-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BuYhTdMlaZX0aNgDiPT0hNZf0g9GqCSE4/WqJvWfDRRgXiemBjSzXOWox+AaWQso iyorFIO0knF/o3ukEbuORw== 0000700565-96-000010.txt : 19961115 0000700565-96-000010.hdr.sgml : 19961115 ACCESSION NUMBER: 0000700565-96-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST MID ILLINOIS BANCSHARES INC CENTRAL INDEX KEY: 0000700565 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 371103704 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13368 FILM NUMBER: 96660582 BUSINESS ADDRESS: STREET 1: 1515 CHARLESTON AVE STREET 2: PO BOX 499 CITY: MATTOON STATE: IL ZIP: 61938 BUSINESS PHONE: 2172347454 MAIL ADDRESS: STREET 1: 1515 CHARLESTON AVENUE STREET 2: PO BOX 499 CITY: MATTOON STATE: IL ZIP: 61938 10-Q 1 SEC 10-Q FOR 3RD QTR UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q SEPTEMBER 30, 1996 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_________________to_________________ Commission file number: 0-13368 First Mid-Illinois Bancshares, Inc. (Exact name of Registrant as specified in its charter) Delaware 37-1103704 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1515 Charleston Avenue, Mattoon, Illinois 61938 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: 217-234-7454 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $4.00 per share Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: 940,816 shares of Common Stock at October 31, 1996. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX Beginning Page No. Part I - Financial Information Item 1 Financial Statements 3 Consolidated Balance Sheets 4 Consolidated Statements of Income 5 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II - Other Information Item 1 Legal Proceedings 31 Item 2 Changes in Securities 31 Item 3 Defaults Upon Senior Securities 31 Item 4 Submission of Matters to a Vote of Securitiy Holders 31 Item 5 Other Information 31 Item 6 Exhibits and Reports on Form 8-K 31 Signatures 32
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information required by generally accepted accounting principles for complete financial statements and related footnote disclosures. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered for a fair presentation have been included. For further information, refer to the financial statements and notes included in the Registrant's 1995 Annual Report to Stockholders.
FIRST MID-ILLINOIS BANCSHARES, INC. CONSOLIDATED BALANCE SHEET (unaudited) September 30, December 31, (dollars in thousands, except per share data) 1996 1995 Assets Cash and due from banks: Noninterest bearing $ 25,882 $ 17,536 Interest bearing 3,848 784 Excess funds sold 600 4,975 Cash and cash equivalents 30,330 23,295 Investment certificates of deposits 99 99 Investment securities available-for-sale at estimated fair value 119,706 119,388 Investment securities held-to-maturity (estimated fair value of $3,430 at September 30, 1996 and $3,409 at December 31, 1995) 3,423 3,381 Loans 348,065 307,004 Less allowance for loan losses 2,705 2,814 Net loans 345,360 304,190 Premises and equipment, net 10,286 9,487 Intangible assets 5,715 6,019 Other assets 8,650 6,635 Total assets $523,569 $472,494 Liabilities and Stockholders' Equity Deposits: Noninterest bearing $ 56,704 $ 51,017 Interest bearing 353,612 345,862 Total deposits 410,316 396,879 Other liabilities 7,246 4,591 Securites sold under agreements to repurchase 14,080 16,815 Federal Home Loan Bank advances 40,426 11,700 Federal funds purchased 6,500 - Long-term debt 6,450 7,200 Total liabilities 485,018 437,185 Stockholders' equity: Series A convertible preferred stock no par value; authorized 1,000,000 shares; issued 620 shares with stated value of $5,000 per 3,100 3,100 Common stock, $4 par value; authorized 2,000,000 shares; issued 936,905 shares at September 30, 1996 and 894,991 at December 31, 1995) 3,748 3,580 Additional paid-in-capital 5,262 3,969 Retained earnings 26,983 24,493 Net unrealized gain (loss) on available-for-sale investment securities (518) 191 38,575 35,333 Less treasury stock at cost, 2,000 shares 24 24 Total stockholders' equity 38,551 35,309 Total liabilities and stockholders' equity $523,569 $472,494 See accompanying notes to consolidated financial statements.
FIRST MID-ILLINOIS BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME Three months ended September 30, 1996 and 1995 (unaudited) (dollars in thousands, except per share data) 1996 1995 Interest income: Interest and fees on loans $ 7,217 $ 6,589 Interest on investment securities 1,900 1,996 Interest on excess funds sold 60 75 Interest on deposits with financial institutions 26 11 Total interest income 9,203 8,671 Interest expense: Interest on deposits 3,841 3,825 Interest on securities sold under agreements to repurchase 133 225 Interest on Federal Home Loan Bank advances 532 214 Interest on federal funds purchased 11 - Interest on long-term debt 130 142 Total interest expense 4,647 4,406 Net interest income 4,556 4,265 Provision for loan losses 36 48 Net interest income after provision for loan losses 4,520 4,217 Other income: Trust fees 248 237 Brokerage and annuity fees 112 42 Service charges 444 406 Securities losses, net (28) - Mortgage banking income 103 78 Other 195 216 Total other income 1,074 979 Other expense: Salaries and employee benefits 2,004 1,889 Occupancy, furniture and equipment, net 621 584 Federal deposit insurance premiums 827 53 Other 1,108 1,045 Total other expense 4,560 3,571 Income before income taxes 1,034 1,625 Income taxes 345 532 Net income $ 689 $ 1,093 Per common share data: Primary earnings per share $ .66 $ 1.15 Fully diluted earnings per share $ .65 $ 1.08 See accompanying notes to consolidated financial statements.
FIRST MID-ILLINOIS BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME Nine months ended September 30, 1996 and 1995 (unaudited) (dollars in thousands, except per share data) 1996 1995 Interest income: Interest and fees on loans $20,443 $18,593 Interest on investment securities 5,623 5,902 Interest on excess funds sold 148 212 Interest on deposits with financial institutions 54 78 Total interest income 26,268 24,785 Interest expense: Interest on deposits 11,409 10,973 Interest on securities sold under agreements to repurchase 393 584 Interest on Federal Home Loan Bank advances 909 313 Interest on federal funds purchased 40 2 Interest on long-term debt 359 431 Total interest expense 13,110 12,303 Net interest income 13,158 12,482 Provision for loan losses 36 138 Net interest income after provision for loan losses 13,122 12,344 Other income: Trust fees 900 845 Brokerage and annuity fees 272 132 Service charges 1,293 1,155 Securities losses, net (10) - Mortgage banking income 299 176 Other 743 638 Total other income 3,497 2,946 Other expense: Salaries and employee benefits 5,890 5,538 Occupancy, furniture and equipment, net 1,775 1,702 Federal deposit insurance premiums 964 495 Other 3,269 3,159 Total other expense 11,898 10,894 Income before income taxes 4,721 4,396 Income taxes 1,663 1,390 Net income $ 3,058 $ 3,006 Per common share data: Primary earnings per share $ 3.11 $ 3.15 Fully diluted earnings per share $ 2.94 $ 2.97 See accompanying notes to consolidated financial statements.
