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 SEPTEMBER 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 October 31, 1997, 1,955,881 common shares, $4.00 par value, were
outstanding.
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
September 30, DECEMBER 31,
(In thousands, except share data) (unaudited) 1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks:
Non-interest bearing $ 19,700 $ 20,158
Interest bearing 474 453
Federal funds sold 4,050 6,500
Cash and cash equivalents 24,224 27,111
Interest bearing deposits with other financial institutions 99 99
Investment securities:
Available-for-sale, at fair value 111,708 114,027
Held-to-maturity, at amortized cost
(estimated fair value of $3,501 and $3,491 at
September 30, 1997 and December 31, 1996, respectively) 3,490 3,481
Loans 362,943 348,217
Less allowance for loan losses 2,633 2,684
Net loans 360,310 345,533
Premises and equipment, net 12,290 10,735
Intangible assets 8,928 5,472
Other assets 9,776 8,939
TOTAL ASSETS $ 530,825 $ 515,397
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 52,605 $ 55,044
Interest bearing 403,484 358,632
Total deposits 456,089 413,676
Securities sold under agreements to repurchase 9,190 18,360
Federal Home Loan Bank advances 10,000 32,426
Long-term debt 6,450 6,200
Other liabilities 4,527 4,831
TOTAL LIABILITIES 486,256 475,493
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 1,952,471 shares in 1997
and 1,885,632 shares in 1996 7,810 3,771
Additional paid-in-capital 6,643 5,463
Retained earnings 26,815 27,578
Net unrealized gain on available-for-sale
investment securities, net of tax 225 16
Less treasury stock at cost, 4,000 shares (24) (24)
TOTAL STOCKHOLDERS' EQUITY 44,569 39,904
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $530,825 $515,397
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
For the nine months ended September 30, 1997 and 1996
(In thousands, except per share data) (unaudited)
1997 1996
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $22,363 $20,443
Interest on investment securities 5,631 5,623
Interest on federal funds sold 122 148
Interest on deposits with other financial institutions 73 54
Total interest income 28,189 26,268
INTEREST EXPENSE:
Interest on deposits 12,629 11,409
Interest on securities sold under agreements
to repurchase 394 393
Interest on Federal Home Loan Bank advances 881 909
Interest on federal funds purchased 25 40
Interest on long-term debt 341 359
Total interest expense 14,270 13,110
Net interest income 13,919 13,158
Provision for loan losses 460 36
Net interest income after provision for loan losses 13,459 13,122
OTHER INCOME:
Trust revenues 1,212 900
Brokerage revenues 346 272
Service charges 1,326 1,293
Securities (losses), net (6) (10)
Mortgage banking revenue 291 299
Other 736 743
Total other income 3,905 3,497
OTHER EXPENSE:
Salaries and employee benefits 5,868 5,890
Occupancy, furniture and equipment, net 2,099 1,775
Federal deposit insurance premiums 12 964
Amortization of intangible assets 518 411
Stationary and supplies 478 397
Legal and professional fees 619 611
Marketing and promotion 397 376
Other 1,644 1,474
Total other expense 11,635 11,898
Income before income taxes 5,729 4,721
Income taxes 2,040 1,663
Net income $ 3,689 $ 3,058
Per common share data:
Primary earnings per share $ 1.81 $ 1.55
Fully diluted earnings per share 1.70 1.47
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended September 30, 1997 and 1996
(In thousands, except per share data) (unaudited)
1997 1996
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 7,662 $ 7,217
Interest on investment securities 1,851 1,900
Interest on federal funds sold 44 60
Interest on deposits with other financial institutions 50 26
Total interest income 9,607 9,203
INTEREST EXPENSE:
Interest on deposits 4,489 3,841
Interest on securities sold under agreements
to repurchase 111 133
Interest on Federal Home Loan Bank advances 182 532
Interest on federal funds purchased 10 11
Interest on long-term debt 117 130
Total interest expense 4,909 4,647
Net interest income 4,698 4,556
Provision for loan losses 210 36
Net interest income after provision for loan losses 4,488 4,520
OTHER INCOME:
Trust revenues 338 248
Brokerage revenues 126 112
Service charges 465 444
Securities (losses), net - (28)
Mortgage banking revenue 122 103
Other 245 195
Total other income 1,296 1,074
OTHER EXPENSE:
Salaries and employee benefits 1,950 2,004
Occupancy, furniture and equipment, net 741 621
Federal deposit insurance premiums 27 827
Amortization of intangible assets 179 137
Stationary and supplies 179 155
Legal and professional fees 234 194
Marketing and promotion 108 121
Other 518 501
Total other expense 3,936 4,560
Income before income taxes 1,848 1,034
Income taxes 663 345
Net income $ 1,185 $ 689
Per common share data:
Primary earnings per share $ .57 $ .33
Fully diluted earnings per share .54 .33
