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 JUNE 30, 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 August 12, 1998, 2,011,492 common shares, $4.00 par value, were
outstanding.
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS June 30, December 31,
(In thousands, except share data) 1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks:
Non-interest bearing $ 18,433 $ 20,486
Interest bearing 297 250
Federal funds sold 5,600 5,925
Cash and cash equivalents 24,330 26,661
Investment securities:
Available-for-sale, at fair value 126,346 116,782
Held-to-maturity, at amortized cost (estimated fair
value of $3,595 and $3,057 at June 30, 1998 and
December 31, 1997, respectively) 3,562 3,020
Loans 343,137 358,223
Less allowance for loan losses 2,837 2,636
Net loans 340,300 355,587
Premises and equipment, net 12,824 12,356
Intangible assets, net 8,169 8,550
Other assets 10,774 10,022
TOTAL ASSETS $526,305 $532,978
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 65,166 $ 53,599
Interest bearing 373,860 403,999
Total deposits 439,026 457,598
Securities sold under agreements to repurchase 6,864 10,780
Federal Home Loan Bank advances 20,500 7,000
Long-term debt 5,450 6,200
Other liabilities 5,514 5,824
TOTAL LIABILITIES 477,354 487,402
Stockholders' Equity
Series A convertible preferred stock; no par value;
authorized 1,000,000 shares; issued 614 shares in
1998 and 620 shares in 1997 with stated value of
$5,000 per share 3,070 3,100
Common stock, $4 par value; authorized 6,000,000
shares in 1998 and 1997; issued 2,013,181 shares
in 1998 and 1,972,709 shares in 1997 8,053 7,891
Additional paid-in-capital 8,232 7,038
Retained earnings 29,270 27,271
Accumulated other comprehensive income 350 300
Less treasury stock at cost, 2,000 shares (24) (24)
TOTAL STOCKHOLDERS' EQUITY 48,951 45,576
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $526,305 $532,978
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 7,245 $ 7,504 $14,610 $14,701
Investment securities 1,975 1,921 3,925 3,780
Federal funds sold 80 52 161 78
Deposits with financial institutions 2 13 20 23
Total interest income 9,302 9,490 18,716 18,582
INTEREST EXPENSE:
Deposits 4,158 4,235 8,465 8,140
Securities sold under agreements
to repurchase 61 125 113 283
Federal Home Loan Bank advances 253 344 472 699
Federal funds purchased 1 6 16 15
Long-term debt 99 120 204 224
Total interest expense 4,572 4,830 9,270 9,361
Net interest income 4,730 4,660 9,446 9,221
Provision for loan losses 150 150 300 250
Net interest income after
provision for loan losses 4,580 4,510 9,146 8,971
OTHER INCOME:
Trust revenues 414 452 831 874
Brokerage revenues 90 84 154 220
Service charges 478 457 940 861
Securities gains(losses), net - (6) 12 (6)
Mortgage banking income 307 100 617 169
Other 251 248 535 491
Total other income 1,540 1,335 3,089 2,609
OTHER EXPENSE:
Salaries and employee benefits 2,107 1,920 4,231 3,918
Occupancy, furniture, equipment, net 729 651 1,438 1,358
Intangible asset amortization 215 231 429 384
Stationary and supplies 168 140 350 302
Legal and professional 215 193 422 385
Marketing and promotion 137 172 263 289
Other 759 611 1,313 1,063
Total other expense 4,330 3,918 8,446 7,699
Income before income taxes 1,790 1,927 3,789 3,881
Income taxes 593 688 1,258 1,377
Net income $ 1,197 $ 1,239 $ 2,531 $ 2,504
Per common share data:
Basic earnings per share $ .56 $ .61 $ 1.20 $ 1.24
Diluted earnings per share $ .53 $ .57 $ 1.13 $ 1.16
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) SIX MONTHS ENDED
June 30,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,531 $ 2,504
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 300 250
Depreciation, amortization and accretion, net 1,026 909
(Gain)loss on sale of securities, net (12) 6
Loss on sale of fixed assets and real estate owned, net 152 2
Gain on sale of loans held for sale, net (444) (116)
Origination of loans held for sale (39,063) (10,992)
Proceeds from sale of loans held for sale 38,228 10,608
(Increase)decrease in other assets (867) 91
Increase(decrease) in other liabilities 245 (5)
Net cash provided by operating activities 2,096 3,257
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of mortgage servicing rights (68) (42)
