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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 June 30, 1995
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Commission file number 0-13343
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Illini Corporation
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(Exact name of registrant as specified in its charter)
Illinois 37-1135429
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
120 Chatham South Road Springfield, Illinois 62704
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(Address of principal executive offices) (Zip Code)
(217) 787-1651
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(Registrant's telephone number, including area code)
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(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
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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 July 31, 1995
<PAGE>
ILLINI CORPORATION
INDEX TO FORM 10-Q
June 30, 1995
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets 3
June 30, 1995 and December 31, 1994
Consolidated Statements of Income 4
Six and Three Months Ended June 30, 1995 and 1994
Consolidated Statements of Cash Flows 5
Six Months Ended June 30, 1995 and 1994
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 8
of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION 15
SIGNATURE PAGE 16
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ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 1995 and December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
June 30 December 31,
1995 1994
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<S> <C> <C>
ASSETS:
Cash and due from banks $ 5,307,510 $ 7,637,207
Federal funds sold 6,345,000 125,000
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Cash and cash equivalents 11,652,510 7,762,207
Investment in debt and marketable equity securities:
Available for sale, at market value 19,996,096 33,043,332
Held to maturity, at amortized cost, estimated market value
of $10,537,033 and $9,219,143 at June 30, 1995 and
December 31, 1994, respectively 10,476,739 10,752,195
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30,472,835 43,795,527
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Loans 105,960,548 99,068,300
Less:
Unearned discount and loan fees 312,569 323,544
Reserve for possible loan losses 1,471,289 1,546,834
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Loans, net 104,176,690 97,197,922
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Premises and equipment 4,122,890 4,163,748
Accrued interest receivable 1,622,177 1,519,771
Other assets 1,511,621 2,072,348
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$ 153,558,723 $ 156,511,523
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LIABILITIES AND SHAREHOLDERS' EQUITY:
Noninterest-bearing demand deposits 19,479,885 21,668,476
Interest-bearing deposits:
NOW and money market accounts 28,775,614 30,417,135
Savings deposits 20,989,455 23,097,415
Time deposits, $100,000 and over 14,299,672 16,081,765
Other time deposits 54,071,343 45,938,684
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Total deposits 137,615,969 137,203,475
Federal funds purchased 0 4,165,000
Securities sold under agreements to repurchase 605,161 641,419
Accrued interest payable 850,167 715,899
Note payable 0 500,000
Other liabilities 721,159 752,863
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Total liabilities 139,792,456 143,978,656
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Shareholders' equity:
Common stock-authorized 800,000 shares of $10
par value; 448,456 shares issued and outstanding at
June 30, 1995 and December 31, 1994 4,484,560 4,484,560
Capital surplus 1,885,913 1,885,913
Retained earnings 7,521,177 7,235,535
Net fair value adjustment for investments in debt and
marketable equity securities available for sale, net of tax (125,383) (1,073,141)
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Total shareholders' equity 13,766,267 12,532,867
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$ 153,558,723 $ 156,511,523
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</TABLE>
See accompanying notes to interim consolidated financial statements.
