UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
SEPTEMBER 30, 1996
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________________to_________________
Commission file number: 0-13368
First Mid-Illinois Bancshares, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 37-1103704
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1515 Charleston Avenue, Mattoon, Illinois 61938
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 217-234-7454
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $4.00 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 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 [ ]
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date: 940,816 shares of Common
Stock at October 31, 1996.
<PAGE>
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
INDEX
<S> <C> <C>
Beginning
Page No.
Part I - Financial Information
Item 1 Financial Statements 3
Consolidated Balance Sheets 4
Consolidated Statements of Income 5
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II - Other Information
Item 1 Legal Proceedings 31
Item 2 Changes in Securities 31
Item 3 Defaults Upon Senior Securities 31
Item 4 Submission of Matters to a Vote of
Securitiy Holders 31
Item 5 Other Information 31
Item 6 Exhibits and Reports on Form 8-K 31
Signatures 32
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include
all of the information required by generally accepted accounting principles
for complete financial statements and related footnote disclosures. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) considered for a fair presentation have been included. For further
information, refer to the financial statements and notes included in the
Registrant's 1995 Annual Report to Stockholders.
<PAGE>
<TABLE>
<CAPTION>
FIRST MID-ILLINOIS BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET (unaudited) September 30, December 31,
(dollars in thousands, except per share data) 1996 1995
<S> <C> <C>
Assets
Cash and due from banks:
Noninterest bearing $ 25,882 $ 17,536
Interest bearing 3,848 784
Excess funds sold 600 4,975
Cash and cash equivalents 30,330 23,295
Investment certificates of deposits 99 99
Investment securities available-for-sale
at estimated fair value 119,706 119,388
Investment securities held-to-maturity (estimated
fair value of $3,430 at September 30, 1996 and
$3,409 at December 31, 1995) 3,423 3,381
Loans 348,065 307,004
Less allowance for loan losses 2,705 2,814
Net loans 345,360 304,190
Premises and equipment, net 10,286 9,487
Intangible assets 5,715 6,019
Other assets 8,650 6,635
Total assets $523,569 $472,494
Liabilities and Stockholders' Equity
Deposits:
Noninterest bearing $ 56,704 $ 51,017
Interest bearing 353,612 345,862
Total deposits 410,316 396,879
Other liabilities 7,246 4,591
Securites sold under agreements to repurchase 14,080 16,815
Federal Home Loan Bank advances 40,426 11,700
Federal funds purchased 6,500 -
Long-term debt 6,450 7,200
Total liabilities 485,018 437,185
Stockholders' equity:
Series A convertible preferred stock no par
value; authorized 1,000,000 shares; issued
620 shares with stated value of $5,000 per 3,100 3,100
Common stock, $4 par value; authorized 2,000,000
shares; issued 936,905 shares at September 30,
1996 and 894,991 at December 31, 1995) 3,748 3,580
Additional paid-in-capital 5,262 3,969
Retained earnings 26,983 24,493
Net unrealized gain (loss) on available-for-sale
investment securities (518) 191
38,575 35,333
Less treasury stock at cost, 2,000 shares 24 24
Total stockholders' equity 38,551 35,309
Total liabilities and stockholders' equity $523,569 $472,494
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
FIRST MID-ILLINOIS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended September 30, 1996 and 1995
(unaudited)
(dollars in thousands, except per share data) 1996 1995
<S> <C> <C>
Interest income:
Interest and fees on loans $ 7,217 $ 6,589
Interest on investment securities 1,900 1,996
Interest on excess funds sold 60 75
Interest on deposits with financial institutions 26 11
Total interest income 9,203 8,671
Interest expense:
Interest on deposits 3,841 3,825
Interest on securities sold under
agreements to repurchase 133 225
Interest on Federal Home Loan Bank advances 532 214
Interest on federal funds purchased 11 -
Interest on long-term debt 130 142
Total interest expense 4,647 4,406
Net interest income 4,556 4,265
Provision for loan losses 36 48
Net interest income after provision
for loan losses 4,520 4,217
Other income:
Trust fees 248 237
Brokerage and annuity fees 112 42
Service charges 444 406
Securities losses, net (28) -
Mortgage banking income 103 78
Other 195 216
Total other income 1,074 979
Other expense:
Salaries and employee benefits 2,004 1,889
Occupancy, furniture and equipment, net 621 584
Federal deposit insurance premiums 827 53
Other 1,108 1,045
Total other expense 4,560 3,571
Income before income taxes 1,034 1,625
Income taxes 345 532
Net income $ 689 $ 1,093
Per common share data:
Primary earnings per share $ .66 $ 1.15
Fully diluted earnings per share $ .65 $ 1.08
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST MID-ILLINOIS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Nine months ended September 30, 1996 and 1995
(unaudited)
(dollars in thousands, except per share data) 1996 1995
<S> <C> <C>
Interest income:
Interest and fees on loans $20,443 $18,593
Interest on investment securities 5,623 5,902
Interest on excess funds sold 148 212
Interest on deposits with financial institutions 54 78
Total interest income 26,268 24,785
Interest expense:
Interest on deposits 11,409 10,973
Interest on securities sold under
agreements to repurchase 393 584
Interest on Federal Home Loan Bank advances 909 313
Interest on federal funds purchased 40 2
Interest on long-term debt 359 431
Total interest expense 13,110 12,303
Net interest income 13,158 12,482
Provision for loan losses 36 138
Net interest income after provision
for loan losses 13,122 12,344
Other income:
Trust fees 900 845
Brokerage and annuity fees 272 132
Service charges 1,293 1,155
Securities losses, net (10) -
Mortgage banking income 299 176
Other 743 638
Total other income 3,497 2,946
Other expense:
Salaries and employee benefits 5,890 5,538
Occupancy, furniture and equipment, net 1,775 1,702
Federal deposit insurance premiums 964 495
Other 3,269 3,159
Total other expense 11,898 10,894
Income before income taxes 4,721 4,396
Income taxes 1,663 1,390
Net income $ 3,058 $ 3,006
Per common share data:
Primary earnings per share $ 3.11 $ 3.15
Fully diluted earnings per share $ 2.94 $ 2.97
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST MID-ILLINOIS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended September 30, 1996 and 1995
(unaudited)
(in thousands) 1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 689 $ 1,093
Adjustment to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 36 48
Depreciation, amortization and accretion, net 315 285
Loss on sales of securities, net 28 -
Gain on sales of loans held for sale (76) (43)
Origination of mortgage loans held for sale (8,665) (4,305)
Proceeds from sales of mortgage loans held for
sale 5,928 4,293
Net(increase) in other assets (828) (719)
Net increase (decrease) in other liabilities 2,682 (960)
Net cash provided by (used in) operating activities 109 (308)
Cash flows from investing activities:
Capitalization of mortgage servicing rights (56) -
Expenditures for premises and equipment (830) (185)
Net (increase) in loans (17,545) (12,658)
Proceeds from sales of:
Securities available-for-sale 18,812 -
Proceeds from maturities of:
Securities available-for-sale 3,527 4,922
Securities held-to-maturity 20 2,749
Purchases of:
Securities available-for-sale (21,106) (2,006)
Securities held-to-maturity - (2,987)
Net cash (used in) investment activities (17,178) (10,165)
Cash flows from financing activities:
Net increase in deposits 6,537 9,600
Net increase (decrease) in securities sold under
agreements to repurchase 3,293 (1,360)
Net increase in Federal Home Loan Bank advances 9,326 7,000
Net increase in federal funds purchased 6,500 -
Repayment of long-term debt (250) (250)
Proceeds from issuance of common stock 98 -
Net cash provided by financing activities 25,504 14,990
Increase in cash and cash equivalents 8,435 4,517