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1997 and 1996
(In thousands) (unaudited)
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,689 $ 3,058
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 460 36
Depreciation, amortization and accretion, net 1,366 945
Loss on sale of securities, net 6 10
Gain on sale of loans held for sale, net (212) (211)
Origination of mortgage loans held for sale (17,437) (14,443)
Proceeds from sale of mortgage loans held for sale 17,298 11,315
(Increase) in other assets (973) (2,015)
Increase (decrease) in other liabilities (283) 3,367
Net cash provided by operating activities 3,914 2,062
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of mortgage servicing rights (62) (118)
Purchases of premises and equipment (1,097) (1,390)
Net increase in loans (14,426) (37,867)
Proceeds from sales of:
Securities available-for-sale 9,983 24,753
Proceeds from maturities of:
Securities available-for-sale 19,650 20,014
Securities held-to-maturity 155 40
Purchases of:
Securities available-for-sale (26,958) (46,103)
Securities held-to-maturity (170) (80)
Cash of acquired branch 22,416 -
Net cash provided by (used in) investing activities 9,491 (40,751)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 14,657 13,437
Decrease in securities sold under agreements to repurchase (9,170) (2,735)
Increase (decrease) in Federal Home Loan Bank advances (22,426) 28,726
Repayment of long-term debt (750) (750)
Proceeds from long-term debt 1,000 -
Proceeds from issuance of common stock 838 998
Dividends paid on preferred stock (16) (16)
Dividends paid on common stock (425) (436)
Net cash provided by (used in) financing activities (16,292) 45,724
Increase (decrease) in cash and cash equivalents (2,887) 7,035
Cash and cash equivalents at beginning of period 27,111 23,295
Cash and cash equivalents at end of period $24,224 $30,330
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $14,623 $13,070
Income taxes 2,285 1,755
Loans transferred to real estate owned 579 290
Dividends reinvested in common shares 529 462
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 September 30, 1997 and 1996, and all such
adjustments are of a normal recurring nature. The results of the interim
periods ended September 30, 1997, are not necessarily indicative of the results
expected for the year ending December 31, 1997.
During the fourth quarter of 1997, the Registrant plans to merge two of its
wholly owned bank subsidiaries, Heartland and First Mid Bank, with First Mid
Bank being the surviving entity. This merger will enable customers of both
banking subsidiaries access to a wider array of real estate loan products and
other financial services and will result in reduced costs of product and
services distributions.
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.
YEAR 2000 COMPLIANCE
The Registrant utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and software
include those developed and maintained by the Registrant's third-party data
processing vendor and purchased software which is run on in-house computer
networks. In 1997, the Registrant initiated a review and assessment of all
hardware and software to confirm that it will function properly in the year
2000. To date, those vendors which have been contacted have indicated that
their hardware or software is or will be Year 2000 compliant by the end of
1998. The Registrant anticipated that year 2000 compliance will increase its
data processing expenses in 1998, although management does not believe that
such costs will have a material impact on overall 1998 financial performance.
EARNINGS PER SHARE
A 2-for-1 common stock split was distributed on June 5, 1997, in the form of
a 100% stock dividend for the stockholders of record on 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:
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
1997 1996 1997 1996
Primary 1,945,720 1,869,384 1,919,264 1,828,800
Fully diluted 2,196,324 2,119,988 2,169,868 2,079,404
<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 nine month
periods ended September 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 total deposits, $.5 million
to loans, $1.3 million to premises and equipment and $3.8 million to intangible
assets.
<PAGE>
OVERVIEW
Net income for the three month period ended September 30, 1997, increased to
$1,185,000, up 72% from $689,000 earned in the same quarter of 1996. On a
fully diluted basis, earnings per share for the quarterly period increased $.21
per share to $.54 as compared to $.33 per share earned in the third quarter of
1996. An increase of $142,000 in net interest income together with higher
levels of non interest income, primarily from trust and brokerage activities,
and a reduction in the amount of non interest expense, primarily attributable
to FDIC deposit insurance premiums, contributed to increased profitability.
