UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
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 identification No.)
incorporation or organization)
1515 CHARLESTON AVENUE, MATTOON, ILLINOIS 61938
(Address and Zip Code of Principal Executive Offices)
(217) 234-7454
(Registrant's telephone number, including area code)
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
(Title of class)
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 [ ]
As of July 31, 1997, 1,948,506 common shares, $4.00 par value, were
outstanding.
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(In thousands, except share data) (unaudited) 1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks:
Non-interest bearing $ 24,677 $ 20,158
Interest bearing 4,939 453
Federal funds sold 4,500 6,500
Cash and cash equivalents 34,116 27,111
Interest bearing deposits with other financial institutions 99 99
Investment securities:
Available-for-sale, at fair value 117,189 114,027
Held-to-maturity, at amortized cost
(estimated fair value of $3,527 and $3,491 at
June 30, 1997 and December 31, 1996, respectively) 3,517 3,481
Loans 357,892 348,217
Less allowance for loan losses 2,496 2,684
Net loans 355,396 345,533
Premises and equipment, net 12,008 10,735
Intangible assets 8,921 5,472
Other assets 8,880 8,939
TOTAL ASSETS $ 540,126 $ 515,397
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 55,682 $ 55,044
Interest bearing 397,306 358,632
Total deposits 452,988 413,676
Securities sold under agreements to repurchase 10,000 18,360
Federal Home Loan Bank advances 23,000 32,426
Long-term debt 6,700 6,200
Other liabilities 4,517 4,831
TOTAL LIABILITIES 497,205 475,493
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 share 3,100 3,100
Common stock, $4 par value; authorized 6,000,000 shares in 1997
and 2,000,000 shares in 1996; issued 1,937,562 shares in 1997
and 1,885,632 shares in 1996 7,750 3,771
Additional paid-in-capital 6,377 5,463
Retained earnings 25,774 27,578
Net unrealized gain (loss) on available-for-sale
investment securities, net of tax (56) 16
Less treasury stock at cost, 4,000 shares (24) (24)
TOTAL STOCKHOLDERS' EQUITY 42,921 39,904
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $540,126 $515,397
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended June 30, 1997 and 1996
(In thousands, except per share data) (unaudited)
1997 1996
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 7,504 $ 6,731
Interest on investment securities 1,921 1,864
Interest on federal funds sold 52 29
Interest on deposits with other financial institutions 13 10
Total interest income 9,490 8,634
INTEREST EXPENSE:
Interest on deposits 4,235 3,785
Interest on securities sold under agreements
to repurchase 125 122
Interest on Federal Home Loan Bank advances 344 221
Interest on Federal funds purchased 6 25
Interest on long-term debt 120 104
Total interest expense 4,830 4,257
Net interest income 4,660 4,377
Provision for loan losses 150 -
Net interest income after provision for loan losses 4,510 4,377
OTHER INCOME:
Trust revenues 452 319
Brokerage revenues 84 112
Service charges 457 439
Securities (losses) gains, net (6) 16
Mortgage banking income 100 92
Other 248 252
Total other income 1,335 1,230
OTHER EXPENSE:
Salaries and employee benefits 1,920 1,969
Occupancy, furniture and equipment, net 651 584
Amortization of intangible assets 208 137
Stationary and supplies 140 139
Legal and professional fees 193 232
Marketing and promotion 172 147
Other 634 588
Total other expense 3,918 3,796
Income before income taxes 1,927 1,811
Income taxes 688 618
Net income $ 1,239 $ 1,193
Per common share data:
Primary earnings per share $ .61 $ .62
Fully diluted earnings per share .57 .58
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
For the six months ended June 30, 1997 and 1996
(In thousands, except per share data) (unaudited)
1997 1996
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $14,701 $13,226
Interest on investment securities 3,780 3,723
Interest on federal funds sold 78 88
Interest on deposits with other financial institutions 23 28
Total interest income 18,582 17,065
INTEREST EXPENSE:
Interest on deposits 8,140 7,568
Interest on securities sold under agreements
to repurchase 283 260
Interest on Federal Home Loan Bank advances 699 377
Interest on Federal funds purchased 15 29
Interest on long-term debt 224 229
Total interest expense 9,361 8,463
Net interest income 9,221 8,602
Provision for loan losses 250 -
Net interest income after provision for loan losses 8,971 8,602
OTHER INCOME:
Trust revenues 874 652
Brokerage revenues 220 160
Service charges 861 849
Securities (losses) gains, net (6) 18
Mortgage banking income 169 197
Other 491 547
Total other income 2,609 2,423
OTHER EXPENSE:
Salaries and employee benefits 3,918 3,900
Occupancy, furniture and equipment, net 1,358 1,140
Amortization of intangible assets 339 274
Stationary and supplies 299 242
Legal and professional fees 385 417
Marketing and promotion 289 255
Other 1,111 1,110
Total other expense 7,699 7,338
Income before income taxes 3,881 3,687
Income taxes 1,377 1,318
Net income $ 2,504 $ 2,369
Per common share data:
Primary earnings per share $ 1.24 $ 1.23
Fully diluted earnings per share 1.16 1.15
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended June 30, 1997 and 1996
(In thousands) (unaudited)
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,239 $ 1,193
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 150 -
Depreciation, amortization and accretion, net 497 320
(Gain) loss on sale of securities, net 6 (16)
Gain on sale of loans held for sale, net (81) (61)
Origination of mortgage loans held for sale (8,534) (3,611)
Proceeds from sale of mortgage loans held for sale 8,090 3,298
Increase in other assets (802) (1,597)
Increase in other liabilities 110 1,164
Net cash provided by operating activities 675 690
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of mortgage servicing rights (21) (30)
Purchases of premises and equipment (265) (332)
Net increase in loans (10,670) (20,081)
Proceeds from sales of:
Securities available-for-sale 9,983 3,439
Proceeds from maturities of:
Securities available-for-sale 3,448 4,308
Securities held-to-maturity 20 20
Purchases of:
Securities available-for-sale (2,728) (8,154)
Securities held-to-maturity (170) (30)
Net cash used in investing activities (403) (20,860)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 5,807 2,956
Increase(decrease)in securities sold under agreements to repurchase (2,720) 1,767
Increase in Federal Home Loan Bank advances 370 17,272
(Decrease) in federal funds purchased - (3,200)
Repayment of long-term debt (250) (250)
Proceeds from issuance of common stock 427 900
Dividends paid on preferred stock (16) (16)
Dividends paid on common stock (192) (196)
Net cash provided by financing activities 3,426 19,233
Increase (decrease) in cash and cash equivalents 3,698 (937)
Cash and cash equivalents at beginning of period 30,418 16,804
Cash and cash equivalents at end of period $34,116 $15,867
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 5,148 $ 4,440
Income taxes 1,355 1,180
Loans transferred to real estate owned 363 276
Dividends reinvested in common shares 320 283
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1997 and 1996
(In thousands) (unaudited)
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,504 $ 2,369
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 250 -
Depreciation, amortization and accretion, net 909 630
(Gain) loss on sale of securities, net 6 (18)
Gain on sale of loans held for sale, net (116) (135)
Origination of mortgage loans held for sale (10,992) (5,778)
Proceeds from sale of mortgage loans held for sale 10,608 5,387
(Increase) decrease in other assets 93 (1,187)
Increase (decrease) in other liabilities (5) 685
Net cash provided by operating activities 3,257 1,953
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of mortgage servicing rights (42) (62)
Purchases of premises and equipment (521) (560)
Net increase in loans (9,153) (20,322)
Proceeds from sales of:
Securities available-for-sale 9,983 5,941
Proceeds from maturities of:
Securities available-for-sale 6,936 16,487
Securities held-to-maturity 130 20
Purchases of:
Securities available-for-sale (20,173) (24,997)
Securities held-to-maturity (170) (80)
Cash of acquired branch 22,416 -
Net cash provided by (used in) investing activities 9,406 (23,573)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 11,556 6,900
Decrease in securities sold under agreements to repurchase (8,360) (6,028)
Increase (decrease) in Federal Home Loan Bank advances (9,426) 13,372
Repayment of long-term debt (500) (500)
Proceeds from long-term debt 1,000 -
Proceeds from issuance of common stock 513 900
Dividends paid on preferred stock (16) (16)
Dividends paid on common stock (425) (436)
Net cash provided by (used in) financing activities (5,658) 14,192
Increase (decrease) in cash and cash equivalents 7,005 (7,428)
Cash and cash equivalents at beginning of period 27,111 23,295
Cash and cash equivalents at end of period $34,116 $15,867
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 9,836 $ 8,574
Income taxes 1,695 1,305
Loans transferred to real estate owned 495 290
Dividends reinvested in common shares 529 463
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of First
Mid-Illinois Bancshares, Inc. ("Registrant") and its wholly owned subsidiaries:
First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank"); Heartland Savings
Bank ("Heartland"); and Mid-Illinois Data Services, Inc. ("MIDS"). All
significant intercompany balances and transactions have been eliminated in
consolidation. 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 June 30, 1997 and 1996, and all such
adjustments are of a normal recurring nature. The results of the interim
periods ended June 30, 1997, are not necessarily indicative of the results
expected for the year ending December 31, 1997.