FIRST MID-ILLINOIS BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended September 30, 1996 and 1995 (unaudited) (in thousands) 1996 1995 Cash flows from operating activities: Net income $ 689 $ 1,093 Adjustment to reconcile net income to net cash provided by operating activities: Provision for loan losses 36 48 Depreciation, amortization and accretion, net 315 285 Loss on sales of securities, net 28 - Gain on sales of loans held for sale (76) (43) Origination of mortgage loans held for sale (8,665) (4,305) Proceeds from sales of mortgage loans held for sale 5,928 4,293 Net(increase) in other assets (828) (719) Net increase (decrease) in other liabilities 2,682 (960) Net cash provided by (used in) operating activities 109 (308) Cash flows from investing activities: Capitalization of mortgage servicing rights (56) - Expenditures for premises and equipment (830) (185) Net (increase) in loans (17,545) (12,658) Proceeds from sales of: Securities available-for-sale 18,812 - Proceeds from maturities of: Securities available-for-sale 3,527 4,922 Securities held-to-maturity 20 2,749 Purchases of: Securities available-for-sale (21,106) (2,006) Securities held-to-maturity - (2,987) Net cash (used in) investment activities (17,178) (10,165) Cash flows from financing activities: Net increase in deposits 6,537 9,600 Net increase (decrease) in securities sold under agreements to repurchase 3,293 (1,360) Net increase in Federal Home Loan Bank advances 9,326 7,000 Net increase in federal funds purchased 6,500 - Repayment of long-term debt (250) (250) Proceeds from issuance of common stock 98 - Net cash provided by financing activities 25,504 14,990 Increase in cash and cash equivalents 8,435 4,517 Cash and cash equivalents at beginning of period 21,895 20,648 Cash and cash equivalents at end of period $30,330 $25,165 Additional disclosure of cash flow information: Interest paid during the period $ 4,496 $ 4,417 Income taxes paid during the period 450 500 Loans transferred to real estate owned - 26 See accompanying notes to consolidated financial statements.
FIRST MID-ILLINOIS BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30, 1996 and 1995 (unaudited) (in thousands) 1996 1995 Cash flows from operating activities: Net income $ 3,058 $ 3,006 Adjustment to reconcile net income to net cash provided by operating activities: Provision for loan losses 36 138 Depreciation, amortization and accretion, net 945 959 Loss on sales of securities, net 10 - Gain on sale of loans held for sale (211) (60) Origination of mortgage loans held for sale (14,443) (5,330) Proceeds from sales of mortgage loans held for sale 11,315 5,689 Net (increase) in other assets (2,015) (1,006) Net increase (decrease) in other liabilities 3,367 (359) Net cash provided by operating activities 2,062 3,037 Cash flows from investing activities: Capitalization of mortgage servicing rights (118) - Expenditures for premises and equipment (1,390) (556) Net (increase) in loans (37,867) (26,666) Proceeds from sales of: Securities available-for-sale 24,753 - Proceeds from maturities of: Securities available-for-sale 20,014 15,124 Securities held-to-maturity 40 4,036 Purchases of: Securities available-for-sale (46,103) (5,685) Securities held-to-maturity (80) (5,991) Net cash (used in) investment activities (40,751) (19,738) Cash flows from financing activities: Net increase in deposits 13,437 9,302 Net increase (decrease) in securities sold under agreements to repurchase (2,735) 3,030 Net increase in Federal Home Loan Bank advances 28,726 13,000 Net increase (decrease) in federal funds purchased 6,500 (500) Repayment of long-term debt (750) (250) Proceeds from issuance of common stock 998 - Dividends paid on preferred stock (16) (42) Dividends paid on common stock (436) (387) Net cash provided by financing activities 45,724 24,153 Increase in cash and cash equivalents 7,035 7,452 Cash and cash equivalents at beginning of period 23,295 17,713 Cash and cash equivalents at end of period $30,330 $25,165 Additional disclosure of cash flow information: Interest paid during the period $ 13,070 $ 12,700 Income taxes paid during the period 1,755 1,350 Loans transferred to real estate owned 290 135 See accompanying notes to consolidated financial statements.
Notes to the Consolidated Financial Statements 1) The consolidated financial statements include the accounts of First Mid- Illinois Bancshares, Inc. (the "Registrant"), and its wholly owned subsidiaries, First Mid-Illinois Bank & Trust, N.A. (the "Bank"), Heartland Savings Bank ("Heartland") and Mid-Illinois Data Services, Inc. ("MIDS"). Intercompany amounts have been eliminated. 2) The financial information reflects all adjustments which, in the opinion of management, are necessary to present a fair statement of the results of the interim periods ended September 30, 1996 and 1995, and all such adjustments are of a normal recurring nature. The results of the interim period ended September 30, 1996, are not necessarily indicative of the results expected for the year ending December 31, 1996. 3) Income for primary and fully diluted earnings per share is adjusted for dividends attributable to preferred stock. Primary earnings per share is based on the weighted average number of common shares outstanding. Fully diluted earnings per share data is computed by using the weighted average number of common shares outstanding, increased by the assumed conversion of the convertible preferred stock. The weighted average number of common equivalent shares used in calculating earnings per share for the periods ended September 30, 1996 and 1995, are as follows:
Three months ended Nine months ended September 30, September 30, 1996 1995 1996 1995 Primary 934,692 889,108 914,400 885,475 Fully Diluted 1,059,994 1,014,410 1,039,702 1,010,777
4) The Registrant is required to classify its debt securities into one of three categories at the time of purchase: held-to-maturity, available-for- sale or trading. Held-to-maturity securities are those which management has the intent and ability to hold to maturity. These securities are carried at amortized historical cost. Available-for-sale securities are those securities which management may sell prior to maturity as a result of the Registrant's overall asset and liability management strategy. These securities are recorded at fair value. Trading securities are those securities bought and held principally for the purpose of selling them in the near term. Trading securities are recorded at the lower of historical cost or estimated fair value. The Registrant currently has no securities designated as trading. 5) Heartland originates residential first mortgage loans both for its portfolio and for sale into the secondary market. Held for sale loans are carried at the lower of aggregate, amortized cost or estimated market value. Mortgage banking income consists of gains or losses on the sale of loans and servicing fee income. Origination costs for loans sold are expensed as incurred. 6) In May 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("FAS 122"). FAS 122 amends FASB Statement No. 65 by establishing a new standard for capitalizing mortgage servicing rights. Under FAS 122, the accounting principles for mortgage servicing rights are the same for mortgages originated by the servicer as for those acquired through purchase transactions. Accordingly, under the new standard, the Registrant will record an asset for mortgage servicing rights when it sells mortgages and retains servicing. Mortgage servicing rights are to be amortized in proportion to the net servicing income over the period during which servicing income is expected to be received. Servicing rights are to be evaluated for impairment based on fair value. The Registrant adopted FAS 122 effective January 1, 1996. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - SUMMARY Net income for the three month period ended September 30, 1996, amounted to $689,000 ($.65 per share on a fully diluted basis). This represents a $404,000 or 37.0% decrease from the earnings of $1,093,000 ($1.08 per share on a fully diluted basis) for the three month period ended September 30, 1995. A summary of the factors which contributed to the earnings decrease follows (dollars in thousands, except per share data):
