<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1995
---------------------------
Commission file number 0-13343
-----------------------
Illini Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Illinois 37-1135429
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
120 South Chatham Road Springfield, Illinois 62704
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(217) 787-1651
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 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
----- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13, or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
448,456 shares of $10 par value common stock as of March 31, 1995
1
<PAGE>
ILLINI CORPORATION
INDEX TO FORM 10-Q
MARCH 31, 1995
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets 3
March 31, 1995 and December 31, 1994
Consolidated Statements of Income 4
Three Months Ended March 31, 1995 and 1994
Consolidated Statements of Cash Flows 5
Three Months Ended March 31, 1995 and 1994
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 8
of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION 14
SIGNATURE PAGE 15
2
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1995 AND DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 5,622,726 $ 7,637,207
Federal funds sold 0 125,000
------------ ------------
Cash and cash equivalents 5,622,726 7,762,207
Investment in debt and marketable equity securities:
Available for sale, at market value 33,604,950 33,043,332
Held to maturity, at amortized cost, estimated market
value of $10,364,924 and $9,219,143 at March 31, 1995 and
December 31, 1994, respectively 10,509,354 10,752,195
------------ ------------
44,114,304 43,795,527
------------ ------------
Loans 100,867,639 99,068,300
Less:
Unearned discount and loan fees 320,297 323,544
Reserve for possible loan losses 1,490,995 1,546,834
------------ ------------
Loans, net 99,056,347 97,197,922
------------ ------------
Premises and equipment 4,149,897 4,163,748
Accrued interest receivable 1,546,457 1,519,771
Other assets 1,840,413 2,072,348
------------ ------------
$156,330,144 $156,511,523
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Noninterest-bearing demand deposits 18,680,205 21,668,476
Interest-bearing deposits:
NOW and money market accounts 29,120,699 30,417,135
Savings deposits 22,247,756 23,097,415
Time deposits, $100,000 and over 15,422,333 16,081,765
Other time deposits 52,271,185 45,938,684
------------ ------------
Total deposits 137,742,178 137,203,475
Federal funds purchased 3,500,000 4,165,000
Securities sold under agreements to repurchase 348,692 641,419
Accrued interest payable 752,817 715,899
Note payable 150,000 500,000
Other liabilities 588,647 752,863
------------ ------------
Total liabilities 143,082,334 143,978,656
------------ ------------
Shareholders' equity:
Common stock-authorized 800,000 shares of $10
par value; 448,456 shares issued and outstanding at
March 31, 1995 and December 31, 1994 4,484,560 4,484,560
Capital surplus 1,885,913 1,885,913
Retained earnings 7,386,735 7,235,535
Net fair value adjustment for investments in debt and
marketable equity securities available for sale, net
of tax (509,398) (1,073,141)
------------ ------------
Total shareholders' equity 13,247,810 12,532,867
------------ ------------
$156,330,144 $156,511,523
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Interest income:
Interest and fees on loans $2,188,274 $2,258,297
Interest on investment securities:
Taxable 462,670 424,392
Exempt from Federal income taxes 126,530 104,072
Interest on short term investments 5,556 41,268
---------- ----------
Total interest income 2,783,030 2,828,029
---------- ----------
Interest expense:
Interest on deposits 1,137,111 1,043,816
Interest on federal funds purchased 21,864 5,499
Interest on securities sold under agreements to repurchase 10,822 11,675
Interest on note payable 8,296 22,233
---------- ----------
Total interest expense 1,178,093 1,083,223
---------- ----------
Net interest income 1,604,937 1,744,806
Provision for possible loan losses 30,000 60,000
---------- ----------
Net interest income after provision
for possible loan losses 1,574,937 1,684,806
Noninterest income 389,418 324,656
Noninterest expense 1,642,152 1,612,395
---------- ----------
Income before income taxes 322,203 397,067
Income tax expense 70,100 84,500
---------- ----------
Net income $ 252,103 $ 312,567
---------- ----------
---------- ----------
Income per common share (based on
weighted average common shares
outstanding of 448,456 for 1995 and 1994): $ 0.56 $ 0.70
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
----------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 252,103 $ 312,567
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 122,375 115,492
Provision for possible loan losses 30,000 60,000
Securities losses, net 0 45,569
(Increase) decrease in accrued interest receivable (26,686) 5,390
Increase in accrued interest payable 36,918 411,992
