UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
JUNE 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 June 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: 934,865 shares of Common
Stock at June 30, 1996.
FORM 10-Q
FOR THE QUARTER ENDED
JUNE 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 28
Item 2 Changes in Securities 28
Item 3 Defaults Upon Senior Securities 28
Item 4 Submission of Matters to a Vote of
Securitiy Holders 28
Item 5 Other Information 28
Item 6 Exhibits and Reports on Form 8-K 28
Signatures 29
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 SHEETS
(unaudited) (dollars in thousands, except per share data)
June 30, December 31,
1996 1995
Assets
Cash and due from banks:
Noninterest bearing $ 18,869 $ 17,536
Interest bearing 951 784
Excess funds sold 2,075 4,975
Cash and cash equivalents 21,895 23,295
Investment certificates of deposits 99 99
Investment securities available-for-sale
at fair value 120,468 119,388
Investment securities held-to-maturity (estimated
fair value of $3,425 at June 30, 1996 and
$3,409 at December 31, 1995) 3,443 3,381
Loans 327,718 307,004
Less allowance for loan losses 2,680 2,814
Net loans 325,038 304,190
Premises and equipment, net 9,659 9,487
Intangible assets 5,802 6,019
Other assets 7,817 6,635
Total assets $494,221 $472,494
Liabilities and Stockholders' Equity
Deposits:
Noninterest bearing $ 50,592 $ 51,017
Interest bearing 353,187 345,862
Total deposits 403,779 396,879
Other liabilities 4,257 4,591
Other borrowings 41,887 28,515
Long-term debt 6,700 7,200
Total liabilities 456,623 437,185
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 share 3,100 3,100
Common stock, $4 par value; authorized 2,000,000
shares; issued 936,865 shares at June 30, 1996
and 894,991 at December 31, 1995) 3,736 3,580
Additional paid-in-capital 5,175 3,969
Retained earnings 26,438 24,493
Net unrealized gain (loss) on available-for-sale
investment securities (827) 191
37,622 35,333
Less treasury stock at cost, 2,000 shares 24 24
Total stockholders' equity 37,598 35,309
Total liabilities and stockholders' equity $494,221 $472,494
See accompanying notes to consolidated financial statements.
FIRST MID-ILLINOIS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended June 30, 1996 and 1995
(unaudited) (in thousands, except per share data)
1996 1995
Interest income:
Interest and fees on loans $ 6,731 $ 6,181
Interest on investment securities 1,864 1,971
Interest on excess funds sold 29 77
Interest on deposits with financial institutions 10 47
Total interest income 8,634 8,276
Interest expense:
Interest on deposits 3,785 3,668
Interest on other borrowings 368 281
Interest on long-term debt 104 149
Total interest expense 4,257 4,098
Net interest income 4,377 4,178
Provision for loan losses - 48
Net interest income after provision
for loan losses 4,377 4,130
Other income:
Trust fees 319 305
Brokerage and annuity fees 112 42
Service charges 439 385
Securities gains, net 16 -
Mortgage banking income 91 71
Other 253 181
Total other income 1,230 984
Other expense:
Salaries and employee benefits 1,959 1,849
Occupancy, furniture and equipment, net 594 569
Federal deposit insurance premiums 69 221
Other 1,174 1,072
Total other expense 3,796 3,711
Income before income taxes 1,811 1,403
Income taxes 618 453
Net income $ 1,193 $ 950
Per common share data:
Primary earnings per share $ 1.23 $ .99
Fully diluted earnings per share $ 1.15 $ .94
See accompanying notes to consolidated financial statements.