Three months ended September 30, 1996 Total Percent vs. September 30, 1995 Net Change Change 1996/1995 Net interest income $ 291 6.8% Provision for loan losses (12) (25.0) Other income 95 9.7 FDIC insurance expense * 774 1,460.4 Other expense 215 6.1 Income taxes (187) (35.2) Total decrease in net income $(404) (37.0)%
Net income for the nine month period ended September 30, 1996, amounted to $3,058,000 ($2.94 per share on a fully diluted basis). This represents a $52,000 or 1.7% increase from the earnings of $3,006,000 ($2.97 per share on a fully diluted basis) for the nine month period ended September 30, 1995. A summary of the factors which contributed to the earnings increase follows (dollars in thousands, except per share data):
Nine months ended September 30, 1996 Total Percent vs. September 30, 1995 Net Change Change 1996/1995 Net interest income $ 676 5.4% Provision for loan losses (102) (73.9) Other income 551 18.7 FDIC insurance expense * 469 94.7 Other expense 535 5.1 Income taxes 273 19.6 Total increase in net income $ 52 1.7%
* 1996 net income was impacted by a $758,000, one-time charge to record the effect of a special assessment associated with the recapitalization of the Savings Association Insurance Fund (the "SAIF") to be paid in the fourth quarter of 1996. Legislation to recapitalize SAIF was signed into law by the President on September 30, and in accordance with generally accepted accounting principles, a liability for the assessment was recorded in the third quarter financial statements. After taking into account the decrease in income taxes that will result from this assessment, the actual reduction in year-to-date income amounted to $491,000 ($.53 per share). NET INTEREST INCOME AND INTEREST RATE SENSITIVITY During the first nine months in 1996, the Registrant's net interest income increased by $676,000 (5.4%) as compared with the net interest income for the same period in 1995. Net interest income for the nine months ended September 30, 1996, was $13,158,000 as compared with $12,482,000 for the nine months ended September 30, 1995. The table which follows sets forth details of average balances, interest income and expense and average rates for the Registrant for 1996 and 1995. The 1996 figures have been annualized based on the actual results through September 30, 1996. The annualized amounts are not necessarily indicative of the actual amounts that are expected or that will occur for the year ended December 31, 1996. As can be seen, annualized net interest margin was 3.99% during the period ended September 30, 1996 (on a tax equivalent basis). The overall cost of interest bearing liabilities and the yield on interest earning assets has remained stable in 1996 as compared with 1995. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY INTEREST RATES AND INTEREST DIFFERENTIAL
Nine Month Period Ended Year Ended September 30, 1996 December 31, 1995 (dollars in thousands) Avg Bal Int(5) Avg Rate Avg Bal Int Avg Rate INTEREST EARNING ASSETS Investment certificates of deposits $ 99 $ 10 10.36% $ 99 $ 10 10.10% Due from banks-interest bearing 1,277 62 4.87% 1,511 84 5.56% Excess funds sold 3,718 198 5.31% 6,199 356 5.74% Investment securities: Taxable 112,264 6,856 6.11% 115,725 7,068 6.11% Tax-exempt (1)(2) 11,589 641 8.38% 12,831 733 8.66% Loans (net of unearned income)(3)(4) 319,209 27,256 8.54% 294,220 25,214 8.57% Total earning assets 448,156 35,023 7.89% 430,585 33,465 7.86% NONEARNING ASSETS Cash and due from banks 16,371 15,382 Premises and equipment 9,633 9,333 Other nonearning assets 12,694 12,699 Allowance for loan losses (2,769) (2,711) TOTAL ASSETS $484,085 $465,288 INTEREST BEARING LIABILITIES Demand deposits 107,711 2,897 2.69% 106,118 2,823 2.66% Savings deposits 40,110 1,092 2.72% 40,920 1,107 2.71% Time deposits 205,523 11,223 5.46% 202,305 10,958 5.42% Securities sold under agreements to repurchase 11,598 524 4.52% 16,481 777 4.71% Federal Home Loan Bank advances 20,517 1,212 5.91% 7,633 488 6.39% Federal funds purchased 994 53 5.37% 26 2 7.69% Long-term debt 6,944 479 6.90% 7,636 571 7.48% Total interest-bearing liabilities 393,397 17,480 4.44% 381,119 16,725 4.39% NONINTEREST BEARING LIABILITIES Demand deposits 49,559 46,237 Other liabilities 4,005 4,561 TOTAL LIABILITIES 446,961 431,917 Stockholders' equity 37,124 33,371 TOTAL LIABILITIES & EQUITY $484,085 $465,288 Net interest earnings $17,544 3.45% $16,740 3.47% Net interest earnings as a % of interest earning assets on a full tax equivalent basis 3.99% 3.98% (1) Full tax equivalent yields on tax exempt securities have been calculated using a 34% tax rate. (2) Investment securities on a full tax equivalent basis amounted to $971 and $1,111 for the periods ended September 30, 1996 and December 31, 1995, respectively. (3) Nonaccrual loans are not material and have been included in the average balances for purposes of this computation. (4) Loan fees included in interest includes are not material. (5) 1996 interest income and expense amounts have been annualized based on results through September 30, 1996. The annualized amounts are not necessarily indicative of the actual amounts that are expected or that will occur for the year ending December 31, 1996.
The following table describes changes in net interest income attributable to changes in the volume of earning assets compared to changes in interest rates.
1996 Compared to 1995 Increase - (Decrease) Total Rate/ (in thousands) Change Volume Rate Volume INTEREST INCOME: Investment certificates of deposits $ - $ - $ - $ - Due from banks-interest bearing (22) (14) (10) 2 Excess funds sold (158) (142) (27) 11 Investment securities: Taxable (212) (211) (1) - Tax-exempt (1) (92) (71) (23) 2 Loans (2)(3) 2,042 2,142 (92) (8) Total interest income 1,558 1,704 (153) 7 INTEREST EXPENSE: Demand deposits 74 43 31 - Savings deposits (15) (22) 7 - Time deposits 265 174 89 2 Securities sold under agreements to repurchase (253) (230) (32) 9 Federal Home Loan Bank advances 725 824 (37) (62) Federal funds purchased 51 75 (1) (23) Long-term debt (92) (52) (44) 4 Total interest expense 755 812 13 (70) NET INTEREST EARNINGS $ 803 $ 892 $(166) $ 77 (1) Interest on tax exempt investment securities is shown on a tax-equivalent basis using a 34% tax rate. (2) Nonaccrual loans are not material and have been included in the average loan balances for purposes of this computation. (3) Loan fees included in interest income are not material.
