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 MARCH 31, 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 May 8, 1997, 953,226 common shares, $4.00 par value, were outstanding.
<PAGE> 1
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
(In thousands, except share data) (unaudited) 1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks:
Non-interest bearing $ 20,036 $ 20,158
Interest bearing 557 453
Federal funds sold 9,825 6,500
Cash and cash equivalents 30,418 27,111
Interest bearing deposits with other financial institutions 99 99
Investment securities:
Available-for-sale, at fair value 127,099 114,027
Held-to-maturity, at amortized cost
(estimated fair value of $3,491 and $3,409 at
March 31, 1997 and December 31, 1996, respectively) 3,369 3,481
Loans 347,107 348,217
Less allowance for loan losses 2,756 2,684
Net loans 344,351 345,533
Premises and equipment, net 12,036 10,735
Intangible assets 9,192 5,472
Other assets 7,999 8,939
TOTAL ASSETS $ 534,563 $ 515,397
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 59,010 $ 55,044
Interest bearing 388,171 358,632
Total deposits 447,181 413,676
Securities sold under agreements to repurchase 12,720 18,360
Federal Home Loan Bank advances 22,630 32,426
Long-term debt 6,950 6,200
Other liabilities 4,282 4,831
TOTAL LIABILITIES 493,763 475,493
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 2,000,000 shares;
issued 950,577 shares in 1997 and 942,816 shares in 1996 3,802 3,771
Additional paid-in-capital 5,727 5,463
Retained earnings 28,771 27,578
Net unrealized gain (loss) on available-for-sale
investment securities, net of tax (576) 16
Less treasury stock at cost, 2,000 shares (24) (24)
TOTAL STOCKHOLDERS' EQUITY 40,800 39,904
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $534,563 $515,397
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31, 1997 and 1996
(In thousands, except per share data) (unaudited) 1997 1996
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 7,197 $ 6,495
Interest on investment securities 1,859 1,859
Interest on federal funds sold 26 59
Interest on deposits with other financial institutions 10 18
Total interest income 9,092 8,431
INTEREST EXPENSE:
Interest on deposits 3,905 3,783
Interest on securities sold under agreements
to repurchase 158 138
Interest on Federal Home Loan Bank advances 355 156
Interest on Federal funds purchased 9 4
Interest on long-term debt 104 125
Total interest expense 4,531 4,206
Net interest income 4,561 4,225
Provision for loan losses 100 -
Net interest income after provision for loan losses 4,461 4,225
OTHER INCOME:
Trust revenues 422 333
Brokerage revenues 136 48
Service charges 404 410
Securities gains, net - 2
Mortgage banking income 69 105
Other 243 295
Total other income 1,274 1,193
OTHER EXPENSE:
Salaries and employee benefits 1,998 1,931
Occupancy, furniture and equipment, net 707 556
Amortization of intangible assets 131 137
Stationary and supplies 159 103
Legal and professional 192 185
Marketing and promotion 117 108
Other 477 522
Total other expense 3,781 3,542
Income before income taxes 1,954 1,876
Income taxes 689 700
Net income $ 1,265 $ 1,176
Per common share data:
Primary earnings per share $ 1.26 $ 1.23
Fully diluted earnings per share 1.18 1.15
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1997 and 1996
(In thousands) (unaudited)
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,265 $ 1,176
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 100 -
Depreciation, amortization and accretion, net 412 310
Gain on sale of securities, net - (2)
Gain on sale of loans held for sale, net (35) (74)
Origination of mortgage loans held for sale (2,458) (2,167)
Proceeds from sale of mortgage loans held for sale 2,518 2,089
(Increase) decrease in other assets 895 410
Increase (decrease) in other liabilities (115) (479)
Net cash provided by (used in)operating activities 2,582 1,263
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of mortgage servicing rights (21) (32)
Purchases of premises and equipment (256) (228)
Net (increase) decrease in loans 1,517 (241)
Proceeds from sales of:
Securities available-for-sale - 2,502
Proceeds from maturities of:
Securities available-for-sale 3,488 12,179
Securities held-to-maturity 110 -
Purchases of:
Securities available-for-sale (17,445) (16,843)
Securities held-to-maturity - (50)
Cash of acquired branch 22,416 -
Net cash used in investing activities (9,809) (2,713)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 5,749 3,944
Decrease in securities sold under agreements to repurchase (5,640) (7,795)
Decrease in Federal Home Loan Bank advances (9,796) (3,900)
Increase in federal funds purchased - 3,200
Repayment of long-term debt (250) (250)
Proceeds from long-term debt 1,000 -
Proceeds from issuance of common stock 86 -
Dividends paid on common stock (233) (240)
Net cash provided by (used in) financing activities 9,084 (5,041)
Increase (decrease) in cash and cash equivalents 3,307 (6,491)
Cash and cash equivalents at beginning of period 27,111 23,295
Cash and cash equivalents at end of period $30,418 $16,804
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 4,688 $ 4,134
Income taxes 340 125
Loans transferred to real estate owned 132 14
Dividends reinvested in common shares 209 180
</TABLE>
<PAGE> 4
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 March 31, 1997 and
1996, and all such adjustments are of a normal recurring nature. The results
of the interim period ended March 31, 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
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
MARCH 31,
1997 1996
<S> <C> <C>
Primary 947,226 898,152
Fully diluted 1,072,528 1,028,454
</TABLE>
<PAGE> 5
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 period
ended March 31, 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.