3
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ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Six and Three Months Ended June 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
1995 1994
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6 Months 3 Months 6 Months 3 Months
----------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $4,529,907 $2,341,633 $4,494,619 $2,236,322
Interest on investment securities:
Taxable 869,870 407,200 900,716 476,324
Exempt from Federal income taxes 251,285 124,755 216,323 112,251
Interest on short term investments 36,826 31,270 57,854 16,586
---------- ---------- ---------- ----------
Total interest income 5,687,888 2,904,858 5,669,512 2,841,483
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits 2,407,352 1,270,241 2,089,619 1,045,803
Interest on Federal funds purchased 33,108 11,244 11,916 6,417
Interest on securities sold under
agreements to repurchase 22,443 11,621 25,320 13,645
Interest on note payable 9,035 739 42,949 20,716
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Total interest expense 2,471,938 1,293,845 2,169,804 1,086,581
---------- ---------- ---------- -----------
Net interest income 3,215,950 1,611,013 3,499,708 1,754,902
Provision for possible loan losses 60,000 30,000 120,000 60,000
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Net interest income after provision
for possible loan losses 3,155,950 1,581,013 3,379,708 1,694,902
Noninterest income 781,176 391,757 704,906 380,250
Noninterest expense 3,299,078 1,656,925 3,207,378 1,594,983
---------- ---------- ---------- -----------
Income before income taxes 638,048 315,845 877,236 480,169
Income tax expense 150,600 80,500 243,000 158,500
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Net income $ 487,448 $ 235,345 $ 634,236 $ 321,669
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Income per common share (based on
weighted average common shares
outstanding of 448,456 for 1995 and
1994): $ 1.09 $ 0.52 $ 1.41 $ 0.72
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
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ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
1995 1994
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 487,448 $ 634,236
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 243,264 228,409
Provision for possible loan losses 60,000 120,000
Securities losses, net 4,036 29,464
Increase in accrued interest receivable (102,406) (126,343)
Increase in accrued interest payable 134,268 18,102
Other, net (144,021) (228,637)
Origination of secondary market mortgage loans (3,120,496) (9,647,549)
Proceeds from the sale of secondary market mortgage loans 2,662,215 10,703,309
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Net cash provided by operating activities 224,308 1,730,991
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Cash flows from investing activities:
Proceeds from sales of debt and marketable equity securities
available for sale 13,409,069 8,068,255
Proceeds from maturities and paydowns of debt securities
available for sale 1,236,014 4,476,953
Proceeds from maturities and paydowns of debt securities
held to maturity 235,000 30,000
Purchases of debt and marketable equity securities
available for sale (287,573) (18,267,496)
Purchases of debt and marketable equity securities
held to maturity 0 (1,856,429)
Net (increase) decrease in loans (6,580,487) 2,524,910
Purchases of premises and equipment (156,786) (210,594)
Proceeds from sales of other real estate 301,328 57,156
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Net cash provided by (used in) investing activities 8,156,565 (5,177,245)
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Cash flows from financing activities:
Net decrease in noninterest-bearing deposit accounts (2,188,591) (2,671,623)
Net increase (decrease) in savings, NOW and money market accounts (3,749,481) 3,727,751
Net decrease in time deposits $100,000 and over (1,782,093) (1,836,395)
Net increase (decrease) in other time deposits 8,132,659 (2,529,564)
Net increase (decrease) in Federal funds purchased (4,165,000) 245,000
Net increase (decrease) in securities sold under
agreements to repurchase (36,258) 82,270
Principal payments on note payable (500,000) (425,000)
Dividends paid (201,806) (78,480)
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Net cash used in financing activities (4,490,570) (3,486,041)
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Net increase (decrease) in cash and cash equivalents 3,890,303 (6,932,295)
Cash and cash equivalents at beginning of period 7,762,207 12,205,523
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Cash and cash equivalents at end of period $ 11,652,510 $ 5,273,228
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Supplemental Information:
Income taxes paid $ 100,000 $ 440,000
Interest paid $ 2,337,670 $ 2,151,702
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Other non-cash investing activities:
Transfer of loans to other real estate $ 43,495 $ 124,534
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</TABLE>
See accompanying notes to interim consolidated financial statements.
