in occupancy expenseis a result of consolidations of several older branches, and sale of MenardCounty branches

 

Data Processing expense increased $72,000 for the nine months-endedSeptember 30, 2001 when compared to the same period in 2000.  The increase is due to costs of a systemsconversion upgrading of the information and processing system.

 

Professional fees continue to be significant in total due to legalproceedings as noted in Part II. Regulatory fees increased $23,000 for the nine months ended September30, 2001, when compared to the same periods in 2000.  The increase is due to higher deposit insurance assessmentscaused by growth in deposits.

 

Other operating expenses increased $50,000 and $62,000 for the threeand nine months ended September 30, 2001, respectively, when compared to thesame periods in 2000.  The increase isdue to travel expense related to the system upgrades, and write downs on oldequipment.

 
****
**CREDIT QUALITY**

 

Gross loans totaled $193.3 million at September 30, 2001, an increaseof $24.3 million, or 14.38%, from $169.0 million at December 31, 2000.  The provision for loan losses has decreasedto $280,000 for the nine months ended September 30, 2001 as compared to$405,000 for the same period in 2000. At September 30, 2001 the allowance as a percent of total loansdecreased to 1.23% as compared to 1.30% at December 31, 2000.  The decrease is a result of the growth inthe loan portfolio.  Management believesthe allowance for loan losses is adequate to support any anticipated losses.

 

 

 

**Three months ended**

 

**Nine months ended**

 

 

 

**September 30,**

 

**September 30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

 

 

**(dollars in thousands)**

 

**Allowance for Loan Losses:**

 

 

 

Balance at beginning of period

 

**$**

**2,318**

** **

$

1,910

 

**$**

**2,188**

** **

$

1,696

 

Provision charged to expense

 

**90**

** **

135

 

**280**

** **

405

 

Charge-offs

 

**51**

** **

36

 

**138**

** **

127

 

Less:  recoveries

 

**16**

** **

69

 

**43**

** **

104

 

Net charge-offs

 

**35**

** **

(33

)

**95**

** **

23

 

Balance at end of period

 

**$**

**2,373**

** **

$

2,078

 

**$**

**2,373**

** **

$

2,078

 

**Net Charge-Off Ratios** (1):

 

 

** **

 

 

 

** **

 

 

Commercial

 

**0.14**

**%**

(0.40

)%

**0.09**

**%**

(0.06

)%

Real Estate

 

**0.01**

** **

(0.07

)

**0.04**

** **

0.01

 

Installment

 

**0.30**

** **

0.66

 

**0.16**

** **

0.21

 

Credit Cards

 

**1.95**

** **

2.17

 

**1.10**

** **

2.41

 

Totals

 

**0.07**

**%**

(0.08

)%

**0.07**

**%**

0.02

%

 

(1) Ratios to average loans are presented on  an annualized basis

 

IlliniCorporation’s primary business of making commercial, real estate, and consumerloans entails potential losses, the magnitude of which depends on a variety ofeconomic factors affecting borrowers, which are beyond the control of theCorporation.  Accordingly, a significantfactor in the Corporation’s past and future operating results is the level ofthe provision for loan losses.  Theprovision for loan losses is down 33.3% and 30.9% for the three and nine monthsended September 30, 2001, respectively, as compared to the comparable periodsin the prior year.  Net charge-offsincreased to $68,000 for the three months ended September 30, 2001, andincreased $72,000 for the nine months ended September 30, 2001

 

Management feels that credit quality systems and controls, along withthe creation of a formalized credit administration function, improves  credit quality.  Illini Corporation has a 1.23% allowance to gross loans ratio asof September 30, 2001 compared to 1.30% and 1.32% as of December 31, 2000 andSeptember 30, 2000, respectively.