<PAGE> 6
OVERVIEW
Net income in the first quarter of 1997 increased to $1,265,000, up 6.8% from
$1,176,000 earned in the same quarter of 1996. On a fully diluted basis,
earnings per share for the quarterly period increased 3 cents per share to
$1.18 as compared to $1.15 per share earned in the first quarter of 1996. An
increase of $336,000 in net interest income together with higher levels on non
interest income, primarily from trust and brokerage activities, contributed to
increased profitability. Because of the increase in the loan portfolio,
during the fourth quarter of 1996, the Registrant began to record provisions
for possible loan losses. This has continued in 1997 and accordingly the
Registrant provided $100,000 for possible loan losses during the quarter. No
provision was made in the first quarter of 1996. Increased equipment,
supplies and other non interest expenses associated with recent technology
investments also reduced first quarter 1997 income by approximately $150,000.
A summary of the factors which contributed to the changes in quarterly net
income follows (in thousands):
TABLE 1 EFFECT ON EARNINGS
1997 VS 1996
Net interest income $ 336
Provision for loan losses (100)
Other income, including securities transactions 81
Other expenses (239)
Income taxes 11
Increase in net income $ 89
The Registrant's annualized return on average total assets increased to .99%
for the quarter ended March 31, 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 12.45% and 12.72% respectively as compared to
11.03% and 11.18% at December 31, 1996. Average total equity to average
assets increased to 7.96% at March 31, 1997 compared to 7.69% at 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> 7
TABLE 2 DISTRIBUTION OF CONSOLIDATED ASSETS, LIABILITIES AND STOCKHOLDERS'
EQUITY - INTEREST, RATES AND NET YIELDS
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED YEAR ENDED
MARCH 31, 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 $ 854 $ 44 5.15% $ 1,264 $ 65 5.14%
Federal funds sold 2,044 104 5.09 3,403 180 5.29
Investment securities
Taxable 108,874 6,814 6.26 111,640 6,858 6.14
Tax-exempt(1) 11,759 942 8.01 11,442 953 8.33
Loans (2)(3) 345,589 28,788 8.33 326,302 27,827 8.53
Total earning assets 469,120 36,692 7.82 454,051 35,883 7.90
Cash and due from banks 18,418 17,051
Premises and equipment 11,074 9,864
Other assets 14,802 12,854
Allowance for loan losses (2,711) (2,762)
Total assets $ 510,703 $ 491,058
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Bearing Deposits
Demand deposits $ 121,195 3,436 2.84% $ 110,708 $ 3,085 2.79%
Savings deposits 38,212 976 2.55 39,364 1,069 2.72
Time deposits 209,268 11,208 5.36 204,362 11,156 5.46
Securities sold under
agreements to repurchase 13,717 632 4.61 12,411 574 4.62
FHLB advances 25,047 1,420 5.67 23,920 1,405 5.87
Federal funds purchased 667 36 5.40 800 44 5.50
Long-term debt 6,242 416 6.66 6,819 472 6.92
Total interest bearing 414,348 18,124 4.37 398,384 17,805 4.47
liabilities
Demand deposits 51,227 50,789
Other liabilities 4,495 4,102
Stockholders' equity 40,633 37,783
Total liabilities & equity $510,703 $ 491,058
Net interest income (TE) $ 18,568 $ 18,078
Net interest spread 3.45% 3.43%
Impact of non-interest bearing
funds .51% .55%
Net yield on interest earning
assets (TE) 3.96% 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 March 31, 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> 8
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
two years (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 $ (21) $ (21) $ - $ -
Federal funds sold (76) (72) (7) 3
Investment securities:
Taxable (44) (171) 130 (3)
Tax-exempt (1) (11) 27 (37) (1)
Loans (2)(3) 961 1,645 (646) (38)
Total interest income 809 1,408 (560) (39)
Interest-Bearing Liabilities