The 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. These financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Registrant's 1996 Form 10-K.
EARNINGS PER SHARE
A 2-for-1 common stock split was distributed in the form of a stock dividend
for the stockholders of record at the close of the business day of May 22,
1997. Accordingly, information with respect to shares of common stock and
earnings per share have been restated in all periods presented to fully reflect
the stock split. Earnings per share of common stock have been determined by
dividing net income for the period by the weighted average number of common
shares outstanding. Income for primary earnings per common share is adjusted
for dividends attributable to preferred stock. 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 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Primary 1,917,057 1,820,268 1,905,817 1,808,286
Fully diluted 2,167,661 2,070,872 2,156,421 2,058,890
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to provide a better
understanding of the consolidated financial condition and results of operations
of the Registrant and its subsidiaries for the three month and six month
periods ended June 30, 1997 and 1996. This discussion and analysis should be
read in conjunction with the consolidated financial statements appearing
elsewhere in this Form 10-Q.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This report contains certain forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Registrant intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Registrant, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Registrant's
ability to predict results or the actual effect of future plans or strategies
is inherently uncertain. Factors which could have a material adverse affect on
the operations and future prospects of the Registrant and the subsidiaries
include, but are not limited to, changes in: interest rates, general economic
conditions, legislative/regulatory changes, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board, the quality or composition of the loan or investment portfolios,
demand for loan products, deposit flows, competition, demand for financial
services in the Registrant's market area and accounting principles, policies
and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed
on such statements. Further information concerning the Registrant and its
business, including additional factors that could materially affect the
Registrant's financial results, is included in the Registrant's filings with
the securities and Exchange Commission.
1997 ACQUISITION
During the first quarter of 1997, the Registrant acquired the Charleston,
Illinois branch location and the deposit base of First of America Bank. This
cash acquisition added approximately $28 million to our deposit totals and
gives us the opportunity to serve the Charleston market from an outstanding
location at the intersection of Lincoln and University Avenues, one of the
highest traffic areas in east central Illinois.
OVERVIEW
Net income for the three month period ended June 30, 1997, increased to
$1,239,000, up 3.9% from $1,193,000 earned in the same quarter of 1996. On a
fully diluted basis, earnings per share for the quarterly period decreased one
cent per share to $.57 as compared to $.58 per share earned in the second
quarter of 1996. An increase of $283,000 in net interest income together with
higher levels of non interest income, primarily from trust and brokerage
activities, contributed to increased profitability. Noninterest expenses,
<PAGE>
such as occupancy expense and the amortization of intangible assets associated
with the acquisition of a Charleston, Illinois branch facility, reduced second
quarter 1997 earnings compared to the same period of 1996. A summary of the
factors which contributed to the changes in quarterly net income follows (in
thousands):
TABLE 1-A EFFECT ON QUARTERLY EARNINGS
<TABLE>
<CAPTION>
1997 VS 1996
<S> <C>
Net interest income $ 283
Provision for loan losses (150)
Other income, including securities transactions 105
Other expenses (122)
Income taxes 70
Increase in net income $ 46
</TABLE>
Net income for the six month period ended June 30, 1997 increased to
$2,504,000, up 5.7% from $2,369,000 earned in the six month period ended June
30, 1996. On a fully diluted basis, earnings per share for the period
increased one cent per share to $ 1.16 as compared to $1.15 per share earned in
the same period of 1996. An increase of $619,000 in net interest income
together with higher levels on non interest income, primarily from trust and
brokerage activities, contributed to increased profitability. The Registrant
provided $250,000 for possible loan losses during the first six months. No
provision was made in the first six months of 1996. Increased equipment,
supplies and other non interest expenses associated with recent technology
investments also reduced the income of the first six months of 1997. A summary
of the factors which contributed to the changes in year-to-date net income
follows (in thousands):
TABLE 1-B EFFECT ON YEAR-TO-DATE EARNINGS
<TABLE>
<CAPTION>
1997 VS 1996
<S> <C>
Net interest income $ 619
Provision for loan losses (250)
Other income, including securities transactions 186
Other expenses (361)
Income taxes 59
Increase in net income $ 135
</TABLE>
The Registrant's annualized return on average total assets increased to .96%
for the six months ended June 30, 1997 as compared to .85% for the year ended
December 31, 1996. Return on average total equity and return on average common
equity increased to 12.17% and 12.40%, respectively for the six month period
ended June 30, 1997 as compared to 11.03% and 11.18% for the year ended
December 31, 1996. Average total equity to average assets increased to 7.92%
for the six months ended June 30, 1997 compared to 7.69% for the year ended
December 31, 1996.
<PAGE>
NET INTEREST INCOME
The largest source of operating revenue for the Registrant is net interest
income. Net interest income represents the difference between total interest
income earned on earning assets and total interest expense paid on interest-
bearing liabilities. The amount of interest income is dependent upon many
factors including the volume and mix of earning assets, the general level of
interest rates and the dynamics of changes in interest rates. The cost of
funds necessary to support earning assets varies with the volume and mix of
interest-bearing liabilities and the rates paid to attract and retain such
funds.