Cash and cash equivalents at beginning of period 21,895 20,648
Cash and cash equivalents at end of period $30,330 $25,165
Additional disclosure of cash flow information:
Interest paid during the period $ 4,496 $ 4,417
Income taxes paid during the period 450 500
Loans transferred to real estate owned - 26
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST MID-ILLINOIS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1996 and 1995
(unaudited)
(in thousands) 1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,058 $ 3,006
Adjustment to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 36 138
Depreciation, amortization and accretion, net 945 959
Loss on sales of securities, net 10 -
Gain on sale of loans held for sale (211) (60)
Origination of mortgage loans held for sale (14,443) (5,330)
Proceeds from sales of mortgage loans held for
sale 11,315 5,689
Net (increase) in other assets (2,015) (1,006)
Net increase (decrease) in other liabilities 3,367 (359)
Net cash provided by operating activities 2,062 3,037
Cash flows from investing activities:
Capitalization of mortgage servicing rights (118) -
Expenditures for premises and equipment (1,390) (556)
Net (increase) in loans (37,867) (26,666)
Proceeds from sales of:
Securities available-for-sale 24,753 -
Proceeds from maturities of:
Securities available-for-sale 20,014 15,124
Securities held-to-maturity 40 4,036
Purchases of:
Securities available-for-sale (46,103) (5,685)
Securities held-to-maturity (80) (5,991)
Net cash (used in) investment activities (40,751) (19,738)
Cash flows from financing activities:
Net increase in deposits 13,437 9,302
Net increase (decrease) in securities sold under
agreements to repurchase (2,735) 3,030
Net increase in Federal Home Loan Bank advances 28,726 13,000
Net increase (decrease) in federal funds purchased 6,500 (500)
Repayment of long-term debt (750) (250)
Proceeds from issuance of common stock 998 -
Dividends paid on preferred stock (16) (42)
Dividends paid on common stock (436) (387)
Net cash provided by financing activities 45,724 24,153
Increase in cash and cash equivalents 7,035 7,452
Cash and cash equivalents at beginning of period 23,295 17,713
Cash and cash equivalents at end of period $30,330 $25,165
Additional disclosure of cash flow information:
Interest paid during the period $ 13,070 $ 12,700
Income taxes paid during the period 1,755 1,350
Loans transferred to real estate owned 290 135
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Notes to the Consolidated Financial Statements
1) The consolidated financial statements include the accounts of First Mid-
Illinois Bancshares, Inc. (the "Registrant"), and its wholly owned
subsidiaries, First Mid-Illinois Bank & Trust, N.A. (the "Bank"), Heartland
Savings Bank ("Heartland") and Mid-Illinois Data Services, Inc. ("MIDS").
Intercompany amounts have been eliminated.
2) The financial information reflects all adjustments which, in the opinion
of management, are necessary to present a fair statement of the results of the
interim periods ended September 30, 1996 and 1995, and all such adjustments
are of a normal recurring nature. The results of the interim period ended
September 30, 1996, are not necessarily indicative of the results expected for
the year ending December 31, 1996.
3) Income for primary and fully diluted earnings per share is adjusted for
dividends attributable to preferred stock. Primary earnings per share is
based on the weighted average number of common shares outstanding. Fully
diluted earnings per share data is computed by using the weighted average
number of common shares outstanding, increased by the assumed conversion of
the convertible preferred stock. The weighted average number of common
equivalent shares used in calculating earnings per share for the periods ended
September 30, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Primary 934,692 889,108 914,400 885,475
Fully Diluted 1,059,994 1,014,410 1,039,702 1,010,777
</TABLE>
4) The Registrant is required to classify its debt securities into one of
three categories at the time of purchase: held-to-maturity, available-for-
sale or trading. Held-to-maturity securities are those which management has
the intent and ability to hold to maturity. These securities are carried at
amortized historical cost. Available-for-sale securities are those securities
which management may sell prior to maturity as a result of the Registrant's
overall asset and liability management strategy. These securities are
recorded at fair value. Trading securities are those securities bought and
held principally for the purpose of selling them in the near term. Trading
securities are recorded at the lower of historical cost or estimated fair
value. The Registrant currently has no securities designated as trading.
5) Heartland originates residential first mortgage loans both for its
portfolio and for sale into the secondary market. Held for sale loans are
carried at the lower of aggregate, amortized cost or estimated market value.
Mortgage banking income consists of gains or losses on the sale of loans and
servicing fee income. Origination costs for loans sold are expensed as
incurred.
<PAGE>
6) In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights" ("FAS 122"). FAS 122 amends FASB Statement No. 65 by
establishing a new standard for capitalizing mortgage servicing rights. Under
FAS 122, the accounting principles for mortgage servicing rights are the same
for mortgages originated by the servicer as for those acquired through
purchase transactions. Accordingly, under the new standard, the Registrant
will record an asset for mortgage servicing rights when it sells mortgages and
retains servicing. Mortgage servicing rights are to be amortized in
proportion to the net servicing income over the period during which servicing
income is expected to be received. Servicing rights are to be evaluated for
impairment based on fair value. The Registrant adopted FAS 122 effective
January 1, 1996.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS - SUMMARY
Net income for the three month period ended September 30, 1996, amounted to
$689,000 ($.65 per share on a fully diluted basis). This represents a
$404,000 or 37.0% decrease from the earnings of $1,093,000 ($1.08 per share on
a fully diluted basis) for the three month period ended September 30, 1995. A
summary of the factors which contributed to the earnings decrease follows
(dollars in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended September 30, 1996 Total Percent
vs. September 30, 1995 Net Change
Change 1996/1995
<S> <C> <C>
Net interest income $ 291 6.8%
Provision for loan losses (12) (25.0)
Other income 95 9.7
FDIC insurance expense * 774 1,460.4
Other expense 215 6.1
Income taxes (187) (35.2)
Total decrease in net income $(404) (37.0)%
</TABLE>
Net income for the nine month period ended September 30, 1996, amounted to
$3,058,000 ($2.94 per share on a fully diluted basis). This represents a
$52,000 or 1.7% increase from the earnings of $3,006,000 ($2.97 per share on a
fully diluted basis) for the nine month period ended September 30, 1995. A
summary of the factors which contributed to the earnings increase follows
(dollars in thousands, except per share data):
<TABLE>
<CAPTION>
Nine months ended September 30, 1996 Total Percent
vs. September 30, 1995 Net Change
Change 1996/1995
<S> <C> <C>
Net interest income $ 676 5.4%
Provision for loan losses (102) (73.9)
Other income 551 18.7
FDIC insurance expense * 469 94.7
Other expense 535 5.1
Income taxes 273 19.6
Total increase in net income $ 52 1.7%
</TABLE>
* 1996 net income was impacted by a $758,000, one-time charge to record the
effect of a special assessment associated with the recapitalization of the
Savings Association Insurance Fund (the "SAIF") to be paid in the fourth
quarter of 1996. Legislation to recapitalize SAIF was signed into law by the
President on September 30, and in accordance with generally accepted
accounting principles, a liability for the assessment was recorded in the
third quarter financial statements. After taking into account the decrease in
income taxes that will result from this assessment, the actual reduction in
year-to-date income amounted to $491,000 ($.53 per share).
