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, 1998
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 12, 1998, 2,000,167 common shares, $4.00 par value, were outstanding.
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS March 31, December 31,
(In thousands, except share data) 1998 1997
ASSETS
<S> <C> <C>
Cash and due from banks:
Non-interest bearing $ 18,981 $ 20,486
Interest bearing 120 250
Federal funds sold 675 5,925
Cash and cash equivalents 19,776 26,661
Investment securities:
Available-for-sale, at fair value 125,895 116,782
Held-to-maturity, at amortized cost (estimated fair
value of $2,942 and $3,057 at March 31, 1998 and
December 31, 1997, respectively) 2,898 3,020
Loans 350,551 358,223
Less allowance for loan losses 2,734 2,636
Net loans 347,817 355,587
Premises and equipment, net 12,463 12,356
Intangible assets, net 8,593 8,550
Other assets 9,299 10,022
TOTAL ASSETS $526,741 $532,978
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 60,436 $ 53,599
Interest bearing 385,813 403,999
Total deposits 446,249 457,598
Securities sold under agreements to repurchase 3,320 10,780
Federal Home Loan Bank advances 17,000 7,000
Long-term debt 5,825 6,200
Other liabilities 6,536 5,824
TOTAL LIABILITIES 478,930 487,402
Stockholders' Equity
Series A convertible preferred stock; no par value;
authorized 1,000,000 shares; issued 620 shares with
stated value of $5,000 per share 3,100 3,100
Common stock, $4 par value; authorized 6,000,000
shares in 1998 and 1997; issued 1,998,756
shares in 1998 and 1,972,709 shares in 1997 7,995 7,891
Additional paid-in-capital 7,812 7,038
Retained earnings 28,534 27,271
Accumulated other comprehensive income 394 300
Less treasury stock at cost, 2,000 shares (24) (24)
TOTAL STOCKHOLDERS' EQUITY 47,811 45,576
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $526,741 $532,978
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31, 1998 and 1997
(In thousands, except per share data)
1998 1997
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 7,365 $ 7,197
Interest on investment securities 1,950 1,859
Interest on federal funds sold 81 26
Interest on deposits with financial institutions 18 10
Total interest income 9,414 9,092
INTEREST EXPENSE:
Interest on deposits 4,307 3,905
Interest on securities sold under agreements
to repurchase 52 158
Interest on Federal Home Loan Bank advances 219 355
Interest on Federal funds purchased 15 9
Interest on long-term debt 105 104
Total interest expense 4,698 4,531
Net interest income 4,716 4,561
Provision for loan losses 150 100
Net interest income after provision for loan losses 4,566 4,461
OTHER INCOME:
Trust revenues 417 422
Brokerage revenues 64 136
Service charges 462 404
Securities gains, net 12 -
Mortgage banking income 310 69
Other 284 243
Total other income 1,549 1,274
OTHER EXPENSE:
Salaries and employee benefits 2,124 1,998
Net occupancy expense 287 280
Equipment rentals, depreciation and maintenance 422 427
Amortization of intangible assets 214 153
Stationary and supplies 182 162
Legal and professional 207 192
Marketing and promotion 126 117
Other 554 452
Total other expense 4,116 3,781
Income before income taxes 1,999 1,954
Income taxes 665 689
Net income $ 1,334 $ 1,265
Per common share data:
Basic earnings per share $ .64 $ .63
Diluted earnings per share .60 .59
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1998 and 1997
(In thousands) 1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,334 $ 1,265
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 150 100
Depreciation, amortization and accretion, net 502 412
Gain on sale of securities, net (12) -
Gain on sale of loans held for sale, net (286) (35)
Origination of mortgage loans held for sale (20,918) (2,458)
Proceeds from sale of mortgage loans held for sale 19,081 2,518
Decrease in other assets 508 895
Increase (decrease) in other liabilities 1,101 (115)
Net cash provided by operating activities 1,460 2,582
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of mortgage servicing rights (41) (21)
Purchases of premises and equipment (395) (256)
Net decrease in loans 9,743 1,517
Proceeds from sales of:
Securities available-for-sale 2,327 -
Proceeds from maturities of:
Securities available-for-sale 12,119 3,488
Securities held-to-maturity 120 110
Purchases of:
Securities available-for-sale (23,370) (17,445)
Securities held-to-maturity (34) -
Purchase of financial organization, net of cash received - 22,416
Net cash provided by investing activities 469 9,809
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase(decrease) in deposits (11,349) 5,749
(Decrease) in securities sold under agreements to repurchase (7,460) (5,640)
Increase(decrease) in short-term FHLB advances 10,000 (9,796)
Repayment of long-term debt (375) (250)
Proceeds from issuance of long-term debt - 1,000
Proceeds from issuance of common stock 619 86
Dividends paid on common stock (249) (233)
Net cash used in financing activities (8,814) (9,084)
Increase (decrease) in cash and cash equivalents (6,885) 3,307
Cash and cash equivalents at beginning of period 26,661 27,111
Cash and cash equivalents at end of period $19,776 $30,418
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 4,764 $ 4,688
Income taxes 250 340
Loans transferred to real estate owned - 132
Dividends reinvested in common shares 260 209
See accompanying notes to consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING AND CONSOLIDATION
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") 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, 1998 and 1997,
and all such adjustments are of a normal recurring nature. The results of the
interim period ended March 31, 1998, are not necessarily indicative of the
results expected for the year ending December 31, 1998.
