<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 September 30, 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 Chatham South Road Springfield, Illinois 62704
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(217) 787-1651
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 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 October 31, 1995
<PAGE>
ILLINI CORPORATION
INDEX TO FORM 10-Q
September 30, 1995
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets 3
September 30, 1995 and December 31, 1994
Consolidated Statements of Income 4
Nine and Three Months Ended September 30, 1995 and 1994
Consolidated Statements of Cash Flows 5
Nine Months Ended September 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
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30 December 31,
1995 1994
------------- -------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 6,786,709 $ 7,637,207
Federal funds sold 1,710,000 125,000
------------- -------------
Cash and cash equivalents 8,496,709 7,762,207
Investment in debt and marketable equity securities:
Available for sale, at market value 18,782,334 33,043,332
Held to maturity, at amortized cost, estimated market value
of $10,587,753 and $9,219,143 at September 30, 1995 and
December 31, 1994, respectively 10,458,862 10,752,195
------------- -------------
29,241,196 43,795,527
------------- -------------
Loans 110,398,259 99,068,300
Less:
Unearned discount and loan fees 334,813 323,544
Reserve for possible loan losses 1,439,664 1,546,834
------------- -------------
Loans, net 108,623,782 97,197,922
------------- -------------
Premises and equipment 4,289,555 4,163,748
Accrued interest receivable 1,905,465 1,519,771
Other assets 1,610,122 2,072,348
------------- -------------
$ 154,166,829 $ 156,511,523
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Noninterest-bearing demand deposits 20,369,890 21,668,476
Interest-bearing deposits:
NOW and money market accounts 27,353,178 30,417,135
Savings deposits 21,667,898 23,097,415
Time deposits, $100,000 and over 13,698,586 16,081,765
Other time deposits 55,226,202 45,938,684
------------- -------------
Total deposits 138,315,754 137,203,475
Federal funds purchased 0 4,165,000
Securities sold under agreements to repurchase 250,000 641,419
Accrued interest payable 865,934 715,899
Note payable 0 500,000
Other liabilities 775,141 752,863
------------- -------------
Total liabilities 140,206,829 143,978,656
------------- -------------
Shareholders' equity:
Common stock-authorized 800,000 shares of $10
par value; 448,456 shares issued and outstanding 4,484,560 4,484,560
Capital surplus 1,885,913 1,885,913
Retained earnings 7,708,369 7,235,535
Net fair value adjustment for investments in debt and
marketable equity securities available for sale, net of tax (118,842) (1,073,141)
------------- -------------
Total shareholders' equity 13,960,000 12,532,867
------------- -------------
$ 154,166,829 $ 156,511,523
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
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ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBEr 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
9 MONTHS 3 MONTHS 9 Months 3 Months
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 7,059,603 $ 2,529,696 $ 6,750,654 $ 2,256,035
Interest on investment securities:
Taxable 1,139,467 269,597 1,372,303 471,587
Exempt from Federal income taxes 375,257 123,972 334,841 118,518
Interest on short term investments 105,997 69,171 64,181 6,327
----------- ----------- ----------- -----------
Total interest income 8,680,324 2,992,436 8,521,979 2,852,467
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits 3,727,179 1,319,827 3,159,053 1,069,434
Interest on Federal funds purchased 33,108 0 38,295 26,379
Interest on securities sold under
agreements to repurchase 29,053 6,610 37,262 11,942
Interest on note payable 9,035 0 62,848 19,899
----------- ----------- ----------- -----------
Total interest expense 3,798,375 1,326,437 3,297,458 1,127,654
----------- ----------- ----------- -----------
Net interest income 4,881,949 1,665,999 5,224,521 1,724,813
Provision for possible loan losses 90,000 30,000 180,000 60,000
----------- ----------- ----------- -----------
Net interest income after provision
for possible loan losses 4,791,949 1,635,999 5,044,521 1,664,813
Noninterest income 1,230,496 449,320 1,095,408 390,502
Noninterest expense 4,940,004 1,640,926 4,902,936 1,695,558
----------- ----------- ----------- -----------
Income before income taxes 1,082,441 444,393 1,236,993 359,757
Income tax expense 306,900 156,300 324,700 81,700
----------- ----------- ----------- -----------
Net income $ 775,541 $ 288,093 $ 912,293 $ 278,057
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income per common share (based on
weighted average common shares
outstanding of 448,456 for 1995 and
1994): $ 1.73 $ 0.64 $ 2.03 $ 0.62
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 775,541 $ 912,293
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 363,474 348,197
