UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 COMMISSION FILE NUMBER: 0-13368 FIRST MID-ILLINOIS BANCSHARES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 37-1103704 (State or other jurisdiction of (I.R.S. employer identification No.) incorporation or organization) 1515 CHARLESTON AVENUE, MATTOON, ILLINOIS 61938 (Address and Zip Code of Principal Executive Offices) (217) 234-7454 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $4.00 PER SHARE (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of May 8, 1997, 953,226 common shares, $4.00 par value, were outstanding.
1 PART I ITEM 1. FINANCIAL STATEMENTS <TABLE> <CAPTION> CONSOLIDATED BALANCE SHEETS MARCH 31, DECEMBER 31, (In thousands, except share data) (unaudited) 1997 1996 <S> <C> <C> ASSETS Cash and due from banks: Non-interest bearing $ 20,036 $ 20,158 Interest bearing 557 453 Federal funds sold 9,825 6,500 Cash and cash equivalents 30,418 27,111 Interest bearing deposits with other financial institutions 99 99 Investment securities: Available-for-sale, at fair value 127,099 114,027 Held-to-maturity, at amortized cost (estimated fair value of $3,491 and $3,409 at March 31, 1997 and December 31, 1996, respectively) 3,369 3,481 Loans 347,107 348,217 Less allowance for loan losses 2,756 2,684 Net loans 344,351 345,533 Premises and equipment, net 12,036 10,735 Intangible assets 9,192 5,472 Other assets 7,999 8,939 TOTAL ASSETS $ 534,563 $ 515,397 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing $ 59,010 $ 55,044 Interest bearing 388,171 358,632 Total deposits 447,181 413,676 Securities sold under agreements to repurchase 12,720 18,360 Federal Home Loan Bank advances 22,630 32,426 Long-term debt 6,950 6,200 Other liabilities 4,282 4,831 TOTAL LIABILITIES 493,763 475,493 Stockholders' Equity Series A convertible preferred stock; no par value; authorized 1,000,000 shares; issued 620 shares with stated value of $5,000 per share 3,100 3,100 Common stock, $4 par value; authorized 2,000,000 shares; issued 950,577 shares in 1997 and 942,816 shares in 1996 3,802 3,771 Additional paid-in-capital 5,727 5,463 Retained earnings 28,771 27,578 Net unrealized gain (loss) on available-for-sale investment securities, net of tax (576) 16 Less treasury stock at cost, 2,000 shares (24) (24) TOTAL STOCKHOLDERS' EQUITY 40,800 39,904 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $534,563 $515,397 </TABLE>
2 <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF INCOME For the three months ended March 31, 1997 and 1996 (In thousands, except per share data) (unaudited) 1997 1996 <S> <C> <C> INTEREST INCOME: Interest and fees on loans $ 7,197 $ 6,495 Interest on investment securities 1,859 1,859 Interest on federal funds sold 26 59 Interest on deposits with other financial institutions 10 18 Total interest income 9,092 8,431 INTEREST EXPENSE: Interest on deposits 3,905 3,783 Interest on securities sold under agreements to repurchase 158 138 Interest on Federal Home Loan Bank advances 355 156 Interest on Federal funds purchased 9 4 Interest on long-term debt 104 125 Total interest expense 4,531 4,206 Net interest income 4,561 4,225 Provision for loan losses 100 - Net interest income after provision for loan losses 4,461 4,225 OTHER INCOME: Trust revenues 422 333 Brokerage revenues 136 48 Service charges 404 410 Securities gains, net - 2 Mortgage banking income 69 105 Other 243 295 Total other income 1,274 1,193 OTHER EXPENSE: Salaries and employee benefits 1,998 1,931 Occupancy, furniture and equipment, net 707 556 Amortization of intangible assets 131 137 Stationary and supplies 159 103 Legal and professional 192 185 Marketing and promotion 117 108 Other 477 522 Total other expense 3,781 3,542 Income before income taxes 1,954 1,876 Income taxes 689 700 Net income $ 1,265 $ 1,176 Per common share data: Primary earnings per share $ 1.26 $ 1.23 Fully diluted earnings per share 1.18 1.15 </TABLE>
3 <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended March 31, 1997 and 1996 (In thousands) (unaudited) 1997 1996 <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,265 $ 1,176 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 100 - Depreciation, amortization and accretion, net 412 310 Gain on sale of securities, net - (2) Gain on sale of loans held for sale, net (35) (74) Origination of mortgage loans held for sale (2,458) (2,167) Proceeds from sale of mortgage loans held for sale 2,518 2,089 (Increase) decrease in other assets 895 410 Increase (decrease) in other liabilities (115) (479) Net cash provided by (used in)operating activities 2,582 1,263 CASH FLOWS FROM INVESTING ACTIVITIES: Capitalization of mortgage servicing rights (21) (32) Purchases of premises and equipment (256) (228) Net (increase) decrease in loans 1,517 (241) Proceeds from sales of: Securities available-for-sale - 2,502 Proceeds from maturities of: Securities available-for-sale 3,488 12,179 Securities held-to-maturity 110 - Purchases of: Securities available-for-sale (17,445) (16,843) Securities held-to-maturity - (50) Cash of acquired branch 22,416 - Net cash used in investing activities (9,809) (2,713) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 5,749 3,944 Decrease in securities sold under agreements to repurchase (5,640) (7,795) Decrease in Federal Home Loan Bank advances (9,796) (3,900) Increase in federal funds purchased - 3,200 Repayment of long-term debt (250) (250) Proceeds from long-term debt 1,000 - Proceeds from issuance of common stock 86 - Dividends paid on common stock (233) (240) Net cash provided by (used in) financing activities 9,084 (5,041) Increase (decrease) in cash and cash equivalents 3,307 (6,491) Cash and cash equivalents at beginning of period 27,111 23,295 Cash and cash equivalents at end of period $30,418 $16,804 ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 4,688 $ 4,134 Income taxes 340 125 Loans transferred to real estate owned 132 14 Dividends reinvested in common shares 209 180 </TABLE>
4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The unaudited consolidated financial statements include the accounts of First Mid-Illinois Bancshares, Inc. ("Registrant") and its wholly owned subsidiaries: First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank"); Heartland Savings Bank ("Heartland"); and Mid-Illinois Data Services, Inc. ("MIDS"). All significant intercompany balances and transactions have been eliminated in consolidation. The financial information reflects all adjustments which, in the opinion of management, are necessary to present a fair statement of the results of the interim periods ended March 31, 1997 and 1996, and all such adjustments are of a normal recurring nature. The results of the interim period ended March 31, 1997, are not necessarily indicative of the results expected for the year ending December 31, 1997. The unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information required by generally accepted accounting principles for complete financial statements and related footnote disclosures. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Registrant's 1996 Form 10-K. EARNINGS PER SHARE Earnings per share of common stock have been determined by dividing net income for the period by the weighted average number of common shares outstanding. Income for primary earnings per common share is adjusted for dividends attributable to preferred stock. Fully diluted earnings per share data is computed by using the weighted average number of common shares outstanding, increased by the assumed conversion of the convertible preferred stock. The weighted average number of common equivalent shares used in calculating earnings per share were as follows: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 1997 1996 <S> <C> <C> Primary 947,226 898,152 Fully diluted 1,072,528 1,028,454 </TABLE>
5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of the Registrant and its subsidiaries for the three month period ended March 31, 1997 and 1996. This discussion and analysis should be read in conjunction with the consolidated financial statements appearing elsewhere in this Form 10-Q. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Registrant intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Registrant, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Registrant's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Registrant and the subsidiaries include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Registrant's market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Registrant and its business, including additional factors that could materially affect the Registrant's financial results, is included in the Registrant's filings with the securities and Exchange Commission.