5
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ILLINI CORPORATION
Notes to Interim Consolidated Financial Statements (Unaudited)
June 30, 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 of the information and notes required by
generally accepted accounting principles for complete consolidated financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and footnotes included in the Company'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 six and three months ended
June 30, 1995 and 1994 are as follows:
1995 1994
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6 Months 3 Months 6 Months 3 Months
---------- ---------- ---------- -----------
Noninterest income:
Service charges on deposits $ 531,823 $ 264,637 $ 509,005 $ 262,814
Securities losses, net (4,036) (4,036) (29,464) 16,105
Mortgage loan servicing fees 77,540 37,753 73,045 39,399
Gain on sale of mortgage loans 26,804 17,508 76,645 13,041
Other income 149,045 75,895 75,675 48,891
---------- ---------- ---------- ----------
Total noninterest income $ 781,176 $ 391,757 $ 704,906 $ 380,250
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits $1,566,382 $ 793,082 $1,532,972 $ 759,792
Occupancy and equipment
expense 499,794 249,478 500,700 258,378
Data processing 184,090 88,767 173,844 82,022
Insurance 20,436 8,150 19,826 11,150
Directors' fees 76,200 44,600 63,810 32,425
Professional fees 115,052 53,968 160,880 65,241
Regulatory fees 165,541 82,727 169,914 85,798
Supplies 75,166 29,070 75,359 34,375
Other expense 596,417 307,083 510,073 265,802
---------- ---------- ---------- ----------
Total noninterest expense $3,299,078 $1,656,925 $3,207,378 $1,594,983
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
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(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 for
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 significant
impact on the Company's consolidated financial position or results of
operations.
7
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ILLINI CORPORATION AND SUBSIDIARY
For the Six and Three Months Ended June 30, 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.
On July 13, 1995, the Bank entered into an agreement with the Security
National Bank of Witt whereby the Security National Bank agrees to purchase
the assets and assume the deposit liabilities of Illini Bank's Coffeen
branch. As of June 30, 1995, the Coffeen branch had approximately $7,522,000
in assets and approximately $12,493,000 in liabilities. The Security
National Bank is in the process of filing the appropriate applications with
the proper regulatory authorities. Given regulatory approval, Illini's
management expects the transaction to be consummated in late 1995 or early
1996 resulting in a gain of approximately $600,000.
FINANCIAL CONDITION
Total assets decreased from $156,511,523 at December 31, 1994, to
$153,558,723 at June 30, 1995. This represents a decrease of $2,952,800 or
1.89% for the six month period. The decrease in total assets is attributable
to a decrease in both investment in debt and marketable equity securities and
federal funds purchased.
Investment in debt and marketable equity securities decreased $13,322,692 or
30.42% from December 31, 1994 to June 30, 1995. Illini restructured its
investment portfolio by selling several investments in debt securities in the
available for sale category and reinvesting the proceeds into marketable
equity securities held in a professionally managed collective investment
fund. In early 1995, the funds changed its portfolio managers and hence
changed the investment strategy with which the management of Illini did not
agree. As a result, Illini decided to liquidate the funds in the second
quarter of 1995. Proceeds received from the sale totaled $10,176,737
resulting in a net loss of $39,625. Also, Illini decided to sell longer term
available for sale mortgage backed securities in an effort to reduce the
short term borrowing position of the Bank.
Net loans increased $6,978,768 or 7.18% from December 31, 1994. This
increase is primarily a result of an increase in the indirect loan portfolio
as well as the funding of several large commercial and commercial real estate
loans. These loans were funded from the liquidity generated from the
investment portfolio, net of the repayment of $4,165,000 in federal funds
purchased.
Additionally, Federal funds sold increased as a result of the liquidation
of the investment portfolio. As short term rates remain artificially high,
Illini intends to use these short term investments to maximize interest
income as well as provide viable source of liquidity.
Total deposits increased slightly during the first six months of 1995. Total
deposits increased $412,494 or .30% from December 31, 1994 to June 30, 1995.
Significant decreases however, occurred in non-
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interest bearing demand deposits, NOW and money market accounts, and savings
deposits as well as time deposits, $100,000 and over. A notable increase
however, was recognized in the other time deposits. As interest rates
increased during the first six months of the year, Illini's deposit structure
shifted from lower cost deposits including, NOW, money market and savings to
time certificates as a result of a widening interest rate gap between these
deposit products. 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. Volatile liabilities in the form of
time deposits, $100,000 and over decreased $1,782,093 or 11.08%, as Illini
chose not to aggressively bid for such funds.