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 1997 Form 10-K.
STOCK SPLIT
On May 22, 1997, the Registrant declared a two-for-one stock split in the form
of a 100% stock dividend. Par value remained at $4 per share. The stock split
increased the Registrant's outstanding common shares from 2,000,000 to 4,000,000
shares. All references in the consolidated financial statements and notes
thereto as to the number of common shares, per common share amounts and market
prices of the Registrant's common stock have been restated giving retroactive
recognition to the stock split.
EARNINGS PER SHARE
Effective December 31, 1997, the Registrant adopted Financial Accounting
Standards Board's Statement No. 128, "EARNINGS PER SHARE" ("SFAS 128"). Income
for Basic Earnings per Share ("EPS") is adjusted for dividends attributable to
preferred stock and is based on the weighted average number of common shares
outstanding. Diluted EPS is computed by using the weighted average number of
common shares outstanding, increased by the assumed conversion of the
convertible preferred stock and the assumed conversion of the stock options.
The components of basic and diluted earnings per common share for the three
months ended March 31, 1998 and 1997 are as follows:
1998 1997
BASIC EARNINGS PER SHARE:
Net income $1,334,000 $1,265,000
Less preferred stock dividends (72,000) (72,000)
Net income available to common
stockholders' equity $1,262,000 $1,193,000
Weighted average common shares
outstanding 1,979,282 1,894,452
Basic Earnings per Common Share $ .64 $ .63
DILUTED EARNINGS PER SHARE:
Net income available to common
stockholders' equity $1,262,000 $1,193,000
Assumed conversion of preferred stock 72,000 72,000
Net income available to common stock-
holders after assumed conversion $1,334,000 $1,265,000
Weighted average common shares
outstanding 1,979,282 1,894,452
Assumed conversion of stock options 4,730 -
Assumed conversion of preferred stock 250,604 250,604
Diluted weighted average common
shares outstanding 2,234,616 2,145,056
Diluted Earnings per Common Share $ .60 $ .59
COMPREHENSIVE INCOME
The Financial Accounting Standards Board (FASB) has issued Statement No. 130,
"REPORTING COMPREHENSIVE INCOME" ("SFAS 130"), which is effective for fiscal
years beginning after December 31, 1997. This statement establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Registrant adopted SFAS 130 on January 1, 1998.
The Registrant's comprehensive income the three month periods ended March 31,
1998 and 1997 (in thousands) is as follows:
1998 1997
Net income $1,334 $1,265
Other comprehensive income, net of tax
unrealized gains(losses) during the period 102 (592)
Less: reclassification adjustment for net
gains realized in net income (8) -
Comprehensive income $1,428 $ 673
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 months ended March 31,
1998 and 1997. This discussion and analysis should be read in conjunction with
the consolidated financial statements, related notes and selected financial
data appearing elsewhere in this report.
FORWARD-LOOKING STATEMENTS
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.
OVERVIEW
Net income in the first quarter of 1998 increased to $1,334,000, up 5.5% from
$1,265,000 for the same period of 1997. Diluted earnings per share for the
quarter increased 1 cent per share to $.64 as compared to $.63 per share earned
in the same quarter of 1997. A summary of the factors which contributed to the
changes in net income follows:
TABLE 1 EFFECT ON EARNINGS
1998
VS
(in thousands) 1997
Net interest income $ 155
Provision for loan losses (50)
Other income, including
securities transactions 275
Other expenses (335)
Income taxes 24
Increase in net income $ 69
The following table shows the Registrant's annualized performance ratios for
the three months ended March 31, 1998 and for the year ended December 31, 1997:
March 31, December 31,
1998 1997
Return on average assets 1.00% .90%
Return on average equity 11.44% 11.08%
Return on average common equity 11.59% 11.23%
Average equity to average assets 8.75% 8.11%
On March 7, 1997, the Registrant acquired the Charleston, Illinois branch
location and the deposit base of First of America Bank. This cash acquisition
added approximately $28 million to total deposits, $500,000 to loans, $1.3
million to premises and equipment and $3.8 million to intangible assets. The
acquisition of the branch was accounted for using the purchase method of
accounting whereby the acquired assets and deposits of the branch were recorded
at their fair values as of the acquisition date. The operating results have
been combined with those of the Registrant since March 7, 1997.