The change in deposit insurance premiums was due to a $758,000 one-time charge
to record the effect of a special assessment associated with the
recapitalization of the Savings Association Insurance Fund. A summary of the
factors which contributed to the changes in quarterly net income follows (in
thousands):
TABLE 1-A EFFECT ON QUARTERLY EARNINGS
1997 VS 1996
Increase in net interest income $ 142
Increase in provision for loan losses (174)
Increase in other income,
including securities transactions 222
Decrease in other expenses 624
Increase in income taxes (318)
Increase in net income $ 496
Net income for the nine month period ended September 30, 1997 increased to
$3,689,000, up 20.6% from $3,058,000 earned in the nine month period ended
September 30, 1996. On a fully diluted basis, earnings per share for the
period increased $.23 per share to $1.70 as compared to $1.47 per share earned
in the same period of 1996. An increase of $761,000 in net interest income
together with higher levels of non interest income, primarily from trust and
brokerage activities, and a reduction in the amount of non interest expense,
primarily attributable to deposit insurance premiums, contributed to increased
profitability. The Registrant provided $460,000 for possible loan losses
during the first nine months, whereas only $36,000 was provided for possible
loan losses during the same nine month period of 1996. Increased equipment,
supplies and other non interest expenses associated with recent technology
investments also reduced the income of the first nine 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
1997 VS 1996
Increase in net interest income $ 761
Increase in provision for loan losses (424)
Increase in other income,
including securities transactions 408
Decrease in other expenses 263
Increase in income taxes (377)
Increase in net income $ 631
The Registrant's annualized return on average total assets increased to .94%
for the nine months ended September 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 11.71% and 11.90%, respectively for the nine month
period ended September 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
8.02% for the nine months ended September 30, 1997 compared to 7.69% for the
year ended December 31, 1996.
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>
NINE MONTH PERIOD ENDED YEAR ENDED
SEPTEMBER 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 $ 1,878 $ 97 5.18% $ 1,264 $ 65 5.14%
Federal funds sold 3,028 163 5.37 3,403 180 5.29
Investment securities
Taxable 108,383 6,808 6.28 111,640 6,858 6.14
Tax-exempt(1) 12,975 1,061 8.17 11,442 953 8.33
Loans (2)(3) 353,357 29,817 8.44 326,302 27,827 8.53
Total earning assets 479,621 37,946 7.91 454,051 35,883 7.90
Cash and due from banks 18,249 17,051
Premises and equipment 11,762 9,864
Other assets 16,682 12,854
Allowance for loan losses (2,658) (2,762)
Total assets $ 523,656 $ 491,058
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Bearing Deposits
Demand deposits $ 123,524 $ 3,592 2.91% $ 110,708 $ 3,085 2.79%
Savings deposits 39,157 1,029 2.63 39,364 1,069 2.72
Time deposits 223,559 12,217 5.46 204,362 11,156 5.46
Securities sold under
agreements to repurchase 11,545 525 4.55 12,411 574 4.62
FHLB advances 20,028 1,176 5.87 23,920 1,405 5.87
Federal funds purchased 644 33 5.18 800 44 5.50
Long-term debt 6,630 455 6.86 6,819 472 6.92
Total interest bearing 425,087 19,027 4.48 398,384 17,805 4.47
liabilities
Demand deposits 52,068 50,789
Other liabilities 4,491 4,102
Stockholders' equity 42,010 37,783
Total liabilities & equity $ 523,656 $ 491,058
Net interest income (TE) $ 18,919 $ 18,078
Net interest spread 3.43% 3.43%
Impact of non-interest bearing
funds .51% .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 September 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 $ 32 $ 31 $ 1 $ -
Federal funds sold (17) (20) 3 -
Investment securities:
Taxable (50) (200) 155 (5)
Tax-exempt (1) 108 128 (18) (2)
Loans (2)(3) 1,990 2,307 (293) (24)
Total interest income 2,063 2,246 (152) (31)
Interest-Bearing Liabilities
Interest-bearing deposits
Demand deposits 507 357 134 16
Savings deposits (40) (6) (34) -
Time deposits 1,061 1,049 11 1
Securities sold under
agreements to repurchase (49) (40) (9) -
FHLB advances (229) (229) - -
Federal funds purchased (11) (9) (3) 1
Long-term debt (17) (13) (4) -
Total interest expense 1,222 1,109 95 18
Net interest income $ 841 $ 1,137 $ (247) $ (49)
(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
September 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 $841,000,
or 4.7% for 1997, compared to an annualized increase of $804,000, or 4.8% 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 $25,570,000, or 5.6%, and average
interest-bearing liabilities increased by $26,703,000, or 6.7%, 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 71.2% on
September 30, 1996, to 73.7% on September 30, 1997, and average securities
decreased from 27.6% to 25.3% for the same periods of time.