Other, net (238,278) (285,895)
Origination of secondary market mortgage loans (1,148,715) (6,111,614)
Proceeds from the sale of secondary market
mortgage loans 866,668 6,687,884
----------- ------------
Net cash (used in) provided by operating activities (105,615) 1,241,385
----------- ------------
Cash flows from investing activities:
Proceeds from sales of debt and marketable equity securities
available for sale 0 7,166,390
Proceeds from maturities and paydowns of debt securities
available for sale 515,805 4,267,840
Proceeds from maturities and paydowns of debt securities
held to maturity 220,000 0
Purchases of debt and marketable equity securities
available for sale (287,573) (11,539,243)
Purchases of debt and marketable equity securities
held to maturity 0 (1,233,775)
Net (increase) decrease in loans (1,606,378) 3,335,441
Purchases of premises and equipment (85,714) (67,845)
Proceeds from sales of other real estate 79,921 57,156
----------- ------------
Net cash (used in) provided by investing activities (1,163,939) 1,985,964
----------- ------------
Cash flows from financing activities:
Net decrease in noninterest-bearing deposit accounts (2,988,271) (1,428,295)
Net increase (decrease) in savings, NOW, and money market
accounts (2,146,095) 2,282,425
Net increase (decrease) in time deposits $100,000 and over (659,432) 267,431
Net increase (decrease) in other time deposits 6,332,501 (1,864,677)
Net decrease in Federal funds purchased (665,000) (335,000)
Net decrease in securities sold under
agreements to repurchase (292,727) (537,675)
Principal payments on note payable (350,000) (100,000)
Dividends paid (100,903) 0
----------- ------------
Net cash used in financing activities (869,927) (1,715,791)
----------- ------------
Net increase (decrease) in cash and cash equivalents (2,139,481) 1,511,558
Cash and cash equivalents at beginning of period 7,762,207 12,205,523
----------- ------------
Cash and cash equivalents at end of period $ 5,622,726 $ 13,717,081
----------- ------------
----------- ------------
Supplemental Information:
Income taxes paid $ 100,000 $ 150,000
Interest paid $ 1,141,175 $ 671,231
Other noncash investing activities:
Transfer of loans to other real estate $ 31,495 $ 0
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE>
ILLINI CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ENDED MARCH 31, 1995
(1) BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and,
therefore, do not include all 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 Illini's Annual Report on Form 10-K for
the year ended December 31, 1994.
(2) NONINTEREST INCOME AND EXPENSE
Details of noninterest income and expense for the three months ended
March 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Noninterest income:
Service charges on deposits $ 267,186 $ 246,191
Securities losses, net -- (45,569)
Mortgage loan servicing fees 38,528 33,646
Gain on sale of mortgage loans 9,296 63,604
Other income 74,408 26,784
---------- ----------
Total noninterest income $ 389,418 $ 324,656
---------- ----------
Noninterest expense:
Salaries and employee
benefits $ 773,300 $ 773,180
Occupancy and equipment
expense 250,316 242,322
Data processing 95,323 91,822
Insurance 12,286 8,676
Directors' fees 31,600 31,385
Professional fees 61,084 95,639
Regulatory fees 82,814 84,116
Supplies 46,096 40,984
Other expense 289,333 244,271
---------- ----------
Total noninterest expense $1,642,152 $1,612,395
---------- ----------
---------- ----------
</TABLE>
6
<PAGE>
(3) NEW ACCOUNTING STANDARDS
Effective January 1, 1995 the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan: (SFAS 114) and Statement
of Financial Accounting Standards No. 118, "Accounting by Creditors of
Impairment of a Loan - Income Recognition and Disclosures" (SFAS 118) which
amends SFAS 114.
SFAS 114 (as amended by SFAS 118) defines the recognition criterion for loan
impairment and the measurement methods for certain impaired loans and loans
whose terms have been modified in troubled debt restructurings ("a
restructured loan"). Specifically, a loan is considered impaired when it is
probable a creditor will be unable to collect all amounts due - both
principal and interest - according to the contractual terms of the loan
agreement. When measuring impairment, the expected future cash flows of an
impaired loan are required to be discounted at the loan's effective interest
rate. Alternatively, impairment can be measured by reference to an
observable market price, if one exists, or the fair value of the collateral
for a collateral-dependent loan. Regardless of the measurement method used
historically, SFAS No. 114 requires a creditor to measure impairment based on
the fair value of the collateral when the creditor determines foreclosure is
probable. Additionally, impairment of a restructured loan is measured by
discounting the total expected future cash flow at the loan's effective rate
of interest as stated in the original loan agreement.