<PAGE>
NET INTEREST INCOME AND INTEREST RATE SENSITIVITY
During the first nine months in 1996, the Registrant's net interest income
increased by $676,000 (5.4%) as compared with the net interest income for the
same period in 1995. Net interest income for the nine months ended September
30, 1996, was $13,158,000 as compared with $12,482,000 for the nine months
ended September 30, 1995. The table which follows sets forth details of
average balances, interest income and expense and average rates for the
Registrant for 1996 and 1995. The 1996 figures have been annualized based on
the actual results through September 30, 1996. The annualized amounts are not
necessarily indicative of the actual amounts that are expected or that will
occur for the year ended December 31, 1996.
As can be seen, annualized net interest margin was 3.99% during the period
ended September 30, 1996 (on a tax equivalent basis). The overall cost of
interest bearing liabilities and the yield on interest earning assets has
remained stable in 1996 as compared with 1995.
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
Nine Month Period Ended Year Ended
September 30, 1996 December 31, 1995
(dollars in thousands) Avg Bal Int(5) Avg Rate Avg Bal Int Avg Rate
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Investment certificates of deposits $ 99 $ 10 10.36% $ 99 $ 10 10.10%
Due from banks-interest bearing 1,277 62 4.87% 1,511 84 5.56%
Excess funds sold 3,718 198 5.31% 6,199 356 5.74%
Investment securities:
Taxable 112,264 6,856 6.11% 115,725 7,068 6.11%
Tax-exempt (1)(2) 11,589 641 8.38% 12,831 733 8.66%
Loans (net of unearned income)(3)(4) 319,209 27,256 8.54% 294,220 25,214 8.57%
Total earning assets 448,156 35,023 7.89% 430,585 33,465 7.86%
NONEARNING ASSETS
Cash and due from banks 16,371 15,382
Premises and equipment 9,633 9,333
Other nonearning assets 12,694 12,699
Allowance for loan losses (2,769) (2,711)
TOTAL ASSETS $484,085 $465,288
INTEREST BEARING LIABILITIES
Demand deposits 107,711 2,897 2.69% 106,118 2,823 2.66%
Savings deposits 40,110 1,092 2.72% 40,920 1,107 2.71%
Time deposits 205,523 11,223 5.46% 202,305 10,958 5.42%
Securities sold under
agreements to repurchase 11,598 524 4.52% 16,481 777 4.71%
Federal Home Loan Bank advances 20,517 1,212 5.91% 7,633 488 6.39%
Federal funds purchased 994 53 5.37% 26 2 7.69%
Long-term debt 6,944 479 6.90% 7,636 571 7.48%
Total interest-bearing liabilities 393,397 17,480 4.44% 381,119 16,725 4.39%
NONINTEREST BEARING LIABILITIES
Demand deposits 49,559 46,237
Other liabilities 4,005 4,561
TOTAL LIABILITIES 446,961 431,917
Stockholders' equity 37,124 33,371
TOTAL LIABILITIES & EQUITY $484,085 $465,288
Net interest earnings $17,544 3.45% $16,740 3.47%
Net interest earnings as a
% of interest earning assets
on a full tax equivalent basis 3.99% 3.98%
<FN>
<F1>(1) Full tax equivalent yields on tax exempt securities have been calculated using a 34% tax rate.
<F2>(2) Investment securities on a full tax equivalent basis amounted to $971 and $1,111 for the
periods ended September 30, 1996 and December 31, 1995, respectively.
<F3>(3) Nonaccrual loans are not material and have been included in the average balances for
purposes of this computation.
<F4>(4) Loan fees included in interest includes are not material.
<F5>(5) 1996 interest income and expense amounts have been annualized based on results through
September 30, 1996. The annualized amounts are not necessarily indicative of the actual
amounts that are expected or that will occur for the year ending December 31, 1996.
</FN>
</TABLE>
<PAGE>
The following table describes changes in net interest income attributable to
changes in the volume of earning assets compared to changes in interest rates.
<TABLE>
<CAPTION>
1996 Compared to 1995
Increase - (Decrease)
Total Rate/
(in thousands) Change Volume Rate Volume
<S> <C> <C> <C> <C>
INTEREST INCOME:
Investment certificates of deposits $ - $ - $ - $ -
Due from banks-interest bearing (22) (14) (10) 2
Excess funds sold (158) (142) (27) 11
Investment securities:
Taxable (212) (211) (1) -
Tax-exempt (1) (92) (71) (23) 2
Loans (2)(3) 2,042 2,142 (92) (8)
Total interest income 1,558 1,704 (153) 7
INTEREST EXPENSE:
Demand deposits 74 43 31 -
Savings deposits (15) (22) 7 -
Time deposits 265 174 89 2
Securities sold under
agreements to repurchase (253) (230) (32) 9
Federal Home Loan Bank advances 725 824 (37) (62)
Federal funds purchased 51 75 (1) (23)
Long-term debt (92) (52) (44) 4
Total interest expense 755 812 13 (70)
NET INTEREST EARNINGS $ 803 $ 892 $(166) $ 77
<FN>
<F1>(1) Interest on tax exempt investment securities is shown on a tax-equivalent
basis using a 34% tax rate.
<F2>(2) Nonaccrual loans are not material and have been included in the average
loan balances for purposes of this computation.
<F3>(3) Loan fees included in interest income are not material.
</FN>
</TABLE>
No out-of-period adjustments have been included in the preceding analysis.
Changes in rates and volume are computed on a consistent basis using the
absolute values of changes in volume compared to the absolute values of the
changes in rates.
There were no foreign activities by the Registrant during the nine month
periods ending September 30, 1996 and 1995.
The following table is the Registrant's "static gap" schedule as of
September 30, 1996. This is one of several tools used by management to
monitor the interest rate sensitivity position of the Registrant. The
following table presents earning assets and interest bearing liabilities
within selected time intervals based on their repricing and maturing
characteristics. Interest rate sensitivity is measured by "gaps", (the
difference between interest earning assets and interest bearing liabilities
within a particular time interval).
A positive GAP indicates more assets than liabilities could reprice in that
time period and a negative GAP indicates more liabilities could reprice.