No out-of-period adjustments have been included in the preceding analysis. Changes in rates and volume are computed on a consistent basis using the absolute values of changes in volume compared to the absolute values of the changes in rates. There were no foreign activities by the Registrant during the nine month periods ending September 30, 1996 and 1995. The following table is the Registrant's "static gap" schedule as of September 30, 1996. This is one of several tools used by management to monitor the interest rate sensitivity position of the Registrant. The following table presents earning assets and interest bearing liabilities within selected time intervals based on their repricing and maturing characteristics. Interest rate sensitivity is measured by "gaps", (the difference between interest earning assets and interest bearing liabilities within a particular time interval). A positive GAP indicates more assets than liabilities could reprice in that time period and a negative GAP indicates more liabilities could reprice.
Number of Months Until Next Repricing Opportunity (dollars in thousands) 0-1 1-3 3-6 6-12 12+ INTEREST EARNING ASSETS: Investment certificates of deposits $ - $ - $ - $ - $ 99 Due from banks-interest bearing 3,848 - - - - Excess funds sold 600 - - - - Investment securities: Taxable 32,361 18,262 9,555 9,665 42,482 Tax-exempt - 560 707 1,003 8,534 Loans 44,438 15,740 32,674 28,749 226,464 Total 81,247 34,562 42,936 39,417 277,579 INTEREST BEARING LIABILITIES: Savings and NOW accts 117,636 - - - - Money market accounts 35,620 - - - - Other time deposits 29,241 30,293 38,632 43,627 58,563 Securities sold under agreements to repurchase - 14,080 - - - Federal Home Loan Bank advances 24,733 5,000 6,193 3,500 1,000 Federal funds purchased 6,500 - - - - Long-term debt 6,450 - - - - Total $ 220,180 $ 49,373 $ 44,825 $ 47,127 $ 59,563 Periodic GAP (138,933) (14,811) (1,889) (7,710) 218,016 Cumulative GAP (138,933) (153,744) (155,633) (163,343) 54,673 Gaps as a percent of interest earning assets: Periodic (29.2%) (3.1%) (0.4%) (1.6%) 45.8% Cumulative (29.2%) (32.3%) (32.7%) (34.3%) 11.5%
The preceding tabulation classifies savings and NOW accounts as immediately repriceable because if rates paid on these accounts were to change, the rates would, most likely, change on all such accounts at the same time. As a practical matter, management is able to exercise a significant amount of control over these rates, although in the past, they have been resistant to rate changes. Management of the Registrant continually monitors its interest rate sensitivity position. While the preceding table is an indication of interest rate risk, overall interest rate sensitivity is influenced by other factors such as the competitive environment, the timing and amount of rate changes, loan prepayments and the inherent stability of certain deposits. A number of different factors, including those objectively determined and measurable, as well as those subjectively ascertained, are considered by management in its evaluation of interest rate risk. As a result of this analysis, management believes that the overall level of interest rate risk is manageable and does not believe that changing rates will have a material negative effect on the Registrant's net interest margin. INVESTMENT PORTFOLIO The Registrant adopted Statement of Financial Accounting Standards No. 115 ("FAS 115"), "Accounting for Certain Investments in Debt and Equity Securities" effective December 31, 1993. Investment securities that the Registrant has the positive intent and ability to hold to maturity are classified as "held-to-maturity" and reported at amortized cost. All other investment securities are classified as "available-for-sale" and have been reported at their estimated fair value at September 30, 1996, and December 31, 1995. In accordance with FAS 115, the unrealized losses, net of related taxes, in the amount of $518,000 have been included in stockholders' equity at September 30, 1996. Total investment securities designated as available-for-sale represented 97% of the portfolio and held-to-maturity represented 3%. During the nine months ended September 30, 1996, $24,695,000 (par value) available-for-sale investment securities were sold. During this same period, $80,000 (par value) held-to-maturity and $43,840,000 (par value) available-for-sale investment securities were purchased. The increase in sales and purchases of investment securities can be attributed to a series of transactions in which mortgage backed securities were sold and replaced in the portfolio with U.S. government agency securities. These transactions were consumated to improve the repricing characteristics of the portfolio, to mollify the Registrant's total exposure to real estate related assets and to improve the yield on the portfolio. For the nine months ended September 30, 1996, there was an increase of 84 basis points in the yield of the investment portfolio due to these transactions. There were 48 investment securities with a par value totaling $24,695,000 that were sold at a net loss of $10,000 during the nine months ended September 30, 1996. The change in the amount of net unrealized gain (loss) on available-for-sale investment securities from December 31, 1995 to September 30, 1996 amounted to a loss of $709,000. This loss reflected the decline in the market value of available-for-sale investment securities during the first nine months of the year. The following table provides detailed information for investment securities at September 30, 1996 and December 31, 1995:
(in thousands) Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available-for-sale - 09/30/96 U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 92,945 $ 33 $ (1,021) $ 91,957 Obligations of state and political subdivisions 7,406 248 (4) 7,650 Mortgage backed securities 15,854 112 (152) 15,814 Other securities 4,285 - - 4,285 Total available-for-sale $120,490 $ 393 $(1,177) $119,706 Held-to-maturity - 09/30/96 Obligations of state and political subdivisions $ 3,423 $ 28 $ (21) $ 3,430
(in thousands) Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available-for-sale - 12/31/95 U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 72,599 $ 481 $ (683) $ 72,397 Obligations of state and political subdivisions 8,628 440 (7) 9,061 Mortgage backed securities 35,766 222 (163) 35,825 Other securities 2,105 - - 2,105 Total available-for-sale $119,098 $ 1,143 $ (853) $119,388 Held-to-maturity - 12/31/95 Obligations of state and political subdivisions $ 3,381 $ 43 $ (15) $ 3,409
Other securities included stock in the Federal Home Loan Bank totaling $3,878,000 at September 30, 1996 and $1,699,000 at December 31, 1995. The following table indicates the expected maturities of investment securities classified as available-for-sale and held-to-maturity at September 30, 1996 and their weighted average yield for each range of maturities. Mortgage backed securities are aged according to their weighted average life. All other securities are shown at their contractual maturity.