SFAS 118 amended SFAS 114 to allow a creditor to use existing methods for
recognizing interest income on an impaired loan. The Company has elected to
continue to use its existing nonaccrual methods for recognizing interest on
impaired loans. Illini continues to apply all payments received on impaired
loans to the outstanding balance of the loan until such time as the loan
balance is reduced to zero, after which payments are applied to interest
income until such time as the forgone interest is recovered.
The impact of initially applying SFAS 114 and SFAS 118 had no impact on the
Company's consolidated financial position or results of operations.
7
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Headquartered in Springfield, Illinois, Illini Corporation (Illini) is a bank
holding company which was organized under the laws of the State of Illinois
in 1983. Illini owns and operates one wholly owned subsidiary bank, Illini
Bank (the Bank). The Bank maintains 18 offices serving the central Illinois
area. The following discussion and related financial information is intended
to aid in understanding the financial position and results of operations of
Illini and the Bank as of and for the periods presented.
FINANCIAL CONDITION
Total assets decreased from $156,511,523 at December 31, 1994, to
$156,330,144 at March 31, 1995. This represents a decrease of $181,379 or
.12% for the three month period.
The slight decrease in total assets is attributable primarily to a decrease
in cash and cash equivalents offset by an increase in net loans and
investment securities. Net loans increased $1,858,425 or 1.91% from December
31, 1994. This increase is primarily a result of an increase in the indirect
consumer loan portfolio.
Investment in debt and marketable equity securities increased $318,777 or
.73% from December 31, 1994. Improving market conditions during the first
quarter positively impacted the carrying value of the available for sale debt
and marketable equity securities of the Bank. This resulted in the increase
in investments in debt and equity securities.
Cash and due from banks and federal funds sold both decreased during the
period. Excess funds provided by a reduction in cash and cash equivalents
were used to fund the increased loan growth.
Total deposits also increased $538,703 from December 31, 1994 to March 31,
1995. Significant decreases occurred in non-interest bearing deposits as
well as the lower cost NOW, money market and savings account deposits. Other
time deposits, however increased $6,332,501 or 13.78% from year end 1994. As
a result of the increasing interest rate environment, Illini has experienced
a shift from lower cost deposits to fixed maturity certificates of deposits.
The decrease in the noninterest-bearing deposits was a direct result of a
decrease in public fund deposits and retail deposits from their generally
higher year end totals. In addition, time deposits, $100,000 and over have
also decreased due to management's desire to not aggressively bid for such
deposits in an effort to reduce the Bank's volatile liability dependency
ratio.
While Illini is still utilizing short term borrowings in the form of Federal
funds purchased and securities sold under agreements to repurchase to fund
loans and investments in debt and marketable equity securities, short term
borrowings have decreased $957,727 from December 31, 1994.
During the first quarter of 1995, the management of Illini continued to
reduce the note payable. On April 20, 1995, this note payable was retired,
leaving the parent company debt free.
8
<PAGE>
RESULTS OF OPERATIONS
Illini recorded earnings of $252,103 for the first quarter of 1995, a
decrease from the $312,567 recorded for the same period in 1994. On a per
share basis, net income was $0.56 and $0.70 for the first quarter of 1995 and
1994, respectively. The annualized return on assets and return on
shareholders' equity for the three months ended March 31, 1995 was .65% and
7.93% respectively. This compares to an annualized return on assets and
return on shareholders' equity for the same period in 1994 of .78% and 9.90%
respectively.
The decrease in the net income is attributable to the decrease in net
interest income, Illini's primary source of earnings. Illini's net interest
income, the difference between interest income and interest expense decreased
by $139,869 to $1,604,937 in the first quarter of 1995 from $1,744,806 in the
first quarter of 1994.
Interest income decreased by $44,999 for the three months ended March 31,
1995 compared to the first quarter of 1994. While interest rates increased
during 1994 and the first quarter of 1995, average earning assets decreased
causing the decrease in interest income. Also, decreases in higher earning
loans have resulted in a shift into lower yielding investment securities.