PROVISION FOR LOAN LOSSES
The provision for loan losses in the third quarter of 1997 was $210,000 and
$36,000 for the same period of 1996. For the nine month period ended September
30, 1997, the provision for loan losses was $460,000 and $36,000 for the same
period of 1996. This was primarily in response to the increase in the loan
portfolio and charge offs during 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 nine
months ended September 30, 1997 and 1996 (in thousands):
TABLE 4-A YEAR-TO-DATE OTHER INCOME
NINE MONTHS ENDED
1997 1996 $ CHANGE
Trust $ 1,212 $ 900 $ 312
Brokerage 346 272 74
Securities (losses) (6) (10) 4
Service charges 1,326 1,293 33
Mortgage banking 291 299 (8)
Other 736 743 (7)
Total other income $ 3,905 $ 3,497 $ 408
The Registrant's other income increased to $3,905,000 in the first nine months
of 1997 as compared to $3,497,000 in the first nine months of 1996.
Trust revenues increased to $1,212,000 in the first nine months of 1997 as
compared to $900,000 for the same period of 1996. Trust assets increased to
$302,589,000 at September 30, 1997 from $223,117,000 at December 31, 1996 and
$213,950,000 at September 30, 1996. During 1997, increased revenues were
primarily due to an increase in fees generated on retirement plans and farm
agencies under management as well as the increase in trust assets.
Revenues from brokerage and annuity sales increased by $74,000 in the first
nine months of 1997 as compared to the same period in 1996. This increase was
attributable to the more favorable market conditions during 1997 for the
variable rate annuities and the special fixed rate annuity programs provided to
customers.
There were net securities losses of $6,000 in the first nine months of 1997 as
compared to $10,000 in net securities losses in the same period of 1996.
Service charges amounted to $1,326,000 in the first nine months of 1997 as
compared to $1,293,000 in the first nine months of 1996. The increase of
$33,000 or 2.6% in service charges in 1997 as compared to 1996 was primarily due
to an increase in the activity of overdraft accounts.
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 $291,000 in the first nine months of 1997 as
compared to $299,000 for the same period of 1996. Included in 1997 and 1996
mortgage banking income was the amount of the mortgage servicing rights recorded
on loans originated and sold into the secondary market with servicing retained
amounting to $48,000 and $8,000 for the nine month periods ended September 30,
1997 and 1996, respectively. In 1997, the volume of loans sold by Heartland was
$17.0 million, representing 260 loans as compared to $12.7 million representing
211 loans during the first nine months of 1996.
The following table sets forth the major components of other income for the
three months ended September 30, 1997 and 1996 (in thousands):
TABLE 4-B QUARTERLY OTHER INCOME
THREE MONTHS ENDED
1997 1996 $ CHANGE
Trust $ 338 $ 248 $ 90
Brokerage 126 112 14
Securities (losses) - (28) 28
Service charges 465 444 21
Mortgage banking 122 103 19
Other 245 195 50
Total other income $ 1,296 $ 1,074 $ 222
The Registrant's other income increased to $1,296,000 in the third quarter of
1997 as compared to $1,074,000 in the third quarter of 1996.
Trust revenues increased to $338,000 in the third quarter of 1997 as compared
to $248,000 in the third quarter of 1996. Trust assets increased to
$302,589,000 at September 30, 1997 from $223,117,000 at December 31, 1996 and
$213,950,000 at September 30, 1996. During the third quarter of 1997 as
compared to the same quarter of 1996, 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 $14,000 in the third
quarter of 1997 as compared to the same period in 1996.
There were no securities gains or losses in the third quarter of 1997 as
compared to $28,000 in net securities losses in the third quarter of 1996.