6 OVERVIEW Net income in the first quarter of 1997 increased to $1,265,000, up 6.8% from $1,176,000 earned in the same quarter of 1996. On a fully diluted basis, earnings per share for the quarterly period increased 3 cents per share to $1.18 as compared to $1.15 per share earned in the first quarter of 1996. An increase of $336,000 in net interest income together with higher levels on non interest income, primarily from trust and brokerage activities, contributed to increased profitability. Because of the increase in the loan portfolio, during the fourth quarter of 1996, the Registrant began to record provisions for possible loan losses. This has continued in 1997 and accordingly the Registrant provided $100,000 for possible loan losses during the quarter. No provision was made in the first quarter of 1996. Increased equipment, supplies and other non interest expenses associated with recent technology investments also reduced first quarter 1997 income by approximately $150,000. A summary of the factors which contributed to the changes in quarterly net income follows (in thousands): TABLE 1 EFFECT ON EARNINGS 1997 VS 1996 Net interest income $ 336 Provision for loan losses (100) Other income, including securities transactions 81 Other expenses (239) Income taxes 11 Increase in net income $ 89 The Registrant's annualized return on average total assets increased to .99% for the quarter ended March 31, 1997 as compared to .85% for the year ended December 31, 1996. Return on average total equity and return on average common equity increased to 12.45% and 12.72% respectively as compared to 11.03% and 11.18% at December 31, 1996. Average total equity to average assets increased to 7.96% at March 31, 1997 compared to 7.69% at December 31, 1996. NET INTEREST INCOME The largest source of operating revenue for the Registrant is net interest income. Net interest income represents the difference between total interest income earned on earning assets and total interest expense paid on interest- bearing liabilities. The amount of interest income is dependent upon many factors including the volume and mix of earning assets, the general level of interest rates and the dynamics of changes in interest rates. The cost of funds necessary to support earning assets varies with the volume and mix of interest-bearing liabilities and the rates paid to attract and retain such funds. For purposes of the following discussion and analysis, the interest earned on tax-exempt securities is adjusted to an amount comparable to interest subject to normal income taxes. The adjustment is referred to as the tax equivalent ("TE") adjustment. The Registrant's average balances, interest income and expense and rates earned or paid for major balance sheet categories are set forth in the following table (dollars in thousands):
7 TABLE 2 DISTRIBUTION OF CONSOLIDATED ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY - INTEREST, RATES AND NET YIELDS <TABLE> <CAPTION> THREE MONTH PERIOD ENDED YEAR ENDED MARCH 31, 1997 (ANNUALIZED)(4) DECEMBER 31, 1996 AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST(4) RATE BALANCE INTEREST RATE <S> <C> <C> <C> <C> <C> <C> ASSETS Interest bearing deposits $ 854 $ 44 5.15% $ 1,264 $ 65 5.14% Federal funds sold 2,044 104 5.09 3,403 180 5.29 Investment securities Taxable 108,874 6,814 6.26 111,640 6,858 6.14 Tax-exempt(1) 11,759 942 8.01 11,442 953 8.33 Loans (2)(3) 345,589 28,788 8.33 326,302 27,827 8.53 Total earning assets 469,120 36,692 7.82 454,051 35,883 7.90 Cash and due from banks 18,418 17,051 Premises and equipment 11,074 9,864 Other assets 14,802 12,854 Allowance for loan losses (2,711) (2,762) Total assets $ 510,703 $ 491,058 LIABILITIES AND STOCKHOLDERS' EQUITY Interest Bearing Deposits Demand deposits $ 121,195 3,436 2.84% $ 110,708 $ 3,085 2.79% Savings deposits 38,212 976 2.55 39,364 1,069 2.72 Time deposits 209,268 11,208 5.36 204,362 11,156 5.46 Securities sold under agreements to repurchase 13,717 632 4.61 12,411 574 4.62 FHLB advances 25,047 1,420 5.67 23,920 1,405 5.87 Federal funds purchased 667 36 5.40 800 44 5.50 Long-term debt 6,242 416 6.66 6,819 472 6.92 Total interest bearing 414,348 18,124 4.37 398,384 17,805 4.47 liabilities Demand deposits 51,227 50,789 Other liabilities 4,495 4,102 Stockholders' equity 40,633 37,783 Total liabilities & equity $510,703 $ 491,058 Net interest income (TE) $ 18,568 $ 18,078 Net interest spread 3.45% 3.43% Impact of non-interest bearing funds .51% .55% Net yield on interest earning assets (TE) 3.96% 3.98% (1) Interest income and rates are presented on a tax equivalent basis ("TE") assuming a federal income tax rate of 34%. (2) Loan fees are included in interest income and are not material. (3) Nonaccrual loans have been included in the average balances. (4) 1997 interest income and expense amounts have been annualized based on results through March 31, 1997. The annualized amounts are not necessarily indicative of the actual amounts that are expected or that will occur for the year ending December 31, 1997. </TABLE>