For purposes of the following discussion and analysis, the interest earned on
tax-exempt securities is adjusted to an amount comparable to interest subject
to normal income taxes. The adjustment is referred to as the tax equivalent
("TE") adjustment. The Registrant's average balances, interest income and
expense and rates earned or paid for major balance sheet categories are set
forth in the following table (dollars in thousands):
<PAGE>
TABLE 2 DISTRIBUTION OF CONSOLIDATED ASSETS, LIABILITIES AND STOCKHOLDERS'
EQUITY - INTEREST, RATES AND NET YIELDS
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED YEAR ENDED
JUNE 30, 1997 (ANNUALIZED)(4) DECEMBER 31, 1996
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST(4) RATE BALANCE INTEREST RATE
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest bearing deposits $ 926 $ 46 5.01% $ 1,264 $ 65 5.14%
Federal funds sold 2,895 156 5.39 3,403 180 5.29
Investment securities
Taxable 109,658 6,874 6.27 111,640 6,858 6.14
Tax-exempt(1) 12,676 1,040 8.20 11,442 953 8.33
Loans (2)(3) 350,317 29,402 8.39 326,302 27,827 8.53
Total earning assets 476,472 37,518 7.87 454,051 35,883 7.90
Cash and due from banks 18,027 17,051
Premises and equipment 11,554 9,864
Other assets 16,021 12,854
Allowance for loan losses (2,704) (2,762)
Total assets $ 519,370 $ 491,058
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Bearing Deposits
Demand deposits $ 122,117 $ 3,502 2.87% $ 110,708 $ 3,085 2.79%
Savings deposits 39,332 1,024 2.60 39,364 1,069 2.72
Time deposits 217,528 11,753 5.40 204,362 11,156 5.46
Securities sold under
agreements to repurchase 12,426 567 4.56 12,411 574 4.62
FHLB advances 24,097 1,398 5.80 23,920 1,405 5.87
Federal funds purchased 548 30 5.51 800 44 5.50
Long-term debt 6,596 448 6.80 6,819 472 6.92
Total interest bearing 422,644 18,722 4.43 398,384 17,805 4.47
liabilities
Demand deposits 51,312 50,789
Other liabilities 4,254 4,102
Stockholders' equity 41,160 37,783
Total liabilities & equity $ 519,370 $ 491,058
Net interest income (TE) $ 18,796 $ 18,078
Net interest spread 3.44% 3.43%
Impact of non-interest bearing
funds .50% .55%
Net yield on interest earning
assets (TE) 3.94% 3.98%
(1) Interest income and rates are presented on a tax equivalent basis ("TE") assuming a federal income tax
rate of 34%.
(2) Loan fees are included in interest income and are not material.
(3) Nonaccrual loans have been included in the average balances.
(4) 1997 interest income and expense amounts have been annualized based on results through June 30, 1997.
The annualized amounts are not necessarily indicative of the actual amounts that are expected or that
will occur for the year ending December 31, 1997.
</TABLE>
<PAGE>
Changes in net interest income may also be analyzed by segregating the volume
and rate components of interest income and interest expense. The following
table summarizes the approximate relative contribution of changes in average
volume and interest rates to changes in net interest income (TE) for the past
year (in thousands):
TABLE 3 ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
<TABLE>
<CAPTION>
1997 COMPARED TO 1996
INCREASE - (DECREASE)(5)
TOTAL RATE/
CHANGE VOLUME RATE VOLUME(4)
<S> <C> <C> <C> <C>
EARNING ASSETS:
Interest bearing deposits $ (19) $ (17) $ (2) $ -
Federal funds sold (24) (27) 3 -
Investment securities:
Taxable 16 (122) 140 (2)
Tax-exempt (1) 87 103 (15) (1)
Loans (2)(3) 1,575 2,048 (441) (32)
Total interest income 1,635 1,985 (315) (35)
Interest-Bearing Liabilities
Interest-bearing deposits
Demand deposits 417 318 90 9
Savings deposits (45) (1) (44) -
Time deposits 597 719 (115) (7)
Securities sold under
agreements to repurchase (7) 1 (8) -
FHLB advances (7) 10 (17) -
Federal funds purchased (14) (14) - -
Long-term debt (24) (15) (8) (1)
Total interest expense 917 1,018 (102) 1
Net interest income $ 718 $ 967 $ (213) $ (36)
(1) Interest income and rates are presented on a tax equivalent basis, assuming a federal income
tax rate of 34%.
(2) Loan fees are included in interest income and are not material.
(3) Nonaccrual loans are not material and have been included in the average balances.
(4) The changes in rate/volume are computed on a consistent basis by multiplying the change in
rates with the change in volume.
(5) 1997 interest income and expense amounts have been annualized based on results through
June 30, 1997. The annualized amounts are not necessarily indicative of the actual amounts
that are expected or that will occur for the year ending December 31, 1997.
</TABLE>
On an annualized tax equivalent basis, net interest income increased $718,000,
or 4.0% for 1997, compared to an annualized increase of $427,000, or 2.5% for
the same period of 1996. As set forth in Table 3, the improvement in net
interest income was due to the increase in the volume of earning assets and
interest-bearing liabilities, partially offset by the effect of changes in
interest rates.
In 1997, average earning assets increased by $22,421,000, or 4.9%, and average
interest-bearing liabilities increased by $24,260,000, or 6.1%, compared with
1996 (Table 2). The higher volumes of earning assets and interest-bearings
liabilities were primarily the result of strong loan growth in 1996 and 1997.
As a percentage of average earning assets, average loans increased from 71.9%
<PAGE>
during 1996 to 73.5% during the first six months of 1997 and average securities
decreased from 27.1% during 1996 to 25.7% during the first six months of 1997.
PROVISION FOR LOAN LOSSES
The provision for loan losses in the second quarter of 1997 was $150,000 and
in the first six months of 1997 was $250,000 while no provision was made in the
same periods of 1996. This was primarily in response to the increase in the
loan portfolio and charge offs during the first half of 1997. For information
on loan loss experience and nonperforming loans, see the "Nonperforming Loans"
and "Loan Quality and Allowance for Loan Losses" sections later in this
document.
OTHER INCOME
An important source of the Registrant's revenue is derived from other
income. The following table sets forth the major components of other income
for the six months ended June 1997 and 1996 (in thousands):
TABLE 4 OTHER INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
1997 1996 $ CHANGE
<S> <C> <C> <C>
Trust $ 874 $ 652 $ 222
Brokerage 200 160 40
Securities gains(losses) (6) 18 (24)
Service charges 861 849 12
Mortgage banking 169 197 (28)
Other 491 547 (56)
Total other income $ 2,609 $ 2,423 $ 186
</TABLE>
The Registrant's other income increased to $2,609,000 in the first six months
of 1997 as compared to $2,423,000 in the first six months of 1996.
Trust revenues increased to $874,000 in the first six months of 1997 as
compared to $652,000 in the first six months of 1996. Trust assets increased
to $289,113,000 at June 30, 1997 from $223,117,000 at December 31, 1996 and
$207,688,000 at June 30, 1996. During 1997, increased revenues were primarily
due to an increase in fees generated on retirement plans and farm agencies
under management and the increase in trust assets.