Interest-bearing deposits
Demand deposits 351 292 54 5
Savings deposits (93) (31) (64) 2
Time deposits 52 268 (211) (5)
Securities sold under
agreements to repurchase 58 60 (2) -
FHLB advances 15 66 (49) (2)
Federal funds purchased (8) (7) (1) -
Long-term debt (56) (40) (17) 1
Total interest expense 319 608 (290) 1
Net interest income $ 490 $ 800 $ (270) $ (40)
(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
March 31, 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, netinterest income increased $490,000,
or 2.7% for 1997, compared to an annualized increase of $123,000, or .7% 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.
<PAGE> 9
In 1997, average earning assets increased by $15,069,000, or 3.3%, and average
interest-bearing liabilities increased $15,964,000, or 4.0%, 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%
during 1996 to 73.7% during the first quarter of 1997, while average securities
decreased from 27.1% during 1996 to 26.3% during the first quarter of 1997.
PROVISION FOR LOAN LOSSES
The provision for loan losses in the first quarter of 1997 was $100,000 while
no provision was made in the same period of 1996. 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
first quarter of 1997 and 1996 (in thousands):
TABLE 4 OTHER INCOME
<TABLE>
<CAPTION>
FIRST QUARTER FIRST QUARTER
1997 1996 $ CHANGE
<S> <C> <C> <C>
Trust $ 422 $ 333 $ 89
Brokerage 136 48 88
Securities losses - 2 (2)
Service charges 404 410 (6)
Mortgage banking 69 105 (36)
Other 243 295 (52)
Total other income $ 1,274 $ 1,193 $ 81
</TABLE>
The Registrant's other income increased to $1,274,000 in the first quarter of
1997 as compared to $1,193,000 in the first quarter of 1996.
Trust revenues increased to $422,000 in the first quarter of 1997 as compared
to $333,000 in the first quarter of 1996. Trust assets increased to
$228,358,000 at March 31, 1997 from $223,117,000 at December 31, 1996 and
$221,913,000 at March 31, 1996. During 1997, increased revenues were primarily
due to an increase in fees generated on retirement plans under management and
the increase in trust assets.
Revenues from brokerage and annuity sales increased in the first quarter 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 no securities gains or (losses) in the first quarter of 1997 as
compared to $2,000 in net securities gains in the first quarter of 1996.
Service charges amounted to $404,000 in the first quarter of 1997 as compared
to $410,000 in the first quarter of 1996. The decrease of $6,000 (1.5%) in
service charges in 1997 as compared to 1996 was primarily due to a decrease in
fees on business transaction 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 $69,000 in the first quarter of 1997 as compared
to $105,000 in the first quarter 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 $15,000 and $2,000 for the quarters ended March 31, 1997 and 1996
respectively. In 1997, the volume of loans sold by Heartland was $2.4 million
representing 37 loans as compared to $3.6 million representing 59 loans during
the first quarter of 1996.
<PAGE> 10
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 quarter of 1997 and 1996 (in thousands):
TABLE 5 OTHER EXPENSE
<TABLE>
<CAPTION>
FIRST QUARTER FIRST QUARTER
1997 1996 $ CHANGE
<S> <C> <C> <C>
Salaries and benefits $ 1,998 $ 1,931 $ 67
Occupancy, furniture & equipment 707 556 151
FDIC premiums (42) 68 (110)
Amortization of intangibles 131 137 (6)
Stationary and supplies 159 103 56
Legal and professional fees 192 185 7
Marketing and promotion 117 108 9
Other operating expenses 497 432 65
Total other expense $ 3,759 $ 3,520 $ 239
</TABLE>
The Registrant's non-interest expense amounted to $3,781,000 in the first
quarter of 1997 as compared to $3,542,000 in the first quarter of 1996.