FIRST MID-ILLINOIS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Six months ended June 30, 1996 and 1995
(unaudited) (in thousands, except per share data)
1996 1995
Interest income:
Interest and fees on loans $13,226 $12,004
Interest on investment securities 3,723 3,906
Interest on excess funds sold 88 137
Interest on deposits with financial institutions 28 67
Total interest income 17,065 16,114
Interest expense:
Interest on deposits 7,568 7,148
Interest on other borrowings 666 460
Interest on long-term debt 229 289
Total interest expense 8,463 7,897
Net interest income 8,602 8,217
Provision for loan losses - 90
Net interest income after provision
for loan losses 8,602 8,127
Other income:
Trust fees 652 608
Brokerage and annuity fees 160 90
Service charges 849 749
Securities gains, net 18 -
Mortgage banking income 196 98
Other 548 422
Total other income 2,423 1,967
Other expense:
Salaries and employee benefits 3,886 3,649
Occupancy, furniture and equipment, net 1,154 1,118
Federal deposit insurance premiums 137 442
Other 2,161 2,114
Total other expense 7,338 7,323
Income before income taxes 3,687 2,771
Income taxes 1,318 858
Net income $ 2,369 $ 1,913
Per common share data:
Primary earnings per share $ 2.46 $ 2.00
Fully diluted earnings per share $ 2.30 $ 1.90
See accompanying notes to consolidated financial statements.
FIRST MID-ILLINOIS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended June 30, 1996 and 1995
(unaudited) (in thousands, except per share data)
1996 1995
Cash flows from operating activities:
Net income $ 1,193 $950
Adjustment to reconcile net income to net cash
provided by operating activities:
Provision for loan losses - 48
Depreciation, amortization and accretion, net 320 341
Gain on sales of securities, net (16) -
Gain on sale of loans held for sale (61) (8)
Origination of mortgage loans held for sale (3,611) (485)
Proceeds from sales of mortgage loans held for
sale 3,298 847
Net (increase) in other assets (1,597) (1,115)
Net increase in other liabilities 1,164 815
Net cash provided by operating activities 690 1,393
Cash flows from investing activities:
Capitalization of mortgage servicing rights (30) -
Expenditures for premises and equipment (332) (232)
Net (increase) in loans (20,081) (12,812)
Proceeds from sales of:
Securities available-for-sale 3,439 -
Proceeds from maturities of:
Securities available-for-sale 4,308 7,733
Securities held-to-maturity 20 469
Purchases of:
Securities available-for-sale (8,154) (217)
Securities held-to-maturity (30) (3,004)
Net cash (used in) investment activities (20,860) (8,063)
Cash flows from financing activities:
Net increase (decrease) in deposits 2,956 (7,550)
Net increase in other borrowings 21,867 8,380
Repayment of long-term debt (250) -
Proceeds from issuance of common stock 900 -
Dividends paid on preferred stock (16) (42)
Dividends paid on common stock (196) (176)
Net cash provided by financing activities 25,261 612
Increase (decrease) in cash and cash equivalents 5,091 (6,058)
Cash and cash equivalents at beginning of period 16,804 26,706
Cash and cash equivalents at end of period $21,895 $20,648
Additional disclosure of cash flow information:
Interest paid during the period $ 4,440 $ 4,111
Income taxes paid during the period 1,180 850
Loans transferred to real estate owned 276 36
See accompanying notes to consolidated financial statements.