 

At September 30, 2001, impaired loans totaled $4.4 million, of which$1.1 million of loans are not past due 90 days, compared to $772,000, which werenot past due 90 days, at December 31, 2000. The majority of the increase in impaired loans is due to threecommercial real estate loans totaling $1.1 million, and five commercial loanstotaling $3.3 million.  The threecommercial real estate loans are secured by first mortgages with a loan tovalue of less than 85%.  Management isworking closely with the borrower to bring these loans into compliance with theterms of the debt instruments.  The fivecommercial loans are secured by inventory, cash value of life insurance, secondmortgages on real estate, and personal guarantees of the borrowers.  Management is working to liquidatecollateral, and has allocated specific reserves to cover any losses.

 

 

 

**September 30,**

 

**December 31,**

 

**September 30,**

 

**Credit Quality**

 

**2001**

 

**2000**

 

**2000**

 

 

 

**(dollars in thousands)**

 

**Nonperforming assets:**

 

 

** **

 

 

 

 

Loans delinquent over 90 days, still accruing interest

 

**$**

**0**

** **

$

0

 

$

0

 

Nonaccrual

 

**3,287**

** **

772

 

763

 

Renegotiated

 

**0**

** **

0

 

32

 

Other real estate owned

 

**423**

** **

359

 

426

 

Total nonperforming assets

 

**$**

**3,710**

** **

$

1,131

 

$

1,221

 

 

 

 

** **

 

** **

 

** **

**Key ratios**:

 

 

** **

 

** **

 

** **

Nonperforming loans to ending loans

 

**1.70**

**%**

0.46

%

0.48

%

90 days delinquent to ending loans

 

**0.00**

** **

0.00

 

0.00

 

Allowance to ending loans

 

**1.23**

** **

1.30

 

1.32

 

Allowance to nonperforming loans

 

**72.19**

** **

283.49

 

261.38

 

 

Illini Corporation’s loan underwriting guidelines and credit reviewprocedures and policies are designed to protect the Corporation from creditlosses.  Illini Corporation’s processfor monitoring loan quality includes detailed monthly trend analysis ofdelinquencies and nonperforming assets. Management and the board of directors monitor potential problem loans,changes to the watchlist, and extensions of credit outside of the loanpolicy.  Management extensively monitorssignificant credit relationships through appraisals, assessment of thefinancial condition of borrowers, restrictions on out-of-area lending, andavoidance of loan concentrations.

 

As discussed in the Corporation’s 2000 Form 10-KSB and previous Form10-QSB reports, management has implemented several initiatives to improvecredit quality.  These steps included aofficer driven problem loan identification system, a revamped allowance forloan losses adequacy determination process, a new loan policy, and improvedreporting systems (credit quality and production).  Management is committed to continuing these initiatives and hassupplemented these efforts in 2001 by engaging an outside firm to perform acomprehensive review of each bank’s loan portfolio to assess its credit qualityand the effectiveness of management’s loan quality systems and controls.

 

**CAPITAL RESOURCES**

** **

The current economic and regulatory environment places increasedemphasis on capital strength.  A strongcapital position, which is vital to the continued profitability of IlliniCorporation, also promotes depositor and investor confidence and provides asolid foundation for the future growth of the organization.  Illini Corporation has satisfied its capitalrequirements principally through the retention of earnings.  At September 30, 2001, Tier 1 risk-basedcapital, total risk-based capital and leverage capital ratios were 6.73%,10.15% and 5.33%, respectively, as compared to 9.63%, 10.87% and 7.27% for theperiod ending December 31, 2000.  Thedecrease is due to the repurchase of 160,088 shares of Illini stock from theNoll family, as described on Form 8-K filings dated May 2, 2001 and June 13,2001.  The decrease in capital wasoffset by the increase in a preferred security issued by the trust subsidiary,Illini Statutory Trust I, which was completed February 22, 2001.  Per regulation 25% of the Tier I capitalratio can be comprised of the trust preferred issue.  For a further explanation please refer to Section 2 under theheading Recent Development.    As ofSeptember 30, 2001, the Corporation and subsidiary banks met the criteria to beclassified as “well capitalized.”