Salaries and employee benefits, the largest component of other expense,
increased to $1,998,000 in the first quarter of 1997 as compared to $1,931,000
in the first quarter of 1996. At March 31, 1997, the number of full-time
equivalent ("FTE") employees totaled 257 compared to 252 at March 31, 1996.
Occupancy, furniture and equipment expense increased to $707,000 in the first
quarter of 1997 as compared to $556,000 in the first quarter of 1996. The
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 cost of insurance premiums assessed by the Federal Deposit Insurance
Corporation ("FDIC") was ($42,000) for the first quarter of 1997, compared to
$68,000 in the first quarter of 1996. The net negative amount recorded in the
first quarter 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 quarter 1997 premium expense of $26,572.
Amortization of intangible assets decreased 4% when comparing the first
quarters of 1997 and 1996. This decrease was the result of the Registrant's
core deposit premium associated with a 1986 bank acquisition being fully
amortized. Amortization expense will increase during the second quarter of 1997
in association with the acquisition by the Registrant of a Charleston, Illinois
branch. New intangible assets generated from this transaction amounted to $3.8
million which will be amortized over 10 to 15 years.
<PAGE> 11
During the first quarter 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 $689,000 in the first quarter of 1997 as
compared to $700,000 in the first quarter of 1996. The tax expense included
state income tax expense totaling $58,000 and $72,000 for the first quarters of
1997 and 1996 respectively. Effective tax rates were 35.3% and 37.3%
respectively, for the first quarter of 1997 and 1996, respectively. 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 for the March
31, 1997 and December 31, 1996 (in thousands):
TABLE 6 INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
MARCH 31, 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 $ 96,292 73% $ 86,518 74%
Obligations of states and
political subdivisions 13,815 11 11,398 10
Mortgage-backed securities 16,949 13 15,283 13
Other securities 4,285 3 4,285 3
Total securities $131,341 100% $117,484 100%
</TABLE>
At March 31, 1997 the Registrant's investment portfolio showed a 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 March 31, 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
<S> <C> <C> <C> <C>
MARCH 31, 1997
AVAILABLE-FOR-SALE:
U.S. Treasury securities
and obligations of
U.S. Government Agencies
and corporations $ 96,292 $ 105 $ (1,124) $ 95,273
Obligations of states and
political subdivisions 10,446 218 (37) 10,627
Mortgage-backed securities 16,949 92 (127) 16,914
Federal Home Loan Bank stock 3,878 - - 3,878
Other securities 407 - - 407
Total available-for-sale $ 127,972 $ 415 $ (1,288) $ 127,099
HELD-TO-MATURITY:
Obligations of states and
political subdivisions $ 3,369 $ 24 $ (55) $ 3,338
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
Mortgage-backed securities 7,917 249 (3) 8,163
Federal Home Loan Bank stock 15,283 103 (82) 15,304
Other securities 3,878 - - 3,878
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 March 31, 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.
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 $ 13,668 $ 63,851 $ 18,275 $ 498 $ 96,292
Obligations of state and
political subdivisions 824 4,923 995 3,704 10,446
Mortgage-backed securities 3,378 10,117 536 2,918 16,949
Other securities - - - 4,285 4,285
Total Investments $ 17,870 $ 78,891 $ 19,806 $ 11,405 $127,972
Weighted average yield 5.59% 6.29% 6.42% 5.98% 6.18%
Full tax equivalent yield 5.72% 6.47% 6.57% 7.40% 6.46%
HELD-TO-MATURITY:
Obligations of state and
political subdivisions $ 632 $ 1,965 $ 308 $ 465 $ 3,369
Weighted average yield 4.88% 5.02% 5.96% 5.74% 5.18%
Full tax equivalent yield 7.40% 7.60% 9.03% 8.70% 7.85%
</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 March 31, 1997.