FIRST MID-ILLINOIS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 1996 and 1995
(unaudited) (in thousands, except per share data)
1996 1995
Cash flows from operating activities:
Net income $ 2,369 $ 1,913
Adjustment to reconcile net income to net cash
provided by operating activities:
Provision for loan losses - 90
Depreciation, amortization and accretion, net 630 674
Gain on sales of securities, net (18) -
Gain on sale of loans held for sale (135) (17)
Origination of mortgage loans held for sale (5,778) (1,025)
Proceeds from sales of mortgage loans held for
sale 5,387 1,396
Net (increase) in other assets (1,187) (287)
Net increase in other liabilities 685 601
Net cash provided by operating activities 1,953 3,345
Cash flows from investing activities:
Capitalization of mortgage servicing rights (62) -
Expenditures for premises and equipment (560) (371)
Net (increase) in loans (20,322) (14,008)
Proceeds from sales of:
Securities available-for-sale 5,941 -
Proceeds from maturities of:
Securities available-for-sale 16,487 10,202
Securities held-to-maturity 20 1,287
Purchases of:
Securities available-for-sale (24,997) (3,679)
Securities held-to-maturity (80) (3,004)
Net cash (used in) investment activities (23,573) (9,573)
Cash flows from financing activities:
Net increase (decrease) in deposits 6,900 (298)
Net increase in other borrowings 13,372 9,890
Repayment of long-term debt (500) -
Proceeds from issuance of common stock 900 -
Dividends paid on preferred stock (16) (42)
Dividends paid on common stock (436) (387)
Net cash provided by financing activities 20,220 9,163
Increase (decrease) in cash and cash equivalents (1,400) 2,935
Cash and cash equivalents at beginning of period 23,295 17,713
Cash and cash equivalents at end of period $21,895 $20,648
Additional disclosure of cash flow information:
Interest paid during the period $ 8,574 $ 8,283
Income taxes paid during the period 1,305 850
Loans transferred to real estate owned 290 109
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 June 30, 1996 and 1995, and all such
adjustments are of a normal recurring nature. The results of the interim
period ended June 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 June 30, 1996 and 1995, are as follows:
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
Primary 910,134 885,620 904,143 883,629
Fully Diluted 1,035,436 1,010,922 1,029,445 1,008,931
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 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 June 30, 1996, amounted to
$1,193,000 ($1.15 per share on a fully diluted basis). This represents a
$243,000 or 25.6% increase from the earnings of $950,000 ($.94 per share on a
fully diluted basis) for the three month period ended June 30, 1995. A
summary of the factors which contributed to the earnings increase follows
(dollars in thousands, except per share data):
Three months ended June 30, 1996 Total Percent
vs. June 30, 1995 Net Change
Change 1996/1995
Net interest income $ 199 4.7%
Provision for loan losses (48) 100.0
Other income 246 25.0
Other expense 85 2.3
Income taxes 165 36.4
Total increase in net income $ 243 25.6%
Net income for the six month period ended June 30, 1996, amounted to
$2,369,000 ($2.30 per share on a fully diluted basis). This represents a
$456,000 or 23.8% increase from the earnings of $1,913,000 ($1.90 per share on
a fully diluted basis) for the six month period ended June 30, 1995. A
summary of the factors which contributed to the earnings increase follows
(dollars in thousands, except per share data):
Six months ended June 30, 1996 Total Percent
vs. June 30, 1995 Net Change
Change 1996/1995
Net interest income $ 385 4.7%
Provision for loan losses (90) 100.0
Other income 456 23.2
Other expense 15 .2
Income taxes 460 53.6
Total increase in net income $ 456 23.8%
NET INTEREST INCOME AND INTEREST RATE SENSITIVITY
During the first six months in 1996, the Registrant's net interest income
increased by $385,000 (4.7%) as compared with the net interest income for the
same period in 1995. Net interest income for the six months ended June 30,
1996, was $8,602,000 as compared with $8,217,000 for the six months ended June
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 June 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 4.00% during the first
half of 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
Six Month Period Ended Year Ended
June 30, 1996 December 31, 1995
(dollars in thousands) Avg Bal Int Avg Rate Avg Bal Int Avg Rate
INTEREST EARNING ASSETS
Investment certificates of deposits $ 99 $ 10 10.30% $ 99 $ 10 10.10%
Due from banks-interest bearing 947 46 4.90% 1,511 84 5.56%
Excess funds sold 3,309 176 5.31% 6,199 356 5.74%
Investment securities:
Taxable 111,853 6,785 6.07% 115,725 7,068 6.11%
Tax-exempt 11,940 661 8.39% 12,831 733 8.66%
Loans (net of unearned income) 310,073 26,452 8.53% 294,220 25,214 8.57%
Total earning assets 438,221 34,130 7.87% 430,585 33,465 7.86%
NONEARNING ASSETS
Cash and due from banks 15,330 15,382
Premises and equipment 9,560 9,333
Other nonearning assets 12,344 12,699
Allowance for loan losses (2,788) (2,711)
TOTAL ASSETS $472,667 $465,288
INTEREST BEARING LIABILITIES
Demand deposits 106,300 2,780 2.62% 106,118 2,823 2.66%
Savings deposits 40,447 1,088 2.69% 40,920 1,107 2.71%
Time deposits 205,395 11,266 5.49% 202,305 10,958 5.42%
Other borrowings 25,342 1,334 5.26% 24,140 1,266 5.24%
Long-term debt 7,068 458 6.48% 7,636 571 7.48%
Total interest-bearing liabilities 384,552 16,926 4.40% 381,119 16,725 4.39%
NONINTEREST BEARING LIABILITIES
Demand deposits 47,779 46,237
Other liabilities 3,931 4,561
TOTAL LIABILITIES 436,262 431,917
Stockholders' equity 36,405 33,371
TOTAL LIABILITIES & EQUITY $472,667 $465,288
Net interest earnings $17,204 3.46% $16,740 3.47%
Net interest earnings as a
% of interest earning assets
on a full tax equivalent basis 4.00% 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 $1,002
and $1,111 for the period ended June 30, 1996 and December 31, 1995,
respectively.