<TABLE>
<CAPTION>
Number of Months Until Next Repricing Opportunity
(dollars in thousands) 0-1 1-3 3-6 6-12 12+
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Investment certificates of deposits $ - $ - $ - $ - $ 99
Due from banks-interest bearing 3,848 - - - -
Excess funds sold 600 - - - -
Investment securities:
Taxable 32,361 18,262 9,555 9,665 42,482
Tax-exempt - 560 707 1,003 8,534
Loans 44,438 15,740 32,674 28,749 226,464
Total 81,247 34,562 42,936 39,417 277,579
INTEREST BEARING LIABILITIES:
Savings and NOW accts 117,636 - - - -
Money market accounts 35,620 - - - -
Other time deposits 29,241 30,293 38,632 43,627 58,563
Securities sold under
agreements to repurchase - 14,080 - - -
Federal Home Loan Bank advances 24,733 5,000 6,193 3,500 1,000
Federal funds purchased 6,500 - - - -
Long-term debt 6,450 - - - -
Total $ 220,180 $ 49,373 $ 44,825 $ 47,127 $ 59,563
Periodic GAP (138,933) (14,811) (1,889) (7,710) 218,016
Cumulative GAP (138,933) (153,744) (155,633) (163,343) 54,673
Gaps as a percent of
interest earning assets:
Periodic (29.2%) (3.1%) (0.4%) (1.6%) 45.8%
Cumulative (29.2%) (32.3%) (32.7%) (34.3%) 11.5%
</TABLE>
The preceding tabulation classifies savings and NOW accounts as immediately
repriceable because if rates paid on these accounts were to change, the rates
would, most likely, change on all such accounts at the same time. As a
practical matter, management is able to exercise a significant amount of
control over these rates, although in the past, they have been resistant to
rate changes.
Management of the Registrant continually monitors its interest rate
sensitivity position. While the preceding table is an indication of interest
rate risk, overall interest rate sensitivity is influenced by other factors
such as the competitive environment, the timing and amount of rate changes,
loan prepayments and the inherent stability of certain deposits. A number of
different factors, including those objectively determined and measurable, as
well as those subjectively ascertained, are considered by management in its
evaluation of interest rate risk. As a result of this analysis, management
believes that the overall level of interest rate risk is manageable and does
not believe that changing rates will have a material negative effect on the
Registrant's net interest margin.
<PAGE>
INVESTMENT PORTFOLIO
The Registrant adopted Statement of Financial Accounting Standards No. 115
("FAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities" effective December 31, 1993. Investment securities that the
Registrant has the positive intent and ability to hold to maturity are
classified as "held-to-maturity" and reported at amortized cost. All other
investment securities are classified as "available-for-sale" and have been
reported at their estimated fair value at September 30, 1996, and December 31,
1995. In accordance with FAS 115, the unrealized losses, net of related
taxes, in the amount of $518,000 have been included in stockholders' equity at
September 30, 1996.
Total investment securities designated as available-for-sale represented 97%
of the portfolio and held-to-maturity represented 3%. During the nine months
ended September 30, 1996, $24,695,000 (par value) available-for-sale
investment securities were sold. During this same period, $80,000 (par value)
held-to-maturity and $43,840,000 (par value) available-for-sale investment
securities were purchased. The increase in sales and purchases of investment
securities can be attributed to a series of transactions in which mortgage
backed securities were sold and replaced in the portfolio with U.S. government
agency securities. These transactions were consumated to improve the
repricing characteristics of the portfolio, to mollify the Registrant's total
exposure to real estate related assets and to improve the yield on the
portfolio. For the nine months ended September 30, 1996, there was an
increase of 84 basis points in the yield of the investment portfolio due to
these transactions.
There were 48 investment securities with a par value totaling $24,695,000
that were sold at a net loss of $10,000 during the nine months ended September
30, 1996.
The change in the amount of net unrealized gain (loss) on available-for-sale
investment securities from December 31, 1995 to September 30, 1996 amounted to
a loss of $709,000. This loss reflected the decline in the market value of
available-for-sale investment securities during the first nine months of the
year.
The following table provides detailed information for investment securities
at September 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
(in thousands) Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available-for-sale - 09/30/96
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 92,945 $ 33 $ (1,021) $ 91,957
Obligations of state and
political subdivisions 7,406 248 (4) 7,650
Mortgage backed securities 15,854 112 (152) 15,814
Other securities 4,285 - - 4,285
Total available-for-sale $120,490 $ 393 $(1,177) $119,706
Held-to-maturity - 09/30/96
Obligations of state and
political subdivisions $ 3,423 $ 28 $ (21) $ 3,430
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(in thousands) Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available-for-sale - 12/31/95
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 72,599 $ 481 $ (683) $ 72,397
Obligations of state and
political subdivisions 8,628 440 (7) 9,061
Mortgage backed securities 35,766 222 (163) 35,825
Other securities 2,105 - - 2,105
Total available-for-sale $119,098 $ 1,143 $ (853) $119,388
Held-to-maturity - 12/31/95
Obligations of state and
political subdivisions $ 3,381 $ 43 $ (15) $ 3,409
</TABLE>
Other securities included stock in the Federal Home Loan Bank totaling
$3,878,000 at September 30, 1996 and $1,699,000 at December 31, 1995.
The following table indicates the expected maturities of investment
securities classified as available-for-sale and held-to-maturity at September
30, 1996 and their weighted average yield for each range of maturities.
Mortgage backed securities are aged according to their weighted average life.
All other securities are shown at their contractual maturity.
<TABLE>
<CAPTION>
Book Value Maturing Investment Securities
One After 1 After 5 After
year through through ten
(dollars in thousands) or less 5 years 10 years years Total
<S> <C> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 16,310 $ 62,070 $ 14,067 $ 498 $ 92,945
Obligations of state and
political subdivisions 821 5,186 804 595 7,406
Mortgage-backed securities 1,884 11,110 981 1,879 15,854
Other securities - - - 4,285 4,285
Total available-for-sale securities $ 19,015 $ 78,366 $ 15,852 $ 7,257 $120,490
Weighted average yield 5.38% 5.94% 6.12% 8.04%
Full tax equivalent yield 5.51% 6.14% 6.27% 8.56%
Held-to-maturity:
Obligations of state and
political subdivisions $ 696 $ 1,854 $ 873 $ - $ 3,423
Weighted average yield 4.65% 4.99% 5.14% -
Full tax equivalent yield 7.08% 7.57% 7.79% -
</TABLE>
The weighted average yields are calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each security. Full
tax equivalent yields have been calculated using a 34% tax rate.
<PAGE>
The maturities of, and yields on, mortgage backed securities have been
calculated using actual quarterly repayment history. However, where
securities have call features and market values greater than par, the call
date has been used to determine the expected maturity.
With the exception of obligations of the U.S. Treasury and other U.S.
Government corporations and agencies, there were no investment securities
of any single issuer, the book value of which exceeded 10% of stockholders'
equity at September 30, 1996.
LOAN PORTFOLIO
The following tables provide information relating to the Registrant's
loan portfolio, risk elements within the portfolio and historical loan loss
experience.