8 Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income (TE) for the past two years (in thousands): TABLE 3 ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE <TABLE> <CAPTION> 1997 COMPARED TO 1996 INCREASE - (DECREASE)(5) TOTAL RATE/ CHANGE VOLUME RATE VOLUME(4) <S> <C> <C> <C> <C> EARNING ASSETS: Interest bearing deposits $ (21) $ (21) $ - $ - Federal funds sold (76) (72) (7) 3 Investment securities: Taxable (44) (171) 130 (3) Tax-exempt (1) (11) 27 (37) (1) Loans (2)(3) 961 1,645 (646) (38) Total interest income 809 1,408 (560) (39) Interest-Bearing Liabilities Interest-bearing deposits Demand deposits 351 292 54 5 Savings deposits (93) (31) (64) 2 Time deposits 52 268 (211) (5) Securities sold under agreements to repurchase 58 60 (2) - FHLB advances 15 66 (49) (2) Federal funds purchased (8) (7) (1) - Long-term debt (56) (40) (17) 1 Total interest expense 319 608 (290) 1 Net interest income $ 490 $ 800 $ (270) $ (40) (1) Interest income and rates are presented on a tax equivalent basis, assuming a federal income tax rate of 34%. (2) Loan fees are included in interest income and are not material. (3) Nonaccrual loans are not material and have been included in the average balances. (4) The changes in rate / volume are computed on a consistent basis by multiplying the change in rates with the change in volume. (5) 1997 interest income and expense amounts have been annualized based on results through March 31, 1997. The annualized amounts are not necessarily indicative of the actual amounts that are expected or that will occur for the year ending December 31, 1997. </TABLE> On an annualized tax equivalent basis, netinterest income increased $490,000, or 2.7% for 1997, compared to an annualized increase of $123,000, or .7% for the same period of 1996. As set forth in Table 3, the improvement in net interest income was due to the increase in the volume of earning assets and interest-bearing liabilities, partially offset by the effect of changes in interest rates.
9 In 1997, average earning assets increased by $15,069,000, or 3.3%, and average interest-bearing liabilities increased $15,964,000, or 4.0%, compared with 1996 (Table 2). The higher volumes of earning assets and interest-bearings liabilities were primarily the result of strong loan growth in 1996 and 1997. As a percentage of average earning assets, average loans increased from 71.9% during 1996 to 73.7% during the first quarter of 1997, while average securities decreased from 27.1% during 1996 to 26.3% during the first quarter of 1997. PROVISION FOR LOAN LOSSES The provision for loan losses in the first quarter of 1997 was $100,000 while no provision was made in the same period of 1996. For information on loan loss experience and nonperforming loans, see the "Nonperforming Loans" and "Loan Quality and Allowance for Loan Losses" sections later in this document. OTHER INCOME An important source of the Registrant's revenue is derived from other income. The following table sets forth the major components of other income for the first quarter of 1997 and 1996 (in thousands): TABLE 4 OTHER INCOME <TABLE> <CAPTION> FIRST QUARTER FIRST QUARTER 1997 1996 $ CHANGE <S> <C> <C> <C> Trust $ 422 $ 333 $ 89 Brokerage 136 48 88 Securities losses - 2 (2) Service charges 404 410 (6) Mortgage banking 69 105 (36) Other 243 295 (52) Total other income $ 1,274 $ 1,193 $ 81 </TABLE> The Registrant's other income increased to $1,274,000 in the first quarter of 1997 as compared to $1,193,000 in the first quarter of 1996. Trust revenues increased to $422,000 in the first quarter of 1997 as compared to $333,000 in the first quarter of 1996. Trust assets increased to $228,358,000 at March 31, 1997 from $223,117,000 at December 31, 1996 and $221,913,000 at March 31, 1996. During 1997, increased revenues were primarily due to an increase in fees generated on retirement plans under management and the increase in trust assets. Revenues from brokerage and annuity sales increased in the first quarter of 1997. This increase was the result of the mid-1996 expansion of the product line, offering full-service brokerage and increasing marketing efforts in this area. There were no securities gains or (losses) in the first quarter of 1997 as compared to $2,000 in net securities gains in the first quarter of 1996. Service charges amounted to $404,000 in the first quarter of 1997 as compared to $410,000 in the first quarter of 1996. The decrease of $6,000 (1.5%) in service charges in 1997 as compared to 1996 was primarily due to a decrease in fees on business transaction accounts. Heartland originates loans for its own portfolio and for sale to others. Mortgage banking income from loans originated and subsequently sold into the secondary market amounted to $69,000 in the first quarter of 1997 as compared to $105,000 in the first quarter of 1996. Included in 1997 and 1996 mortgage banking income is the amount of the mortgage servicing rights recorded on loans originated and sold into the secondary market with servicing retained amounting to $15,000 and $2,000 for the quarters ended March 31, 1997 and 1996 respectively. In 1997, the volume of loans sold by Heartland was $2.4 million representing 37 loans as compared to $3.6 million representing 59 loans during the first quarter of 1996.