 

Earnings retention is affected by the board of director’s declarationof cash dividends.  The dividend payoutratio is an indicator of the level of earnings retained.  The Board of Directors of the Corporationconsiders the capital strength of the Corporation and the banks in determiningthe appropriate level of cash dividends to be paid to shareholders.  The dividend payout ratio for the three andnine months ended September 30, 2001 was 34.25% and 40.89%, respectively ascompared to 57.76% and 52.00% for the three and nine months ended September 30,2000.

 

**LIQUIDITY**

 

Illini Corporation’s policy is to manage interest rate risk to a levelwhich places limits on the sensitivity of its earnings to changes in marketinterest rates.  An explanation of theasset/liability management process is found in the Corporation’s 2000 Form10-KSB, beginning on page 15.  Interest rate risk management at IlliniCorporation is executed through the use of on-balance sheet investmentproducts.

 

The assets portion of the balance sheet provides liquidity primarilythrough loan principal repayments, maturities of investment securities, andsales of investment securities available for sale.  The liability side of the balance sheet provides liquiditythrough various customers’ interest-bearing and noninterest-bearing depositaccounts.  Short-term borrowings are anadditional source of liquidity and represent Illini Corporation’s incrementalborrowing capacity.

 

Illini Corporation uses a comprehensive analysis of its asset/liabilityfunction, including a review of its funds management policy and its principalmeasure of liquidity.  The Corporationimplemented a new measure of liquidity measurement, called “Basic Surplus,”which redefines liquid assets as the total assets held by the Corporation whichcan be converted to cash in thirty days or less, reduced by short termliabilities.  As of September 30, 2001,the most recent calculation, Illini Corporation’s core liquidity was $27.1million, or 11.74% of total average assets.

 

Management believes the formula provides an accurate measurement ofliquidity and provides management with a comprehensible and consistent tool todevelop pricing and profitability strategies. Based on the new measurement and as compared to peer banks, managementbelieves the liquidity position of the banks is strong.

 
****
**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

Derivative financialinstruments include futures, forwards, interest rate swaps, option contracts,and other financial instruments with similar characteristics.  The bank subsidiaries currently do not enterinto futures, forwards, swaps, or options. However, they are a party to financial instruments with off-balancesheet risk in the normal course of business to meet the financing needs of itscustomers.  These financial instrumentsinclude commitments to extend credit and standby letters of credit.  These instruments involve to varyingdegrees, elements of credit and interest rate risk in excess of the amountrecognized in the consolidated balance sheets. Commitments generally have fixed expiration dates and require collateralfrom the borrower if deemed necessary by the banks.  Standby letters of credit are conditional commitments issued bythe banks to guarantee the performance of a customer to a third party up to astipulated amount and within specified terms and conditions.  Commitments to extend credit and standbyletters of credit are not recorded as an asset or liability by the banks untiland unless the instrument is exercised.

 

The bank subsidiaries exposure to market risk and interest rate risk isreviewed by their individual Asset/Liability Committees.  Management realizes certain risks areinherent, such as the uncertainty of market interest rates, and that its goalis to identify and manage such risks. The primary tool management uses to monitor and manage interest raterisk is a static gap report.  The banksubsidiaries have no market risk sensitive instruments held for tradingpurposes.

 

The Corporation’s interest rate and market risk profile has notmaterially changed from the year ended December 31, 2000.  Please refer to the Corporation’s 2000 Form10-KSB for further discussion of the Corporation’s market and interest raterisk.