(3) Nonaccrual loans have been included in the average balances.
(4) Interest includes net loan fees.
(5) 1996 interest income and expense amounts have been annualized based on
results through June 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
(in thousands).
1996 Compared to 1995
Increase - (Decrease)
Total Rate/
Change Volume Rate Volume
INTEREST INCOME:
Investment certificates of deposit $ - $ - $ - $ -
Due from banks-interest bearing (38) (31) (11) 4
Excess funds sold (180) (165) (27) 12
Investment securities:
Taxable (283) (237) (48) 2
Tax-exempt (72) (51) (23) 2
Loans 1,238 1,358 (114) (6)
Total interest income 665 874 (223) 14
INTEREST EXPENSE:
Demand deposits (43) 5 (48) -
Savings deposits (19) (13) (6) -
Time deposits 308 167 139 2
Other borrowings 68 63 5 -
Long-term debt (113) (42) (77) 6
Total interest expense 201 180 13 8
NET INTEREST EARNINGS $ 464 $ 694 $(236) $ 6
Nonaccrual loans are not material and have been included in the average loan
balances for purposes of this computation. 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. Loan fees included in interest income are not material.
Interest on nontaxable securities is shown on a tax-equivalent basis using a
34% tax rate.
There were no foreign activities by the Registrant during the six month
periods ending June 30, 1996 and 1995.
The following table is the Registrant's "static gap" schedule as of June 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.
(dollars in thousands) Number of Months Until Next Repricing Opportunity
0-1 1-3 3-6 6-12 12+
INTEREST EARNING ASSETS:
Investment certificates of deposits $ - $ - $ - $ - $ 99
Due from banks-interest bearing 951 - - - -
Excess funds sold 2,075 - - - -
Investment securities:
Taxable 36,640 14,023 9,612 15,245 36,864
Tax-exempt 15 5 561 1,004 9,942
Loans 37,112 14,628 24,979 37,199 213,800
Total 76,793 28,656 35,152 53,448 260,705
INTEREST BEARING LIABILITIES:
Savings and NOW accts 111,244 - - - -
Money market accounts 34,032 - - - -
Other time deposits 40,887 43,024 35,288 36,873 51,839
Other borrowings 17,780 15,607 5,000 1,500 2,000
Long-term debt 6,700 - - - -
Total $ 210,643 $ 58,631 $ 40,288 $ 38,373 $ 53,839
Periodic GAP (133,850) (29,975) (5,136) 15,075 206,866
Cumulative GAP (133,850) (163,825) (168,961) (153,886) 52,980
Gaps as a percent of
interest earning assets:
Periodic (29.4%) (6.6%) (1.1%) 3.3% 45.5%
Cumulative (29.4%) (36.0%) (37.2%) (33.8%) 11.7%
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 and they have shown to be very 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 June 30, 1996, and December 31,
1995. In accordance with FAS 115, the unrealized losses, net of related
taxes, in the amount of $827,000 have been included in stockholders' equity at
June 30, 1996.