10 OTHER EXPENSE The major categories of other expense include salaries and employee benefits, occupancy and equipment expenses and other operating expenses associated with day-to-day operations. The following table sets forth the major components of other expense for the first quarter of 1997 and 1996 (in thousands): TABLE 5 OTHER EXPENSE <TABLE> <CAPTION> FIRST QUARTER FIRST QUARTER 1997 1996 $ CHANGE <S> <C> <C> <C> Salaries and benefits $ 1,998 $ 1,931 $ 67 Occupancy, furniture & equipment 707 556 151 FDIC premiums (42) 68 (110) Amortization of intangibles 131 137 (6) Stationary and supplies 159 103 56 Legal and professional fees 192 185 7 Marketing and promotion 117 108 9 Other operating expenses 497 432 65 Total other expense $ 3,759 $ 3,520 $ 239 </TABLE> The Registrant's non-interest expense amounted to $3,781,000 in the first quarter of 1997 as compared to $3,542,000 in the first quarter of 1996. Salaries and employee benefits, the largest component of other expense, increased to $1,998,000 in the first quarter of 1997 as compared to $1,931,000 in the first quarter of 1996. At March 31, 1997, the number of full-time equivalent ("FTE") employees totaled 257 compared to 252 at March 31, 1996. Occupancy, furniture and equipment expense increased to $707,000 in the first quarter of 1997 as compared to $556,000 in the first quarter of 1996. The increase was primarily due to the increase in depreciation expense recorded on the technology equipment put into service at the beginning of 1997. This included items relating to document imaging, report imaging, home banking and wide-area network projects. The cost of insurance premiums assessed by the Federal Deposit Insurance Corporation ("FDIC") was ($42,000) for the first quarter of 1997, compared to $68,000 in the first quarter of 1996. The net negative amount recorded in the first quarter of 1997 represented a partial refund on the 1996 assessments paid to the Savings Association Insurance Fund in the amount of $68,945 and the first quarter 1997 premium expense of $26,572. Amortization of intangible assets decreased 4% when comparing the first quarters of 1997 and 1996. This decrease was the result of the Registrant's core deposit premium associated with a 1986 bank acquisition being fully amortized. Amortization expense will increase during the second quarter of 1997 in association with the acquisition by the Registrant of a Charleston, Illinois branch. New intangible assets generated from this transaction amounted to $3.8 million which will be amortized over 10 to 15 years.
11 During the first quarter of 1997, various categories of other operating expenses were impacted by the implementation of several large technology projects including imaging of customer checks and statements and the establishment of a wide-area network, along with new products being introduced such as pc banking. INCOME TAXES Total income tax expense amounted to $689,000 in the first quarter of 1997 as compared to $700,000 in the first quarter of 1996. The tax expense included state income tax expense totaling $58,000 and $72,000 for the first quarters of 1997 and 1996 respectively. Effective tax rates were 35.3% and 37.3% respectively, for the first quarter of 1997 and 1996, respectively. The decrease in the effective tax rate was in part due to an increase of state tax-exempt interest income which resulted from a change in the mix of the investment portfolio. ANALYSIS OF BALANCE SHEETS SECURITIES The Registrant's overall investment goal is to maximize earnings while maintaining liquidity in securities having minimal credit risk. The types and maturities of securities purchased are primarily based on the Registrant's current and projected liquidity and interest rate sensitivity positions. The following table sets forth the amortized cost of the securities for the March 31, 1997 and December 31, 1996 (in thousands): TABLE 6 INVESTMENT PORTFOLIO <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 1997 1996 % OF % OF AMOUNT TOTAL AMOUNT TOTAL <S> <C> <C> <C> <C> U.S. Treasury securities and obligations of U.S. Government Agencies and corporations $ 96,292 73% $ 86,518 74% Obligations of states and political subdivisions 13,815 11 11,398 10 Mortgage-backed securities 16,949 13 15,283 13 Other securities 4,285 3 4,285 3 Total securities $131,341 100% $117,484 100% </TABLE> At March 31, 1997 the Registrant's investment portfolio showed a increase in mortgage-backed securities, U. S. Government agency securities and municipal securities.
The amortized cost, gross unrealized gains and losses and estimated fair values for available- for-sale and held-to-maturity securities by major security type at March 31, 1997 and December 31, 1996 were as follows (in thousands): TABLE 7 INVESTMENTS AT AMORTIZED COST / ESTIMATED FAIR VALUE <TABLE> <CAPTION> GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE <S> <C> <C> <C> <C> MARCH 31, 1997 AVAILABLE-FOR-SALE: U.S. Treasury securities and obligations of U.S. Government Agencies and corporations $ 96,292 $ 105 $ (1,124) $ 95,273 Obligations of states and political subdivisions 10,446 218 (37) 10,627 Mortgage-backed securities 16,949 92 (127) 16,914 Federal Home Loan Bank stock 3,878 - - 3,878 Other securities 407 - - 407 Total available-for-sale $ 127,972 $ 415 $ (1,288) $ 127,099 HELD-TO-MATURITY: Obligations of states and political subdivisions $ 3,369 $ 24 $ (55) $ 3,338 DECEMBER 31, 1996 AVAILABLE-FOR-SALE: U.S. Treasury securities and obligations of U.S. Government Agencies and corporations $ 86,518 $ 342 $ (585) $ 86,275 Obligations of states and political subdivisions Mortgage-backed securities 7,917 249 (3) 8,163 Federal Home Loan Bank stock 15,283 103 (82) 15,304 Other securities 3,878 - - 3,878 Total available-for-sale $ 114,003 $ 694 $ (670) $ 114,027 HELD-TO-MATURITY: Obligations of states and political subdivisions $ 3,481 $ 28 $ (18) $ 3,491 </TABLE> The following table indicates the expected maturities of investment securities classified as available-for-sale and held-to-maturity, presented at amortized cost, at March 31, 1997 (dollars in thousands) and the weighted average yield for each range of maturities. Mortgage backed securities are aged according to their weighted average life. All other securities are shown at their contractual maturity. TABLE 8 INVESTMENT MATURITY SCHEDULE <TABLE> <CAPTION> ONE AFTER 1 AFTER 5 AFTER YEAR THROUGH THROUGH TEN OR LESS 5 YEARS 10 YEARS YEARS TOTAL <S> <C> <C> <C> <C> <C> AVAILABLE-FOR-SALE: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 13,668 $ 63,851 $ 18,275 $ 498 $ 96,292 Obligations of state and political subdivisions 824 4,923 995 3,704 10,446 Mortgage-backed securities 3,378 10,117 536 2,918 16,949 Other securities - - - 4,285 4,285 Total Investments $ 17,870 $ 78,891 $ 19,806 $ 11,405 $127,972 Weighted average yield 5.59% 6.29% 6.42% 5.98% 6.18% Full tax equivalent yield 5.72% 6.47% 6.57% 7.40% 6.46% HELD-TO-MATURITY: Obligations of state and political subdivisions $ 632 $ 1,965 $ 308 $ 465 $ 3,369 Weighted average yield 4.88% 5.02% 5.96% 5.74% 5.18% Full tax equivalent yield 7.40% 7.60% 9.03% 8.70% 7.85% </TABLE> The weighted