TYPES OF LOANS
The composition of the Registrant's loan portfolio as of September 30,
1996, December 31, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
<S> <C> <C> <C>
Commercial, financial
and agricultural $ 73,485 $ 65,916 $ 61,520
Real estate - mortgage 242,507 211,147 195,524
Installment 30,464 27,996 22,294
Other 1,609 1,945 2,815
Total loans $348,065 $307,004 $282,153
</TABLE>
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table presents the aggregate balances of loans outstanding
as of September 30, 1996, by maturities, based on remaining scheduled,
contractual repayments of principal:
<TABLE>
<CAPTION>
Over 1
One year through Over
(in thousands) or less 5 years 5 years Total
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 50,499 $ 21,405 $ 1,581 $ 73,485
Real estate - mortgage 49,472 125,468 67,567 242,507
Installment 7,520 22,593 351 30,464
Other 225 809 575 1,609
Total loans $ 107,716 $170,275 $ 70,074 $348,065
</TABLE>
As of September 30, 1996, loans with maturities over one year were
comprised of $190,756,000 in fixed rate loans and $49,593,000 in variable
rate loans. The loan maturities noted previously are based on the
contractual provisions of the individual loans. The Registrant has no
general policy regarding rollovers, and borrower requests for such are
handled on a case by case basis.
<PAGE>
As of September 30, 1996, the Registrant had loan concentrations in
agricultural industries of 12.6% of outstanding loans. The Registrant had
no other industry loan concentrations in excess of 10% of outstanding loans.
There was no foreign activity required to be disclosed for the reporting
period ended September 30, 1996.
RISK ELEMENTS
The Registrant adopted Statement of Financial Accounting Standards No.
114 "Accounting by Creditors for Impairment of a Loan" ("FAS 114") and
Statement of Financial Accounting Standards No. 118 "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosure" ("FAS 118")
effective January 1, 1995. FAS 114 applies to all creditors and to all
loans that are accounted for at fair value or at the lower of cost or fair
value. It requires that impaired loans be measured at the present values of
expected future cash flows by discounting those cash flows at the loan's
effective interest rate. FAS 118 amends FAS 114 to allow a creditor to use
existing methods for recognizing interest income on an impaired loan. FAS
118 also amends the disclosure requirements of FAS 114 to require
information about the recorded investment in certain impaired loans and
about how a creditor recognizes interest income related to those impaired
loans.
At September 30, 1996, the recorded investment of impaired loans totaled
$818,000 as compared with $1,240,000 at December 31, 1995. There was no
related allowance for these impaired loans either at September 30, 1996 or
December 31, 1995. The average recorded investment in impaired loans
during 1996 was $1,013,000. Total interest income which would have been
recorded under the original terms of the impaired loans was $99,000. Total
interest income earned on these impaired loans totaled $35,000.
It is the Registrant's policy to discontinue the accrual of interest
income on any loan when, in the opinion of management, there is reasonable
doubt as to the timely collectibility of interest or principal. Nonaccrual
loans are returned to accrual status when, in the opinion of management, the
financial position of the borrower indicates there is no longer any
reasonable doubt as to the timely collectibility of interest or principal.
The following table presents information concerning the aggregate amount
of nonperforming loans at the dates indicated. Nonperforming loans include:
(a) loans accounted for on a nonaccrual basis; (b) accruing loans
contractually past due 90 days or more as to interest or principal payments;
and (c) loans not included in (a) or (b) previously, which are "restructured
loans" as defined in Statement of Financial Accounting Standards No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings."
<PAGE>
<TABLE>
<CAPTION>
Nonperforming Loans September 30, December 31,
(in thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 230 $ 636 $ 393 $ 497 $ 685
Loans past due ninety days
or more and still accruing 382 554 509 248 585
Restructured loans which are
performing in accordance with
revised terms 588 604 772 307 383
</TABLE>
SUMMARY OF LOAN LOSS EXPERIENCE
There was a $36,000 provision for loan losses charged to expense for the
nine months ended September 30, 1996, as compared to $138,000 for the nine
months ended September 30, 1995.
Management establishes an allowance for loan losses which reduces the
total loans outstanding by an estimate of uncollectible loans. Loans deemed
to be uncollectible are charged against and reduce the allowance. The
provision for loan losses and recoveries are credited to and increase the
allowance. The allowance for loan losses totaled $2,705,000 (.78% of total
loans) at September 30, 1996, and $2,814,000 (.92% of total loans) at
December 31, 1995.
<PAGE>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
A summary of loan loss experience for the periods indicated is as follows:
<TABLE>
<CAPTION>
Nine
months ended
September 30, Year ended December 31,
(dollars in thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Average loans outstanding
net of unearned income $319,209 $294,220 $243,166 $214,408 $178,919
Allowance-beginning of year 2,814 2,608 2,110 1,906 1,566
Balance of acquired subsidiary - - 343 - -
Charge-offs:
Commercial, financial
and agricultural 131 18 29 140 298
Real estate-mortgage - 111 28 241 350
Installment 102 57 120 86 139
Total charge-offs 233 186 177 467 787
Recoveries:
Commercial, financial
and agricultural 49 73 98 150 167
Real estate-mortgage - - 21 3 18
Installment 39 39 45 26 49
Total recoveries 88 112 164 179 234
Net charge-offs 145 74 13 288 553
Provision for loan losses 36 280 168 492 543
Allowance-end of period $ 2,705 $2,814 $ 2,608 $ 2,110 $ 1,906
Ratio of net charge-offs
to average loans .05% .03% .01% .13% .31%
Ratio of allowance for loan
losses to ending loans
(net of unearned income) .78% .92% .93% .95% .89%
Ratio of allowance for loan losses
to total non-performing loans 231.20% 156.90% 168.10% 200.60% 115.30%
</TABLE>
The allowance for loan losses represents management's best estimate of
the reserve necessary to adequately cover losses that could ultimately be
realized from current loan exposures. In determining the adequacy of the
allowance for loan losses, management relies predominantly on a disciplined
credit review and approval process which extends to the full range of the
Registrant's credit exposure. The review process is directed by overall
lending policy and is intended to identify, at the earliest possible stage,
borrowers who might be facing financial difficulty. Once identified, the
magnitude of the exposure to individual borrowers is quantified in the form
of specific allocation of the allowance for loan losses. Collateral values
are considered by management in the determination of such specific
allocations. Additional factors considered by management in evaluating the
overall adequacy of the allowance include historical net loan losses, the
level and composition of nonaccrual, past due and restructured loans and
the current and anticipated economic conditions in the region where the
Registrant operates. In addition to the aforementioned considerations,
management also considers the experience of certain other similarly
situated banks, thrifts and bank holding companies.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses, in management's judgment, would be
allocated as follows to cover potential loan losses:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
Allowance % of Allowance % of
for loans for loans
loan to total loan to total
(dollars in thousands) losses loans losses loans
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 1,843 21.1% $ 1,554 21.5%
Real estate-mortgage 426 69.7% 314 68.8%
Installment 133 8.6% 131 9.1%
Other - .6% - .6%
Total allocated 2,402 1,999
Unallocated 303 N/A 815 N/A
Allowance at end of
reported period $ 2,705 100.0% $ 2,814 100.0%
</TABLE>
The allowance is allocated to the individual loan categories by a specific
reserve for all classified loans plus a percentage of loans not classified
based on historical losses.
There were no other interest-bearing assets which would be required to be
disclosed as having "risk elements" if such other assets were loans.