Total investment securities designated as available-for-sale represented 97%
of the portfolio and held-to-maturity represented 3%. During the six months
ended June 30, 1996, $3,425,000 (par value) available-for-sale and no held-to-
maturity investment securities were sold. During the six months ended June
30, 1996, $30,000 (par value) held-to-maturity and $6,600,000 (par value)
available-for-sale investment securities were purchased.
There were seven investment securities with a par value totaling $5,925,000
that were sold at a total gain of $18,000 during the six months ended June 30,
1996.
The change in the amount of net unrealized gain (loss) on available-for-sale
securities from December 31, 1995 to June 30, 1996 amounted to a loss of
$1,018,000. This loss reflects the decline in the market value of available-
for-sale securities during the first six months of the year.
The following table provides detailed information for investment securities
at June 30, 1996 and December 31, 1995, (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale - 06/30/96
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 78,849 $ 166 $ (1,606) $ 77,409
Obligations of state and
political subdivisions 8,301 308 (8) 8,601
Mortgage backed securities 30,787 154 (268) 30,673
Other securities 3,785 - - 3,785
Total available-for-sale $121,722 $ 628 $(1,882) $120,468
Held-to-maturity - 06/30/96
Obligations of state and
political subdivisions $ 3,443 $ 17 $ (35) $ 3,425
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
$3,378,000 at June 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 June 30,
1996 (dollars in thousands) 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
or less 5 years 10 years years Total
Available-for-sale:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 14,428 $ 52,798 $ 11,125 $ 498 $ 78,849
Obligations of state and
political subdivisions 1,032 6,563 706 - 8,301
Mortgage-backed securities 3,896 23,172 799 2,920 30,787
Other securities - - - 3,785 3,785
Total available-for-sale
securities $ 19,356 $ 82,533 $ 12,630 $ 7,203 $121,722
Weighted average yield 5.81% 5.53% 5.74% 8.12%
Full tax equivalent yield 5.92% 5.77% 5.91% 8.12%
Held-to-maturity:
Obligations of state and
political subdivisions $ 693 $ 1,842 $ 908 $ - $ 3,443
Weighted average yield 4.63% 5.02% 5.12% -
Full tax equivalent yield 7.04% 7.61% 7.76% -
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 June 30, 1996.
In December 1995, the Registrant reclassified certain investment securities
between held-to-maturity and available-for-sale in accordance with guidelines
issued by the Financial Accounting Standards Board ("FASB") permitting a one-
time change in classification. Based on discussion and analysis, the
Registrant decided that only local, non-rated municipal securities would be
classified as held-to-maturity and the remaining portfolio would be designated
as available-for-sale. The book value and gross unrealized loss of securities
transferred from held-to-maturity to available-for-sale amounted to
$52,536,000 and $445,000, respectively.
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 June 30, 1996,
December 31, 1995 and 1994 was as follows (in thousands):
1996 1995 1994
Commercial, financial
and agricultural $ 68,721 $ 65,916 $ 61,520
Real estate - mortgage 227,380 211,147 195,524
Installment 29,885 27,996 22,294
Other 1,732 1,945 2,815
Total loans $327,718 $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 June 30, 1996, by maturities, based on remaining scheduled, contractual
repayments of principal (in thousands):
Over 1
One year through Over
or less 5 years 5 years Total
Commercial, financial
and agricultural $ 46,611 $ 20,369 $ 1,741 $ 68,721
Real estate - mortgage 43,937 115,653 67,790 227,380
Installment 7,340 21,656 889 29,885
Other 258 886 588 1,732
Total loans $ 98,146 $158,564 $ 71,008 $327,718
As of June 30, 1996, loans with maturities over one year were comprised of
$180,366,000 in fixed rate loans and $49,206,000 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 June 30, 1996, the Registrant had loan concentrations in agricultural
industries of 12.5% 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 June 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 June 30, 1996, the recorded investment of impaired loans totaled $883,000
as compared with $1,240,000 at December 31, 1995. There was no related
allowance for these impaired loans either at June 30, 1996 or December 31,
1995. The average recorded investment in impaired loans during 1996 was
$1,078,000. Total interest income which would have been recorded under the
original terms of the impaired loans was $83,000. Total interest income
earned on these impaired loans totaled $25,000.