Interest expense also increased $94,870 for the three month period ended
March 31, 1995 compared to the same period in 1994. As previously mentioned,
in the first quarter of 1995, Illini realized a shift from the lower cost
interest bearing transaction accounts, money market accounts, and savings
deposits into higher cost time deposits resulting in the significant increase
in interest expense. While Illini experienced a reduction in both interest
earning assets and interest bearing liabilities, interest bearing liabilities
continue to reprice at higher interest rate levels as compared to the
corresponding interest earning assets. The effect of which was a reduction
in net interest income.
Other real estate included in other assets decreased from $623,916 at
December 31, 1994 to $575,290 at March 31, 1995. This decrease is largely
due to the sale of other real estate during the first quarter. Proceeds
received from the sales totaled $79,921, resulting in a net gain of $30,753,
which is included in other noninterest income on the consolidated statements
of income.
Net charge-offs for the first quarter of 1995 were 85,839 compared to 12,843
for the same period in 1994. Non-performing loans decreased $260,000 or
25.32% from $1,027,000 at December 31, 1994 to $767,000 at March 31, 1995.
The reserve for possible loan losses as a percentage of non-performing loans
was 194.39% at March 31, 1995, a significant improvement over 150.62%
attained at December 31, 1994. As the quality of assets improves, the need
for an increased provision for possible loan losses has diminished. The
provision for possible loan losses was $30,000 for the three month period
ended March 31, 1995, compared to $60,000 for the same period in 1994. The
provisions for 1995 and 1994 are results of management's efforts to maintain
the reserve for possible loan losses at targeted levels, adequate for the
risks associated with the loan portfolio, and to do so in a regular fashion
throughout the year. Management will continue to analyze the adequacy of the
reserve for possible loan losses on a quarterly basis and will continue to
make provisions to the reserve for possible loan losses at levels deemed
necessary.
Noninterest income increased by $64,762 for the three month period ended
March 31, 1995, as compared to the same period in 1994. This increase is a
result of a gain on the sale of other real estate coupled with securities
losses recognized in the first quarter of 1994 as the management of Illini
began
9
<PAGE>
to restructure the investment portfolio in an effort to manage the interest
sensitivity risk associated with the Company's balance sheet. Service
charges on deposits continue to increase and servicing fees associated with
the FNMA fixed rate loan program remains strong through the first quarter.
Noninterest expense increased $29,757 for the three month period ended March
31, 1995, compared to the same period in 1994. Slight increases in expenses
have been recognized in salaries and employee benefits, occupancy and
equipment, data processing, insurance, director fees, and supplies. Other
expenses which include advertising, marketing and promotions increased in the
first quarter of 1995 as compared to the same period in 1994 as a direct
result of management's continuing effort to increase the market share of the
Illini Bank. Offsetting these increases, Illini experienced a decrease in
professional and regulatory fees in the first quarter of 1995 as compared to
the first quarter in 1994.
Lower income taxes is a result of a decrease in federal and state taxable
income recorded in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of an enterprise to generate adequate amounts of
cash to meet the enterprise's needs for cash. Liquidity has both short term
and long term aspects, and involves both internal and external sources of
cash.
Internal sources of cash for Illini include cash and cash equivalents, which
also include federal funds sold. External sources of cash include principal
collected on loans and new customer deposits, as well as investment
maturities.
During the first quarter of 1994, the Board of Directors of Illini approved a
resolution to adopt the payment of quarterly dividends. Prior to 1994,
Illini's policy was to pay a dividend once annually. In keeping with this
policy, the Board of Directors approved a regular quarterly dividend on
January 25, 1995 to shareholders of record February 28, 1995 payable on March
15, 1995 in the amount of 22.5 cents per share.
The consolidated statement of cash flows shows cash provided by and used in
Illini's operating, investing and financing activities. As the statement
reflects, Illini had a net decrease in cash and cash equivalents of
$2,139,481 for the three months ended March 31, 1995 as compared to a net
increase of $1,511,558 for the same three months in 1994. Net cash used in
operations was $105,615 for 1995 compared to net cash provided by operations
of $1,241,385 in 1994. Net cash used in investing activities was $1,163,939
for 1995 as compared to net cash provided by investing activities of
$1,985,964 in 1994. This reflects the increase in net loans. Net cash used
in financing activities was $869,927 for the three month period ending March
31, 1995 compared to $1,715,791 for the same period in 1994. The negative
cash flow from financing activities for 1995 is the result of a significant
decrease in noninterest-bearing deposits, savings, NOW and money market
deposit accounts, offset by an increase in other time deposits. Decreases in
time deposits, $100,000 and over, federal funds purchased, securities sold
under agreements to repurchase and notes payable also attributed to the
negative cash flow in the first quarter of 1995.