Proceeds from sales of investment securities and realized gains and losses
were as follows during the quarter ended March 31, 1997 and the year ended
December 31, 1996 (in thousands):
TABLE 9 PROCEEDS FROM SALE
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
<S> <C> <C>
Proceeds from sales $ - $31,667
Gains - 155
Losses - 164
</TABLE>
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 for the periods ended March 31, 1997 and December 31, 1996
(in thousands):
TABLE 10 COMPOSITION OF LOANS
<TABLE>
<CAPTION>
March 31, DECEMBER 31,
1997 1996
<S> <C> <C>
Commercial, financial
and agricultural $ 69,752 $ 75,028
Real estate - mortgage 245,729 241,240
Installment 30,287 30,423
Other 1,339 1,526
Total loans $347,107 $348,217
</TABLE>
At March 31, 1997, the Registrant had loan concentrations in agricultural
industries of 12.0% 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 March 31,
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 $ 46,822 $ 3,919 $ 19,011 $ 69,752
Real estate - mortgage 41,082 54,718 149,929 245,729
Installment 6,419 22,831 1,037 30,287
Other 371 548 420 1,339
Total loans $ 94,694 $ 82,016 $ 170,397 $ 347,107
(1) Based on scheduled principal repayments.
(2) Includes demand loans, past due loans and overdrafts.
</TABLE>
As of March 31, 1997, loans with maturities over one year consisted of
$205,843,000 in fixed rate loans and $46,570,000 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.
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>
MARCH 31, DECEMBER 31,
1997 1996
<S> <C> <C>
Nonaccrual loans $ 1,223 $ 790
Loans past due ninety days
or more and still accruing 399 575
Restructured loans which are
performing in accordance
with revised terms 444 580
</TABLE>
The $423,000 increase in nonaccrual loans resulted from two individual loans
to a single borrower totaling $451,000, which were placed on nonaccrual status
during the first quarter of 1997. These two loans are well collateralized and
management does not anticipate any material loss. Nevertheless, because the
borrower is experiencing cash flow difficulties and filed chapter 11 bankruptcy
during the first quarter of 1997, these loans were placed on nonaccrual status.
Interest income for the quarter ended March 31, 1997 that would have been
reported if nonaccrual and restructured loans had been performing totaled
$154,000. Interest income that was included in income for the same period
totaled $10,000.
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 March 31, 1997, the
Registrant's loan portfolio included $41.6 million of loans to borrowers whose
businesses are directly related to agriculture. The balance decreased $4.8
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 $178.0 million or 51.3% of total loans at March 31, 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>
QUARTER ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1997 1996
<S> <C> <C>
Average loans outstanding,
net of unearned income $345,589 $326,302
Allowance-beginning of year 2,684 2,814
Charge-offs:
Commercial, financial
and agricultural 2 238
Real estate-mortgage - 6
Installment 38 131
Total charge-offs 40 375
Recoveries:
Commercial, financial
and agricultural 4 53
Real estate-mortgage - -
Installment 8 45
Total recoveries 12 98
Net charge-offs 28 277
Provision for loan losses 100 147
Allowance-end of period $ 2,756 $ 2,684
Ratio of net charge-offs to
average loans .01% .08%
Ratio of allowance for loan
losses to loans outstanding
(less unearned interest
at end of period) .79% .77%
Ratio of allowance for loan
losses to nonperforming
loans 133.4% 138.0%
</TABLE>
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 quarter of 1997, the Registrant had net charge-offs of
$28,000 as compared to $277,000 for the year ended December 31, 1996. $151,000
(55%) of the 1996 charge-offs related to three specific loans for which
management does not anticipate any significant future recoveries. Management
provided $100,000 for loan losses during the first quarter of 1997. No
provision was made during the same period in 1996. The amount of the
provision was partially due to the increasing rate of personal bankruptcies
both nationally and in the Registrant's service area as well as the
Registrant's general expectations for growth in the loan portfolio.
At March 31, 1997, the allowance was $2,756,000, or .79% of total loans, and
133.4% of nonperforming loans. On December 31, 1996, the allowance for loan
losses amounted to $2,684,000, or .77% of total loans, and 138.0% 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>
MARCH 31, 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 $ 1,997 20.1% $ 1,854 21.5%
Real estate-mortgage 414 70.8 434 69.3
Installment 144 8.7 152 8.7
Other - .4 - .5
Total allocated 2,555 2,440
Unallocated 201 N/A 244 N/A
Allowance at end of
reported period $ 2,756 $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.