Book Value Maturing Investment Securities One After 1 After 5 After year through through ten (dollars in thousands) or less 5 years 10 years years Total Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 16,310 $ 62,070 $ 14,067 $ 498 $ 92,945 Obligations of state and political subdivisions 821 5,186 804 595 7,406 Mortgage-backed securities 1,884 11,110 981 1,879 15,854 Other securities - - - 4,285 4,285 Total available-for-sale securities $ 19,015 $ 78,366 $ 15,852 $ 7,257 $120,490 Weighted average yield 5.38% 5.94% 6.12% 8.04% Full tax equivalent yield 5.51% 6.14% 6.27% 8.56% Held-to-maturity: Obligations of state and political subdivisions $ 696 $ 1,854 $ 873 $ - $ 3,423 Weighted average yield 4.65% 4.99% 5.14% - Full tax equivalent yield 7.08% 7.57% 7.79% -
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. The maturities of, and yields on, mortgage backed securities have been calculated using actual quarterly repayment history. However, where securities have call features and market values greater than par, the call date has been used to determine the expected maturity. With the exception of obligations of the U.S. Treasury and other U.S. Government corporations and agencies, there were no investment securities of any single issuer, the book value of which exceeded 10% of stockholders' equity at September 30, 1996. LOAN PORTFOLIO The following tables provide information relating to the Registrant's loan portfolio, risk elements within the portfolio and historical loan loss experience. TYPES OF LOANS The composition of the Registrant's loan portfolio as of September 30, 1996, December 31, 1995 and 1994 was as follows:
(in thousands) 1996 1995 1994 Commercial, financial and agricultural $ 73,485 $ 65,916 $ 61,520 Real estate - mortgage 242,507 211,147 195,524 Installment 30,464 27,996 22,294 Other 1,609 1,945 2,815 Total loans $348,065 $307,004 $282,153
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES The following table presents the aggregate balances of loans outstanding as of September 30, 1996, by maturities, based on remaining scheduled, contractual repayments of principal:
Over 1 One year through Over (in thousands) or less 5 years 5 years Total Commercial, financial and agricultural $ 50,499 $ 21,405 $ 1,581 $ 73,485 Real estate - mortgage 49,472 125,468 67,567 242,507 Installment 7,520 22,593 351 30,464 Other 225 809 575 1,609 Total loans $ 107,716 $170,275 $ 70,074 $348,065
As of September 30, 1996, loans with maturities over one year were comprised of $190,756,000 in fixed rate loans and $49,593,000 in variable rate loans. The loan maturities noted previously are based on the contractual provisions of the individual loans. The Registrant has no general policy regarding rollovers, and borrower requests for such are handled on a case by case basis. As of September 30, 1996, the Registrant had loan concentrations in agricultural industries of 12.6% of outstanding loans. The Registrant had no other industry loan concentrations in excess of 10% of outstanding loans. There was no foreign activity required to be disclosed for the reporting period ended September 30, 1996. RISK ELEMENTS The Registrant adopted Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" ("FAS 114") and Statement of Financial Accounting Standards No. 118 "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosure" ("FAS 118") effective January 1, 1995. FAS 114 applies to all creditors and to all loans that are accounted for at fair value or at the lower of cost or fair value. It requires that impaired loans be measured at the present values of expected future cash flows by discounting those cash flows at the loan's effective interest rate. FAS 118 amends FAS 114 to allow a creditor to use existing methods for recognizing interest income on an impaired loan. FAS 118 also amends the disclosure requirements of FAS 114 to require information about the recorded investment in certain impaired loans and about how a creditor recognizes interest income related to those impaired loans. At September 30, 1996, the recorded investment of impaired loans totaled $818,000 as compared with $1,240,000 at December 31, 1995. There was no related allowance for these impaired loans either at September 30, 1996 or December 31, 1995. The average recorded investment in impaired loans during 1996 was $1,013,000. Total interest income which would have been recorded under the original terms of the impaired loans was $99,000. Total interest income earned on these impaired loans totaled $35,000. It is the Registrant's policy to discontinue the accrual of interest income on any loan when, in the opinion of management, there is reasonable doubt as to the timely collectibility of interest or principal. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collectibility of interest or principal. The following table presents information concerning the aggregate amount of nonperforming loans at the dates indicated. Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due 90 days or more as to interest or principal payments; and (c) loans not included in (a) or (b) previously, which are "restructured loans" as defined in Statement of Financial Accounting Standards No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings."
Nonperforming Loans September 30, December 31, (in thousands) 1996 1995 1994 1993 1992 Nonaccrual loans $ 230 $ 636 $ 393 $ 497 $ 685 Loans past due ninety days or more and still accruing 382 554 509 248 585 Restructured loans which are performing in accordance with revised terms 588 604 772 307 383
SUMMARY OF LOAN LOSS EXPERIENCE There was a $36,000 provision for loan losses charged to expense for the nine months ended September 30, 1996, as compared to $138,000 for the nine months ended September 30, 1995. Management establishes an allowance for loan losses which reduces the total loans outstanding by an estimate of uncollectible loans. Loans deemed to be uncollectible are charged against and reduce the allowance. The provision for loan losses and recoveries are credited to and increase the allowance. The allowance for loan losses totaled $2,705,000 (.78% of total loans) at September 30, 1996, and $2,814,000 (.92% of total loans) at December 31, 1995. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES A summary of loan loss experience for the periods indicated is as follows:
Nine months ended September 30, Year ended December 31, (dollars in thousands) 1996 1995 1994 1993 1992 Average loans outstanding net of unearned income $319,209 $294,220 $243,166 $214,408 $178,919 Allowance-beginning of year 2,814 2,608 2,110 1,906 1,566 Balance of acquired subsidiary - - 343 - - Charge-offs: Commercial, financial and agricultural 131 18 29 140 298 Real estate-mortgage - 111 28 241 350 Installment 102 57 120 86 139 Total charge-offs 233 186 177 467 787 Recoveries: Commercial, financial and agricultural 49 73 98 150 167 Real estate-mortgage - - 21 3 18 Installment 39 39 45 26 49 Total recoveries 88 112 164 179 234 Net charge-offs 145 74 13 288 553 Provision for loan losses 36 280 168 492 543 Allowance-end of period $ 2,705 $2,814 $ 2,608 $ 2,110 $ 1,906 Ratio of net charge-offs to average loans .05% .03% .01% .13% .31% Ratio of allowance for loan losses to ending loans (net of unearned income) .78% .92% .93% .95% .89% Ratio of allowance for loan losses to total non-performing loans 231.20% 156.90% 168.10% 200.60% 115.30%