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
(in thousands)
June 30, December 31,
1996 1995 1994 1993 1992
Nonaccrual loans $ 282 $ 636 $ 393 $ 497 $ 685
Loans past due ninety days
or more and still accruing 682 554 509 248 585
Restructured loans which are
performing in accordance
with revised terms 601 604 772 307 383
SUMMARY OF LOAN LOSS EXPERIENCE
There was no provision for loan losses charged to expense for the six months
ended June 30, 1996, as compared to $90,000 for the six months ended June 30,
1995. This decrease was due to reduced loan charge offs, a lower level of
problem loans and favorable economic conditions which allowed the Registrant
to reduce the provision.
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 $2,680,000 (.82% of total loans) at June 30,
1996, and $2,814,000 (.92% of total loans) at December 31, 1995. The
allowance for loan losses equaled 171.2% and 156.9% of total non-performing
loans at June 30, 1996 and December 31, 1995, respectively.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
A summary of loan loss experience for the periods indicated is as follows
(dollars in thousands):
Six
months ended
June 30, Year ended December 31,
1996 1995 1994 1993 1992
Average loans outstanding
net of unearned income $310,073 $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 75 18 29 140 298
Real estate-mortgage - 111 28 241 350
Installment 88 57 120 86 139
Total charge-offs 163 186 177 467 787
Recoveries:
Commercial, financiaL
and agricultural 8 73 98 150 167
Real estate-mortgage - - 21 3 18
Installment 21 39 45 26 49
Total recoveries 29 112 164 179 234
Net charge-offs (recoveries) 134 74 13 288 553
Provision for loan losses - 280 168 492 543
Allowance-end of period $ 2,680 $2,814 $ 2,608 $ 2,110 $ 1,906
Ratio of net charge-offs
(recoveries) to average loans .04% .03% .01% .13% .31%
Ratio of allowance for loan losses
to loans outstanding (less
unearned interest) at end of period .82% .92% .93% .95% .89%
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 (in thousands):
June 30, 1996 December 31, 1995
Allowance % of Allowance % of
for loans for loans
loan to total loan to total
losses loans losses loans
Commercial, financial
and agricultural $ 1,731 21.0% $ 1,554 21.5%
Real estate-mortgage 392 69.4% 314 68.8%
Installment 136 9.1% 131 9.1%
Other - .5% - .6%
Total allocated 2,259 1,999
Unallocated 421 N/A 81 N/A
Allowance at end of
reported period $ 2,680 100.0% $ 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 six
months ended June 30, 1996 (annualized) and the years ended December 31,
1995 and 1994:
1996 1995 1994
Return on average total assets 1.00% .84% .83%
Return on average total stockholders' equity 13.01% 11.76% 11.35%
Return on average common stockholders' equity 13.37% 12.02% 11.59%
Dividend payout ratio 16.45% 19.76% 20.89%
Average total equity to average assets ratio 7.70% 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 June 30, 1996, December
31, 1995 and 1994 (in thousands):
June 30, December 31, December 31,
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
Demand deposits:
Non-interest bearing $ 47,779 - $ 46,237 - $ 37,527 -
Interest bearing 106,300 2.62% 106,118 2.66% 110,069 2.51%
Savings 40,447 2.69% 40,920 2.71% 38,985 2.59%
Time deposits 205,395 5.49% 202,305 5.42% 170,252 4.29%
Total average deposits $399,921 3.83% $395,580 3.76% $356,833 3.10%
The following table sets forth the maturity of time deposits of
$100,000 or more at June 30, 1996 (in thousands):
Time Deposits Other Total
3 months or less $ 24,660 $ - $ 24,660
Over 3 through 6 months 4,252 - 4,252
Over 6 through 12 months 5,208 3,000 8,208
Over 12 months 5,683 - 5,683
Total $ 39,803 $ 3,000 $ 42,803
There were no time deposits of $100,000 or more that were issued by
foreign offices at June 30, 1996.