RESULTS OF OPERATIONS
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):
TABLE 2 DISTRIBUTION OF CONSOLIDATED ASSETS, LIABILITIES AND STOCKHOLDERS'
EQUITY - INTEREST, RATES AND NET YIELDS
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
MARCH 31, 1998 <F4> DECEMBER 31, 1997
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-bearing deposits $ 1,323 $ 70 5.32% $ 1,497 $ 75 5.01%
Federal funds sold 5,944 324 5.45% 4,254 230 5.41%
Investment securities
Taxable 113,872 7,118 6.25% 107,124 6,759 6.31%
Tax-exempt<F1> 12,637 1,036 8.20% 13,046 1,062 8.14%
Loans <F2><F3> 354,138 29,460 8.32% 355,167 30,040 8.46%
Total earning assets 487,914 38,008 7.79% 481,088 38,166 7.93%
Cash and due from banks 18,155 18,363
Premises and equipment 12,132 11,916
Other assets 17,633 17,056
Allowance for loan losses (2,700) (2,672)
Total assets $533,134 $525,751
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing deposits
Demand deposits $133,952 3,932 2.94% $125,666 $ 3,684 2.93%
Savings deposits 38,018 848 2.23% 38,642 999 2.59%
Time deposits 227,095 12,448 5.48% 226,431 12,464 5.50%
Securities sold under
agreements to repurchase 4,939 207 4.20% 10,806 488 4.52%
FHLB advances 16,222 875 5.39% 17,221 1,018 5.91%
Federal funds purchased 1,087 62 5.70% 502 26 5.18%
Long-term debt 6,192 420 6.78% 6,584 452 6.87%
Total interest-bearing
liabilities 427,505 18,792 4.40% 425,852 19,131 4.49%
Demand deposits 53,420 52,660
Other liabilities 5,560 4,601
Stockholders' equity 46,649 42,638
Total liabilities & equity $533,134 $525,751
Net interest income (TE) $ 19,216 $ 19,035
Net interest spread 3.39% 3.44%
Impact of non-interest bearing funds .54% .52%
Net yield on interest-earning assets 3.94% 3.96%
<FN>
<F1> Interest income and rates are presented on a tax-equivalent basis ("TE") assuming a federal income tax rate
of 34%.
<F2> Loans fees are included in interest income and are not material.
<F3> Nonaccrual loans have been included in the average balances.
<F4> 1998 interest income and expense amounts have been annualized based on results through March 31, 1998. The
annualized amounts are not necessarily indicative of the actual amounts that are expected or that will occur
for the year ending December 31, 1998.
</FN>
</TABLE>
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), on an
annualized basis, for the three months ended March 31, 1998 and 1997 (in
thousands):
TABLE 3 ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
<TABLE>
<CAPTION>
1998 COMPARED TO 1997
INCREASE - (DECREASE)<F5>
TOTAL RATE/
CHANGE VOLUME RATE VOLUME<F4>
<S> <C> <C> <C> <C>
EARNING ASSETS:
Interest-bearing deposits $ (5) $ (9) $ 5 $ (1)
Federal funds sold 94 91 2 1
Investment securities:
Taxable 359 426 (63) (4)
Tax-exempt <F1> (26) (33) 7 -
Loans <F2><F3> (580) (89) (492) 1
Total interest income (158) 386 (541) (3)
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits
Demand deposits 248 243 5 -
Savings deposits (151) (16) (137) 2
Time deposits (16) 37 (53) -
Securities sold under
agreements to repurchase (281) (265) (35) 19
FHLB advances (143) (59) (89) 5
Federal funds purchased 36 30 3 3
Long-term debt (32) (27) (5) -
Total interest expense (339) (57) (311) 29
Net interest income $ 181 $ 443 $(230) $ (32)
<FN>
<F1> Interest income and rates are presented on a tax equivalent basis, assuming a federal income
tax rate of 34%.
<F2> Loan fees are included in interest income and are not material.
<F3> Nonaccrual loans are not material and have been included in the average balances.
<F4> The changes in rate/volume are computed on a consistent basis by multiplying the change in
rates by the change in volume.
<F5> 1998 interest income and expense amounts have been annualized based on results through March 31,
1998. The annualized amounts are not necessarily indicative of the actual amounts that are
expected or that will occur for the year ending December 31, 1998.
</FN>
</TABLE>
On an annualized tax equivalent basis, net interest income increased $181,000,
or .95% in 1998, compared to an annualized increase of $490,000, or 2.7% in
1997. As set forth in Table 3, the slight improvement in net interest income in
1998 was due primarily to the increases in the volume of earning assets and
interest-bearing liabilities. In 1997, the increase in net interest income was
due to the increase in the volume of earning assets and interest-bearing
liabilities, partially offset by the effect of changes in interest rates.
In 1998, average earning assets increased by $6,826,000, or 1.4%, and average
interest-bearing liabilities increased $1,653,000, or .4%, compared with 1997,
as shown in Table 2. The higher volumes of earning assets and interest-bearing
liabilities were primarily the result of strong investment growth in 1998. As a
percentage of average earning assets, average loans decreased from 73.8% during
1997 to 72.6% for the first quarter of 1998, while average securities increased
from 25.0% in 1997 to 25.9% during the first quarter of 1998.
The interest margin decreased slightly from 3.96% in 1997 to 3.94% during the
first quarter of 1998.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the first quarter of 1998 was $150,000, an
increase from $100,000 for the same period in 1997. For additional 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 1998 and 1997 (in thousands):
TABLE 4 OTHER INCOME
First quarter: 1998 1997 $ CHANGE
Trust $ 417 $ 422 $ (5)
Brokerage 64 136 (72)
Securities gains 12 - 12
Service charges 462 404 58
Mortgage banking 310 69 241
Other 284 243 41
Total other income $ 1,549 $ 1,274 $ 275
The Registrant's other income increased to $1,549,000 in the first quarter of
1998 as compared to $1,274,000 in the same period of 1997.