 

**PART II.  OTHERINFORMATION**

 

Item 1    Legal Proceedings 

 

Mary Quinn v. Illini Corporation and Illinois StockTransfer Co.,

Sangamon County Case No. 98 CH 240

 

                Illini Corporationadopted a Shareholder Rights Agreement on June 20, 1997, and named IllinoisStock Transfer Company (“ISTC”) as its rights agent thereunder.  Illini Corporation was notified in May 1998of a threatened complaint against ISTC by an Illini Corporationshareholder.  The shareholder, Mary K.Quinn (“Quinn”), who owns 21 shares of stock in Illini Corporation, filed suitagainst ISTC on June 9, 1998 in the Seventh Judicial Circuit Court, SangamonCounty, Illinois.  Quinn sought tocompel ISTC to distribute rights certificates to Illini Corporation’sshareholders and further sought to certify all Illini Corporation shareholdersas 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. IST has vigorously contested Quinn’s assertions that Ida R. Noll was anacquiring person, that the Rights Agreement had been triggered, and that ISTChad 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 filedan Amended Complaint adding Illini Corporation as a defendant to her action.  Both Illini Corporation and ISTC answeredthe Amended Complaint and denied that Ida R. Noll was an acquiring person.  Quinn asserted that she was entitled torecover her attorneys’ fees from Illini Corporation and ISTC.

Quinn filed a Motion for Summary Judgment that askedthe Court to determine as a matter of law that Ida R. Noll became an acquiringperson on April 16, 1998, that the Rights Agreement was triggered as a resultand that Illini Corporation and ISTC had a duty to distribute rightscertificates to all shareholders as of April 16, 1998, except for Ida R.Noll.  Illini Corporation opposedQuinn’s Motion for Summary Judgment, which was heard by the Court on June 18,1999.  On June 29, 1999, the Courtentered 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 her intent toseek an injunction that would preclude Illini Corporation from completing itsacquisition of the Farmers State Bank of Camp Point (Camp Point), pending furtherorder of the Court.  Quinn subsequentlyfiled a Motion for Preliminary Injunction and a Memorandum of Law in Support ofher 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 mergerclosed prior to a determination on the merits of her suit.  Illini Corporation filed extensive briefs inopposition to the Motion for Preliminary Injunction, and the Court heard theMotion on July 1, 1999.  The Courtentered a written Order on July 13, 1999, denying the Motion for PreliminaryInjunction.

 

Quinn’s counsel filed a Motion for Reconsideration ofthe Orders denying Quinn’s Motion for Summary Judgment and Motion forPreliminary Injunction.  IlliniCorporation 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 SummaryJudgment and denied Quinn’s Motion for Reconsideration.  An Order was subsequently entered on January12, 2000.

Quinn’s counsel announced on October 18, 1999, theintention to petition the Court for an order directing Illini Corporation andISTC to pay Quinn’s attorneys’ fees pursuant to the attorney fee provision ofthe Rights Agreement.  Quinn’s feepetition was heard and denied.  Quinnhas filed a pending appeal as to all adverse orders.  The Corporation is vigorously contesting the appeal.  Oral argument was held before the IllinoisAppellate Court for the Fourth District on July 18, 2000.

                On July 31, 2000,the Appellate Court issued an order reversing the trial court’s order grantingsummary judgment to Illini Corporation and remanding the case for trial.  The Appellate Court found that genuine issueof material fact remained concerning whether the Illini Corporation board ofdirectors acted in good faith (1) in determining on April 30, 1998 thatIda Noll’s acquisition of shares w-as inadvertent and (2) in amending theagreement on June 30, 1998.  The AppellateCourt also reversed the trial court’s order denying Quinn’s request for costs,expenses and attorneys fees, finding that the fee provision of the RightsAgreement did not require one who brought an action to enforce the agreement toprevail in that action in order to recover fees.  As of June 30, 2001, Illini Corporation has accrued its bestestimate as a contingency reserve for this litigation to cover expenses andattorneys fees, although such amounts shall be subject to further discovery.

The case has been remanded to the trial court.  The trial court has permitted Quinn to addMrs. Noll as a party to the action. Quinn subsequently filed a motion to compel an additional deposition ofBurnard K. McHone, President, Illini Corporation, with respect to a certainStock Purchase Agreement pursuant to which shares owned by Mrs. Noll’s familywere redeemed by Illini Corporation. The trial court denied the motion to compel finding that Quinn failed toshow any basis that the Stock Purchase Agreement was relevant to her claims inthe lawsuit.  A motion has been filed torequire the addition of a necessary party. A hearing on the motion is set for November 15, 2001.