Provision for possible loan losses 90,000 180,000
Securities losses, net 4,036 30,829
Increase in accrued interest receivable (385,694) (308,833)
Increase in accrued interest payable 150,035 6,583
Other, net (273,424) (393,670)
Origination of secondary market mortgage loans (7,188,143) (10,731,854)
Proceeds from the sale of secondary market mortgage loans 7,188,143 11,735,614
------------ ------------
Net cash provided by operating activities 723,968 1,779,159
------------ ------------
Cash flows from investing activities:
Proceeds from sales of debt and marketable equity securities
available for sale 13,409,069 12,079,367
Proceeds from maturities and paydowns of debt securities
available for sale 2,478,079 4,974,842
Proceeds from maturities and paydowns of debt securitie
held to maturity 235,000 30,000
Purchases of debt and marketable equity securities
available for sale (287,573) (18,702,355)
Purchases of debt and marketable equity securities
held to maturity 0 (2,731,866)
Net (increase) decrease in loans (11,515,860) 2,835,843
Purchases of premises and equipment (420,851) (745,491)
Proceeds from sale of premises and equipment 0 3,750
Proceeds from sales of other real estate 359,517 62,263
------------ ------------
Net cash provided by (used in) investing activities 4,257,381 (2,193,647)
------------ ------------
Cash flows from financing activities:
Net decrease in noninterest-bearing deposit accounts (1,298,586) (1,790,309)
Net increase (decrease) in savings, NOW and money market accounts (4,493,474) 1,267,573
Net decrease in time deposits $100,000 and over (2,383,179) (533,976)
Net increase (decrease) in other time deposits 9,287,518 (3,707,906)
Net increase (decrease) in Federal funds purchased (4,165,000) 500,000
Net decrease in securities sold under agreements
to repurchase (391,419) (343,758)
Principal payments on note payable (500,000) (575,000)
Dividends paid (302,707) (168,171)
------------ ------------
Net cash used in financing activities (4,246,847) (5,351,547)
------------ ------------
Net increase (decrease) in cash and cash equivalents 734,502 (5,766,035)
Cash and cash equivalents at beginning of period 7,762,207 12,205,523
------------ ------------
Cash and cash equivalents at end of period $ 8,496,709 $ 6,439,488
------------ ------------
------------ ------------
Supplemental Information:
Income taxes paid $ 123,000 $ 565,000
Interest paid $ 3,648,340 $ 3,290,875
------------ ------------
------------ ------------
Other non-cash investing activities:
Transfer of loans to other real estate $ 191,495 $ 124,534
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
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ILLINI CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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.
Results for the three and nine months ended September 30, 1995 are not
indicative of the companies annual performance.
(2) NONINTEREST INCOME AND EXPENSE
Details of noninterest income and expense for the nine and three months
ended September 30, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------ ------------------------
9 MONTHS 3 MONTHS 9 Months 3 Months
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Noninterest income:
Service charges on deposits $ 795,648 $ 263,825 $ 789,196 $ 280,191
Securities losses, net (4,036) 0 (30,829) (1,365)
Mortgage loan servicing fees 118,743 41,203 112,891 39,846
Gain on sale of mortgage loans 66,972 40,168 86,802 10,157
Other income 253,169 104,124 137,348 61,673
------------ ----------- ------------ -----------
Total noninterest income $ 1,230,496 $ 449,320 $ 1,095,408 $ 390,502
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Noninterest expense:
Salaries and employee benefits $ 2,373,724 $ 807,342 $ 2,332,356 $ 799,384
Occupancy and equipment
expense 765,569 265,775 760,102 259,402
Data processing 280,161 96,071 260,245 86,401
Insurance 27,327 6,891 29,332 9,506
Directors' fees 119,553 43,353 107,310 43,500
Professional fees 207,309 92,257 247,885 87,005
Regulatory fees 161,772 (3,769) 255,303 85,389
Supplies 112,232 37,066 119,799 44,440
Other expense 892,357 295,940 790,604 280,531
------------ ----------- ------------ -----------
Total noninterest expense $ 4,940,004 $ 1,640,926 $ 4,902,936 $ 1,695,558
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
6
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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
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
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 of Witt agrees to purchase the
assets and assume the deposit liabilities of Illini Bank's Coffeen branch. As
of June 30, 1995, the Coffeen, Illinois branch had approximately $7,522,000 in
assets and approximately $12,493,000 in liabilities. The Security National Bank
of Witt 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 $154,166,829
at September 30, 1995. This represents a decrease of $2,344,694 or 1.50% for
the nine 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, substantially offset by an increase in loans.