Trust revenues decreased slightly to $417,000 in the first quarter of 1998 from
$422,000 for the same period in 1997. This decrease in revenues was primarily a
result of the timing of the farm management fees relating to the sale of grain.
Trust assets increased 1.4% to $331,569,000 at March 31, 1998 from $326,935,000
at December 31, 1997 and $228,358,000 at March 31, 1997. The increase in trust
assets during 1997 was due primarily to growth of the trust accounts under
management and a market value adjustment upward for the agricultural-related
properties.
Revenues from brokerage operations decreased by 52.9% in the first quarter of
1998, as compared to the same period in 1997, primarily as a result of intense
competition from local brokerage firms.
Net securities gains for the first quarter of 1998 were $12,000, as compared to
none during the same period of 1997.
Service charges amounted to $462,000 in the first quarter of 1998, as compared
to $404,000 for the same period of 1997. This increase of $58,000 or 14.4% in
service charges in 1998 as compared to 1997 was primarily due to an increase in
the number of savings and transaction accounts, an increase in the service
charges on ATM's and the volume associated with these accounts.
First Mid Bank originates residential real estate 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 $310,000 in the first
quarter of 1998 as compared to $69,000 in the same period of 1997. This
increase in 1998 was attributed to an increase in the volume of loans sold by
First Mid Bank to $18.8 million (representing 231 loans) from $2.4 million in
1997 (representing 37 loans). Included in mortgage banking income was the
amount of the mortgage servicing fees recorded on loans originated and sold into
the secondary market with servicing retained. This amount was $41,000 for the
first quarter of 1998 as compared to $21,000 for the same period in 1997.
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 1998 and 1997 (in thousands):
TABLE 5 OTHER EXPENSE
First quarter: 1998 1997 $ CHANGE
Salaries and benefits $ 2,124 $ 1,998 $ 126
Occupancy and equipment 709 707 2
FDIC premiums 28 (42) 70
Amortization of intangibles 214 153 61
Stationery and supplies 182 162 20
Legal and professional fees 207 192 15
Marketing and promotion 126 117 9
Other operating expenses 526 494 32
Total other expense $ 4,116 $ 3,781 $ 335
The Registrant's non-interest expense amounted to $4,116,000 for the first
quarter of 1998 as compared to $3,781,000 for the same period in 1997, an
increase of $335,000 or 8.9%. Each category of other expense showed an
increase.
Salaries and employee benefits, the largest component of other expense,
increased to $2,124,000 for the first quarter of 1998 as compared to $1,998,000
for the same period in 1997. This 6.3% increase was due to normal annual salary
adjustments to employees as well as higher benefit costs.
Occupancy, furniture and equipment expense remained fairly constant at $709,000
for the first quarter of 1998 as compared to $707,000 for the same period in
1997. These amounts include depreciation expense recorded on technology
equipment put into service at the beginning of 1997 as well as 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") for the first quarter of 1998 was $28,000 remaining fairly
constant as compared to $27,000 for the same period in 1997. However, during
the first quarter of 1997, the Registrant received a refund of $69,000 on the
1996 assessments of the Savings Association Insurance Fund ("SAIF").
Amortization of intangible assets increased 39.9% when comparing the first
quarter of 1998 to the same period in 1997. This increase was due to the
goodwill and core deposit intangible associated with the purchase of the
Charleston branch in March, 1997.
During the first quarter of 1998 as compared to the same period in 1997, other
operating expenses increased $76,000 or 7.9% to $1,041,000 in 1998 from $965,000
in 1997. This increase was due primarily to the implementation of the merchant
debit card program and the extension of the wide area network.
INCOME TAXES
Total income tax expense amounted to $665,000 for the first quarter of 1998 as
compared to $689,000 for the same period in 1997. Effective tax rates were
33.3% and 35.3% for the first quarter of 1998 and 1997, respectively.
THE YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000. The
Year 2000 issue affects virtually all companies and organizations.
The Registrant has considered the impact of the Year 2000 issue for its computer
systems and applications as well as its general operations, customers and
suppliers. The Registrant has developed a stratigic plan for Year 2000
compliance which is being administered by a committee with representation from
all functional areas of the company as well as extensive involvement and
oversite by the board of directors and senior management. The plan follows the
guidelines set forth by the Federal Financial Institutions Examinations Council
("FFIEC"). The Registrant is 75% complete in its assessment phase, identifying
hardware, software, networks, other processing platforms and customer and vendor
interdependency affected by the Year 2000 date change. The plan calls for all
mission critical items to be Year 2000 compliant by year-end 1998.