Revenues from brokerage and annuity sales increased by $40,000 in the first
six months of 1997. This increase was the result of the mid-1996 expansion of
the product line, offering full-service brokerage and increasing marketing
efforts in this area.
There were net securities losses of $6,000 in the first six months of 1997 as
compared to $18,000 in net securities gains in the first six months of 1996.
Service charges amounted to $861,000 in the first six months of 1997 as
compared to $849,000 in the first six months of 1996. The increase of $12,000
or 1.4% in service charges in 1997 as compared to 1996 was primarily due to an
increase in the activity of overdraft accounts.
<PAGE>
Heartland originates loans for its own portfolio and for sale to others.
Mortgage banking income from loans originated and subsequently sold into the
secondary market amounted to $169,000 in the first six months of 1997 as
compared to $197,000 in the first six months of 1996. Included in 1997 and
1996 mortgage banking income is the amount of the mortgage servicing rights
recorded on loans originated and sold into the secondary market with
servicing retained amounting to $31,000 and $4,000 for the six months ended
June 30, 1997 and 1996, respectively. In 1997, the volume of loans sold by
Heartland was $10.5 million representing 162 loans as compared to $5.4
million representing 115 loans during the first six months of 1996.
OTHER EXPENSE
The major categories of other expense include salaries and employee benefits,
occupancy and equipment expenses and other operating expenses associated with
day-to-day operations. The following table sets forth the major components of
other expense for the first six months of 1997 and 1996 (in thousands):
TABLE 5 OTHER EXPENSE
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
1997 1996 $ CHANGE
<S> <C> <C> <C>
Salaries and benefits $ 3,918 $ 3,900 $ 18
Occupancy, furniture & equipment 1,358 1,140 218
FDIC premiums (15) 137 (152)
Amortization of intangibles 339 274 65
Stationary and supplies 299 242 57
Legal and professional fees 385 417 (32)
Marketing and promotion 289 255 34
Other operating expenses 1,126 973 153
Total other expense $ 7,699 $ 7,338 $ 361
</TABLE>
The Registrant's non-interest expense amounted to $7,699,000 in the first six
months of 1997 as compared to $7,338,000 in the first six months of 1996.
Salaries and employee benefits, the largest component of other expense,
remained constant at $3,918,000 in the first six months of 1997 as compared to
$3,900,000 in the first six months of 1996. At June 30, 1997, the number of
full-time equivalent ("FTE") employees totaled 255 compared to 252 at June 30,
1996.
Occupancy, furniture and equipment expense increased to $1,358,000 in the
first six months of 1997 as compared to $1,140,000 in the first six months of
1996. The 19.1% increase was primarily due to the increase in depreciation
expense recorded on the technology equipment put into service at the beginning
of 1997. This included items relating to document imaging, report imaging,
home banking and wide-area network projects.
The net negative amount of FDIC premiums recorded in the first six months of
1997 represented a partial refund on the 1996 assessments paid to the Savings
Association Insurance Fund in the amount of $68,945 and the first six months
1997 premium expense of $53,533.
<PAGE>
Amortization of intangible assets increased 23.7% when comparing the first
six months of 1997 and 1996. This net increase is the result of a decrease of
approximately $25,000 from the Registrant's core deposit premium associated with
a 1986 bank acquisition being fully amortized, as well as an increase of
$91,000 during the second quarter of 1997 in association with the acquisition
by the Registrant of a Charleston, Illinois branch. Core deposit premium and
goodwill generated from this transaction amounted to $3.8 million, which will
be amortized over 10 and 15 years, respectively.
During the first six months of 1997, various categories of other operating
expenses were impacted by the implementation of several large technology
projects including imaging of customer checks and statements and the
establishment of a wide-area network, along with new products being introduced
such as pc banking.
INCOME TAXES
Total income tax expense amounted to $1,377,000 in the first six months of
1997 as compared to $1,318,000 in the first six months of 1996. The tax
expense included state income tax expense totaling $116,000 and $149,000 for
the first six months of 1997 and 1996, respectively. Effective tax rates
were 35.5% and 35.7% respectively, for the first six months of 1997 and 1996.
The decrease in the effective tax rate was in part due to an increase of
state tax-exempt interest income which resulted from a change in the mix of
the investment portfolio.
ANALYSIS OF BALANCE SHEETS
SECURITIES
The Registrant's overall investment goal is to maximize earnings while
maintaining liquidity in securities having minimal credit risk. The types and
maturities of securities purchased are primarily based on the Registrant's
current and projected liquidity and interest rate sensitivity positions. The
following table sets forth the amortized cost of the securities at June 30,
1997 and December 31, 1996 (in thousands):
TABLE 6 INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of
U.S. Government Agencies
and corporations $ 87,704 73% $ 86,518 74%
Obligations of states and
political subdivisions 13,883 11 11,398 10
Mortgage-backed securities 16,651 14 15,283 13
Other securities 2,552 2 4,285 3
Total securities $120,790 100% $117,484 100%
</TABLE>
At June 30, 1997 the Registrant's investment portfolio showed an increase in
mortgage-backed securities, U. S. Government agency securities and municipal
securities.
<PAGE>
The amortized cost, gross unrealized gains and losses and estimated fair
values for available-for-sale and held-to-maturity securities by major security
type at June 30, 1997 and December 31, 1996 were as follows (in thousands):
TABLE 7 INVESTMENTS AT AMORTIZED COST / ESTIMATED FAIR VALUE
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<C> <C> <C> <C> <C>
JUNE 30, 1997
AVAILABLE-FOR-SALE:
U.S. Treasury securities
and obligations of
U.S. Government Agencies
and corporations $ 87,704 $ 138 $ (546) $ 87,296
Obligations of states and
political subdivisions 10,366 325 (1) 10,690
Mortgage-backed securities 16,651 111 (111) 16,651
Federal Home Loan Bank stock 2,115 - - 2,115
Other securities 437 - - 437
Total available-for-sale $117,273 $ 574 $ (658) $117,189
HELD-TO-MATURITY:
Obligations of states and
political subdivisions $ 3,517 $ 34 $ (24) $ 3,527
DECEMBER 31, 1996
AVAILABLE-FOR-SALE:
U.S. Treasury securities
and obligations of
U.S. Government Agencies
and corporations $ 86,518 $ 342 $ (585) $ 86,275
Obligations of states and
political subdivisions 7,917 249 (3) 8,163
Mortgage-backed securities 15,283 103 (82) 15,304
Federal Home Loan Bank stock 3,878 - - 3,878
Other securities 407 - - 407
Total available-for-sale $114,003 $ 694 $ (670) $114,027
HELD-TO-MATURITY:
Obligations of states and
political subdivisions $ 3,481 $ 28 $ (18) $ 3,491
</TABLE>
The following table indicates the expected maturities of investment
securities classified as available-for-sale and held-to-maturity, presented
at amortized cost, at June 30, 1997 (dollars in thousands) and the weighted
average yield for each range of maturities. Mortgage backed securities are
<PAGE>
aged according to their weighted average life. All other securities are
shown at their contractual maturity.