The cash flow statement is a valuable management tool for determining cash
needs. Management believes that the amounts reflected therein indicate that
Illini is currently able to meet its cash needs. Management also anticipates
that Illini will be able to meet future cash needs through careful planning
and monitoring using the cash flow statement and other management tools.
10
<PAGE>
Capital levels and ratios are tracked by bank regulators and analysts as
indicators of capital adequacy. Illini's capital to asset ratio which
excludes the Net fair value adjustment for investments in debt and marketable
equity securities available for sale, net of tax adjustment was 8.80% at
March 31, 1995 and 8.69% at December 31, 1994. Illini has looked primarily
to retained earnings to build its capital. Management anticipates that any
future cash dividends will be modest, to the extent that they will allow
Illini to maintain adequate capital levels.
The Federal Reserve Board established risk-based capital guidelines for bank
holding companies effective March 15, 1989. The guidelines define Tier 1
Capital and Total Capital. Tier 1 Capital consists of common and qualifying
preferred shareholders' equity and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and 50% of investments in
unconsolidated subsidiaries. Total Capital consists of, in addition to Tier 1
Capital, mandatory convertible debt, preferred stock not qualifying as Tier 1
Capital, subordinated and other qualifying term debt and a portion of the
reserve for possible loan losses less the remaining 50% of investments in
unconsolidated subsidiaries. The Tier 1 component must comprise at lease 50%
of qualifying Total Capital. Risk-based capital ratios are calculated with
reference to risk-weighted assets, which include both on-and-off balance
sheet exposures. Effective December 31, 1992, the minimum required
qualifying total capital ratio is 8%, of which at least 4% must consist of
Tier 1 Capital.
As of March 31, 1995 Illini and the Bank are both in compliance with the Tier 1
Capital ratio requirement and all other applicable regulatory capital
requirements, as calculated in accordance with the risk-based capital
guidelines.
Effective December 19, 1992, as mandated by the Federal Deposit Insurance
Corporation Improvement Act (discussed below), insured depository
institutions such as the Bank are classified into one of five capital zones
based on the institution's capital levels.
MINIMUM CAPITAL RATIOS
<TABLE>
<CAPTION>
Total Tier 1 Tier 1
risk-based risk-based leveraged
ratio ratio ratio
---------- ---------- ---------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8 4 4
Undercapitalized < 8 < 4 < 4
Significantly undercapitalized < 6 < 3 < 3
Critically undercapitalized * * *
<FN>
* A critically undercapitalized institution is defined as having tangible
equity to total assets ratio of 2% or less. The capital levels maintained by
an insured depository institution are/will be used in determining the
institution's ability to act without prior consent of the FDIC in areas such
as dividend payments, compensation, and material transactions, etc. The
capital zone of an institution also determines the insurance premium which is
assessed thereon. At March 31, 1995, the Bank was considered "well
capitalized."
</TABLE>
11
<PAGE>
INTEREST RATE SENSITIVITY
Interest rate sensitivity is a function of the repricing characteristics of a
bank holding company's portfolio of interest-earning assets and
interest-bearing liabilities. A bank holding company such as Illini is
sensitive to changes in interest rates when interest-earning assets and
interest-bearing liabilities, which are due to reprice within a given time
period, are not equal. Various interest rate sensitive assets and
liabilities are responsive to market interest rate fluctuations to varying
degrees, and this must be considered along with the quantity of assets and
liabilities which will reprice within a given time period.
Illini's management regularly reviews its asset/liability strategy. At
times, Illini will selectively mismatch the repricing of certain asset and
liability time frames to take advantage of short-term interest rate swings.
Illini Bank controls its own asset/liability mix within the constraints of
its individual loan and deposit structure. The Bank uses its investment
portfolio in conjunction with its loan and deposit needs in an effort to
maximize benefits of investment decisions based upon consolidated tax,
liquidity, and market concentration positions.
The asset/liability management process, which involves structuring the
consolidated balance sheet is a dynamic process essential to minimize the
effect of fluctuating interest rates on net interest income.