The allowance for loan losses represents management's best estimate of the reserve necessary to adequately cover losses that could ultimately be realized from current loan exposures. In determining the adequacy of the allowance for loan losses, management relies predominantly on a disciplined credit review and approval process which extends to the full range of the Registrant's credit exposure. The review process is directed by overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Once identified, the magnitude of the exposure to individual borrowers is quantified in the form of specific allocation of the allowance for loan losses. Collateral values are considered by management in the determination of such specific allocations. Additional factors considered by management in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and restructured loans and the current and anticipated economic conditions in the region where the Registrant operates. In addition to the aforementioned considerations, management also considers the experience of certain other similarly situated banks, thrifts and bank holding companies. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The allowance for loan losses, in management's judgment, would be allocated as follows to cover potential loan losses:
September 30, 1996 December 31, 1995 Allowance % of Allowance % of for loans for loans loan to total loan to total (dollars in thousands) losses loans losses loans Commercial, financial and agricultural $ 1,843 21.1% $ 1,554 21.5% Real estate-mortgage 426 69.7% 314 68.8% Installment 133 8.6% 131 9.1% Other - .6% - .6% Total allocated 2,402 1,999 Unallocated 303 N/A 815 N/A Allowance at end of reported period $ 2,705 100.0% $ 2,814 100.0%
The allowance is allocated to the individual loan categories by a specific reserve for all classified loans plus a percentage of loans not classified based on historical losses. There were no other interest-bearing assets which would be required to be disclosed as having "risk elements" if such other assets were loans. RETURN ON EQUITY AND ASSETS The following table presents selected financial ratios for the nine months ended September 30, 1996 (annualized) and the years ended December 31, 1995 and 1994:
1996 1995 1994 Return on average total assets .84% .84% .83% Return on average total stockholders' equity 10.98% 11.76% 11.35% Return on average common stockholders' equity 11.14% 12.02% 11.59% Dividend payout ratio 19.54% 19.76% 20.89% Average total equity to average assets ratio 7.67% 7.17% 7.38%
DEPOSIT BASE The following table details the year-to-date average deposits for the indicated periods and weighted average rates at September 30, 1996, December 31, 1995 and 1994:
September 30, December 31, December 31, 1996 1995 1994 Weighted Average Weighted Average Weighted Average (dollars in thousands) Amount Rate Amount Rate Amount Rate Demand deposits: Non-interest bearing $ 49,559 - $ 46,237 - $ 37,527 - Interest bearing 107,711 2.69% 106,118 2.66% 110,069 2.51% Savings 40,110 2.72% 40,920 2.71% 38,985 2.59% Time deposits 205,523 5.46% 202,305 5.42% 170,252 4.29% Total average deposits $402,903 3.78% $395,580 3.76% $356,833 3.10%
The following table sets forth the maturity of time deposits of $100,000 or more at September 30, 1996:
(in thousands) Time Deposits Other Total 3 months or less $ 21,235 $ - $ 21,235 Over 3 through 6 months 5,487 3,000 8,487 Over 6 through 12 months 7,743 - 7,743 Over 12 months 6,719 - 6,719 Total $ 41,184 $ 3,000 $ 44,184
There were no time deposits of $100,000 or more that were issued by foreign offices at September 30, 1996. OTHER BORROWINGS Other borrowings at September 30, 1996, December 31, 1995 and December 31, 1994 are shown in following table:
1996 1995 1994 Securities sold under agreements to repurchase $ 14,080 $ 16,815 $ 15,590 Federal Home Loan Bank advances: Overnight advances 12,223 2,220 3,500 Fixed term due in one year or less 27,193 6,000 - Fixed term due after one year 1,000 3,500 - Federal funds purchased 6,500 - 500 Total $ 61,006 $ 28,515 $ 19,590
Federal Home Loan Bank advances are secured by stock of the Federal Home Loan Bank of Chicago and by residential mortgage loans. Information concerning these borrowings at September 30, 1996, December 31, 1995 and December 31, 1994 is as follows:
(in thousands) 1996 1995 1994 Maximum Outstanding at any Month-End During the Year: Securities sold under agreements to repurchase $ 16,590 $ 21,200 $ 15,980 Federal Home Loan Bank advances 40,426 16,500 8,250 Federal funds purchased 6,500 - 5,000 Averages for the Year: Securities sold under agreements to repurchase $ 11,598 16,481 9,697 Federal Home Loan Bank advances 20,517 7,633 2,696 Federal funds purchased 994 26 710
OTHER INCOME Other income increased $551,000 or 18.7% to $3,497,000 in the first nine months of 1996 as compared with $2,946,000 in the same period of 1995. The following table sets forth information regarding the major components of and changes in other income.
Nine months ended Change September 30, 1996/1995 (dollars in thousands) 1996 1995 Amount Percent Trust fees $ 900 $ 845 $ 55 6.5% Brokerage and annuity fees 272 132 140 106.1 Service charges 1,293 1,155 138 11.9 Securities losses, net (10) - 10 100.0 Mortgage banking income 299 176 123 69.9 Other 743 638 105 16.5 Total other income $3,497 $2,946 $ 551 18.7%
Trust fees increased 6.5% when comparing year-to-date 1996 and 1995, primarily because trust assets increased from $202 million to $214 million. There was also growth in estate accounts which generated higher fees, as well as an increase in agency fees. Revenues from brokerage and annuity fees increased 106.1% from the first nine months of 1996 compared to the same period in 1995. This considerable increase was due to an early 1996 transition to full service brokerage, higher fees for value-added services and a wider array of products. Service charges on deposits consist of fees on both interest bearing and non-interest bearing accounts and charges for other items, including insufficient funds, overdrafts and stop payment requests. These fees increased 11.9% when comparing year-to-date 1996 and 1995, primarily due to an increase in deposit accounts. During the nine month period ended September 30, 1996, net losses from sales of securities was $10,000. No securities were sold in the period ended September 30, 1995. Mortgage banking income increased significantly in the first nine months of 1996 as compared to 1995. This resulted from Heartland; increased originations of mortgage loans and a larger percent being sold in the secondary market. Also affecting income from the sale of loans was FAS 122, "Accounting for Mortgage Servicing Rights" which the Registrant adopted on January 1, 1996. The Registrant recognized $118,000 of additional income by recording the value of the originated mortgage servicing rights associated with the loans sold during the first nine months of 1996. During the nine month period ended September 30, 1996, other income increased $105,000 (16.5%) as compared to the same period in 1995. This increase was the result of a gain on the sale of the Sullivan facility's former bookkeeping building of $47,000, as well as a $55,000 net gain on the sale of other real estate owned located in Neoga and Charleston. There was also an increase in loan fees associated with home equity lines of credit. OTHER EXPENSE Other expense increased $1,004,000 or (9.2%) to $11,898,000 in the first nine months of 1996 as compared with $10,894,000 in the first nine months of 1995. Other expense as a percentage of average assets remained stable at 2.4% during the first nine months of 1996 and 1995. The following table sets forth information regarding the major components of and changes in other expense.