Also during 1995, Illini continued its plan to reduce the Company's debt. On
April 20, 1995, Illini retired its note payable, leaving the parent company
debt fee.
RESULTS OF OPERATIONS
Illini recorded earnings of $487,448 and $235,345 for the six month and three
month periods ended June 30, 1995, respectively compared to $634,236 and
$321,669 for the same periods in 1994. On a per share basis income was $1.09
for the six months ended June 30, 1995 as compared to $1.41 for the six
months ended June 30, 1994, a decrease of $0.32. Income on a per share basis
decreased $0.20 for the three months ended June 30, 1995 as compared to the
three month period ended June 30, 1994. The annualized return on assets and
return on shareholders' equity for the six months ended June 30, 1995 was
.63% and 7.41% respectively . This compares to an annualized return on
assets and return on shareholders' equity for the same period in 1994 of
.80% and 10.04% respectively.
The decrease in 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 continues to
decrease. Net interest income decreased by $283,758 to $3,215,950 for the
first half of 1995 compared to the first half of 1994 and decreased $143,889
for the three months ending June 30, 1995 compared to the same period in
1994. Illini's net interest margin decreased .15% from 4.66% for the six
months ended June 30, 1994 to 4.51% for the six months ended June 30, 1995.
During 1994 and early 1995, the Federal Open Market Committee increased
interest rates in an effort to control inflation and slow down the economy.
The impact of the increase in rates not only produced an increase in rates
associated with investment securities, but also caused financial institutions
to raise the prime lending rate from 6% to 9%. As interest rates increased,
so also did deposit rates. During the first quarter several new financial
institutions began offering above market rate deposit products in an effort
to increase and maintain marketshare within the Springfield area. This
caused Illini to react in a similar fashion by also increasing deposit rates
to diminish the erosion of Illini's deposit base. On the other hand, Illini
had a large portion of its commercial loan portfolio in adjustable rate and
short term operating loans tied to the Bank's prime lending rate.
Unfortunately, competition forced Illini to renegociate lower interest rate
terms with its borrowers. Illini was faced with either renegociating the
interest rate terms or having the borrowers refinance with other institutions
leaving Illini to reinvest the payoff proceeds into even lower yielding
investment securities. As these interest rate increases have stabilized,
Illini's net interest margin has begun to increase. As opportunity allows,
Illini will continue to restructure both the loan and investment portfolio in
an effort to maximize the net interest margin. While Illini does not expect
the net interest margin to increase to levels achieved during the declining
interest rate environment experienced in 1992 and 1993, management
anticipates a gradual increase in the net interest margin throughout the
remainder of 1995.
Interest income increased $18,376 and $63,375 for the six and three month
periods ended June 30, 1995 compared to the same periods in 1994. Interest
income also increased $121,828 in the second
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quarter of 1995 as compared to first quarter of 1995. While interest rates
increased during 1994 and 1995, average earning assets decreased at a faster
pace than interest rates causing a decrease in interest income during the
first quarter. As higher yielding loan growth increased during 1995,
interest income continued to increase producing higher levels of income in
the second quarter.
Interest expense has increased $302,134 and $207,264 for the six and three
month periods ended June 30, 1995 compared to the same periods in 1994. As
previously mentioned, in the first quarter of 1995, Illini realized a shift
from 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 is a reduction in net interest income.
Other real estate included in other assets decreased from $623,916 at
December 31, 1994 to $394,904 at June 30, 1995. This decrease is largely due
to the sale of other real estate in the first half of 1995. Proceeds received
from this sale totaled $301,328, resulting in a gain of $28,820, which is
included in other noninterest income on the consolidated statements of income.