TABLE 8 INVESTMENT MATURITY SCHEDULE
<TABLE>
<CAPTION>
ONE AFTER 1 AFTER 5 AFTER
YEAR THROUGH THROUGH TEN
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 $ 15,992 $ 53,945 $ 17,269 $ 498 $ 87,704
Obligations of state and
political subdivisions 735 4,830 999 3,802 10,366
Mortgage-backed securities 1,260 8,900 1,073 5,418 16,651
Other securities - - - 2,552 2,552
Total Investments $ 17,987 $ 67,675 $ 87,016 $ 12,270 $117,273
Weighted average yield 5.36% 6.30% 6.48% 6.34% 6.19%
Full tax equivalent yield 5.47% 6.51% 6.64% 7.41% 6.47%
HELD-TO-MATURITY:
Obligations of state and
political subdivisions $ 714 $ 1,983 $ 353 $ 465 $ 3,517
Weighted average yield 4.75% 5.10% 5.73% 5.74% 5.18%
Full tax equivalent yield 7.19% 7.73% 8.69% 8.71% 7.84%
</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.
With the exception of obligations of the U.S. Treasury and other U.S.
Government agencies and corporations, there were no investment securities of
any single issuer the book value of which exceeded 10% of stockholders'
equity at June 30, 1997.
Proceeds from sales of investment securities and realized gains and losses
were as follows during the six months ended June 30, 1997 and the year ended
December 31, 1996 (in thousands):
TABLE 9 PROCEEDS FROM SALES
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
<S> <C> <C>
Proceeds from sales $9,983 $31,667
Gains 20 155
Losses 26 164
</TABLE>
<PAGE>
LOANS
The loan portfolio (net of unearned discount) is the largest category of the
Registrant's earning assets. The following table summarizes the composition of
the loan portfolio at June 30, 1997 and December 31, 1996 (in thousands):
TABLE 10 COMPOSITION OF LOANS
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
<S> <C> <C>
Commercial, financial
and agricultural $76,681 $ 75,028
Real estate - mortgage 249,781 241,240
Installment 30,215 30,423
Other 1,215 1,526
Total loans $357,892 $348,217
</TABLE>
At June 30, 1997, the Registrant had loan concentrations in agricultural
industries of 12.8% of outstanding loans as compared to 13.3% at December 31,
1996. The Registrant had no further industry loan concentrations in excess of
10% of outstanding loans.
TABLE 11 LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY
The following table presents the balance of loans outstanding as of June 30,
1997, by maturities (dollars in thousands):
<TABLE>
<CAPTION>
MATURITY (1)
OVER 1
ONE YEAR THROUGH OVER
OR LESS(2) 5 YEARS 5 YEARS TOTAL
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $53,792 $ 21,072 $ 1,817 $ 76,681
Real estate - mortgage 41,017 131,963 76,801 249,781
Installment 6,464 22,627 1,124 30,215
Other 291 510 414 1,215
Total loans $101,564 $176,172 $80,156 $357,892
(1) Based on scheduled principal repayments.
(2) Includes demand loans, past due loans and overdrafts.
</TABLE>
As of June 30, 1997, loans with maturities over one year consisted of
$213,157,000 in fixed rate loans and $43,171,000 in variable rate loans. The
loan maturities noted above are based on the contractual provisions of the
individual loans. The Registrant has no general policy regarding rollovers and
borrower requests, which are handled on a case by case basis.
<PAGE>
NONPERFORMING LOANS
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 loans not included in (a) and (b) above which are
defined as "troubled debt restructurings".
The following table presents information concerning the aggregate amount of
nonperforming loans (in thousands):
TABLE 12 NONPERFORMING LOANS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
<S> <C> <C>
Nonaccrual loans $ 790 $ 790
Loans past due ninety days
or more and still accruing 320 575
Restructured loans which are
performing in accordance
with revised terms 431 580
</TABLE>
Interest income for the six months ended June 30, 1997 that would have been
reported if nonaccrual and restructured loans had been performing totaled
$118,000. Interest income that was included in income for the same period
totaled $18,000.
The Registrant's policy generally is to discontinue the accrual of interest
income on any loan for which principal or interest is 90 days past due and
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.
LOAN QUALITY AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's estimate of the reserve
necessary to adequately cover losses that could ultimately be realized from
current loan exposures. The provision for loan losses is the charge against
current earnings that is determined by management as the amount needed to
maintain an adequate allowance for loan losses. In determining the adequacy of
the allowance for loan losses, and therefore the provision to be charged to
current earnings, 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 exposure to individual borrowers is quantified in the form of
specific allocations 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 renegotiated 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 loan loss experience of other banks, thrifts
and financial services holding companies.
<PAGE>
Management recognizes that there are risk factors which are inherent in the
Registrant's loan portfolio. All financial institutions face risk factors in
their loan portfolios because risk exposure is a function of the business. The
Registrant's operations (and therefore its loans) are concentrated in east
central Illinois, an area where agriculture is the dominant industry.
Accordingly, lending and other business relationships with agriculture-based
businesses are critical to the Registrant's success. At June 30, 1997, the
Registrant's loan portfolio included $45.9 million of loans to borrowers whose
businesses are directly related to agriculture. The balance decreased $.5
million from $46.4 million at December 31, 1996. In addition to agricultural
lending, the Registrant has historically had substantial residential mortgage
lending activity in and around east central Illinois. Residential mortgage
loans amounted to $185.2 million or 51.7% of total loans at June 30, 1997. At
December 31, 1996, these loans amounted to $172.3 million or 49.5% of total
loans.
TABLE 13 ALLOWANCE FOR LOAN LOSSES
Loan loss experiences are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1997 1996
<S> <C> <C>
Average loans outstanding,
net of unearned income $350,317 $326,302
Allowance-beginning of year 2,684 2,814
Charge-offs:
Commercial, financial
and agricultural 344 238
Real estate-mortgage 53 6
Installment 60 131
Total charge-offs 457 375
Recoveries:
Commercial, financial
and agricultural 6 53
Real estate-mortgage 1 -
Installment 12 45
Total recoveries 19 98
Net charge-offs 438 277
Provision for loan losses 250 147
Allowance-end of period $2,496 $ 2,684
Ratio of net charge-offs to
average loans .13% .08%
Ratio of allowance for loan
losses to loans outstanding
(less unearned interest
at end of period) .70% .77%
Ratio of allowance for loan
losses to nonperforming
loans 162.0% 138.0%
</TABLE>
<PAGE>
The Registrant minimizes credit risk by adhering to sound underwriting and
credit review policies. These policies are reviewed at least annually, and
changes are approved by the board of directors. Senior management is actively
involved in business development efforts and the maintenance and monitoring of
credit underwriting and approval. The loan review system and controls are
designed to identify, monitor and address asset quality problems in an accurate
and timely manner. On a monthly basis, the board of directors reviews the
status of problem loans. In addition to internal policies and controls,
regulatory authorities periodically review asset quality and the overall
adequacy of the allowance for loan losses.
During the first six months of 1997, the Registrant had net charge-offs of
$438,000 as compared to $277,000 for the year ended December 31, 1996 and
provided $250,000 during the first six months 1997. During 1997, the
Registrant experienced collection problems with four specific borrowers which
in the aggregate comprised $348,000 (80%) of 1997 charge offs. Management
does not anticipate any significant future recoveries from these charged off
loans. These charge offs, as well as the Registrant's general expectations
for future growth in the loan portfolio, resulted in the 1997 increase in the
provision for loan losses.