Service charges amounted to $465,000 in the third quarter of 1997 as compared
to $444,000 in the third quarter of 1996. The increase of $21,000 or 4.7% in
service charges in 1997 as compared to 1996 was primarily due to an increase in
the activity of overdraft accounts.
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 nine months of 1997 and 1996 (in thousands):
<PAGE>
TABLE 5-A YEAR-TO-DATE OTHER EXPENSE
NINE MONTHS ENDED
1997 1996 $ CHANGE
Salaries and benefits $ 5,868 $ 5,890 $ (22)
Occupancy, furniture & equipment 2,099 1,775 324
FDIC premiums 12 964 (952)
Amortization of intangibles 518 411 107
Stationary and supplies 478 397 81
Legal and professional fees 619 611 8
Marketing and promotion 397 376 21
Other operating expenses 1,644 1,474 170
Total other expense $11,635 $11,898 $ (263)
The Registrant's non-interest expense amounted to $11,635,000 in the first
nine months of 1997 as compared to $11,898,000 in the first nine months of 1996.
Salaries and employee benefits, the largest component of other expense,
remained constant at $5,868,000 in the first nine months of 1997 as compared to
$5,890,000 in the first nine months of 1996. At September 30, 1997, the number
of full-time equivalent ("FTE") employees totaled 264 compared to 254 at
September 30, 1996.
Occupancy, furniture and equipment expense increased to $2,099,000 in the
first nine months of 1997 as compared to $1,775,000 in the first nine months of
1996. The 18.3% 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 amount of FDIC premiums recorded in the first nine months of 1997
includes a refund of $69,000 on the 1996 assessments of the Savings Association
Insurance Fund ("SAIF"). During the first nine months of 1996, the Registrant
recorded premium expense of $206,000 and a one-time special SAIF assessment of
$758,000, as required by federal legislation, to increase the balance of the
SAIF. A lower premium rate in effect beginning in 1997 helped to reduce overall
deposit insurance.
Amortization of intangible assets increased 26.0% when comparing the first
nine months of 1997 and 1996. This net increase was primarily the result of an
increase of $159,000 during the second and third quarters of 1997 in association
with the acquisition by the Registrant of the Charleston branch. Core deposit
premium and goodwill generated from this transaction amounted to $3.8 million,
which will be amortized over 7 and 15 years, respectively.
During the first nine 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.
<PAGE>
The following table sets forth the major components of other expense for the
third quarter of 1997 and 1996 (in thousands):
TABLE 5-B QUARTERLY OTHER EXPENSE
THREE MONTHS ENDED
1997 1996 $ CHANGE
Salaries and benefits $ 1,950 $ 2,004 $ (54)
Occupancy, furniture & equipment 741 621 120
FDIC premiums 27 827 (800)
Amortization of intangibles 179 137 42
Stationary and supplies 179 155 24
Legal and professional fees 234 194 40
Marketing and promotion 108 121 (13)
Other operating expenses 518 501 17
Total other expense $ 3,936 $ 4,560 $ (624)
The Registrant's non-interest expense amounted to $3,936,000 in the third
quarter of 1997 as compared to $4,560,000 in the third quarter of 1996.
Salaries and employee benefits, the largest component of other expense,
decreased slightly from $1,950,000 in the third quarter of 1997 as compared to
$2,004,000 in the third quarter of 1996. This slight decrease was primarily due
to insurance expense.
Occupancy, furniture and equipment expense increased to $741,000 in the third
quarter of 1997 as compared to $621,000 in the third quarter of 1996. The 19.3%
increase was primarily due to the increase in depreciation expense recorded on
the technology equipment placed into service at the beginning of 1997. This
included items relating to document imaging, report imaging, home banking and
wide-area network projects.
FDIC premiums recorded in the third quarter of 1997 decreased to $27,000 from
$69,000 in the third quarter of 1996. The Registrant also recorded a one-time
special SAIF assessment of $758,000 during the third quarter of 1996.
Amortization of intangible assets increased 30.7% when comparing the third
quarters of 1997 and 1996. This increase in expenses resulted from the March
1997, acquisition of the Charleston, Illinois branch. Core deposit premium and
goodwill generated from this transaction amounted to $3.8 million, and is being
amortized over 7 and 15 years, respectively.