 

Ida R Noll v. Illini Corporation, et al.,

Sangamon County Case No. 98 MR 226

 

This case is described in Illini Corporation’s AnnualReport on form 10KSB for 2000.   Thecase was dismissed with prejudice on June 3, 2001.

 

Ida R. Noll v. Ernest H. Huls, Illini Corporation, etal,

Sangamon County Case No. 99 CH 196

 

This case is described in Illini Corporation’s AnnualReport on form 10KSB for 2000.   Thecase was dismissed with prejudice on June 13, 2001.

 

Item 2     Changes inSecurities - none

 

Item 3     Defaults Upon SeniorSecurities – none

 

Item 4     Submission ofMatters to a Vote of Security Holders

The Annual Meetingof Shareholders of the Company was held on September 20, 2001, for the purposeof electing five directors each to serve a term of three years and ratifyingthe appointment of two directors to fill unexpired terms and ratifying theappointment of BKD,LLP (formerly known as Olive,LLP) as the Company’sindependent auditors for fiscal year ending December 31, 2001.  Proxies for the meeting were solicited bymanagement pursuant to Regulation 14A under Securities Exchange Act of 1934,and there was no solicitation in opposition to management’s solicitation.

 

   All five of Management’snominees for director listed in the proxy statement were elected.  The results of the vote were as follows:

 

 

 

**Shares**

 

 

 

**Broker**

 

 

 

**Voted**

 

**Shares**

 

**Non**

 

 

 

**“For”**

 

**“Withheld”**

 

**Votes**

 

William McCubbin

 

318,815

 

1,890

 

7,064

 

Burnard K. McHone

 

318,278

 

1,890

 

7,064

 

Robert F. Olson

 

318,944

 

1,890

 

7,064

 

Jane Schachtsiek

 

318,378

 

1,890

 

7,064

 

N.Ronald Thunman

 

318,815

 

1,890

 

7,064

 

 

The appointment of Anthony F. Liberatore and Jesse A. Werner, Jr. tofill the unexpired terms was ratified. The result of the vote were as follows:

 

 

 

**Shares**

 

 

 

 

 

 

 

**Voted**

** **

**Shares**

 

 

** **

 

 

**“For”**

** **

**“Withheld”**

 

**“Abstain”**

** **

 

 

317,819

 

2,303

 

414

 

 

The following persons continued their terms of office as directors ofthe Company following the Annual Meeting: Thomas A. Black, Lawrence B. Curtin,William N. Etherton, John H. Pickrell.

 

The appointment of BKD LLP(formerly know as Olive,LLP)as the Company’sauditors for the fiscal year ending December 31, 2001, was ratified.  The results of the vote were as follows:

 

 

 

**“For”**

 

**“Against”**

 

**“Abstain”**

 

Ratification of BKD,LLP

 

317,320

 

2,128

 

1,088

 

 

Item 5    Other Information- none

 

Item 6    Exhibits and Reportson Form 8-K

 

(a)    Exhibits:

The Exhibits filed herewith are set forth in the Exhibit Index filed asa part of these Form 10-QSB.

 

(b)    Reports on Form 8-K :

There were no reports on Form 8-K filed for the quarter ended September30, 2001.

 

**SIGNATURES**

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

Illini  Corporation

 

 

 

(Registrant)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By:  /s/  Burnard K. McHone

 

November  13, 2001

 

Burnard  K. McHone

 

Date  signed

 

President

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By:  /s/  Deann Hager

 

November  13, 2001

 

Deann  Hager

 

Date  signed

 

Finance  Manager

 

 

 

 

**EXHIBIT INDEX**

 

 

Number

 

Description

 

 

 

(none)

 

(none)

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