OTHER BORROWINGS
Other borrowings at June 30, 1996, December 31, 1995 and December 31,
1994 are shown (in thousands) in the following table:
1996 1995 1994
Securities sold under agreement
to repurchase $ 10,787 $ 16,815 $ 15,590
Federal Home Loan Bank advances:
Overnight advances 8,600 2,200 3,500
Fixed term advances due in one
year or less 22,500 6,000 -
Fixed term advances due after
one year - 3,500 -
Federal funds purchased - - 500
Total other borrowings $ 41,887 $ 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 such borrowings for the periods ended June 30,
1996 (six months), December 31, 1995 (twelve months) and December 31,
1994 (twelve months) is as follows (in thousands):
1996 1995 1994
Maximum amount of borrowings
outstanding at any month end $ 41,887 $ 36,770 $ 23,460
Average amount outstanding 25,342 24,114 13,103
Weighted average interest
rate-end of period 5.37% 5.11% 3.55%
Weighted average interest
rate during the year 5.26% 5.24% 3.59%
OTHER INCOME
Other income increased $456,000 or 23.2% to $2,423,000 in the first
six months of 1996 as compared with $1,967,000 in the same period of
1995. The following table sets forth information regarding the major
components of and changes in other income (dollars in thousands).
Six months ended Change
June 30, 1996/1995
1996 1995 Amount Percent
Trust fees $ 652 $ 608 $ 44 7.2%
Brokerage and annuity fees 160 90 70 77.8
Service charges 849 749 100 13.4
Securities gains, net 18 - 18 100.0
Mortgage banking income 196 98 98 100.0
Other 548 422 126 29.9
Total other income $2,423 $1,967 $ 456 23.2%
Trust fees have increase 7.2% when comparing year-to-date 1996 and
1995, primarily becasue trust assets have increased from $195 million to
$208 million representing approximately 50 accounts.
Revenues from brokerage and annuity fees have increased 77.8% from the
first six months of 1995 to the same period in 1996. This considerable
increase is 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 13.4% when comparing year-to-date 1996 and 1995, primarily due
to the increase in deposit accounts.
During the six month period ended June 30, 1996, net gains from sales
of securities were $18,000. No securities were sold in the period ended
June 30, 1995.
Mortgage banking income has increased significantly in the first six
months of 1996 as compared to 1995. This has resulted from Heartland
originating more mortgage loans and selling them 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 $62,000 of additional
income by recording the value of the originated mortgage servicing
rights associated with the loans sold during the first six months of
1996.
During the six month period ended June 30, 1996 as compared to the
same period in 1995, other income increased $126,000 (29.9%). This
increase was a result of a gain on sale of $47,000 of the Sullivan
facility's former bookkeeping building, 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, primarily generated from home
equity lines of credit, which is a new product being offered.
OTHER EXPENSE
Other expense increased $15,000 or (.2%) to $7,338,000 in the first
six months of 1996 as compared with $7,323,000 in the first six months
of 1995. Other expense as a percentage of average assets remained
stable at 1.6% during the first six months of 1996 and 1995. The
following table sets forth information regarding the major components of
and changes in other expense (dollars in thousands).
Six months ended Change
June 30, 1996/1995
1996 1995 Amount Percent
Salaries and employee benefits $ 3,886 $ 3,649 $ 237 6.5%
Occupancy, furniture and equipment, net 1,154 1,118 36 3.2
Federal deposit insurance premiums 137 442 (305) (69.0)
Other 2,161 2,114 47 2.2
Total other expense $ 7,338 $ 7,323 $ 15 .2%
Salaries and employee benefits, the largest component of other
expense, increased $237,000 or 6.5% during the first six months of 1996
as compared with the same period in 1995. This increase was due to
regular pay increases made to the employees.