INCOME TAXES
Total income tax expense amounted to $2,040,000 in the first nine months of
1997 as compared to $1,663,000 in the first nine months of 1996. The total tax
expense included state income tax expense of $173,000 and $152,000 for the first
nine months of 1997 and 1996, respectively. Effective tax rates were 35.6% and
35.2% respectively, for the first nine months of 1997 and 1996.
<PAGE>
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 September 30,
1997 and December 31, 1996 (in thousands):
TABLE 6 INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 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 $ 76,986 67% $ 86,518 74%
Obligations of states and
political subdivisions 13,418 12 11,398 10
Mortgage-backed securities 21,901 19 15,283 13
Other securities 2,552 2 4,285 3
Total securities $114,857 100% $117,484 100%
</TABLE>
At September 30, 1997 the Registrant's investment portfolio showed an increase
in mortgage-backed securities and municipal securities.
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 September 30, 1997 and December 31, 1996 were as follows (in thousands):
<PAGE>
TABLE 7 INVESTMENTS AT AMORTIZED COST / ESTIMATED FAIR VALUE
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
September 30, 1997
AVAILABLE-FOR-SALE:
U.S. Treasury securities
and obligations of
U.S. Government Agencies
and corporations $ 76,986 $ 202 $ (252) $ 76,936
Obligations of states and
political subdivisions 9,928 325 (1) 10,252
Mortgage-backed securities 21,901 150 (83) 21,968
Federal Home Loan Bank stock 2,115 - - 2,115
Other securities 437 - - 437
Total available-for-sale $111,367 $ 677 $ (336) $111,708
HELD-TO-MATURITY:
Obligations of states and
political subdivisions $ 3,490 $ 31 $ (20) $ 3,501
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 September 30, 1997 (dollars in thousands) and the 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.
<PAGE>
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 $ 10,803 $ 50,121 $ 15,564 $ 498 $ 76,986
Obligations of state and
political subdivisions 709 4,668 749 3,802 9,928
Mortgage-backed securities 2,137 9,230 2,966 7,568 21,901
Other securities - - - 2,552 2,552
Total Investments $ 13,649 $ 64,019 $ 19,279 $ 14,420 $111,367
Weighted average yield 5.80% 6.32% 6.39% 6.39% 6.28%
Full tax equivalent yield 5.93% 6.54% 6.51% 7.26% 6.55%
HELD-TO-MATURITY:
Obligations of state and
political subdivisions $ 700 $ 1,972 $ 353 $ 465 $ 3,490
Weighted average yield 4.70% 5.09% 5.73% 5.74% 5.16%
Full tax equivalent yield 7.12% 7.71% 8.69% 8.70% 7.82%
</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
September 30, 1997.
Proceeds from sales of investment securities and realized gains and losses
were as follows during the nine months ended September 30, 1997 and the year
ended December 31, 1996 (in thousands):
TABLE 9 PROCEEDS FROM SALES
September 30, 1997 December 31, 1996
Proceeds from sales $9,983 $31,667
Gains 20 155
Losses 26 164
<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 September 30, 1997 and December 31, 1996 (in thousands):
TABLE 10 COMPOSITION OF LOANS
September 30, December 31,
1997 1996
Commercial, financial
and agricultural $74,342 $ 75,028
Real estate - mortgage 257,317 241,240
Installment 30,184 30,423
Other 1,100 1,526
Total loans $362,943 $348,217
At September 30, 1997, the Registrant had loan concentrations in agricultural
industries of 13.3% of outstanding loans, remaining unchanged since 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 September
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 $52,454 $ 19,700 $ 2,189 $ 74,342
Real estate - mortgage 43,013 138,518 75,786 257,317
Installment 6,315 22,838 1,032 30,184
Other 210 488 402 1,100
Total loans $101,992 $178,544 $79,409 $362,943
(1) Based on scheduled principal repayments.
(2) Includes demand loans, past due loans and overdrafts.
</TABLE>
As of September 30, 1997, loans with maturities over one year consisted of
$214,163,000 in fixed rate loans and $43,790,000 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
September 30, December 31,
1997 1996
Nonaccrual loans $ 990 $ 790
Loans past due ninety days
or more and still accruing 287 575
Restructured loans which are
performing in accordance
with revised terms 360 580
Interest income for the nine months ended September 30, 1997 that would have
been reported if nonaccrual and restructured loans had been performing totaled
$136,000. Interest income that was included in income for the same period
totaled $26,000.
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.