average yields are calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. Full tax equivalent yields have been calculated using a 34% tax rate. With the exception of obligations of the U.S. Treasury and other U.S. Government agencies and corporations, there were no investment securities of any single issuer the book value of which exceeded 10% of stockholders' equity at March 31, 1997. Proceeds from sales of investment securities and realized gains and losses were as follows during the quarter ended March 31, 1997 and the year ended December 31, 1996 (in thousands): TABLE 9 PROCEEDS FROM SALE <TABLE> <CAPTION> MARCH 31, 1997 DECEMBER 31, 1996 <S> <C> <C> Proceeds from sales $ - $31,667 Gains - 155 Losses - 164 </TABLE> LOANS The loan portfolio (net of unearned discount) is the largest category of the Registrant's earning assets. The following table summarizes the composition of the loan portfolio for the periods ended March 31, 1997 and December 31, 1996 (in thousands): TABLE 10 COMPOSITION OF LOANS <TABLE> <CAPTION> March 31, DECEMBER 31, 1997 1996 <S> <C> <C> Commercial, financial and agricultural $ 69,752 $ 75,028 Real estate - mortgage 245,729 241,240 Installment 30,287 30,423 Other 1,339 1,526 Total loans $347,107 $348,217 </TABLE> At March 31, 1997, the Registrant had loan concentrations in agricultural industries of 12.0% of outstanding loans as compared to 13.3% at December 31, 1996. The Registrant had no further industry loan concentrations in excess of 10% of outstanding loans. TABLE 11 LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY The following table presents the balance of loans outstanding as of March 31, 1997, by maturities (dollars in thousands): <TABLE> <CAPTION> MATURITY (1) OVER 1 ONE YEAR THROUGH OVER OR LESS(2) 5 YEARS 5 YEARS TOTAL <S> <C> <C> <C> <C> Commercial, financial and agricultural $ 46,822 $ 3,919 $ 19,011 $ 69,752 Real estate - mortgage 41,082 54,718 149,929 245,729 Installment 6,419 22,831 1,037 30,287 Other 371 548 420 1,339 Total loans $ 94,694 $ 82,016 $ 170,397 $ 347,107 (1) Based on scheduled principal repayments. (2) Includes demand loans, past due loans and overdrafts. </TABLE> As of March 31, 1997, loans with maturities over one year consisted of $205,843,000 in fixed rate loans and $46,570,000 in variable rate loans. The loan maturities noted above are based on the contractual provisions of the individual loans. The Registrant has no general policy regarding rollovers and borrower requests, which are handled on a case by case basis. NONPERFORMING LOANS Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due 90 days or more as to interest or principal payments; and loans not included in (a) and (b) above which are defined as "troubled debt restructurings". The following table presents information concerning the aggregate amount of nonperforming loans (in thousands): TABLE 12 NONPERFORMING LOANS <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 1997 1996 <S> <C> <C> Nonaccrual loans $ 1,223 $ 790 Loans past due ninety days or more and still accruing 399 575 Restructured loans which are performing in accordance with revised terms 444 580 </TABLE> The $423,000 increase in nonaccrual loans resulted from two individual loans to a single borrower totaling $451,000, which were placed on nonaccrual status during the first quarter of 1997. These two loans are well collateralized and management does not anticipate any material loss. Nevertheless, because the borrower is experiencing cash flow difficulties and filed chapter 11 bankruptcy during the first quarter of 1997, these loans were placed on nonaccrual status. Interest income for the quarter ended March 31, 1997 that would have been reported if nonaccrual and restructured loans had been performing totaled $154,000. Interest income that was included in income for the same period totaled $10,000. The Registrant's policy generally is to discontinue the accrual of interest income on any loan for which principal or interest is 90 days past due and when, in the opinion of management, there is reasonable doubt as to the timely collectibility of interest or principal. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collectibility of interest or principal. LOAN QUALITY AND ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents management's estimate of the reserve necessary to adequately cover losses that could ultimately be realized from current loan exposures. The provision for loan losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate allowance for loan losses. In determining the adequacy of the allowance for loan losses, and therefore the provision to be charged to current earnings, management relies predominantly on a disciplined credit review and approval process which extends to the full range of the Registrant's credit exposure. The review process is directed by overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Once identified, the magnitude of exposure to individual borrowers is quantified in the form of specific allocations of the allowance for loan losses. Collateral values are considered by management in the determination of such specific allocations. Additional factors considered by management in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and renegotiated loans and the current and anticipated economic conditions in the region where the Registrant operates. In addition to the aforementioned considerations, management also considers the loan loss experience of other banks, thrifts and financial services holding companies. Management recognizes that there are risk factors which are inherent in the Registrant's loan portfolio. All financial institutions face risk factors in their loan portfolios because risk exposure is a function of the business. The Registrant's operations (and therefore its loans) are concentrated in east central Illinois, an area where agriculture is the dominant industry. Accordingly, lending and other business relationships with agriculture-based businesses are critical to the Registrant's success. At March 31, 1997, the Registrant's loan portfolio included $41.6 million of loans to borrowers whose businesses are directly related to agriculture. The balance decreased $4.8 million from $46.4 million at December 31, 1996. In addition to agricultural lending, the Registrant has historically had substantial residential mortgage lending activity in and around east central Illinois. Residential mortgage loans amounted to $178.0 million or 51.3% of total loans at March 31, 1997. At December 31, 1996, these loans amounted to $172.3 million or 49.5% of total loans. TABLE 13 ALLOWANCE FOR LOAN LOSSES Loan loss experiences are summarized as follows (dollars in thousands): <TABLE> <CAPTION> QUARTER ENDED YEAR ENDED MARCH 31, DECEMBER 31, 1997 1996 <S> <C> <C> Average loans outstanding, net of unearned income $345,589 $326,302 Allowance-beginning of year 2,684 2,814 Charge-offs: Commercial, financial and agricultural 2 238 Real estate-mortgage - 6 Installment 38 131 Total charge-offs 40 375 Recoveries: Commercial, financial and agricultural 4 53 Real estate-mortgage - - Installment 8 45 Total recoveries 12 98 