Additionally, alarms, elevators, heating and cooling systems, and other
computer-controlled mechanical devices on which the Registrant relies are being
evaluated. Those found not to be in compliance will be modified or replaced
with a compliant product. While there will be some expenses incurred during the
next two years, the Registrant has not identified any situations at this time
that will require material cost expenditures to become fully compliant. An
unknown element at this time is the impact of the Year 2000 on the Registrant's
borrowing customers and their ability to repay. The Registrant has initiated a
program to communicate with key bank customers to ensure they are properly
prepared for the Year 2000 and will not suffer serious adverse consequences.
See also, "Recent Regulatory Developments."
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 the amortized cost of the securities for
March 31, 1998 and December 31, 1997 (in thousands):
TABLE 6 INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 82,194 64% $ 80,509 67%
Obligations of states and
political subdivisions 12,693 10% 12,820 11%
Mortgage-backed securities 30,528 24% 23,272 20%
Other securities 2,781 2% 2,747 2%
Total securities $128,196 100% $119,348 100%
</TABLE>
At March 31, 1998, the Registrant's investment portfolio showed an increase in
U.S. Government agency securities and mortgage-backed securities as well as a
slight decrease in obligations of states and political subdivisions. This
change in the portfolio mix improved the repricing characteristics of the
portfolio, helped mollify the Registrant's exposure relating to interest rate
risk and improved the portfolio yield.
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, 1998 and December 31, 1997 were as follows (in thousands):
TABLE 7 INVESTMENTS AT AMORTIZED COST / ESTIMATED FAIR VALUE
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1998 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities
and obligations of
U.S. Government Agencies
and corporations $ 82,194 $ 219 $ (186) $ 82,227
Obligations of states and
political subdivisions 9,795 371 (1) 10,165
Mortgage-backed securities 30,528 248 (54) 30,722
Federal Home Loan Bank stock 2,115 - - 2,115
Other securities 666 - - 666
Total available-for-sale $125,298 $ 838 $ (241) $125,895
Held-to-maturity:
Obligations of states and
political subdivisions $ 2,898 $ 47 $ (3) $ 2,942
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1997 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities
and obligations of
U.S. Government Agencies
and corporations $ 80,509 $ 198 $ (256) $ 80,451
Obligations of states and
political subdivisions 9,800 373 - 10,173
Mortgage-backed securities 23,272 195 (56) 23,411
Federal Home Loan Bank stock 2,115 - - 2,115
Other securities 632 - - 632
Total available-for-sale $116,328 $ 766 $ (312) $116,782
Held-to-maturity:
Obligations of states and
political subdivisions $ 3,020 $ 41 $ (4) $ 3,057
</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, 1998 (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 $ 9,339 $47,808 $25,047 $ - $ 82,194
Obligations of state and
political subdivisions 1,759 2,892 1,339 3,805 9,795
Mortgage-backed securities 1,437 10,565 7,256 11,270 30,528
Other securities - - - 2,781 2,781
Total available-for-sale $12,535 $61,265 $33,642 $17,856 $125,298
Weighted average yield 5.73% 6.36% 6.24% 5.18% 6.22%
Full tax-equivalent yield 6.09% 6.51% 6.35% 5.76% 6.45%
Held-to-maturity:
Obligations of state and
political subdivisions $ 473 $ 1,701 $ 280 $ 445 $ 2,898
Weighted average yield 4.89% 5.14% 5.70% 5.74% 5.25%
Full tax-equivalent yield 7.41% 7.79% 8.64% 8.70% 7.95%
</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.
The maturities of, and yields on, mortgage-backed securities have been
calculated using actual repayment history. However, where securities have call
features, and have a market value in excess of par value, 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
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,
1998.
Proceeds from sales of investment securities and realized gains and losses were
as follows during the first quarter ended March 31, 1998 and the year ended
December 31, 1997 (in thousands):
March 31, December 31,
1998 1997
Proceeds from sales $ 2,327 $ 9,983
Gains 15 20
Losses 3 26
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, 1998 and December 31, 1997
(in thousands):
TABLE 9 COMPOSITION OF LOANS
March 31, DECEMBER 31,
1998 1997
Commercial, financial
and agricultural $ 70,240 $ 73,854
Real estate - mortgage 249,591 252,312
Installment 27,665 29,266
Other 3,055 2,791
Total loans $350,551 $358,223
The Registrant had loan concentrations in agricultural industries of 13.5% at
March 31, 1998 and 13.8% at December 31, 1997. The Registrant had no further
industry loan concentrations in excess of 10% of outstanding loans.
TABLE 10 LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY
The following table presents the balance of loans outstanding as of March 31,
1998, by maturities (dollars in thousands):
<TABLE>
<CAPTION>
MATURITY<F1>
OVER 1
ONE YEAR THROUGH OVER
OR LESS<F2> 5 YEARS 5 YEARS TOTAL
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 48,703 $ 19,922 $ 1,615 $ 70,240
Real estate - mortgage 50,918 134,625 64,048 249,591
Installment 5,948 20,879 838 27,665
Other 711 1,967 377 3,055
Total loans $106,280 $177,393 $ 66,878 $350,551
<FN>
<F1> Based on scheduled principal repayments.
<F2> Includes demand loans, past due loans and overdrafts.