RETURN ON EQUITY AND ASSETS
The following table presents selected financial ratios for the nine months
ended September 30, 1996 (annualized) and the years ended December 31, 1995
and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Return on average total assets .84% .84% .83%
Return on average total stockholders' equity 10.98% 11.76% 11.35%
Return on average common stockholders' equity 11.14% 12.02% 11.59%
Dividend payout ratio 19.54% 19.76% 20.89%
Average total equity to average assets ratio 7.67% 7.17% 7.38%
</TABLE>
<PAGE>
DEPOSIT BASE
The following table details the year-to-date average deposits for the
indicated periods and weighted average rates at September 30, 1996,
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
September 30, December 31, December 31,
1996 1995 1994
Weighted Average Weighted Average Weighted Average
(dollars in thousands) Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
Non-interest bearing $ 49,559 - $ 46,237 - $ 37,527 -
Interest bearing 107,711 2.69% 106,118 2.66% 110,069 2.51%
Savings 40,110 2.72% 40,920 2.71% 38,985 2.59%
Time deposits 205,523 5.46% 202,305 5.42% 170,252 4.29%
Total average deposits $402,903 3.78% $395,580 3.76% $356,833 3.10%
</TABLE>
The following table sets forth the maturity of time deposits of $100,000
or more at September 30, 1996:
<TABLE>
<CAPTION>
(in thousands) Time Deposits Other Total
<S> <C> <C> <C>
3 months or less $ 21,235 $ - $ 21,235
Over 3 through 6 months 5,487 3,000 8,487
Over 6 through 12 months 7,743 - 7,743
Over 12 months 6,719 - 6,719
Total $ 41,184 $ 3,000 $ 44,184
</TABLE>
There were no time deposits of $100,000 or more that were issued by
foreign offices at September 30, 1996.
OTHER BORROWINGS
Other borrowings at September 30, 1996, December 31, 1995 and December 31,
1994 are shown in following table:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Securities sold under
agreements to repurchase $ 14,080 $ 16,815 $ 15,590
Federal Home Loan Bank advances:
Overnight advances 12,223 2,220 3,500
Fixed term due in one year or less 27,193 6,000 -
Fixed term due after one year 1,000 3,500 -
Federal funds purchased 6,500 - 500
Total $ 61,006 $ 28,515 $ 19,590
</TABLE>
Federal Home Loan Bank advances are secured by stock of the Federal Home
Loan Bank of Chicago and by residential mortgage loans.
<PAGE>
Information concerning these borrowings at September 30, 1996, December
31, 1995 and December 31, 1994 is as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
<S> <C> <C> <C>
Maximum Outstanding at any
Month-End During the Year:
Securities sold under
agreements to repurchase $ 16,590 $ 21,200 $ 15,980
Federal Home Loan Bank advances 40,426 16,500 8,250
Federal funds purchased 6,500 - 5,000
Averages for the Year:
Securities sold under
agreements to repurchase $ 11,598 16,481 9,697
Federal Home Loan Bank advances 20,517 7,633 2,696
Federal funds purchased 994 26 710
</TABLE>
OTHER INCOME
Other income increased $551,000 or 18.7% to $3,497,000 in the first nine
months of 1996 as compared with $2,946,000 in the same period of 1995. The
following table sets forth information regarding the major components of and
changes in other income.
<TABLE>
<CAPTION>
Nine months ended Change
September 30, 1996/1995
(dollars in thousands) 1996 1995 Amount Percent
<S> <C> <C> <C> <C>
Trust fees $ 900 $ 845 $ 55 6.5%
Brokerage and annuity fees 272 132 140 106.1
Service charges 1,293 1,155 138 11.9
Securities losses, net (10) - 10 100.0
Mortgage banking income 299 176 123 69.9
Other 743 638 105 16.5
Total other income $3,497 $2,946 $ 551 18.7%
</TABLE>
Trust fees increased 6.5% when comparing year-to-date 1996 and 1995,
primarily because trust assets increased from $202 million to $214 million.
There was also growth in estate accounts which generated higher fees, as
well as an increase in agency fees.
Revenues from brokerage and annuity fees increased 106.1% from the first
nine months of 1996 compared to the same period in 1995. This considerable
increase was due to an early 1996 transition to full service brokerage,
higher fees for value-added services and a wider array of products.
Service charges on deposits consist of fees on both interest bearing and
non-interest bearing accounts and charges for other items, including
insufficient funds, overdrafts and stop payment requests. These fees
increased 11.9% when comparing year-to-date 1996 and 1995, primarily due to
an increase in deposit accounts.
<PAGE>
During the nine month period ended September 30, 1996, net losses from
sales of securities was $10,000. No securities were sold in the period
ended September 30, 1995.
Mortgage banking income increased significantly in the first nine months
of 1996 as compared to 1995. This resulted from Heartland; increased
originations of mortgage loans and a larger percent being sold in the
secondary market. Also affecting income from the sale of loans was FAS 122,
"Accounting for Mortgage Servicing Rights" which the Registrant adopted on
January 1, 1996. The Registrant recognized $118,000 of additional income by
recording the value of the originated mortgage servicing rights associated
with the loans sold during the first nine months of 1996.
During the nine month period ended September 30, 1996, other income
increased $105,000 (16.5%) as compared to the same period in 1995. This
increase was the result of a gain on the sale of the Sullivan facility's
former bookkeeping building of $47,000, as well as a $55,000 net gain on the
sale of other real estate owned located in Neoga and Charleston. There was
also an increase in loan fees associated with home equity lines of credit.
OTHER EXPENSE
Other expense increased $1,004,000 or (9.2%) to $11,898,000 in the first
nine months of 1996 as compared with $10,894,000 in the first nine months of
1995. Other expense as a percentage of average assets remained stable at
2.4% during the first nine months of 1996 and 1995. The following table
sets forth information regarding the major components of and changes in
other expense.
<TABLE>
<CAPTION>
Nine months ended Change
September 30, 1996/1995
(dollars in thousands) 1996 1995 Amount Percent
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 5,890 $ 5,538 $ 352 6.4%
Occupancy, furniture and equipment, net 1,775 1,702 73 4.3
Federal deposit insurance premiums 964 495 469 94.7
Other 3,269 3,159 110 3.5
Total other expense $11,898 $10,894 $1,004 9.2%
</TABLE>
Salaries and employee benefits, the largest component of other expense,
increased $352,000 or 6.4% during the first nine months of 1996 as compared
with the same period in 1995. This increase was primarily due to regular
pay increases made to the employees.
Net occupancy, furniture and equipment expense increased $73,000 or 4.3%
during the first nine months of 1996 compared with the same period in 1995.
This increase was attributable in part to the new facility that opened in
Arcola in September 1995, and several remodeling projects being completed at
facilities owned by subsidiaries of the Registrant.
FDIC insurance premiums increased $469,000 or 94.7% in the first nine
months of 1996 compared with 1995. This increase was the result of a
one-time charge to earnings of $758,000 on September 30, 1996 to record the
effect of a special assessment associated with the recapitalization of the
Savings Association Insurance Fund (the "SAIF"), made against Heartland, as
a SAIF-member, and against the Bank due to the SAIF-assessable deposits
acquired by the Bank from Heartland in 1992. The increase in insurance
premiums represented by the special assessment was offset by a reduction in
the deposit insurance assessments charged to members of the Bank Insurance
Fund (the "BIF"), such as the Bank, from a range of 0.23% to 0.31% of
deposits for the semi-annual assessment period which began January 1, 1995,
to a range of $1,000 to 0.27% of deposits for the semi-annual assessment
period which began January 1, 1996. As a result of the recapitalization of
the SAIF, the FDIC has issued a proposal to reduce the deposit insurance
assessment rates charged members of the SAIF to the same levels charged
members of the BIF effective January 1, 1997. See "Recent Regulatory
Developments". Assuming the FDIC's proposal is adopted, beginning January
1, 1997, assuming Heartland and the Bank continue to occupy the same risk
categories under the FDIC's risk-based assessment system, Heartland and the
Bank will be assessed at uniform rates for FDIC deposit insurance.