At June 30, 1997, the allowance was $2,496,000, or .70% of total loans, and
162% of nonperforming loans. On December 31, 1996, the allowance for loan
losses amounted to $2,684,000, or .77% of total loans, and 138% of
nonperforming loans.
The allowance for loan losses, in management's judgment, would be allocated
as follows to cover potential loan losses (in thousands):
TABLE 14 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
ALLOWANCE % OF ALLOWANCE % OF
FOR LOANS FOR LOANS
LOAN TO TOTAL LOAN TO TOTAL
LOSSES LOANS LOSSES LOANS
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 1,289 21.4% $ 1,854 21.5%
Real estate-mortgage 319 69.8 434 69.3
Installment 201 8.4 152 8.7
Other - .4 - .5
Total allocated 1,809 2,440
Unallocated 687 N/A 244 N/A
Allowance at end of
reported period $2,496 $100.0% $ 2,684 100.0%
</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.
<PAGE>
DEPOSITS
Funding the Registrant's earning assets is substantially provided by a
combination of consumer, commercial and public fund deposits. The Registrant
continues to focus its strategies and emphasis on retail core deposits, the
major component of funding sources. The following table sets forth the average
deposits and weighted average rates at June 30, 1997 and December 31, 1996
(dollars in thousands):
TABLE 15 COMPOSITION OF DEPOSITS
<TABLE>
<CAPTION>
PERIOD ENDED PERIOD ENDED
JUNE 30, 1997 DECEMBER 31, 1996
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C>
Demand deposits:
Non-interest bearing $ 51,312 - $ 50,789 -
Interest bearing 122,117 2.87% 110,708 2.79%
Savings 39,332 2.60 39,364 2.72
Time deposits 217,528 5.40 204,362 5.46
Total average deposits $430,289 3.78% $405,223 3.78%
</TABLE>
The following table sets forth the maturity of time deposits of $100,000 or
more (in thousands):
TABLE 16 MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
JUNE 30, December 31,
1997 1996
<C> <C> <C>
3 months or less $ 20,789 $ 20,658
Over 3 through 6 months 9,436 7,322
Over 6 through 12 months 16,307 6,897
Over 12 months 7,533 5,893
Total $ 54,065 $ 40,770
</TABLE>
OTHER BORROWINGS
Other borrowings consist of securities sold under agreements to repurchase,
Federal Home Loan Bank advances, and federal funds purchased. Information
relating to other borrowings for the periods ended June 30, 1997 and December
31, 1996 is presented below (in thousands):
<PAGE>
TABLE 17 SCHEDULE OF OTHER BORROWINGS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
<S> <C> <C>
1997 1996
End of Period:
Securities sold under agreements to repurchase $10,000 $18,360
Federal Home Loan Bank advances:
Overnight - 19,733
Fixed term - due in one year or less 16,000 11,693
Fixed term - due after one year 7,000 1,000
Total $33,000 $50,786
Average interest rate at end of period 5.43% 5.91%
Maximum Outstanding at Any Month-end
Securities sold under agreements to repurchase $17,710 $18,860
Federal Home Loan Bank advances:
Overnight 23,733 23,083
Fixed term - due in one year or less 16,000 20,693
Fixed term - due after one year 9,000 7,500
Federal funds purchased - 6,500
Averages for the Year
Securities sold under agreements to repurchase $12,426 $12,411
Federal Home Loan Bank advances:
Overnight 13,246 8,136
Fixed term - due in one year or less 4,189 9,352
Fixed term - due after one year 6,663 6,432
Federal funds purchased 548 800
Average interest rate during the year 5.38% 5.45%
</TABLE>
Securities sold under agreements to repurchase primarily represent borrowings
originated as part of cash management services offered to corporate customers.
The remaining balance of securities sold under agreements to repurchase
represents term repurchase agreements with the State of Illinois.
Federal Home Loan Bank advances represent borrowings by the Bank Subsidiaries
to fund loan demand.
INTEREST RATE SENSITIVITY
The Registrant seeks to maximize its net interest margin within an acceptable
level of interest rate risk. Interest rate risk can be defined as the amount
of forecasted net interest income that may be gained or lost due to favorable
or unfavorable movements in interest rates. Interest rate risk, or
sensitivity, arises when the maturity or repricing characteristics of assets
differ significantly from the maturity or repricing characteristics of
liabilities.
<PAGE>
The Registrant monitors its interest rate sensitivity position to maintain a
balance between rate sensitive assets and rate sensitive liabilities. This
balance serves to limit the adverse effects of changes in interest rates. The
Registrant's asset/liability management committee oversees the interest rate
sensitivity position and directs the overall allocation of funds in an effort
to maintain a cumulative one-year gap to earning assets ratio of less than
30% of total earning assets.
In the banking industry, a traditional measurement of interest rate
sensitivity is known as "gap" analysis, which measures the cumulative
differences between the amounts of assets and liabilities maturing or repricing
at various intervals. The following table sets forth the amounts of interest-
earning assets and interest-bearing liabilities outstanding at June 30, 1997,
which are anticipated by the Registrant to reprice or mature in each of the
future time periods shown. Except for savings and N.O.W. accounts the amounts
of assets and liabilities shown which reprice or mature during a particular
period are based upon the contractual terms of the asset or liability. Regular
savings accounts are assumed to be withdrawn over a 60 month period and NOW
accounts were assumed to be withdrawn over an 18 month period. The two deposit
types collectively totaled $118 million at June 30, 1997. Management believes
that these assumptions approximate actual experience and considers them
reasonable, although the actual amortization and repayment of assets and
liabilities may vary substantially.
TABLE 18 GAP TABLE
<TABLE>
<CAPTION>
(In thousands) NUMBER OF MONTHS UNTIL NEXT REPRICING OPPORTUNITY
0-1 1-3 3-6 6-12 12+
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Deposits with other financial
institutions $ 4,939 $ 99 $ - $ - $ -
Federal funds sold 4,500 - - - -
Taxable investment securities 27,336 12,892 4,842 5,778 55,918
Nontaxable investment securities 5 472 621 930 11,902
Loans 38,630 22,340 25,345 41,266 230,313
Total $ 75,420 $ 35,704 $ 30,907 $ 47,974 $298,133
INTEREST BEARING LIABILITIES:
Savings and N.O.W. accounts (1) 5,053 10,105 15,158 30,317 57,814
Money market accounts 41,492 - - - -
Other time deposits 22,900 50,853 40,002 58,225 65,386
Other borrowings 26,000 - - - 7,000
Long-term debt 6,700 - - - -
Total $102,145 $ 60,958 $ 55,160 $ 88,542 $130,200
Periodic GAP $(26,725) $(25,254) $(24,253) $ (40,568) $167,933
Cumulative GAP $(26,725) $(51,979) $(76,232) $(116,800) $ 51,133
GAP as a % of interest earning assets:
Periodic (5.5%) (5.2%) (5.0%) (8.3%) 34.4%
Cumulative (5.5%) (10.6%) (15.6%) (23.9%) 10.5%
(1) Historically the Registrant's NOW accounts and savings deposits have been relatively
insensitive to interest rate changes. However, the Registrant considers a portion of
these deposits to be rate sensitive based on historical trends and management's
expectations.