Net charge offs for the first six months of 1995 were $135,546 compared to
$13,645 for the same period in 1994, an increase of $121,901. Nonperforming
loans decreased, $197,000 or 19.18% from $1,027,000 at December 31, 1994 to
$830,000 at June 30, 1995. The reserve for possible loan losses as a
percentage of nonperforming loans was 177.26% at June 30, 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 $60,000 for the
six month period ended June 30, 1995, compared to $120,000 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 as
deemed necessary.
Noninterest income increased $76,270 and $11,507 for the six and three month
periods ended June 30, 1995, as compared to the same periods in 1994.
Service charges on deposits continue to increase and servicing fees
associated with the FNMA fixed rate loan program remain strong through the
first half of 1995. Other income increased $73,370 from the six month
period ended June 30, 1995 as compared to the six month period ended June 30,
1994. During 1995, Illini instituted a new credit card program which
generated merchants fees totaling $14,193. Illini also recognized a net gain
of $28,820 from the sale of other real estate during the first six months of
1995. In addition, Illini recognized increases in safe deposit rental income,
line of credit fees, and a one time recovery of loan fees previously deemed
uncollectable. Illini also recognized net securities losses of $4,036 in
conjunction with the liquidation and restructuring of the investment
portfolio.
Noninterest expense increased $91,700 for the six month period and $61,942
for the three month period ended June 30, 1995, compared to the same periods
in 1994. Increases in expenses have been recognized in salaries and employee
benefits, data processing,, insurance, and directors fees. Other expenses
which includes marketing and promotions also increased in the first six
months of 1995 as a result of management's continuing effort to increase the
market share of Illini Bank. Offsetting these increases, Illini experienced a
decrease in occupancy and equipment expense, professional fees, regulatory
fees, and supplies in the first half of 1995 as compared to the same period
in 1994. The
10
<PAGE>
decrease in professional fees is a direct result of a decrease in legal fees.
As a result of an improvement in the quality of the loan portfolio and a
reduction in delinquent loans, legal fees have diminished.
Lower income taxes for 1995 are the 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 and sales.
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 declared and paid a regular quarterly
dividend of 22.5 cents per share in both the first and second quarter of
1995. On July 26, 1995 the Board of Directors also declared a third quarter
dividend payable to shareholders of record August 31, 1995 payable on
September 15, 1995 in the amount of 22.5 cents per share.
The consolidated statements of cash flows shows cash provided by and used in
Illini's operating, investing and financing activities. As the statements
reflects, Illini had a net increase in cash and cash equivalents of
$3,890,303 for the six months ended June 30, 1995 as compared to net decrease
in cash and cash equivalents of $6,932,295 for the six months ended June 30,
1994. Net cash provided by operating activities was $224,308 in 1995
compared to $1,730,991 in 1994. Net cash provided by investing activities
was $8,156,565 in 1995 as compared with net cash used in investing activities
of $5,177,245 in 1994. This reflects the substantial decrease in net
investments as a result of the liquidation of the marketable equity
securities as well as the proceeds received from the sale of available for
sale mortgage back securities and maturities within the portfolio. Net cash
provided by the proceeds from the investment portfolio was offset by the net
increase in loans of $6,580,487. Net cash used in financing activities was
$4,490,570 for the six month period ending June 30, 1995 compared to net cash
used in financing activities of $3,486,041 for the same period in 1994. The
negative cash flow from financing activities for 1995 is the result of a
decrease in federal funds purchased, time deposits, $100,000 and over, and
the retirement of the note payable. In addition, Illini recognized a shift
from noninterest-bearing deposits and lower cost deposits including NOW,
money market and savings accounts to other time deposits.
The cash flow statement is a valuable management tool for determining cash
needs. Management believes that the numbers 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.
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 was 9.05% at June 30, 1995
and 8.70% at
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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 stockholder's 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 least 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. As of 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 June 30,1995, Illini and the Bank are 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, insured depository institutions such as the Bank
are classified into one of five capital zones based on the institution's
capital levels.