Purchases of premises and equipment (1,058) (521)
Net (increase) decrease in loans 16,266 (9,153)
Proceeds from sales of:
Securities available-for-sale 2,327 9,983
Proceeds from maturities of:
Securities available-for-sale 24,030 6,936
Securities held-to-maturity 410 130
Purchases of:
Securities available-for-sale (36,010) (20,173)
Securities held-to-maturity (799) (170)
Purchase of financial organization, net of cash - 22,416
Net cash provided by (used in) investing activities 5,098 9,406
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase(decrease) in deposits (18,572) 11,556
Increase (decrease) in securities sold under
agreements to repurchase (3,916) (8,360)
Increase(decrease) in FHLB advances 13,500 (9,426)
Repayment of long-term debt (750) (500)
Proceeds from issuance of long-term debt - 1,000
Proceeds from issuance of common stock 704 513
Dividends paid on preferred stock (16) (16)
Dividends paid on common stock (475) (425)
Net cash provided by (used in) financing activities (9,525) (5,658)
Increase(decrease) in cash & cash equivalents (2,331) 7,005
Cash & cash equivalents at beginning of period 26,661 27,111
Cash and cash equivalents at end of period $24,330 $34,116
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 9,158 $ 9,836
Income taxes $ 1,968 $ 1,695
Loans transferred to real estate owned $ 335 $ 495
Dividends reinvested in common shares $ 622 $ 529
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
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:
Mid-Illinois Data Services, Inc. ("MIDS") and First Mid-Illinois Bank & Trust,
N.A. ("First Mid Bank") and its wholly-owned subsidiary First Mid-Illinois
Insurance Services ("First Mid Insurance"). First Mid Insurance began
operations during the second quarter of 1998. 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 June 30, 1998 and 1997, and all such adjustments are of a normal recurring
nature. The results of the interim periods ended June 30, 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. 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.
<PAGE>
The components of basic and diluted earnings per common share are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, 1998 1997 1998 1997
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income $1,197,000 $1,239,000 $2,531,000 $2,504,000
Less preferred stock dividends (72,000) (72,000) (143,000) (143,000)
Net income available to common
stockholders' equity $1,125,000 $1,167,000 $2,388,000 $2,361,000
Weighted average common shares
outstanding 2,002,657 1,917,057 1,991,034 1,905,817
Basic Earnings per Common Share $ .56 $ .61 $ 1.20 $ 1.24
DILUTED EARNINGS PER SHARE:
Net income available to common
stockholders' equity $1,125,000 $1,167,000 $2,388,000 $2,361,000
Conversion of preferred stock 72,000 72,000 143,000 143,000
Net income available to common
stockholders after conversion $1,197,000 $1,239,000 $2,531,000 $2,504,000
Weighted average common shares
outstanding 2,002,657 1,917,057 1,991,034 1,905,817
Conversion of stock options 4,101 - 5,511 -
Conversion of preferred stock 249,564 250,604 250,081 250,604
Diluted weighted average common
shares outstanding 2,256,322 2,167,661 2,246,626 2,156,421
Diluted Earnings per Common Share $ .53 $ .57 $ 1.13 $ 1.16
</TABLE>
COMPREHENSIVE INCOME
The Financial Accounting Standards Board 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 is shown as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $1,197 $1,239 $ 2,531 $ 2,504
Other comprehensive income, net of tax:
Unrealized gains(losses) during the period (44) 516 58 (76)
Reclassification adjustment for net
(gains)losses realized in net income - 4 (8) 4
Comprehensive income $1,153 $1,759 $2,581 $2,432
</TABLE>
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 and six months
ended June 30, 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 for the three months ended June 30, 1998, decreased to $1,197,000,
down 3.4% from $1,239,000 for the same period of 1997. Diluted earnings per
share for the quarter decreased 4 cents per share to $.53 as compared to $.57
per share earned in the same quarter of 1997. A summary of the factors which
contributed to the changes in net income for the three months is shown in Table
1.