</FN>
</TABLE>
As of March 31, 1998, loans with maturities over one year consisted of
$203,267,000 in fixed rate loans and $41,004,000 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 ninety 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 11 NONPERFORMING LOANS
March 31, December 31,
1998 1997
Nonaccrual loans $1,141 $1,194
Loans past due ninety days
or more and still accruing 196 145
Restructured loans which are
performing in accordance
with revised terms 1,457 346
The $1.1 million increase in restructured loans resulted from four individual
collateral dependent loans to a single borrower that went restructured during
the first quarter of 1998. Management does not anticipate any material loss
from these loans.
Interest income that would have been reported if nonaccrual and restructured
loans had been performing totaled $191,000 for the first quarter ended March 31,
1998. Interest income that was included in income totaled $30,000 for this same
period.
The Registrant's policy generally is to discontinue the accrual of interest
income on any loan for which principal or interest is ninety days past due and
when, in the opinion of management, there is reasonable doubt as to the timely
collection 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
collection of interest or principal.
LOAN QUALITY AND ALLOWANCE FOR LOAN LOSSES
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. 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.
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, 1998, the
Registrant's loan portfolio included $47.4 million of loans to borrowers whose
businesses are directly related to agriculture. The balance decreased $1.9
million from $49.3 million at December 31, 1997. In addition to agricultural
lending, the Registrant has historically had substantial residential mortgage
lending activity in and around east central Illinois. At March 31, 1998, these
loans amounted to $175.0 million or 49.9% of total loans. Such residential
mortgage loans amounted to $181.3 million or 50.6% of total loans at
December 31, 1997.
Loan loss experience for the first quarter ended March 31, 1998 and for the year
ended December 31, 1997 are as follows (dollars in thousands):
TABLE 12 ALLOWANCE FOR LOAN LOSSES
March 31, December 31,
1998 1997
Average loans outstanding,
net of unearned income $354,138 $355,167
Allowance-beginning of year 2,636 2,684
Charge-offs:
Commercial, financial
and agricultural 24 588
Real estate-mortgage 10 69
Installment 31 145
Total charge-offs 65 802
Recoveries:
Commercial, financial
and agricultural 2 28
Real estate-mortgage - 1
Installment 11 25
Total recoveries 13 54
Net charge-offs 52 748
Provision for loan losses 150 700
Allowance-end of period $ 2,734 $ 2,636
Ratio of net charge-offs to
average loans .01% .21%
Ratio of allowance for loan
losses to loans outstanding
(less unearned interest
at end of period) .78% .74%
Ratio of allowance for loan
losses to nonperforming
loans 97.9% 156.4%
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 and external auditors periodically review asset quality
and the overall adequacy of the allowance for loan losses.
During the first quarter of 1998, the Registrant had net charge-offs of $52,000
as compared to $748,000 for the year ended December 31, 1997. Management
provided $150,000 for loan losses during the first quarter of 1998 as compared
to $100,000 for the same period in 1997. 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.
On March 31, 1998, the allowance for loan losses amounted to $2,734,000, or .78%
of total loans, and 97.9% of nonperforming loans. At December 31, 1997, the
allowance was $2,636,000, or .74% of total loans and 156.4% of nonperforming
loans. The ratio of the allowance for loan loss to total nonperforming loans
decreased substantially from 156.4% at December 31, 1997 to 97.9% at March 31,
1998 due to the aforementioned $1.1 million restructured loans. The allowance
for loan losses, in management's judgment, would be allocated as follows to
cover potential loan losses (in thousands):
TABLE 13 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
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 $ 1,703 20.6% $ 1,699 20.6%
Real estate-mortgage 290 70.4 245 70.4%
Installment 192 8.2 192 8.2%
Other - .8 - .8%
Total allocated 2,185 2,136
Unallocated 549 N/A 500 N/A
Allowance at end of
reported period $ 2,734 100.0% $ 2,636 100.0%
</TABLE>
The allowance is allocated to the individual loan categories by a specific
allocation 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, 1998 and December 31, 1997
(dollars in thousands):
TABLE 14 COMPOSITION OF DEPOSITS
MARCH 31, DECEMBER 31,
1998 1997
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
Demand deposits:
Non-interest bearing $ 53,420 - $ 52,660 -
Interest bearing 133,952 2.94% 125,666 2.93%
Savings 38,018 2.23% 38,642 2.59%
Time deposits 227,095 5.48% 226,431 5.50%
Total average deposits $452,485 3.81% $443,399 3.87%
The following table sets forth the maturity of time deposits of $100,000 or more
as of March 31, 1998 and December 31, 1997 (in thousands):
TABLE 15 MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
March 31, December 31,
1998 1997
3 months or less $ 15,684 $ 21,715
Over 3 through 6 5,509 12,287
Over 6 through 12 9,764 6,438
Over 12 months 8,601 10,293
Total $ 39,558 $ 50,733
OTHER BORROWINGS
Other borrowings consist of securities sold under agreements to repurchase,
Federal Home Loan Bank ("FHLB") advances, and Federal funds purchased.