Net charge-offs 28 277 Provision for loan losses 100 147 Allowance-end of period $ 2,756 $ 2,684 Ratio of net charge-offs to average loans .01% .08% Ratio of allowance for loan losses to loans outstanding (less unearned interest at end of period) .79% .77% Ratio of allowance for loan losses to nonperforming loans 133.4% 138.0% </TABLE> The Registrant minimizes credit risk by adhering to sound underwriting and credit review policies. These policies are reviewed at least annually, and changes are approved by the board of directors. Senior management is actively involved in business development efforts and the maintenance and monitoring of credit underwriting and approval. The loan review system and controls are designed to identify, monitor and address asset quality problems in an accurate and timely manner. On a monthly basis, the board of directors reviews the status of problem loans. In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for loan losses. During the first quarter of 1997, the Registrant had net charge-offs of $28,000 as compared to $277,000 for the year ended December 31, 1996. $151,000 (55%) of the 1996 charge-offs related to three specific loans for which management does not anticipate any significant future recoveries. Management provided $100,000 for loan losses during the first quarter of 1997. No provision was made during the same period in 1996. The amount of the provision was partially due to the increasing rate of personal bankruptcies both nationally and in the Registrant's service area as well as the Registrant's general expectations for growth in the loan portfolio. At March 31, 1997, the allowance was $2,756,000, or .79% of total loans, and 133.4% of nonperforming loans. On December 31, 1996, the allowance for loan losses amounted to $2,684,000, or .77% of total loans, and 138.0% of nonperforming loans. The allowance for loan losses, in management's judgment, would be allocated as follows to cover potential loan losses (in thousands): TABLE 14 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES <TABLE> <CAPTION> MARCH 31, 1997 DECEMBER 31, 1996 ALLOWANCE % OF ALLOWANCE % OF FOR LOANS FOR LOANS LOAN TO TOTAL LOAN TO TOTAL LOSSES LOANS LOSSES LOANS <S> <C> <C> <C> <C> Commercial, financial and agricultural $ 1,997 20.1% $ 1,854 21.5% Real estate-mortgage 414 70.8 434 69.3 Installment 144 8.7 152 8.7 Other - .4 - .5 Total allocated 2,555 2,440 Unallocated 201 N/A 244 N/A Allowance at end of reported period $ 2,756 $100.0% $ 2,684 100.0% </TABLE> The allowance is allocated to the individual loan categories by a specific reserve for all classified loans plus a percentage of loans not classified based on historical losses. DEPOSITS Funding the Registrant's earning assets is substantially provided by a combination of consumer, commercial and public fund deposits. The Registrant continues to focus its strategies and emphasis on retail core deposits, the major component of funding sources. The following table sets forth the average deposits and weighted average rates at March 31, 1997 and December 31, 1996 (dollars in thousands): TABLE 15 COMPOSITION OF DEPOSITS <TABLE> <CAPTION> MARCH 31, 1997 DECEMBER 31, 1996 WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE <S> <C> <C> <C> <C> Demand deposits: Non-interest bearing $ 51,227 - $ 50,789 - Interest bearing 121,195 2.84% 110,708 2.79% Savings 38,212 2.55 39,364 2.72 Time deposits 209,268 5.36 204,362 5.46 Total average deposits $419,902 3.72 $405,223 3.78 </TABLE> The following table sets forth the maturity of time deposits of $100,000 or more (in thousands): TABLE 16 MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 1997 1996 <S> <C> <C> 3 months or less $ 17,124 $ 20,658 Over 3 through 6 months 6,260 7,322 Over 6 through 12 months 14,132 6,897 Over 12 months 6,302 5,893 Total $43,818 $ 40,770 </TABLE> OTHER BORROWINGS Other borrowings consist of securities sold under agreements to repurchase, Federal Home Loan Bank advances, and federal funds purchased. Information relating to other borrowings for the periods ended March 31, 1997 and December 31, 1996 is presented below (in thousands): TABLE 17 SCHEDULE OF OTHER BORROWINGS <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 1997 1996 <S> <C> <C> End of period: Securities sold under agreements to repurchase $12,720 $18,360 Federal Home Loan Bank advances: Overnight 16,130 19,733 Fixed term - due in one year or less 3,500 11,693 Fixed term - due after one year 3,000 1,000 Federal funds purchased - - Total $35,350 $50,786 Average interest rate at end of period 5.86% 5.91% Maximum Outstanding at Any Month-end Securities sold under agreements to repurchase $17,710 $18,860 Federal Home Loan Bank advances: Overnight 23,733 23,083 Fixed term - due in one year or less 3,500 20,693 Fixed term - due after one year 3,000 7,500 Federal funds purchased - 6,500 Averages for the Year Securities sold under agreements to repurchase $13,717 $12,411 Federal Home Loan Bank advances: Overnight 19,433 8,136 Fixed term - due in one year or less 3,746 9,352 Fixed term - due after one year 1,867 6,432 Federal funds purchased 667 800 Average interest rate during the year 5.30% 5.45% </TABLE> Securities sold under agreements to repurchase primarily represent borrowings originated as part of cash management services offered to corporate customers. The remaining balance of securities sold under agreements to repurchase represents term repurchase agreements with the State of Illinois. Federal Home Loan Bank advances represent borrowings by the Bank Subsidiaries to fund loan demand. INTEREST RATE SENSITIVITY The Registrant seeks to maximize its net interest margin within an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to favorable or unfavorable movements in interest rates. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of assets differ significantly from the maturity or repricing characteristics of liabilities. The Registrant monitors its interest rate sensitivity position to maintain a balance between rate sensitive assets and rate sensitive liabilities. This balance serves to limit the adverse effects of changes in interest rates. The Registrant's asset/liability management committee oversees the interest rate sensitivity position and directs the overall allocation of funds in an effort to maintain a cumulative one-year gap to earning assets ratio of less than 30% of total earning assets. In the banking industry, a traditional measurement of interest rate sensitivity is known as "gap" analysis, which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at March 31, 1997, which anticipated by the Registrant to reprice or mature in each of the future time periods shown. Except for savings and N.O.W. accounts the amounts of assets and liabilities shown which reprice or mature during a particular period are based upon the contractual terms of the asset or liability. Regular savings accounts are assumed to be withdrawn over a 60 month period and NOW accounts sere assumed to be withdrawn over a 18 month period. The two deposit types collectively totaled $129 million at March 31, 1997. Management believes that these assumptions approximate