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 March 31, 1997 and December 31,
1996 (dollars in thousands):
TABLE 15 COMPOSITION OF DEPOSITS
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C>
Demand deposits:
Non-interest bearing $ 51,227 - $ 50,789 -
Interest bearing 121,195 2.84% 110,708 2.79%
Savings 38,212 2.55 39,364 2.72
Time deposits 209,268 5.36 204,362 5.46
Total average deposits $419,902 3.72 $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>
MARCH 31, DECEMBER 31,
1997 1996
<S> <C> <C>
3 months or less $ 17,124 $ 20,658
Over 3 through 6 months 6,260 7,322
Over 6 through 12 months 14,132 6,897
Over 12 months 6,302 5,893
Total $43,818 $ 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 March 31, 1997 and December
31, 1996 is presented below (in thousands):
TABLE 17 SCHEDULE OF OTHER BORROWINGS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
<S> <C> <C>
End of period:
Securities sold under agreements to repurchase $12,720 $18,360
Federal Home Loan Bank advances:
Overnight 16,130 19,733
Fixed term - due in one year or less 3,500 11,693
Fixed term - due after one year 3,000 1,000
Federal funds purchased - -
Total $35,350 $50,786
Average interest rate at end of period 5.86% 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 3,500 20,693
Fixed term - due after one year 3,000 7,500
Federal funds purchased - 6,500
Averages for the Year
Securities sold under agreements to repurchase $13,717 $12,411
Federal Home Loan Bank advances:
Overnight 19,433 8,136
Fixed term - due in one year or less 3,746 9,352
Fixed term - due after one year 1,867 6,432
Federal funds purchased 667 800
Average interest rate during the year 5.30% 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 March
31, 1997, which 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 sere assumed to be withdrawn over a 18 month
period. The two deposit types collectively totaled $129 million at March 31,
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
INTEREST EARNING ASSETS: 0-1 1-3 3-6 6-12 12+
<S> <C> <C> <C> <C> <C>
Deposits with other financial
institutions $ 557 $ - $ - $ 99 $ -
Federal funds sold 9,825 - - - -
Taxable investment securities 29,461 13,256 8,774 2,954 62,026
Nontaxable investment securities - 219 486 1,341 11,951
Loans 48,228 18,424 22,311 33,782 224,362
Total $ 88,071 $ 31,899 $ 31,571 $ 38,176 $ 298,339
INTEREST BEARING LIABILITIES:
Savings and N.O.W. accounts (1) 5,440 10,881 16,320 32,641 63,405
Money market accounts 36,821 - - - -
Other time deposits 26,100 38,288 52,267 50,764 55,244
Other borrowings 17,630 14,720 - - 3,000
Long-term debt 6,950 - - - -
Total $ 92,941 $ 63,889 $ 68,587 $ 83,405 $ 121,649
Periodic GAP $ ( 4,870) $ (31,990) $ (37,106) $ (45,224) $ 176,690
Cumulative GAP $ ( 4,870) $ (36,860) $ (73,876) $(119,105) $ 57,585
GAP as a % of interest earning assets:
Periodic (1.0%) (6.6%) (7.6%) (9.3%) 36.2%
Cumulative (1.0%) (7.6%) (15.1%) (24.4%) 11.8%
(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 March 31, 1997, the table above reflects that the Registrant is liability
sensitive due to the level of interest bearing demand deposits and savings
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 $369,000 in 90 days and
$1,191,000 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 sin 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 March 31, 1997, the Registrant's stockholders' equity amounted to
$40,800,000, an $896,000 or 2.2% increase from the $39,904,000 balance as of
December 31, 1996. Year to date, net income contributed $1,265,000 to equity
before the declaration of dividends to preferred stockholders amounting to
$143,000. The change in net unrealized gain on available-for-sale investment
securities decreased stockholders' equity by $592,000, 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 quarter of 1997, 1,356 shares were
issued pursuant to the Deferred Compensation Plan and 897 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 shareholders 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 $442,000 in common and preferred stock dividends paid during the first
quarter of 1997, $209,000 or 47.3% was reinvested into shares of common stock
of the Registrant through the Dividend Reinvestment Plan. This resulted in an
additional 5,507 shares of common stock being issued during the first quarter
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 March 31, 1997, that all capital adequacy requirements have been met.