Information relating to other borrowings for the first quarter ended March 31,
1998 and the year ended December 31, 1997 is presented below (in thousands):
TABLE 16 SCHEDULE OF OTHER BORROWINGS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
<S> <C> <C>
End of period:
Securities sold under agreements to repurchase $ 3,320 $10,780
Federal Home Loan Bank advances:
Overnight - -
Fixed term - due in one year or less - -
Fixed term - due after one year 17,000 7,000
Federal funds purchased - -
Total $20,320 $17,780
Average interest rate at end of period 5.19% 5.01%
Maximum Outstanding at Any Month-end
Securities sold under agreements to repurchase $ 5,560 $17,710
Federal Home Loan Bank advances:
Overnight - 23,733
Fixed term - due in one year or less - 16,000
Fixed term - due after one year 17,000 9,000
Federal funds purchased 5,750 -
Total $28,400 $66,443
Averages for the Period
Securities sold under agreements to repurchase $ 4,939 $10,806
Federal Home Loan Bank advances:
Overnight - 6,933
Fixed term - due in one year or less - 3,455
Fixed term - due after one year 16,222 6,833
Federal funds purchased 1,086 502
Total $22,247 $28,529
Average interest rate during the period 5.15% 5.02%
</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.
FHLB advances represent borrowings by First Mid Bank 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 Registrant's interest rate
repricing gaps for selected maturity periods at March 31, 1998 (in thousands):
TABLE 17 GAP TABLE
<TABLE>
<CAPTION>
NUMBER OF MONTHS UNTIL NEXT REPRICING OPPORTUNITY
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS: 0-1 1-3 3-6 6-12 12+
Deposits with other financial
institutions $ 121 $ - $ - $ - $ -
Federal funds sold 675 - - - -
Taxable investment securities 26,737 9,719 17,185 18,882 43,079
Nontaxable investment securities - 818 111 1,622 10,641
Loans 45,244 21,348 19,887 40,611 223,460
Total $ 72,777 $ 31,885 $ 37,183 $ 61,115 $ 277,180
INTEREST BEARING LIABILITIES:
Savings and N.O.W. accounts 119,807 - - - -
Money market accounts 46,478 - - - -
Other time deposits 30,403 28,509 42,192 44,802 73,626
Other borrowings - 3,320 1,000 14,000 2,000
Long-term debt 5,825 - - - -
Total $ 202,513 $ 31,829 $ 43,192 $ 58,802 $ 75,626
Periodic GAP $(129,736) $ 56 $ (6,009) $ 2,313 $201,554
Cumulative GAP $(129,736) $(129,680) $(135,689) $(133,376) $ 68,178
GAP as a % of interest earning assets:
Periodic (27.0%) 0.0% (1.3%) 0.5% 42.0%
Cumulative (27.0%) (27.0%) (28.3%) (27.8%) 14.2%
</TABLE>
At March 31, 1998, the Registrant was liability sensitive on a cumulative basis
through the twelve-month time horizon. Accordingly, future increases in
interest rates, if any, could have an unfavorable effect on the net interest
margin. However, the Registrant's historical repricing of N.O.W. and savings
accounts has not, and is not expected to change on a frequent basis. To some
extent, this would mitigate the negative effect of an upturn in rates. Over the
past years, management has placed an emphasis on growing core deposits, which
are considered to be less sensitive to changes in interest rates.
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 assumptions relative to the prepayments,
reinvestment and roll overs of assets and liabilities, of which First Mid Bank
represents substantially all of the Registrant's rate sensitive assets and
liabilities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Based on the financial analysis performed as of March 31, 1998, which takes into
account how the specific interest rate scenario would be expected to impact each
interest-earning asset and each interest-bearing liability, the Registrant
estimates that no material changes from the December 31, 1997 analysis would
occur. See the Registrant's December 31, 1997 Form 10-K for details.
CAPITAL RESOURCES
At March 31, 1998, the Registrant's stockholders' equity amounted to
$47,811,000, a $2,235,000 or 4.9% increase from the $45,576,000 balance as of
December 31, 1997. During the three month period ended March 31, 1998, net
income contributed $1,334,000 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 increased stockholders' equity by
$94,000, net of tax.
The Registrant issues 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. For
the quarter ended March 31, 1998, 1,894 shares were issued pursuant to the
Deferred Compensation Plan and 16,462 shares were issued pursuant to the First
Retirement and Savings Plan. For the year ended December 31, 1997, 11,403
shares were issued pursuant to the Deferred Compensation Plan and 44,893 shares
were issued pursuant to the First Retirement and Savings Plan.
The Registrant has a Dividend Reinvestment Plan whereby common and preferred
shareholders can elect to have their cash dividends automatically reinvested
into newly-issued common shares of the Registrant. Of the $509,000 in common
and preferred stock dividends paid during the first quarter of 1998, $259,000 or
51.0% was reinvested into shares of common stock of the Registrant through the
Dividend Reinvestment Plan. This resulted in an additional 7,691 shares of
common stock being issued during this period of 1998. As of the year ended
December 31, 1997, 32,781 shares of common stock were issued pursuant to the
Dividend Reinvestment Plan.
In 1997, the Registrant established an Incentive Stock Option Plan ("ISO Plan")
intended to provide a means whereby directors and certain officers can acquire
shares of the Registrant's common stock. A maximum of 100,000 shares have been
authorized under the ISO Plan. The shares will be awarded at an exercise price
equal to the fair market value of the shares on the date of grant. The options
are granted for a 10 year term and vest over a period of four years.