<TABLE>
<CAPTION>
Minimum Capital Ratios
-------------------------------------------
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 * * *
</TABLE>
* A critically undercapitalized institution is defined as having a 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
institutions 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 June 30, 1995, the Bank's total risk-based capital
ratio was 13.91%. The Bank's tier 1 risk-based capital ratio and tier 1
leveraged ratio was 13.80%. Based upon these capital ratios, the Bank is
considered "well capitalized."
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
12
<PAGE>
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 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.
The 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 the 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 to allow approximately equal amounts of assets and
liabilities to reprice at the same time, 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 June 30, 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 $ 20,047 $ 11,234 $ 18,379 $ 53,401 $ 2,900
Investments in debt and
marketable equity securities 5,687 3,619 5,141 14,465 1,561
Other interest-earning assets 6,345 -- -- -- --
-------- -------- -------- -------- --------
Total Interest-earning Assets $ 32,079 $ 14,853 $ 23,520 $ 67,866 $ 4,461
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Interest-bearing Liabilities
Savings, NOW, and money
market accounts $ 49,765 -- -- -- --
Time deposits 19,302 11,221 21,939 15,785 124
Federal funds purchased -- -- -- -- --
Securities sold under
agreements to repurchase 355 -- 150 100 --
-------- -------- -------- -------- --------
Total Interest-bearing Liabilities $ 69,422 $ 11,221 $ 22,089 $ 15,885 $ 124
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Gap by Period $(37,343) $ 3,632 $ 1,431 $ 51,981 $ 4,337
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Cumulative Gap $(37,343) $(33,711) $(32,280) $ 19,701 $ 24,038
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
13
<PAGE>
As indicated in this table, Illini operates on a short-term basis similar to
most other financial institutions, as its liabilities, with savings, NOW, and
money market 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.
During moderate interest rate movements, 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. However, should significant interest
rate changes occur over a short period of time, such as happened in 1994 and
1995, Illini's net interest margin will be subject to increased volatility
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 changes in the expected rate of
inflation and to changes in monetary and fiscal policy.
Inflation, however, does have an impact on the growth of total assets in the
banking industry, often resulting in a need to increase capital at higher
than normal rates to maintain an appropriate capital to asset ratio.
14
<PAGE>
PART II. OTHER INFORMATION
ILLINI CORPORATION AND SUBSIDIARY
June 30, 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 - none
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
June 30, 1995.
15
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
June 30, 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 K. McHone Date signed
President
----------------------------- ---------------------------
Jeffrey A. Cole Date signed
Chief Financial Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 5,307,510
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,345,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,996,096
<INVESTMENTS-CARRYING> 10,476,729
<INVESTMENTS-MARKET> 10,537,033
<LOANS> 105,647,979
<ALLOWANCE> 1,471,289
<TOTAL-ASSETS> 153,558,733
<DEPOSITS> 137,615,969
<SHORT-TERM> 605,161
<LIABILITIES-OTHER> 1,571,326
<LONG-TERM> 0
<COMMON> 4,484,560
0
0
<OTHER-SE> 9,281,767
<TOTAL-LIABILITIES-AND-EQUITY> 153,558,723
<INTEREST-LOAN> 4,529,907
<INTEREST-INVEST> 1,121,155
<INTEREST-OTHER> 36,826
<INTEREST-TOTAL> 5,687,888
<INTEREST-DEPOSIT> 2,407,352
<INTEREST-EXPENSE> 2,471,938
<INTEREST-INCOME-NET> 3,215,950
<LOAN-LOSSES> 60,000
<SECURITIES-GAINS> (4,036)
<EXPENSE-OTHER> 3,299,078
<INCOME-PRETAX> 638,048
<INCOME-PRE-EXTRAORDINARY> 638,048
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 487,448
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 8.05
<LOANS-NON> 830,000
<LOANS-PAST> 184,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,546,834
<CHARGE-OFFS> 168,351
<RECOVERIES> 32,806
<ALLOWANCE-CLOSE> 1,471,289
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