As of March 31, 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>
MARCH 31, 1997
Total Capital
(to risk-weighted assets)
Registrant $ 34,927 11.14% $ 25,092 > 8.00% $ 31,365 > 10.00%
First Mid Bank 31,227 11.69 21.372 > 8.00 26,715 > 10.00
Heartland 7,209 16.52 3.491 > 8.00 4,364 > 10.00
Tier 1 Capital
(to risk-weighted assets)
Registrant 32,171 10.26 12,546 > 4.00 18,819 > 6.00
First Mid Bank 28,820 10.79 10,686 > 4.00 16,029 > 6.00
Heartland 6,860 15.72 1,745 > 4.00 2,618 > 6.00
Tier 1 Capital
(to average assets)
Registrant 32,171 6.44 19,988 > 4.00 24,984 > 5.00
First Mid Bank 28,820 7.04 16,371 > 4.00 20,463 > 5.00
Heartland 6,860 7.64 3,593 > 4.00 4,491 > 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, defers the
effective date of certain elements of SFAS 125 for one year. The Registrant
does not expect these pronouncements to have a significant impact on its
consolidated financial condition or results of operations.
In February 1997, FASB Statement No 128, "Earnings Per Share" (Statement 128,
was issued. Statement 128 supersedes APB Opinion No. 15, Earnings Per Share
and specifies the computations, presentation, and disclosure requirements for
earnings per share (EPS) for entities with publicly held common stock or
potential common stock. Statement 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 APB15.
Statement 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 Statement 128. The Registrant does
not expect adoption of Statement 128 to have a significant impact on its
financial statements.
RECENT REGULATORY DEVELOPMENTS
Various bills have been introduced in the Congress 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.
While the scope of permissible nonbanking activities and the conditions under
which the new powers could be exercised varies among the bills, 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. The bills also impose various restrictions on transactions between
the depository institution subsidiaries of the bank holding companies and their
nonbank affiliates. These restrictions are intended to protect the depository
institutions from the risks of the new nonbanking activities permitted to such
affiliates.
Additionally, legislation has been introduced in Illinois that would generally
allow banks to engage in insurance activities, subject to various conditions,
including restrictions on the manner in which insurance products are marketed
to bank customers and requirements that banks selling insurance provide certain
disclosures to customers. The Illinois legislature is also considering
legislation that would prohibit out-of-state banks from acquiring a bank
located in Illinois unless the Illinois-based bank has been in existence and
continuously operated for a period of at least five years.
At this time, the Registrant is unable to predict whether any of the pending
bills will be enacted and, therefore is unable to predict the impact such
legislation may have on the operations of the Registrant and its bank
subsidiaries.
<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
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 March 31, 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 12 day of May 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: May 12, 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>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<CAPTION>
<PERIOD-TYPE> 3-MOS
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 20,036
<INT-BEARING-DEPOSITS> 557
<FED-FUNDS-SOLD> 9,825
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 127,099
<INVESTMENTS-CARRYING> 3,369
<INVESTMENTS-MARKET> 3,491
<LOANS> 347,107
<ALLOWANCE> 2,756
<TOTAL-ASSETS> 534,563
<DEPOSITS> 447,181
<SHORT-TERM> 35,350
<LIABILITIES-OTHER> 4,282
<LONG-TERM> 6,950
<COMMON> 3,802
0
3,100
<OTHER-SE> 33,898
<TOTAL-LIABILITIES-AND-EQUITY> 534,563
<INTEREST-LOAN> 7,197
<INTEREST-INVEST> 1,859
<INTEREST-OTHER> 36
<INTEREST-TOTAL> 9,092
<INTEREST-DEPOSIT> 3,905
<INTEREST-EXPENSE> 4,531
<INTEREST-INCOME-NET> 4,561
<LOAN-LOSSES> 100
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,781
<INCOME-PRETAX> 1,954
<INCOME-PRE-EXTRAORDINARY> 1,954
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,265
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 1.18
<YIELD-ACTUAL> 3.96
<LOANS-NON> 1,223
<LOANS-PAST> 399
<LOANS-TROUBLED> 444
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,684
<CHARGE-OFFS> 40
<RECOVERIES> 12
<ALLOWANCE-CLOSE> 2,756
<ALLOWANCE-DOMESTIC> 2,756
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 201
</TABLE>