Other expense increased $110,000 or 3.5% for the first nine months of 1996
as compared with the same period of 1995. This increase was attributable to
an increase in supplies expense in connection with new machine readable
teller forms being printed.
INCOME TAXES
The Registrant recorded federal income tax expense of $1,663,000 for the
nine months ended September 30, 1996, as compared to $1,390,000 for the same
period in 1995. The effective federal income tax rate was 32.0% for the
nine months ended September 30, 1996, as compared with 31.6% in the same
period in 1995. Tax exempt interest as a percentage of total interest
income declined in 1996, which contributed to the higher tax rate. Also,
the Registrant recorded state income tax in the amount of $152,000 for the
nine months ended September 30, 1996. In past years, the Registrant's low
loan to deposit ratio and heavy reliance on interest income from state tax
exempt securities had combined to produce operating losses for state tax
purposes. These net operating loss carryforwards generated in years past
have now been exhausted.
LIQUIDITY
Liquidity represents the ability of the Registrant and its subsidiaries to
meet the present and future requirements of customers for new loans and
deposit withdrawals. Liquidity management focuses on the ability to obtain
funds economically and to maintain assets which may be converted into cash
at minimal costs. The Registrant has provided for its liquidity needs
through growth in core deposits, maturing loans and investment securities,
and by maintaining adequate balances in other short-term investments.
Management continually and carefully monitors its expected liquidity
requirements, focusing primarily on cash flows from operating, investing
and financing activities.
<PAGE>
A summary of the Registrant's cash flows from these sources during the
three month periods ended September 30, 1996 and 1995 and for the nine month
periods ended September 30, 1996 and 1995 follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
(in thousands) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Cash flow provided by (used in):
Operating activities $ 109 $ (308) $ 2,062 $ 3,037
Investing activities (17,178) (10,165) (40,751) (19,738)
Financing activities 25,504 14,990 45,724 24,153
Total $ 8,435 $4,517 $ 7,035 $ 7,452
</TABLE>
The Registrant's need for liquidity is influenced by several factors,
including the increased loan demand brought on by the economic expansion in
the Registrant's market area. Also affecting the Registrant's cash flow is
its relationship with seasonal customers such as public entities, highway
contractors and those associated with the agricultural industry.
CAPITAL RESOURCES
The Registrant and its subsidiaries have capital ratios which are higher
than the fully-phased in regulatory capital requirements. The requirements
call for a minimum total risk-based capital ratio of 8% and a minimum
leverage ratio of 3% for the most highly rated banks that do not expect
significant growth. All other institutions are required to maintain a ratio
of Tier 1 capital to total assets of 4% to 5% depending on their particular
circumstances and risk profiles. At September 30, 1996, the Registrant's
leverage ratio was 6.66%.
A tabulation of the Registrant's and its subsidiaries' risk-based capital
ratios as of September 30, 1996, follows:
<TABLE>
<CAPTION>
Tier one Total
risk-based risk-based
capital ratio capital ratio
<S> <C> <C>
First Mid-Illinois Bancshares, Inc. 10.7% 11.6%
First Mid-Illinois Bank & Trust, N.A. 11.3% 12.2%
Heartland Savings Bank 15.3% 16.0%
</TABLE>
Banks and bank holding companies are generally expected to operate at or
above the minimum capital requirements. These ratios are well in excess of
regulatory minimums and will allow the Registrant to operate without capital
adequacy concerns.
<PAGE>
RECENT REGULATORY DEVELOPMEMTS
On September 30, 1996, President Clinton signed into law the "Economic
Growth and Regulatory Paperwork Reduction Act of 1996" (the "Regulatory
Reduction Act"). Subtitle G of the Regulatory Reduction Act consists of the
"Deposit Insurance Funds Act of 1996" (the "DIFA"). The DIFA provides for a
one-time special assessment on each depository institution holding deposits
subject to assessment by the FDIC for the Savings Association Insurance Fund
(the "SAIF") in an amount which, in the aggregate, will increase the
designated reserve ratio of the SAIF (I.E., the ratio of the insurance
reserves of the SAIF to total SAIF-insured deposits) to 1.25% on October 1,
1996. Subject to certain exceptions, the special assessment is payable in
full on November 27, 1996. As a SAIF-member, Heartland is subject to the
special assessment. Additionally, the Bank holds SAIF-assessable deposits
as a result of branches acquired from Heartland in 1992. Thus, the Bank
will be subject to the special assessment with respect to those deposits.
Under the DIFA, the amount of the special assessment payable by an
institution is to be determined on the basis of the amount of
SAIF-assessable deposits held by the institution on March 31, 1995, or
acquired by the institution after March 31, 1995 from another institution
which held the deposits as of that date but is no longer in existence on
November 27, 1996. The DIFA provides for a 20% discount in calculating the
SAIF-assessable deposits of certain "Oakar" banks (I.E., Bank Insurance Fund
("BIF") member banks that hold deposits acquired from a SAIF member that are
deemed to remain SAIF insured) and certain "Sasser" banks (I.E., banks that
converted from thrift to bank charters but remain SAIF members). The Bank
qualifies for the 20% discount provided by the DIFA for "Oakar" banks, but
although Heartland is a "Sasser" bank, Heartland does not meet the
requirements established in the DIFA to qualify for this 20% discount. The
DIFA also exempts certain institutions from payment of the special
assessment (including institutions that are undercapitalized or that would
become undercapitalized as a result of payment of the special assessment),
and allows an institution to pay the special assessment in two installments
if there is a significant risk that by paying the special assessment in a
lump sum, the institution or its holding company would be in default under
or in violation of terms or conditions of debt obligations or preferred
stock issued by the institution or its holding company and outstanding on
September 13, 1995.
On October 8, 1996, the FDIC adopted a final regulation implementing the
SAIF special assessment. In that regulation, the FDIC set the special
assessment rate at 0.657% of SAIF-assessable deposits held on March 31,
1995. As a result of the special assessment, the Bank and Heartland have
each taken a charge against earnings for the quarter ended September 30,
1996, in the amount of $199,000 and $559,000, respectively. In November,
the FDIC has notified the Bank and Heartland that the dollar amounts of the
special assessments payable by the Bank and Heartland are estimated to be
$199,000 and $552,000, respectively. As discussed below, however, the
recapitalization of the SAIF resulting from the special assessment should
significantly reduce the ongoing deposit insurance expense of Heartland and
allow Heartland and the Bank to pay uniform rates for deposit insurance.