</TABLE>
<PAGE>
At June 30, 1997, the table above reflects that the Registrant was liability
sensitive due to the level of interest bearing demand deposits and savings
deposits which are generally subject to immediate withdrawal and are
repriceable at any time. As such, the effect of an increase in the prime
rate of 100 basis points would decrease net interest income by approximately
$520,000 in 90 days and $1,168,000 in 12 months assuming no management
intervention. A fall in the interest rates would have the opposite effect
for the same period. In analyzing interest rate sensitivity, the Registrant
considers these differences and incorporates other assumptions and factors,
such as balance sheet growth and prepayments, to better measure interest rate
risk.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as ARM loans, have features
which restrict changes in interest rates on a short-term basis and over the
life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. Finally, the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
Interest rate sensitivity using a static GAP analysis basis is only one of
several measurements of the impact of interest rate changes on net interest
income used by the Registrant. Its actual usefulness in assessing the effect
of changes in interest rates varies with the constant changes which occur in
the composition of the Registrant's earning assets and interest bearing
liabilities. For this reason, the Registrant uses financial models to
project interest income under various rate scenarios and various assumptions
relative to the prepayments, reinvestment and roll overs of assets and
liabilities.
CAPITAL RESOURCES
At June 30, 1997, the Registrant's stockholders' equity amounted to
$42,921,000, a $3,017,000 or 7.6% increase from the $39,904,000 balance as of
December 31, 1996. Year to date, net income contributed $2,504,000 to equity
before $72,000 of dividends to preferred stockholders. Common stock dividends
declared during this same period of 1997 amounted to $385,000. The change in
net unrealized gain on available-for-sale investment securities decreased
stockholders' equity by $72,000, net of tax.
During 1996, the Registrant began issuing Company common stock as part of a
deferred compensation plan for its directors and certain senior officers and as
an investment option under the Registrant's 401-K (First Retirement and Savings
Plan) for its employees. During the first six months of 1997, 2,951 shares
were issued pursuant to the Deferred Compensation Plan and 10,296 shares were
issued pursuant to the First Retirement and Savings Plan.
In late 1994, the Registrant implemented a Dividend Reinvestment Plan whereby
common and preferred stockholders could elect to have their cash dividends
automatically reinvested into newly-issued common shares of the Registrant.
This plan became effective with the January, 1995 common stock dividend. Of
the $971,000 in common and preferred stock dividends paid during the first six
months of 1997, $529,000 or 54.5% was reinvested into shares of common stock of
the Registrant through the Dividend Reinvestment Plan. This resulted in an
additional 18,662 shares of common stock being issued during the first six
months of 1997.
<PAGE>
The Registrant is subject to various regulatory capital requirements
administered by the federal banking agencies. Bank holding companies follow
minimum regulatory requirements established by the Federal Reserve Board, First
Mid Bank follows similar minimum regulatory requirements established for
national banks by the Office of the Comptroller of the Currency and Heartland
is regulated by the FDIC and the Office of the Commissioner of Banks & Real
Estate. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary action by regulators that, if
undertaken, could have a direct material effect on the Registrant's financial
statements.
Quantitative measures established by each regulatory agency to ensure capital
adequacy require the reporting institutions to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital to risk-
weighted assets, and of Tier 1 capital to average assets. Management
believes, as of June 30, 1997, that all capital adequacy requirements have
been met.
As of June 30, 1997, the most recent notification from the primary regulators
categorized the Registrant, First Mid Bank and Heartland as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios must be maintained as set forth in the table. There are no
conditions or events since that notification that management believes have
changed these categories.
TABLE 19 CAPITAL RATIOS
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
JUNE 30, 1997
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk-weighted assets)
Registrant $36,552 11.30% $25,870 > 8.00% $32,338 > 10.00%
First Mid Bank 32,301 11.65 22,180 > 8.00 27,725 > 10.00
Heartland 7,388 17.23 3,430 > 8.00 4,287 > 10.00
Tier 1 Capital
(to risk-weighted assets)
Registrant 34,056 10.53 12,935 > 4.00 19,403 > 6.00
First Mid Bank 30,153 10.88 11,090 > 4.00 16,635 > 6.00
Heartland 7,039 16.42 1,715 > 4.00 2,572 > 6.00
Tier 1 Capital
(to average assets)
Registrant 34,056 6.57 20,740 > 4.00 25,925 > 5.00
First Mid Bank 30,153 7.08 17,029 > 4.00 21,286 > 5.00
Heartland 7,039 7.74 3,636 > 4.00 4,545 > 5.00
</TABLE>
<PAGE>
LIQUIDITY
Liquidity represents the ability of the Registrant and its subsidiaries to
meet the requirements of customers for loans and deposit withdrawals.
iquidity management focuses on the ability to obtain funds economically for
these purposes and to maintain assets which may be converted into cash at
minimal costs. Management monitors its expected liquidity requirements
carefully, focusing primarily on cash flows from operating, investing and
financing activities.
EFFECTS OF INFLATION
Unlike industrial companies, virtually all of the assets and liabilities of
the Registrant are monetary in nature. As a result, interest rates have a more
significant impact on the Registrant's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or experience the same magnitude of changes as goods and services,
since such prices are effected by inflation. In the current economic
environment, liquidity and interest rate adjustments are features of the
Registrant's assets and liabilities which are important to the maintenance of
acceptable performance levels. The Registrant attempts to maintain a balance
between monetary assets and monetary liabilities, over time, to offset these
potential effects.
FUTURE ACCOUNTING CHANGES
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
("SFAS 125"). SFAS 125, among other things, applies a "financial-components
approach" that focuses on control, whereby an entity recognizes the financial
and servicing assets it controls and the liabilities it has incurred,
derecognizes assets when control has been surrendered, and derecognizes
liabilities when extinguished. SFAS 125 provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. SFAS 125 is effective for transactions occurring after
December 31, 1996; however SFAS 127, issued in December 1996, defers the
effective date of certain elements of SFAS 125 for one year. The Registrant
adopted SFAS 125 during the first quarter of 1997, without any significant
impact on its consolidated financial condition or results of operations.
In February 1997, FASB issued SFAS No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 supersedes APB Opinion No. 15, "Earnings Per Share"
("APB #15") and specifies the computations, presentation, and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock or potential common stock. SFAS 128 was issued to simplify the
computation of EPS and to make the U.S. standard more compatible with the EPS
standards of other countries and that of the International Accounting
Standards Committee. It replaces the presentation of primary EPS with a
presentation of basic EPS and fully diluted EPS with diluted EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation.
Basic EPS, unlike primary EPS, excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS under APB #15.
<PAGE>
SFAS 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Earlier application is not permitted
(although pro forma EPS disclosure in the footnotes for periods prior to
required adoption is permitted). After adoption, all prior-period EPS data
presented shall be restated to conform with SFAS 128. The Registrant does not
expect adoption of SFAS 128 to have a significant impact on its financial
statements.