In October, 1997, the Registrant granted 19,500 options at an option price of
$23.51. In December, 1997, the Registrant granted 11,500 options at an option
price of $33.73. The Registrant applied APB Opinion No. 25 in accounting for
the ISO Plan and, accordingly, compensation cost based on fair value at grant
date has not been recognized for its stock options in the consolidated financial
statements for the periods ended March 31, 1998 and December 31, 1997.
The Registrant and First Mid Bank have capital ratios above the regulatory
capital requirements. These 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 risk-weighted assets of
4% to 5% depending on their particular circumstances and risk profiles. At
March 31, 1998, the Registrant's leverage ratio was 7.45%.
A tabulation of the Registrant's and First Mid Bank's capital ratios as of March
31, 1998 and December 31, 1997 follows:
TABLE 18 CAPITAL RATIOS
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
MARCH 31, 1998
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk-weighted assets)
Registrant $ 41,779 13.15% $ 25,411 > 8.00% $ 31,764 > 10.00%
First Mid Bank 43,810 13.92 25,175 > 8.00 31,469 > 10.00
Tier 1 Capital
(to risk-weighted assets)
Registrant 39,045 12.29 12,706 > 4.00 19,058 > 6.00
First Mid Bank 41,076 13.05 12,588 > 4.00 18,881 > 6.00
Tier 1 Capital
(to average assets)
Registrant 39,045 7.45 20,950 > 4.00 26,188 > 5.00
First Mid Bank 41,076 7.87 20,874 > 4.00 26,093 > 5.00
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
DECEMBER 31, 1997
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk-weighted assets)
Registrant $ 39,416 12.20% $ 25,842 > 8.00% $ 32,303 > 10.00%
First Mid Bank 42,105 13.17 25,584 > 8.00 31,980 > 10.00
Tier 1 Capital
(to risk-weighted assets)
Registrant 36,780 11.39 12,921 > 4.00 19,382 > 6.00
First Mid Bank 39,469 12.34 12,792 > 4.00 19,188 > 6.00
Tier 1 Capital
(to average assets)
Registrant 36,780 7.05 20,879 > 4.00 26,099 > 5.00
First Mid Bank 39,469 7.59 20,807 > 4.00 26,009 > 5.00
</TABLE>
Banks and bank holding companies are generally expected to operate at or above
the minimum capital requirements. These ratios are in excess of regulatory
minimums and will allow the Registrant to operate without capital adequacy
concerns.
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. At March 31, 1998, the excess collateral at the Federal Home Loan Bank
will support approximately $85 million of additional advances. 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, 1997, the FASB issued Statement No. 131, "DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION," ("SFAS 131"). SFAS 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. SFAS 131 is effective for financial
periods beginning after December 15, 1997, and is not expected to have a
material impact on the Registrant.
RECENT REGULATORY DEVELOPMENTS
The federal banking regulators have issued several statements providing guidance
to financial institutions on the steps the regulators expect financial
institutions to take to become Year 2000 compliant. Each of the federal banking
regulators is also examining the financial institutions under its jurisdiction
to assess each institutions's compliance with the outstanding guidance. If an
institution's progress in addressing the Year 2000 problem is deemed by its
primary federal regulator to be less than satisfactory, the institution will be
required to enter into memorandum of understanding with the regulator which
will, among other things, require the institution to promptly develop and submit
an acceptable plan for becoming Year 2000 compliant and to provide periodic
reports describing the institution's progress in implementing the plan. Failure
to satisfactorily address the Year 2000 problem may also expose a financial
institution to other forms of enforcement action that its primary federal
regulator deems appropriate to address the deficiencies in the institution's
Year 2000 remediation program.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Since First Mid Bank acts as a depository of funds, it 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 First Mid Bank and
that such litigation will not materially adversely affect the Registrant's
consolidated financial condition.
In addition to the normal proceedings referred to above, Heartland, a subsidiary
of the Registrant that merged will First Mid Bank during 1997, 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. At this time, it is too early to tell whether First Mid Bank will
ultimately prevail in the suit and if so, what damages my 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, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized on this 12th day of May,
1998.
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, 1998
*---------------------*
EXHIBIT INDEX TO FORM 10-K REGISTRATION STATEMENT
EXHIBIT
NUMBER DESCRIPTION AND FILING OR INCORPORATION REFERENCE
3.1 RESTATED CERTIFICATE OF INCORPORATION AND AMENDMENT TO RESTATED
CERTIFICATE OF INCORPORATION OF FIRST MID-ILLINOIS BANCSHARES, INC.
Exhibit 3(a) to First Mid-Illinois Bancshares, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1987 (File No. 0-13688)
3.2 RESTATED BYLAWS OF FIRST MID-ILLINOIS BANCSHARES, INC.
Exhibit 3(b) to First Mid-Illinois Bancshares, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1987 (File No 0-13368)
11.1 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(Filed herewith)
27.1 FINANCIAL DATA SCHEDULE
(Filed herewith)
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