Nine months ended Change September 30, 1996/1995 (dollars in thousands) 1996 1995 Amount Percent Salaries and employee benefits $ 5,890 $ 5,538 $ 352 6.4% Occupancy, furniture and equipment, net 1,775 1,702 73 4.3 Federal deposit insurance premiums 964 495 469 94.7 Other 3,269 3,159 110 3.5 Total other expense $11,898 $10,894 $1,004 9.2%
Salaries and employee benefits, the largest component of other expense, increased $352,000 or 6.4% during the first nine months of 1996 as compared with the same period in 1995. This increase was primarily due to regular pay increases made to the employees. Net occupancy, furniture and equipment expense increased $73,000 or 4.3% during the first nine months of 1996 compared with the same period in 1995. This increase was attributable in part to the new facility that opened in Arcola in September 1995, and several remodeling projects being completed at facilities owned by subsidiaries of the Registrant. FDIC insurance premiums increased $469,000 or 94.7% in the first nine months of 1996 compared with 1995. This increase was the result of a one-time charge to earnings of $758,000 on September 30, 1996 to record the effect of a special assessment associated with the recapitalization of the Savings Association Insurance Fund (the "SAIF"), made against Heartland, as a SAIF-member, and against the Bank due to the SAIF-assessable deposits acquired by the Bank from Heartland in 1992. The increase in insurance premiums represented by the special assessment was offset by a reduction in the deposit insurance assessments charged to members of the Bank Insurance Fund (the "BIF"), such as the Bank, from a range of 0.23% to 0.31% of deposits for the semi-annual assessment period which began January 1, 1995, to a range of $1,000 to 0.27% of deposits for the semi-annual assessment period which began January 1, 1996. As a result of the recapitalization of the SAIF, the FDIC has issued a proposal to reduce the deposit insurance assessment rates charged members of the SAIF to the same levels charged members of the BIF effective January 1, 1997. See "Recent Regulatory Developments". Assuming the FDIC's proposal is adopted, beginning January 1, 1997, assuming Heartland and the Bank continue to occupy the same risk categories under the FDIC's risk-based assessment system, Heartland and the Bank will be assessed at uniform rates for FDIC deposit insurance. Other expense increased $110,000 or 3.5% for the first nine months of 1996 as compared with the same period of 1995. This increase was attributable to an increase in supplies expense in connection with new machine readable teller forms being printed. INCOME TAXES The Registrant recorded federal income tax expense of $1,663,000 for the nine months ended September 30, 1996, as compared to $1,390,000 for the same period in 1995. The effective federal income tax rate was 32.0% for the nine months ended September 30, 1996, as compared with 31.6% in the same period in 1995. Tax exempt interest as a percentage of total interest income declined in 1996, which contributed to the higher tax rate. Also, the Registrant recorded state income tax in the amount of $152,000 for the nine months ended September 30, 1996. In past years, the Registrant's low loan to deposit ratio and heavy reliance on interest income from state tax exempt securities had combined to produce operating losses for state tax purposes. These net operating loss carryforwards generated in years past have now been exhausted. LIQUIDITY Liquidity represents the ability of the Registrant and its subsidiaries to meet the present and future requirements of customers for new loans and deposit withdrawals. Liquidity management focuses on the ability to obtain funds economically and to maintain assets which may be converted into cash at minimal costs. The Registrant has provided for its liquidity needs through growth in core deposits, maturing loans and investment securities, and by maintaining adequate balances in other short-term investments. Management continually and carefully monitors its expected liquidity requirements, focusing primarily on cash flows from operating, investing and financing activities. A summary of the Registrant's cash flows from these sources during the three month periods ended September 30, 1996 and 1995 and for the nine month periods ended September 30, 1996 and 1995 follows:
Three months ended Nine months ended September 30, September 30, (in thousands) 1996 1995 1996 1995 Cash flow provided by (used in): Operating activities $ 109 $ (308) $ 2,062 $ 3,037 Investing activities (17,178) (10,165) (40,751) (19,738) Financing activities 25,504 14,990 45,724 24,153 Total $ 8,435 $4,517 $ 7,035 $ 7,452
The Registrant's need for liquidity is influenced by several factors, including the increased loan demand brought on by the economic expansion in the Registrant's market area. Also affecting the Registrant's cash flow is its relationship with seasonal customers such as public entities, highway contractors and those associated with the agricultural industry. CAPITAL RESOURCES The Registrant and its subsidiaries have capital ratios which are higher than the fully-phased in regulatory capital requirements. The requirements call for a minimum total risk-based capital ratio of 8% and a minimum leverage ratio of 3% for the most highly rated banks that do not expect significant growth. All other institutions are required to maintain a ratio of Tier 1 capital to total assets of 4% to 5% depending on their particular circumstances and risk profiles. At September 30, 1996, the Registrant's leverage ratio was 6.66%. A tabulation of the Registrant's and its subsidiaries' risk-based capital ratios as of September 30, 1996, follows:
Tier one Total risk-based risk-based capital ratio capital ratio First Mid-Illinois Bancshares, Inc. 10.7% 11.6% First Mid-Illinois Bank & Trust, N.A. 11.3% 12.2% Heartland Savings Bank 15.3% 16.0%
Banks and bank holding companies are generally expected to operate at or above the minimum capital requirements. These ratios are well in excess of regulatory minimums and will allow the Registrant to operate without capital adequacy concerns. RECENT REGULATORY DEVELOPMEMTS On September 30, 1996, President Clinton signed into law the "Economic Growth and Regulatory Paperwork Reduction Act of 1996" (the "Regulatory Reduction Act"). Subtitle G of the Regulatory Reduction Act consists of the "Deposit Insurance Funds Act of 1996" (the "DIFA"). The DIFA provides for a one-time special assessment on each depository institution holding deposits subject to assessment by the FDIC for the Savings Association Insurance Fund (the "SAIF") in an amount which, in the aggregate, will increase the designated reserve ratio of the SAIF (I.E., the ratio of the insurance reserves of the SAIF to total SAIF-insured deposits) to 1.25% on October 1, 1996. Subject to certain exceptions, the special assessment is payable in full on November 27, 1996. As a SAIF-member, Heartland is subject to the special assessment. Additionally, the Bank holds SAIF-assessable deposits as a result of branches acquired from Heartland in 1992. Thus, the Bank will be subject to the special assessment with respect to those deposits. Under the DIFA, the amount of the special assessment payable by an institution is to be determined on the basis of the amount of SAIF-assessable deposits held by the institution on March 31, 1995, or acquired by the institution after March 31, 1995 from another institution which held the deposits as of that date but is no longer in existence on November 27, 1996. The DIFA provides for a 20% discount in calculating the SAIF-assessable deposits of certain "Oakar" banks (I.E., Bank Insurance Fund ("BIF") member banks that hold deposits acquired from a SAIF member that are deemed to remain SAIF insured) and certain "Sasser" banks (I.E., banks that converted from thrift to bank charters but remain SAIF members). The Bank qualifies for the 20% discount provided by the DIFA for "Oakar" banks, but although Heartland is a "Sasser" bank, Heartland does not meet the requirements established in the DIFA to qualify for this 20% discount. The DIFA also exempts certain institutions from payment of the special assessment (including institutions that are undercapitalized or that would become undercapitalized as a result of payment of the special assessment), and allows an institution to pay