Investment in debt and marketable equity securities decreased $14,554,331 or
33.23% from December 31, 1994 to September 30, 1995. In 1994, Illini
restructured its investment portfolio by selling several investments in debt
securities in the available for sale category and reinvested 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 $11,425,860 or 11.76% 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.
8
<PAGE>
Total deposits increased slightly during the first nine months of 1995. Total
deposits increased $1,112,279 or .81% from December 31, 1994 to September 30,
1995. Significant decreases however, occurred in non-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 nine 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
$2,383,179 or 14.82%, 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 $775,541 and $288,093 for the nine month and three
month periods ended September 30, 1995, respectively compared to $912,293 and
$278,057 for the same periods in 1994. On a per share basis income was $1.73
for the nine months ended September 30, 1995 as compared to $2.03 for the nine
months ended September 30, 1994, a decrease of $0.30. Income on a per share
basis increased $0.02 for the three months ended September 30, 1995 as compared
to the three month period ended September 30, 1994. The annualized return on
assets and return on shareholders' equity for the nine months ended September
30, 1995 was .67% and 7.83% respectively. This compares to an annualized
return on assets and return on shareholders' equity for the same period in 1994
of .77% and 9.71% 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 $342,572 to $4,881,949 for the first nine
months of 1995 compared to the first nine months of 1994 and decreased $58,814
for the three months ending September 30, 1995 compared to the same period in
1994. Illini's net interest margin decreased .11 basis points from 4.71% for
the nine months ended September 30, 1994 to 4.60% for the nine months ended
September 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.
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.
Competition forced Illini to renegotiate lower interest rate terms with its
borrowers. Illini was faced with either renegotiating 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
9
<PAGE>
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 $158,345 and $139,969 for the nine and three month
periods ended September 30, 1995 compared to the same periods in 1994. During
1995, interest earning assets shifted to higher yielding loans. This shift
coupled with higher interest rates produced an increase in interest income for
the nine month period ending September 30, 1995 as compared to the same period
in 1994.
Interest expense has increased $500,917 and $198,783 for the nine and three
month periods ended September 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 $507,279 at September 30, 1995. This decrease is largely due to the
sale of other real estate in the first nine months of 1995. Proceeds received
from this sale totaled $359,517, resulting in a net gain of $82,074, which is
included in other noninterest income on the consolidated statements of income.
Net charge offs for the first nine months of 1995 were $197,171 compared to
$160,322 for the same period in 1994, an increase of $36,849. Nonperforming
loans increased, $186,000 or 18.11% from $1,027,000 at December 31, 1994 to
$1,213,000 at September 30, 1995. The reserve for possible loan losses as a
percentage of nonperforming loans was 118.68% at September 30, 1995, as compared
to 150.62% at December 31, 1994. The provision for possible loan losses was
$90,000 for the nine month period ended September 30, 1995, compared to $180,000
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 $135,088 and $58,818 for the nine and three month
periods ended September 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 nine
months of 1995. Other income increased $115,821 from the nine month period
ended September 30, 1995 as compared to the nine month period ended September
30, 1994. During 1995, Illini instituted a new credit card program which
generated merchants fees totaling $28,586. Illini also recognized a net gain of
$82,074 from the sale of other real estate during the first nine 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.
10
<PAGE>
Illini also recognized net securities losses of $4,036 in conjunction with the
liquidation and restructuring of the investment portfolio.
Noninterest expense increased $37,068 for the nine month period while decreasing
$54,632 for the three month period ended September 30, 1995, compared to the
same periods in 1994. Increases in expenses have been recognized in salaries
and employee benefits, occupancy and equipment, data processing, and directors
fees. Other expenses which includes marketing and promotions also increased in
the first nine 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 insurance, professional fees, regulatory fees, and
supplies in the first nine of 1995 as compared to the same period in 1994. The
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. In addition,
regulatory fee decreased in the third quarter and year to date due to a refund
of $86,207 in Federal Deposit Insurance Corporation insurance premiums as well
as a reduction in future premiums as a result of the Federal Deposit Insurance
Corporation insurance funding requirements.