actual experience and considers them reasonable, although the actual amortization and repayment of assets and liabilities may vary substantially. TABLE 18 GAP TABLE <TABLE> <CAPTION> (In thousands) NUMBER OF MONTHS UNTIL NEXT REPRICING OPPORTUNITY INTEREST EARNING ASSETS: 0-1 1-3 3-6 6-12 12+ <S> <C> <C> <C> <C> <C> Deposits with other financial institutions $ 557 $ - $ - $ 99 $ - Federal funds sold 9,825 - - - - Taxable investment securities 29,461 13,256 8,774 2,954 62,026 Nontaxable investment securities - 219 486 1,341 11,951 Loans 48,228 18,424 22,311 33,782 224,362 Total $ 88,071 $ 31,899 $ 31,571 $ 38,176 $ 298,339 INTEREST BEARING LIABILITIES: Savings and N.O.W. accounts (1) 5,440 10,881 16,320 32,641 63,405 Money market accounts 36,821 - - - - Other time deposits 26,100 38,288 52,267 50,764 55,244 Other borrowings 17,630 14,720 - - 3,000 Long-term debt 6,950 - - - - Total $ 92,941 $ 63,889 $ 68,587 $ 83,405 $ 121,649 Periodic GAP $ ( 4,870) $ (31,990) $ (37,106) $ (45,224) $ 176,690 Cumulative GAP $ ( 4,870) $ (36,860) $ (73,876) $(119,105) $ 57,585 GAP as a % of interest earning assets: Periodic (1.0%) (6.6%) (7.6%) (9.3%) 36.2% Cumulative (1.0%) (7.6%) (15.1%) (24.4%) 11.8% (1) Historically the Registrant's NOW accounts and savings deposits have been relatively insensitive to interest rate changes. However, the Registrant considers a portion of these deposits to be rate sensitive based on historical trends and management's expectations. </TABLE> At March 31, 1997, the table above reflects that the Registrant is liability sensitive due to the level of interest bearing demand deposits and savings which are generally subject to immediate withdrawal and are repriceable at any time. As such, the effect of an increase in the prime rate of 100 basis points would decrease net interest income by approximately $369,000 in 90 days and $1,191,000 in 12 months assuming no management intervention. A fall in the interest rates would have the opposite effect for the same period. In analyzing interest rate sensitivity, the Registrant considers these differences and incorporates other assumptions and factors, such as balance sheet growth and prepayments, to better measure interest rate risk. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM loans, have features which restrict changes sin interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. Interest rate sensitivity using a static GAP analysis basis is only one of several measurements of the impact of interest rate changes on net interest income used by the Registrant. Its actual usefulness in assessing the effect of changes in interest rates varies with the constant changes which occur in the composition of the Registrant's earning assets and interest bearing liabilities. For this reason, the Registrant uses financial models to project interest income under various rate scenarios and various assumptions relative to the prepayments, reinvestment and roll overs of assets and liabilities. CAPITAL RESOURCES At March 31, 1997, the Registrant's stockholders' equity amounted to $40,800,000, an $896,000 or 2.2% increase from the $39,904,000 balance as of December 31, 1996. Year to date, net income contributed $1,265,000 to equity before the declaration of dividends to preferred stockholders amounting to $143,000. The change in net unrealized gain on available-for-sale investment securities decreased stockholders' equity by $592,000, net of tax. During 1996, the Registrant began issuing Company common stock as part of a deferred compensation plan for its directors and certain senior officers and as an investment option under the Registrant's 401-K (First Retirement and Savings Plan) for its employees. During the first quarter of 1997, 1,356 shares were issued pursuant to the Deferred Compensation Plan and 897 shares were issued pursuant to the First Retirement and Savings Plan. In late 1994, the Registrant implemented a Dividend Reinvestment Plan whereby common and preferred shareholders could elect to have their cash dividends automatically reinvested into newly-issued common shares of the Registrant. This plan became effective with the January, 1995 common stock dividend. Of the $442,000 in common and preferred stock dividends paid during the first quarter of 1997, $209,000 or 47.3% was reinvested into shares of common stock of the Registrant through the Dividend Reinvestment Plan. This resulted in an additional 5,507 shares of common stock being issued during the first quarter of 1997. The Registrant is subject to various regulatory capital requirements administered by the federal banking agencies. Bank holding companies follow minimum regulatory requirements established by the Federal Reserve Board, First Mid Bank follows similar minimum regulatory requirements established for national banks by the Office of the Comptroller of the Currency and Heartland is regulated by the FDIC and the Office of the Commissioner of Banks & Real Estate. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Registrant's financial statements. Quantitative measures established by each regulatory agency to ensure capital adequacy require the reporting institutions to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk- weighted assets, and of Tier 1 capital to average assets. Management believes, as of March 31, 1997, that all capital adequacy requirements have been met. As of March 31, 1997, the most recent notification from the primary regulators categorized the Registrant, First Mid Bank and Heartland as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios must be maintained as set forth in the table. There are no conditions or events since that notification that management believes have changed these categories. TABLE 19 CAPITAL RATIOS <TABLE> <CAPTION> TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO <S> <C> <C> <C> <C> <C> <C> MARCH 31, 1997 Total Capital (to risk-weighted assets) Registrant $ 34,927 11.14% $ 25,092 > 8.00% $ 31,365 > 10.00% First Mid Bank 31,227 11.69 21.372 > 8.00 26,715 > 10.00 Heartland 7,209 16.52 3.491 > 8.00 4,364 > 10.00 Tier 1 Capital (to risk-weighted assets) Registrant 32,171 10.26 12,546 > 4.00 18,819 > 6.00 First Mid Bank 28,820 10.79 10,686 > 4.00 16,029 > 6.00 Heartland 6,860 15.72 1,745 > 4.00 2,618 > 6.00 Tier 1 Capital (to average assets) Registrant 32,171 6.44 19,988 > 4.00 24,984 > 5.00 First Mid Bank 28,820 7.04 16,371 > 4.00 20,463 > 5.00 Heartland 6,860 7.64 3,593 > 4.00 4,491 > 5.00 </TABLE> LIQUIDITY Liquidity represents the ability of the Registrant and its subsidiaries to meet the requirements of customers for loans and deposit withdrawals. Liquidity management focuses on the ability to obtain funds economically for these purposes and to maintain assets which may be converted into cash at minimal costs. Management monitors its expected liquidity requirements carefully, focusing primarily on cash flows from operating, investing and financing activities. EFFECTS OF INFLATION Unlike industrial companies, virtually all of the assets and liabilities of the Registrant are monetary in nature. As a result, interest rates have a more significant impact on the