The following table reflects Illini's interest rate gap (rate-sensitive
assets minus rate-sensitive liabilities) analysis as of March 31, 1995,
individually and cumulatively, through various time horizons (in thousands of
dollars):
<TABLE>
<CAPTION>
Contractual Repayment Schedule if Fixed Rate;
Earliest Possible Repricing Interval if Floating Rate
---------------------------------------------------------------
Over 3 Over 6 Over 1
3 months months year
months through through through Over 5
or less 6 months 12 months 5 years years
---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Interest-earning Assets
Loans $ 19,556 $ 8,353 $ 16,028 $ 53,996 $ 2,935
Investments in debt and
marketable equity securities 17,261 2,010 6,895 15,988 1,960
Other interest-earning assets -- -- -- -- --
--------- --------- -------- -------- --------
Total Interest-earning Assets $ 36,817 $ 10,363 $ 22,923 $ 69,984 $ 4,895
--------- --------- -------- -------- --------
--------- --------- -------- -------- --------
Interest-bearing Liabilities
Savings, NOW, and money
market accounts $ 51,368 -- -- -- --
Time deposits 21,148 14,558 13,176 18,771 41
Federal funds purchased 3,500 -- -- -- --
Securities sold under
agreements to repurchase 150 99 -- 100 --
Note payable 150 -- -- -- --
--------- --------- -------- -------- --------
Total Interest-bearing Liabilities $ 76,316 $ 14,657 $ 13,176 $ 18,871 $ 41
--------- --------- -------- -------- --------
--------- --------- -------- -------- --------
Gap by Period $ (39,499) $ (4,294) $ 9,747 $ 51,113 $ 4,854
--------- --------- -------- -------- --------
--------- --------- -------- -------- --------
Cumulative Gap $ (39,499) $ (43,793) $(34,046) $ 17,067 $ 21,921
--------- --------- -------- -------- --------
--------- --------- -------- -------- --------
</TABLE>
12
<PAGE>
As indicated in this table, Illini operates on a short-term basis similar to
most other financial institutions, as its liabilities, with savings and NOW
accounts included, typically reprice more quickly than its assets. However,
the process of asset/liability management in a financial institution is
dynamic and subject to economic events not easily predicted. Illini believes
its current asset/liability management program will allow adequate reaction
time for trends in the market place as they occur, minimizing the negative
impact of such trends on net interest margins.
In the first quarter of 1994, the management of Illini made a decision to
sell several available for sale debt securities and reinvest the proceeds
into marketable equity securities held in professionally managed collective
investment funds which are managed by the Piper Trust Funds, Inc. The two
types of funds in which Illini has invested are the short duration fund and
the intermediate duration fund with approximately 80% of the investment in
the short duration fund. The decision to invest in these funds was primarily
to help hedge the interest rate risk associated with Illini's liability
sensitive balance sheet in a rising rate environment. Management believes
this type of strategy will soften the impact of a shrinking net interest
margin as interest rates increase.
EFFECTS OF INFLATION
The effects of inflation on financial institutions are different from the
effects on other commercial enterprises since financial institutions make few
significant capital or inventory expenditures which are directly affected by
changing prices. Because bank assets and liabilities are virtually all
monetary in nature, inflation does not affect a financial institution as much
as changes in interest rates. The general level of inflation does, in fact,
underlie the general level of most interest rates, however, interest rates do
not increase at the rate of inflation as do the prices of goods and services.
Rather, interest rates react more to the changes in the expected rate of
inflation and to changes in monetary and fiscal policy.
Inflation, however, does have an impact on the growth of total assets in the
banking industry, often resulting in a need to increase capital at higher
than normal rates to maintain appropriate capital to asset ratios.
13
<PAGE>
PART II. OTHER INFORMATION
ILLINI CORPORATION AND SUBSIDIARY
MARCH 31, 1995
Item 1 LEGAL PROCEEDINGS
Various legal claims have arisen in the normal course of business,
which, in the opinion of Illini management and legal counsel, will
not result in any material liability to Illini.
Item 2 CHANGES IN SECURITIES - none
Item 3 DEFAULTS UPON SENIOR SECURITIES - none
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The election of six Directors, each of whom is to hold office for a
term of three years and until their successors have been duly elected
and qualified.
The matter of the election of directors brought to a vote before
the shareholders was approved by a consenting majority at Illini's
Annual Meeting held on April 20, 1995.
Item 5 OTHER INFORMATION - none
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(A) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended
March 31, 1995.
14
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
MARCH 31, 1995
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Illini Corporation by
- ------------------------ ------------
Burnard McHone Date signed
President
- ------------------------ -----------
Jeffrey A. Cole Date signed
Chief Financial Officer
15
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