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 September 30, 1997, the
Registrant's loan portfolio included $48.1 million of loans to borrowers whose
businesses are directly related to agriculture. The balance increased $1.7
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 $187.9 million or 51.8% of total loans at September 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):
NINE MONTHS ENDED YEAR ENDED
September 30, DECEMBER 31,
1997 1996
Average loans outstanding,
net of unearned income $353,357 $326,302
Allowance-beginning of year 2,684 2,814
Charge-offs:
Commercial, financial
and agricultural 354 238
Real estate-mortgage 67 6
Installment 115 131
Total charge-offs 536 375
Recoveries:
Commercial, financial
and agricultural 10 53
Real estate-mortgage - -
Installment 15 45
Total recoveries 25 98
Net charge-offs 511 277
Provision for loan losses 460 147
Allowance-end of period $2,633 $ 2,684
Ratio of net charge-offs to
average loans .14% .08%
Ratio of allowance for loan
losses to loans outstanding
(less unearned interest
at end of period) .73% .77%
Ratio of allowance for loan
losses to nonperforming
loans 160.8% 138.0%
<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 nine months of 1997, the Registrant had net charge-offs of
$511,000. Of this amount, $358,000 was attributable to losses on four specific
commercial borrowers with the remainder generally being the result of personal
bankruptcies. During the third quarter, management also identified an
additional borrower with a loss potential of $240,000. This was placed on
nonaccrual status during September, 1997. The aforementioned matters together
with the Registrant's general expectations for future growth in the loan
portfolio resulted in an increase in the provision for loan losses to $460,000
during the first nine months of 1997 as compared to $147,000 during the year
ended December 31, 1996.
At September 30, 1997, the allowance was $2,633,000, or .73% of total loans,
and 160.8% 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>
September 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 $ 1,644 20.5% $ 1,854 21.5%
Real estate-mortgage 320 70.9 434 69.3
Installment 206 8.3 152 8.7
Other - .3 - .5
Total allocated 2,170 2,440
Unallocated 463 N/A 244 N/A
Allowance at end of
reported period $2,633 $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 September 30, 1997 and December 31, 1996
(dollars in thousands):
TABLE 15 COMPOSITION OF DEPOSITS
<TABLE>
<CAPTION>
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C>
Demand deposits:
Non-interest bearing $ 52,068 - $ 50,789 -
Interest bearing 123,524 2.91% 110,708 2.79%
Savings 39,157 2.63 39,364 2.72
Time deposits 223,559 5.46 204,362 5.46
Total average deposits $438,308 3.84% $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
September 30, December 31,
1997 1996
3 months or less $ 16,224 $ 20,658
Over 3 through 6 months 17,011 7,322
Over 6 through 12 months 9,603 6,897
Over 12 months 9,240 5,893
Total $ 52,078 $ 40,770
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 September 30, 1997 and
December 31, 1996 is presented below (in thousands):
<PAGE>
TABLE 17 SCHEDULE OF OTHER BORROWINGS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
<S> <C> <C>
End of Period:
Securities sold under agreements to repurchase $9,190 $18,360
Federal Home Loan Bank advances:
Overnight - 19,733
Fixed term - due in one year or less 3,000 11,693
Fixed term - due after one year 7,000 1,000
Total $19,190 $50,786
Average interest rate at end of period 5.21% 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 $11,545 $12,411
Federal Home Loan Bank advances:
Overnight 9,269 8,136
Fixed term - due in one year or less 3,982 9,352
Fixed term - due after one year 6,777 6,432
Federal funds purchased 644 800
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.