the special assessment in two installments if there is a significant risk that by paying the special assessment in a lump sum, the institution or its holding company would be in default under or in violation of terms or conditions of debt obligations or preferred stock issued by the institution or its holding company and outstanding on September 13, 1995. On October 8, 1996, the FDIC adopted a final regulation implementing the SAIF special assessment. In that regulation, the FDIC set the special assessment rate at 0.657% of SAIF-assessable deposits held on March 31, 1995. As a result of the special assessment, the Bank and Heartland have each taken a charge against earnings for the quarter ended September 30, 1996, in the amount of $199,000 and $559,000, respectively. In November, the FDIC has notified the Bank and Heartland that the dollar amounts of the special assessments payable by the Bank and Heartland are estimated to be $199,000 and $552,000, respectively. As discussed below, however, the recapitalization of the SAIF resulting from the special assessment should significantly reduce the ongoing deposit insurance expense of Heartland and allow Heartland and the Bank to pay uniform rates for deposit insurance. In light of the recapitalization of the SAIF pursuant to the special assessment authorized by the DIFA, the FDIC, on October 8, 1996, issued a proposed rule that would reduce regular semi-annual SAIF assessments from the current range of 0.23% - 0.31% of deposits to a range of 0% - 0.27% of deposits. Under the proposal, the new rates would be effective October 1, 1996 for Oakar and Sasser banks, but would not take affect for other SAIF-assessable institutions until January 1, 1997. From October 1, 1996 through December 31, 1996, SAIF-assessable institutions other than Oakar and Sasser banks would, under the proposal, be assessed at rates ranging from 0.18% to 0.27% of deposits, which represents the amount the FDIC calculates as necessary to cover the interest due for that period on outstanding obligations of the Financing Corporation (the "FICO"), discussed below. Because SAIF-assessable institutions have already been assessed at current rates (I.E., 0.23% - 0.31% of deposits) for the semi-annual period ending December 31, 1996, the proposal contemplates that the FDIC will refund the amount collected from such institutions for the period from October 1, 1996 through December 31, 1996 which exceeds the amount due for that period under the reduced assessment schedule. Assuming the proposal is adopted as proposed, and assuming the Bank and Heartland each retains its current risk classification under the FDIC's risk-based assessment system, the deposit insurance assessments payable by Heartland will be reduced significantly, to the same level currently paid by Heartland's BIF-member competitors and reduce the Bank's assessments on its SAIF-assessable deposits to the same level paid by the Bank on its BIF- assessable deposits. Prior to the enactment of the DIFA, a substantial amount of the SAIF assessment revenue was used to pay the interest due on bonds issued by the FICO, the entity created in 1987 to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the SAIF's predecessor insurance fund. Pursuant to the DIFA, the interest due on outstanding FICO bonds will be covered by assessments against both SAIF and BIF member institutions beginning January 1, 1997. Between January 1, 1997 and December 31, 1999, FICO assessments against BIF-member institutions, such as the Bank, cannot exceed 20% of the FICO assessments charged SAIF-member institutions. From January 1, 2000 until the FICO bonds mature in 2019, FICO assessments will be shared by all FDIC-insured institutions on a PRO RATA basis. The FDIC estimates that the FICO assessments for the period January 1, 1997 through December 31, 1999 will be approximately 0.013% of deposits for BIF members versus approximately 0.064% of deposits for SAIF members, and will be less than 0.025% of deposits thereafter. The DIFA also provides for a merger of the BIF and the SAIF on January 1, 1999, provided there are no state or federally chartered, FDIC-insured savings associations existing on that date. To facilitate the merger of the BIF and the SAIF, the DIFA directs the Treasury Department to conduct a study on the development of a common charter and to submit a report, along with appropriate legislative recommendations, to the Congress by March 31, 1997. In addition to the DIFA, the Regulatory Reduction Act includes a number of statutory changes designed to eliminate duplicative, redundant or unnecessary regulatory requirements. Among other things, the Regulatory Reduction Act establishes streamlined notice procedures for the commencement of new nonbanking activities by bank holding companies, eliminates the need for national banks, such as the Bank, to obtain OCC approval to establish an off-site ATM, excludes ATM closures and certain branch office relocations from the prior notice requirements applicable to branch closings, significantly expands the authority of well-capitalized and well-managed national banks to invest in office premises without prior regulatory approval, and establishes time frames within which the FDIC must act on applications by state banks, such as Heartland, to engage in activities which, although permitted for the state bank under applicable state law, are not permissible activities for national banks. The Regulatory Reduction Act also clarifies the liability of a financial institution, when acting as a lender or in a fiduciary capacity, under the federal environmental clean-up laws. Although the full impact of the Regulatory Reduction Act on the operations of the Registrant and its subsidiaries cannot be determined at this time, management believes that the legislation will reduce compliance costs to some extent and allow the Registrant and its subsidiaries somewhat greater operating flexibility. On August 10, 1996, President Clinton signed into law the Small Business Job Protection Act of 1996 (the "Job Protection Act"). Among other things, the Job Protection Act eliminates the percent-of-taxable-income ("PTI") method for computing additions to a savings association's or savings bank's tax bad debt reserves for tax years beginning after December 31, 1995, and requires all savings associations and savings banks which have used the PTI method to recapture, over a six year period, all or a portion of their tax bad debt reserves added since the last taxable year beginning before January 1, 1988. The Job Protection Act allows a savings association or savings bank to postpone the recapture of bad debt reserves for up to two years if the institution meets a minimum level of mortgage lending activity during those years. Heartland believes that it will engage in sufficient mortgage lending activity during 1996 and 1997 to be able to postpone any recapture of its bad debt reserves until 1998. As a result of these provisions of the Job Protection Act, Heartland will determine additions to its tax bad debt reserves using the same method as a commercial bank of comparable size, and, if Heartland were to decide to convert to a commercial bank charter, the changes in the tax bad debt recapture rules enacted in the Job Protection Act should make such conversion less costly. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. There are no material pending legal proceedings to which the Registrant or any of its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses. ITEM 2. CHANGES IN SECURITIES. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Net applicable. ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 27. Financial Data Schedule (b) Form 8-K None filed during the nine month period ended September 30, 1996. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST MID-ILLINOIS BANCSHARES, INC. (Registrant) Date: November 12, 1996 /s/ Daniel E. Marvin, Jr. Daniel E. Marvin, Jr. President and Chief Executive Officer Date: November 12, 1996 /s/ William S. Rowland William S. Rowland Chief Financial Officer EX-27 2
9 1000 9-MOS DEC-31-1996 SEP-30-1996 25882 3848 600 0 119706 3423 3430 348065 2705 523569 410316 61006 7246 6450 0 3100 3748 31703 523569 20443 5623 202 26268 11409 13110 13158 36 (10) 11898 4721 4721 0 0 3058 3.11 2.94 7.89 230 382 588 818 2814 233 88 2705 2705 0 303
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