<PAGE>
In light of the recapitalization of the SAIF pursuant to the special
assessment authorized by the DIFA, the FDIC, on October 8, 1996, issued a
proposed rule that would reduce regular semi-annual SAIF assessments from
the current range of 0.23% - 0.31% of deposits to a range of 0% - 0.27% of
deposits. Under the proposal, the new rates would be effective October 1,
1996 for Oakar and Sasser banks, but would not take affect for other
SAIF-assessable institutions until January 1, 1997. From October 1, 1996
through December 31, 1996, SAIF-assessable institutions other than Oakar and
Sasser banks would, under the proposal, be assessed at rates ranging from
0.18% to 0.27% of deposits, which represents the amount the FDIC calculates
as necessary to cover the interest due for that period on outstanding
obligations of the Financing Corporation (the "FICO"), discussed below.
Because SAIF-assessable institutions have already been assessed at current
rates (I.E., 0.23% - 0.31% of deposits) for the semi-annual period ending
December 31, 1996, the proposal contemplates that the FDIC will refund the
amount collected from such institutions for the period from October 1, 1996
through December 31, 1996 which exceeds the amount due for that period under
the reduced assessment schedule. Assuming the proposal is adopted as
proposed, and assuming the Bank and Heartland each retains its current risk
classification under the FDIC's risk-based assessment system, the deposit
insurance assessments payable by Heartland will be reduced significantly, to
the same level currently paid by Heartland's BIF-member competitors and
reduce the Bank's assessments on its SAIF-assessable deposits to the same
level paid by the Bank on its BIF- assessable deposits.
Prior to the enactment of the DIFA, a substantial amount of the SAIF
assessment revenue was used to pay the interest due on bonds issued by the
FICO, the entity created in 1987 to finance the recapitalization of the
Federal Savings and Loan Insurance Corporation, the SAIF's predecessor
insurance fund. Pursuant to the DIFA, the interest due on outstanding FICO
bonds will be covered by assessments against both SAIF and BIF member
institutions beginning January 1, 1997. Between January 1, 1997 and
December 31, 1999, FICO assessments against BIF-member institutions, such
as the Bank, cannot exceed 20% of the FICO assessments charged SAIF-member
institutions. From January 1, 2000 until the FICO bonds mature in 2019,
FICO assessments will be shared by all FDIC-insured institutions on a
PRO RATA basis. The FDIC estimates that the FICO assessments for the period
January 1, 1997 through December 31, 1999 will be approximately 0.013% of
deposits for BIF members versus approximately 0.064% of deposits for SAIF
members, and will be less than 0.025% of deposits thereafter.
The DIFA also provides for a merger of the BIF and the SAIF on January 1,
1999, provided there are no state or federally chartered, FDIC-insured
savings associations existing on that date. To facilitate the merger of the
BIF and the SAIF, the DIFA directs the Treasury Department to conduct a
study on the development of a common charter and to submit a report, along
with appropriate legislative recommendations, to the Congress by March 31,
1997.
In addition to the DIFA, the Regulatory Reduction Act includes a number of
statutory changes designed to eliminate duplicative, redundant or
unnecessary regulatory requirements. Among other things, the Regulatory
Reduction Act establishes streamlined notice procedures for the commencement
of new nonbanking activities by bank holding companies, eliminates the need
for national banks, such as the Bank, to obtain OCC approval to establish an
off-site ATM, excludes ATM closures and certain branch office relocations
from the prior notice requirements applicable to branch closings,
significantly expands the authority of well-capitalized and well-managed
national banks to invest in office premises without prior regulatory
approval, and establishes time frames within which the FDIC must act on
applications by state banks, such as Heartland, to engage in activities
which, although permitted for the state bank under applicable state law, are
not permissible activities for national banks. The Regulatory Reduction Act
also clarifies the liability of a financial institution, when acting as a
lender or in a fiduciary capacity, under the federal environmental clean-up
laws. Although the full impact of the Regulatory Reduction Act on the
operations of the Registrant and its subsidiaries cannot be determined at
this time, management believes that the legislation will reduce compliance
costs to some extent and allow the Registrant and its subsidiaries somewhat
greater operating flexibility.
On August 10, 1996, President Clinton signed into law the Small Business
Job Protection Act of 1996 (the "Job Protection Act"). Among other things,
the Job Protection Act eliminates the percent-of-taxable-income ("PTI")
method for computing additions to a savings association's or savings bank's
tax bad debt reserves for tax years beginning after December 31, 1995, and
requires all savings associations and savings banks which have used the PTI
method to recapture, over a six year period, all or a portion of their tax
bad debt reserves added since the last taxable year beginning before January
1, 1988. The Job Protection Act allows a savings association or savings
bank to postpone the recapture of bad debt reserves for up to two years if
the institution meets a minimum level of mortgage lending activity during
those years. Heartland believes that it will engage in sufficient mortgage
lending activity during 1996 and 1997 to be able to postpone any recapture
of its bad debt reserves until 1998. As a result of these provisions of the
Job Protection Act, Heartland will determine additions to its tax bad debt
reserves using the same method as a commercial bank of comparable size, and,
if Heartland were to decide to convert to a commercial bank charter, the
changes in the tax bad debt recapture rules enacted in the Job Protection
Act should make such conversion less costly.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Registrant
or any of its subsidiaries is a party other than ordinary routine litigation
incidental to their respective businesses.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Net applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27. Financial Data Schedule
(b) Form 8-K
None filed during the nine month period ended September 30, 1996.
<PAGE>
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.
FIRST MID-ILLINOIS BANCSHARES, INC. (Registrant)
Date: November 12, 1996 /s/ Daniel E. Marvin, Jr.
Daniel E. Marvin, Jr.
President and Chief Executive Officer
Date: November 12, 1996 /s/ William S. Rowland
William S. Rowland
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 25882
<INT-BEARING-DEPOSITS> 3848
<FED-FUNDS-SOLD> 600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 119706
<INVESTMENTS-CARRYING> 3423
<INVESTMENTS-MARKET> 3430
<LOANS> 348065
<ALLOWANCE> 2705
<TOTAL-ASSETS> 523569
<DEPOSITS> 410316
<SHORT-TERM> 61006
<LIABILITIES-OTHER> 7246
<LONG-TERM> 6450
0
3100
<COMMON> 3748
<OTHER-SE> 31703
<TOTAL-LIABILITIES-AND-EQUITY> 523569
<INTEREST-LOAN> 20443
<INTEREST-INVEST> 5623
<INTEREST-OTHER> 202
<INTEREST-TOTAL> 26268
<INTEREST-DEPOSIT> 11409
<INTEREST-EXPENSE> 13110
<INTEREST-INCOME-NET> 13158
<LOAN-LOSSES> 36
<SECURITIES-GAINS> (10)
<EXPENSE-OTHER> 11898
<INCOME-PRETAX> 4721
<INCOME-PRE-EXTRAORDINARY> 4721
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3058
<EPS-PRIMARY> 3.11
<EPS-DILUTED> 2.94
<YIELD-ACTUAL> 7.89
<LOANS-NON> 230
<LOANS-PAST> 382
<LOANS-TROUBLED> 588
<LOANS-PROBLEM> 818
<ALLOWANCE-OPEN> 2814
<CHARGE-OFFS> 233
<RECOVERIES> 88
<ALLOWANCE-CLOSE> 2705
<ALLOWANCE-DOMESTIC> 2705
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 303
</TABLE>