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 September 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 $120 million at September 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
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS: 0-1 1-3 3-6 6-12 12+
Deposits with other financial
institutions $ 573 $ - $ - $ - $ -
Federal funds sold 4,050 - - - -
Taxable investment securities 24,610 11,510 7,467 15,237 42,894
Nontaxable investment securities - 620 727 315 11,814
Loans 47,222 14,047 33,085 34,115 234,474
Total $ 76,455 $ 26,177 $ 41,279 $ 49,667 $289,182
INTEREST BEARING LIABILITIES:
Savings and N.O.W. accounts (1) 5,168 10,336 15,504 31,007 58,108
Money market accounts 49,288 - - - -
Other time deposits 25,880 29,163 60,349 46,315 72,365
Other borrowings 9,190 3,000 - 1,000 6,000
Long-term debt 6,450 - - - -
Total $ 95,976 $ 42,499 $ 75,853 $ 78,322 $136,473
Periodic GAP $(19,521) $(16,322) $(34,574) $ (28,655) $152,709
Cumulative GAP $(19,521) $(35,843) $(70,417) $(99,072) $ 53,637
GAP as a % of interest earning assets:
Periodic (4.0%) (3.4%) (7.2%) (5.9%) 31.6%
Cumulative (4.0%) (7.4%) (14.6%) (20.5%) 11.1%
(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>
At September 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 may be
repriced 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 September 30, 1997, the Registrant's stockholders' equity amounted to
$44,569,000, a $4,665,000 or 11.7% increase from the $39,904,000 balance as of
December 31, 1996. Year to date, net income contributed $3,689,000 to equity
before $215,000 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 increased
stockholders' equity by $209,000, 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 nine months of 1997, 7,867 shares
were issued pursuant to the Deferred Compensation Plan and 33,537 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 nine
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 27,435 shares of common stock being issued during the first nine
months of 1997.
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 September 30, 1997, that all capital adequacy requirements have been met.
As of September 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
<S> <C> <C> <C> <C> <C> <C>
September 30, 1997
Total Capital
(to risk-weighted assets)
Registrant $38,230 11.74% $26,046 > 8.00% $32,558 > 10.00%
First Mid Bank 33,755 11.99 22,516 > 8.00 28,145 > 10.00
Heartland 7,513 17.66 3,404 > 8.00 4,255 > 10.00
Tier 1 Capital
(to risk-weighted assets)
Registrant 35,597 10.93 13,023 > 4.00 19,535 > 6.00
First Mid Bank 31,147 11.18 11,258 > 4.00 16,887 > 6.00
Heartland 7,164 16.84 1,702 > 4.00 2,553 > 6.00
Tier 1 Capital
(to average assets)
Registrant 35,597 6.91 20,619 > 4.00 25,774 > 5.00
First Mid Bank 31,147 7.26 17,333 > 4.00 21,666 > 5.00
Heartland 7,164 8.07 3,553 > 4.00 4,441 > 5.00
</TABLE>
LIQUIDITY
Liquidity represents the ability of the Registrant and its subsidiaries to
meet the requirements of customers for loans and deposit withdrawals. Liquidity
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, deferred 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.
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. The Registrant does not expect adoption of
SFAS 129 to have a significant impact on its financial statements.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which is effective for fiscal years beginning after December 15, 1997. This
statement establishes 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.
<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.
TEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 September 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 12th day of November, 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: November 12, 1997
*---------------------*
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX TO FORM 10-Q
<S> <C> <C>
EXHIBIT
NUMBER DESCRIPTION AND FILING OR INCORPORATION REFERENCE
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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 19700
<INT-BEARING-DEPOSITS> 474
<FED-FUNDS-SOLD> 4050
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 111708
<INVESTMENTS-CARRYING> 3490
<INVESTMENTS-MARKET> 3501
<LOANS> 362943
<ALLOWANCE> 2633
<TOTAL-ASSETS> 530825
<DEPOSITS> 456089
<SHORT-TERM> 12190
<LIABILITIES-OTHER> 4527
<LONG-TERM> 13450
0
3100
<COMMON> 7810
<OTHER-SE> 33659
<TOTAL-LIABILITIES-AND-EQUITY> 530825
<INTEREST-LOAN> 22363
<INTEREST-INVEST> 5631
<INTEREST-OTHER> 195
<INTEREST-TOTAL> 28189
<INTEREST-DEPOSIT> 12629
<INTEREST-EXPENSE> 14270
<INTEREST-INCOME-NET> 13919
<LOAN-LOSSES> 460
<SECURITIES-GAINS> (6)
<EXPENSE-OTHER> 11635
<INCOME-PRETAX> 5729
<INCOME-PRE-EXTRAORDINARY> 5729
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3689
<EPS-PRIMARY> 1.81
<EPS-DILUTED> 1.70
<YIELD-ACTUAL> 3.94
<LOANS-NON> 990
<LOANS-PAST> 287
<LOANS-TROUBLED> 360
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2684
<CHARGE-OFFS> 536
<RECOVERIES> 25
<ALLOWANCE-CLOSE> 2633
<ALLOWANCE-DOMESTIC> 2633
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 463
</TABLE>