Net occupancy, furniture and equipment expense increased $36,000 or
3.2% during the first six months of 1996 compared with the same period
in 1995. This increase was attributable in part to the new facility
opened in Arcola in September 1995, and several remodeling projects
being completed at facilities throughout the Registrant.
FDIC Insurance premiums decreased $305,000 or 69.0% in the six months
of 1996 compared with 1995. This decrease was the result of 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. Heartland, as a
member of the Savings Association Insurance Fund (the "SAIF"), was not
affected by this reduction. Because the SAIF reserves do not yet equal
the statutorily designated reserve ratio of 1.25% of total SAIF-insured
deposits, the FDIC is prohibited by federal law from reducing SAIF
deposit insurance assessments to the levels currently charged members of
the BIF. As a result, SAIF assessments for the semi-annual assessment
period which began January 1, 1996, remained at the range 0.23% to 0.31%
of deposits, the same range in effect for the semi-annual assessment
period which began January 1, 1995.
Other expense increased $47,000 or 2.2% for the first six months of
1996 as compared with the same period of 1995. This increase was
attributable to an increase in supplies expense and loan origination
expense.
INCOME TAXES
The Registrant recorded federal income tax expense of $1,168,000 for
the six months ended June 30, 1996, as compared to $858,000 for the same
period in 1995. The effective federal income tax rate was 31.7% for the
six months ended June 30, 1996, as compared with 31.0% 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 $150,000
for the six months ended June 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 June 30, 1996 and 1995 and for the six month
periods ended June 30, 1996 and 1995 follows (in thousands):
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
Cash flow provided by (used in):
Operating activities $ 690 $ 1,393 $ 1,953 $ 3,345
Investing activities (20,860) (8,063) (23,573) (9,573)
Financing activities 25,261 612 20,220 9,163
Total $ 5,091 $(6,058) $(1,400) $ 2,935
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 June 30, 1996,
the Registrant's leverage ratio was 6.67%.
A tabulation of the Registrant's and its subsidiaries' risk-based
capital ratios as of June 30, 1996, follows:
Tier one Total
risk-based risk-based
capital ratio capital ratio
First Mid-Illinois Bancshares, Inc. 11.4% 12.0%
First Mid-Illinois Bank & Trust, N.A. 11.9% 12.9%
Heartland Savings Bank 16.9% 17.6%
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.
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.
On May 15, 1996, the Annual Meeting of Stockholders was held. At the
meeting, Kenneth R. Diepholz and Gary W. Melvin were elected to serve as
Class I directors with term expiring 1999. Continuing Class II
directors (term expires in 1997) are Richard Anthony Lumpkin, William G.
Roley and William S. Rowland and continuing Class III directors (term
expires in 1998) are Charles A. Adams, Daniel E. Marvin, Jr. and Ray
Anthony Sparks. The stockholders also approved the adoption of the
First Mid-Illinois Bancshares, Inc. Deferred Compensation Plan and
ratified the appointment of KPMG Peat Marwick, LLP as the Registrant's
independent public accountants for the year ending December 31, 1996.
There were 901,980 issued and outstanding shares of Common Stock at
the time of the Annual Meeting. The voting at the meeting, on the items
listed below, was as follows:
Election of Directors For Withheld
Kenneth R. Diepholz 791,676 1,735
Gary W. Melvin 791,676 1,735
Adoption of Deferred
Compensation Plan
For Against Withheld No Vote
684,938 34,100 54,181 20,192
The stockholders also voted to ratify the appointment of the
Registrant's auditors as well as the Deferred Compensation Plan.
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 six month period ended June 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: August 5, 1996 /s/ Daniel E. Marvin, Jr.
Daniel E. Marvin, Jr.
President and Chief Executive Officer
Date: July 30, 1996 /s/ William S. Rowland
William S. Rowland
Chief Financial Officer