In February, 1997, FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure", which is effective for financial statements for periods
ending after December 15, 1997. This statement lists required disclosures about
capital structure that had been included in a number of previously existing
separate statements and opinions.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which is effective for fiscal years beginning after December 15, 1997. This
statement established standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements. This statement requires that all
items that are required in a financial statement that is displayed with the
same prominence as other financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which is effective for fiscal years
beginning after December 31, 1997. This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
RECENT REGULATORY DEVELOPMENTS
The Committee on Banking and Financial Services of the U.S. House of
Representatives has approved legislation that would allow bank holding
companies to engage in a wider range of nonbanking activities, including
greater authority to engage in securities and insurance activities. The
expanded powers generally would be available to a bank holding company only
if the bank holding company and its bank subsidiaries remain well-capitalized
and well-managed, and if each of the depository institution subsidiaries of
the bank holding company had received at least a "satisfactory" rating under
the Community Reinvestment Act. The proposed legislation would also impose
various restrictions on transactions between the depository institution
subsidiaries of bank holding companies and their nonbank affiliates. These
restrictions are intended to protect the depository institutions from risks
of the new nonbanking activities permitted to such affiliates. At this time,
the Company is unable to predict whether the proposed legislation will be
enacted and, therefore, is unable to predict the impact such legislation may
have on the operations of the Company and its subsidiaries.
Additionally, legislation has been enacted in Illinois that would allow
Illinois banks, effective October 1, 1997, to engage in insurance activities,
subject to various conditions, including requirements for the manner in which
insurance products are marketed to bank customers and requirements that banks
selling insurance provide certain disclosures to customers. Legislation has
also been enacted in Illinois that would prohibit out-of-state banks from
acquiring an Illinois bank unless the Illinois bank has been in existence and
continuously operated for a period of at least five years.
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Since the Bank Subsidiaries act as depositories of funds, each is named from
time to time as a defendant in law suits (such as garnishment proceedings)
involving claims to the ownership of funds in particular accounts. Management
believes that all such litigation as well as other pending legal proceedings
constitute ordinary routine litigation incidental to the business of the Bank
Subsidiaries and that such litigation will not materially adversely affect the
Registrant's consolidated financial condition.
In addition to the normal legal proceedings referred to above, the
Registrant, on behalf of Heartland, filed a complaint on December 5, 1995,
against the U.S. Government which is now pending in the U.S. Court of Federal
Claims in Washington D.C. This complaint relates to Heartland's interest as
successor to Mattoon Federal Savings and Loan Association which incurred a
significant amount of supervisory goodwill when it acquired Urbana Federal
Savings and Loan in 1982. The complaint alleges that the Government breached
its contractual obligations when, in 1989, it issued new rules which
eliminated supervisory goodwill from inclusion in regulatory capital. In
January 1997, the U.S. Court of Federal Claims denied the Government's motion
to dismiss this supervisory goodwill complaint. The Government had taken the
position that the complaint, as well as the complaints of a number of other
parties, should be prohibited from moving forward on statute of limitation
grounds. At this time it is too early to tell whether Heartland will
ultimately prevail in the suit and if so, what damages may be recovered.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 21, 1997, the Annual Meeting of Stockholders was held. At the meeting,
Richard Anthony Lumpkin, William G. Roley and William S. Rowland were elected
to serve as Class II directors with terms expiring in 2000. Continuing Class I
directors (term expires in 1999) are Kenneth R. Diepholz and Gary W. Melvin and
continuing Class III directors (term expires in 1998) are Charles A. Adams,
Daniel E. Marvin, Jr. and Ray Anthony Sparks. The stockholders also approved
amending Article IV of the Registrant's Certificate of Incorporation to
increase the number of authorized shares of Common Stock, $4 par value per
share, from 2,000,000 to 6,000,000 shares and ratified the appointment of
KPMG Peat Marwick, LLP as the Registrant's independent public accountants for
the year ending December 31, 1997.
There were 962,836 issued and outstanding shares of Common Stock at the time of
the Annual Meeting. The voting at the meeting, on the items listed below, was
as follows:
<PAGE>
<TABLE>
<CAPTION>
Election of Directors For Withheld
<S> <C> <C>
Richard Anthony Lumpkin 842,586 3,146
William G. Roley 842,372 3,360
William S. Rowland 842,560 3,172
</TABLE>
<TABLE>
<CAPTION>
Increase in number of authorized shares
Broker
For Against Withheld Non Vote
<C> <C> <C> <C>
803,187 3,661 38,884 -
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(3) -- Exhibits
(a)(3) -- The exhibits required by Item 601 of Regulation S-K and filed
herewith are listed in the exhibit Index which follows the Signature Page and
immediately precedes the exhibits filed.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the quarter
ended June 30, 1997.
<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 on this 31st day of July 1997.
FIRST MID-ILLINOIS BANCSHARES, INC.
(Registrant)
/s/Daniel E. Marvin, Jr.
*-------------------------------------*
Daniel E. Marvin, Jr.
President and Chief Executive Officer
/s/William S. Rowland
*-------------------------------------*
William S. Rowland
Chief Financial Officer
Dated: July 31, 1997
*---------------------*
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX TO FORM 10-Q
EXHIBIT
NUMBER DESCRIPTION AND FILING OR INCORPORATION REFERENCE
<S> <C>
3.1 RESTATED CERTIFICATE OF INCORPORATION AND AMENDMENT TO RESTATED
CERTIFICATE OF INCORPORATION OF FIRST MID-ILLINOIS BANCSHARES, INC.
Exhibit 3(a) to First Mid-Illinois Bancshares, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1987 (File No. 0-13688)
3.2 RESTATED BYLAWS OF FIRST MID-ILLINOIS BANCSHARES, INC.
Exhibit 3(b) to First Mid-Illinois Bancshares, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1987 (File No 0-13368)
11.1 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(Filed herewith)
27.1 FINANCIAL DATA SCHEDULE
(Filed herewith)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 24677
<INT-BEARING-DEPOSITS> 4939
<FED-FUNDS-SOLD> 4500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 117189
<INVESTMENTS-CARRYING> 3517
<INVESTMENTS-MARKET> 3527
<LOANS> 357892
<ALLOWANCE> 2496
<TOTAL-ASSETS> 540126
<DEPOSITS> 452988
<SHORT-TERM> 26000
<LIABILITIES-OTHER> 4517
<LONG-TERM> 13700
0
3100
<COMMON> 7750
<OTHER-SE> 32071
<TOTAL-LIABILITIES-AND-EQUITY> 540126
<INTEREST-LOAN> 14701
<INTEREST-INVEST> 3780
<INTEREST-OTHER> 101
<INTEREST-TOTAL> 18582
<INTEREST-DEPOSIT> 8140
<INTEREST-EXPENSE> 9361
<INTEREST-INCOME-NET> 9221
<LOAN-LOSSES> 250
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7699
<INCOME-PRETAX> 3881
<INCOME-PRE-EXTRAORDINARY> 3881
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2504
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.16
<YIELD-ACTUAL> 3.94
<LOANS-NON> 790
<LOANS-PAST> 320
<LOANS-TROUBLED> 431
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2684
<CHARGE-OFFS> 457
<RECOVERIES> 19
<ALLOWANCE-CLOSE> 2496
<ALLOWANCE-DOMESTIC> 2496
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 687
</TABLE>