Registrant's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or experience the same magnitude of changes as goods and services, since such prices are effected by inflation. In the current economic environment, liquidity and interest rate adjustments are features of the Registrant's assets and liabilities which are important to the maintenance of acceptable performance levels. The Registrant attempts to maintain a balance between monetary assets and monetary liabilities, over time, to offset these potential effects. FUTURE ACCOUNTING CHANGES In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). SFAS 125, among other things, applies a "financial-components approach" that focuses on control, whereby an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes assets when control has been surrendered, and derecognizes liabilities when extinguished. SFAS 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS 125 is effective for transactions occurring after December 31, 1996; however SFAS 127, issued in December 1996, defers the effective date of certain elements of SFAS 125 for one year. The Registrant does not expect these pronouncements to have a significant impact on its consolidated financial condition or results of operations. In February 1997, FASB Statement No 128, "Earnings Per Share" (Statement 128, was issued. Statement 128 supersedes APB Opinion No. 15, Earnings Per Share and specifies the computations, presentation, and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock or potential common stock. Statement 128 was issued to simplify the computation of EPS and to make the U.S. standard more compatible with the EPS standards of other countries and that of the International Accounting Standards Committee. It replaces the presentation of primary EPS with a presentation of basic EPS and fully diluted EPS with diluted EPS. IT also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS, unlike primary EPS, excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS under APB15. Statement 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted (although pro forma EPS disclosure in the footnotes for periods prior to required adoption is permitted). After adoption, all prior-period EPS data presented shall be restated to conform with Statement 128. The Registrant does not expect adoption of Statement 128 to have a significant impact on its financial statements. RECENT REGULATORY DEVELOPMENTS Various bills have been introduced in the Congress that would allow bank holding companies to engage in a wider range of nonbanking activities, including greater authority to engage in securities and insurance activities. While the scope of permissible nonbanking activities and the conditions under which the new powers could be exercised varies among the bills, the expanded powers generally would be available to a bank holding company only if the bank holding company and its bank subsidiaries remain well-capitalized and well- managed. The bills also impose various restrictions on transactions between the depository institution subsidiaries of the bank holding companies and their nonbank affiliates. These restrictions are intended to protect the depository institutions from the risks of the new nonbanking activities permitted to such affiliates. Additionally, legislation has been introduced in Illinois that would generally allow banks to engage in insurance activities, subject to various conditions, including restrictions on the manner in which insurance products are marketed to bank customers and requirements that banks selling insurance provide certain disclosures to customers. The Illinois legislature is also considering legislation that would prohibit out-of-state banks from acquiring a bank located in Illinois unless the Illinois-based bank has been in existence and continuously operated for a period of at least five years. At this time, the Registrant is unable to predict whether any of the pending bills will be enacted and, therefore is unable to predict the impact such legislation may have on the operations of the Registrant and its bank subsidiaries.
PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Since the Bank Subsidiaries act as depositories of funds, each is named from time to time as a defendant in law suits (such as garnishment proceedings) involving claims to the ownership of funds in particular accounts. Management believes that all such litigation as well as other pending legal proceedings constitute ordinary routine litigation incidental to the business of the Bank Subsidiaries and that such litigation will not materially adversely affect the Registrant's consolidated financial condition. In addition to the normal legal proceedings referred to above, the Registrant, on behalf of Heartland, filed a complaint on December 5, 1995, against the U.S. Government which is now pending in the U.S. Court of Federal Claims in Washington D.C. This complaint relates to Heartland's interest as successor to Mattoon Federal Savings and Loan Association which incurred a significant amount of supervisory goodwill when it acquired Urbana Federal Savings and Loan in 1982. The complaint alleges that the Government breached its contractual obligations when, in 1989, it issued new rules which eliminated supervisory goodwill from inclusion in regulatory capital. In January 1997, the U.S. Court of Federal Claims denied the Government's motion to dismiss this supervisory goodwill complaint. The Government had taken the position that the complaint, as well as the complaints of a number of other parties, should be prohibited from moving forward on statute of limitation grounds. At this time it is too early to tell whether Heartland will ultimately prevail in the suit and if so, what damages may be recovered. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K. (a)(3) -- Exhibits (a)(3) -- The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the exhibit Index which follows the Signature Page and immediately precedes the exhibits filed. (b) Reports on Form 8-K There were no reports on Form 8-K filed by the Registrant during the quarter ended March 31, 1997.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on this 12 day of May 1997. FIRST MID-ILLINOIS BANCSHARES, INC. (Registrant) /s/ Daniel E. Marvin, Jr. *-------------------------------------* Daniel E. Marvin, Jr. President and Chief Executive Officer /s/ William S. Rowland *-------------------------------------* William S. Rowland Chief Financial Officer Dated: May 12, 1997 *---------------------*
<TABLE> <CAPTION> EXHIBIT INDEX TO FORM 10-Q EXHIBIT NUMBER DESCRIPTION AND FILING OR INCORPORATION REFERENCE <S> <C> 3.1 RESTATED CERTIFICATE OF INCORPORATION AND AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION OF FIRST MID-ILLINOIS BANCSHARES, INC. Exhibit 3(a) to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987 (File No. 0-13688) 3.2 RESTATED BYLAWS OF FIRST MID-ILLINOIS BANCSHARES, INC. Exhibit 3(b) to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987 (File No 0-13368) 11.1 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE (Filed herewith) 27.1 FINANCIAL DATA SCHEDULE (Filed herewith) </TABLE>