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 the first, second, and third quarter of 1995. On
October 25, 1995 the Board of Directors also declared a fourth quarter dividend
payable to shareholders of record November 30, 1995 payable on December 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
reflect, Illini had a net increase in cash and cash equivalents of $734,502 for
the nine months ended September 30, 1995 as compared to net decrease in cash
and cash equivalents of $5,766,035 for the nine months ended September 30, 1994.
Net cash provided by operating activities was $723,968 in 1995 compared to
$1,779,159 in 1994. Net cash provided by investing activities was $4,257,381 in
1995 as compared with net cash used in investing activities of $2,193,647 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
11
<PAGE>
increase in loans of $11,515,860. Net cash used in financing activities was
$4,246,847 for the nine month period ending September 30, 1995 compared to net
cash used in financing activities of $5,351,547 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 9.13% at September 30, 1995 and
8.70% 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 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 September 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.
12
<PAGE>
<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
September 30, 1995, the Bank's total risk-based capital ratio was
13.42%. The Bank's tier 1 risk-based capital ratio and tier 1
leveraged ratio was 13.40%. 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 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 September 30, 1995,
individually and cumulatively, through various time horizons (in thousands of
dollars):
13
<PAGE>
<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 $ 22,138 $ 11,608 $ 16,776 $ 57,171 $ 2,705
Investments in debt and
marketable equity securities 7,288 3,500 3,154 13,933 1,366
Other interest-earning assets 1,710 -- -- -- --
-------- -------- -------- -------- --------
Total Interest-earning Assets $ 31,136 $ 15,108 $ 19,930 $ 71,104 $ 4,071
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Interest-bearing Liabilities
Savings, NOW, and money
market accounts $ 49,021 -- -- -- --
Time deposits 15,523 11,625 26,307 15,242 228
Federal funds purchased -- -- -- -- --
Securities sold under
agreements to repurchase -- -- 150 100 --
-------- -------- -------- -------- --------
Total Interest-bearing Liabilities $ 64,544 $ 11,625 $ 26,457 $ 15,342 $ 228
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Gap by Period $(33,408) $ 3,483 $ (6,527) $ 55,762 $ 3,843
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Cumulative Gap $(33,408) $(29,925) $(36,452) $ 19,310 $ 23,153
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
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.
14
<PAGE>
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.
15
<PAGE>
PART II. OTHER INFORMATION
ILLINI CORPORATION AND SUBSIDIARY
September 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
September 30, 1995.
16
<PAGE>
ILLINI CORPORATION AND SUBSIDIARY
September 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
/s/ Burnard K. McHone 11-9-95
- --------------------- -----------
Burnard K. McHone Date signed
President and Acting Chief Financial Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 6,786,709
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,710,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,782,334
<INVESTMENTS-CARRYING> 10,458,862
<INVESTMENTS-MARKET> 10,587,753
<LOANS> 10,063,446
<ALLOWANCE> 1,439,664
<TOTAL-ASSETS> 154,166,829
<DEPOSITS> 138,315,754
<SHORT-TERM> 250,000
<LIABILITIES-OTHER> 1,641,075
<LONG-TERM> 0
<COMMON> 4,484,560
0
0
<OTHER-SE> 9,475,440
<TOTAL-LIABILITIES-AND-EQUITY> 154,166,829
<INTEREST-LOAN> 7,059,603
<INTEREST-INVEST> 1,514,724
<INTEREST-OTHER> 105,997
<INTEREST-TOTAL> 8,680,324
<INTEREST-DEPOSIT> 3,727,179
<INTEREST-EXPENSE> 3,798,375
<INTEREST-INCOME-NET> 4,881,949
<LOAN-LOSSES> 90,000
<SECURITIES-GAINS> (4,036)
<EXPENSE-OTHER> 4,940,004
<INCOME-PRETAX> 1,082,441
<INCOME-PRE-EXTRAORDINARY> 1,082,441
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 775,541
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.73
<YIELD-ACTUAL> 8.18
<LOANS-NON> 844,000
<LOANS-PAST> 369,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,546,834
<CHARGE-OFFS> 244,610
<RECOVERIES> 47,440
<ALLOWANCE-CLOSE> 1,439,664
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