Net income for the six months ended June 30, 1998, increased to $2,531,000, up
1.1% from $2,504,000 for the same period of 1997. Diluted earnings per share
for the period decreased 3 cents per share to $1.13 as compared to $1.16 per
share earned in the same period of 1997. A summary of the factors which
contributed to the changes in net income for the six months is shown in Table 1.
<PAGE>
TABLE 1 EFFECT ON EARNINGS
1998 VS 1997
(in thousands) THREE MONTHS SIX MONTHS
Net interest income $ 70 $ 225
Provision for loan losses - (50)
Other income, including
securities transactions 205 480
Other expenses (412) (747)
Income taxes 95 119
Increase(decrease) in net income $ (42) $ 27
The following table shows the Registrant's annualized performance ratios for the
six months ended June 30, 1998 and for the year ended December 31, 1997:
June 30, December 31,
1998 1997
Return on average assets .96% .90%
Return on average equity 10.66% 11.08%
Return on average common equity 10.76% 11.23%
Average equity to average assets 8.98% 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):
<PAGE>
TABLE 2 DISTRIBUTION OF CONSOLIDATED ASSETS, LIABILITIES AND STOCKHOLDERS'
EQUITY - INTEREST, RATES AND NET YIELDS
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
JUNE 30, 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 $ 797 $ 41 5.12% $ 1,497 $ 75 5.01%
Federal funds sold 5,946 322 5.42% 4,254 230 5.41%
Investment securities
Taxable 113,879 7,144 6.27% 107,124 6,759 6.31%
Tax-exempt<F1> 13,894 1,068 7.69% 13,046 1,062 8.14%
Loans <F2><F3> 350,309 29,221 8.34% 355,167 30,040 8.46%
Total earning assets 484,825 37,796 7.80% 481,088 38,166 7.93%
Cash and due from banks 16,513 18,363
Premises and equipment 12,429 11,916
Other assets 17,785 17,056
Allowance for loan losses (2,744) (2,672)
Total assets $528,808 $525,751
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing deposits
Demand deposits $130,234 3,918 3.01% $125,666 $ 3,684 2.93%
Savings deposits 38,527 866 2.25% 38,642 999 2.59%
Time deposits 220,921 12,146 5.50% 226,431 12,464 5.50%
Securities sold under
agreements to repurchase 5,222 226 4.34% 10,806 488 4.52%
FHLB advances 17,511 944 5.39% 17,221 1,018 5.91%
Federal funds purchased 565 32 5.66% 502 26 5.18%
Long-term debt 6,005 408 6.79% 6,584 452 6.87%
Total interest-bearing
liabilities 418,985 18,540 4.43% 425,852 19,131 4.49%
Demand deposits 56,922 52,660
Other liabilities 5,415 4,601
Stockholders' equity 47,486 42,638
Total liabilities & equity $528,808 $525,751
Net interest income (TE) $ 19,256 $ 19,035
Net interest spread 3.37% 3.44%
Impact of non-interest bearing funds .60% .52%
Net yield on interest-earning assets 3.97% 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 June 30, 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 six months ended June 30, 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>
EARNING ASSETS:
<S> <C> <C> <C> <C>
Interest-bearing deposits $ (34) $ (35) $ 2 $ (1)
Federal funds sold 92 91 1 -
Investment securities:
Taxable 385 426 (39) (2)
Tax-exempt <F1> 6 69 (59) (4)
Loans <F2><F3> (819) (412) (413) 6
Total interest income (370) 139 (508) (1)
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits
Demand deposits 234 133 97 4
Savings deposits (133) (3) (130) -
Time deposits (318) (303) (15) -
Securities sold under
agreements to repurchase (262) (252) (20) 10
FHLB advances (74) 17 (90) (1)
Federal funds purchased 6 3 2 1
Long-term debt (44) (39) (5) -
Total interest expense (591) (444) (161) 14
Net interest income $ 221 $ 583 $(347) $ (15)
<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
June 30, 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 $221,000,
or 1.2% in 1998, compared to an annualized increase of $718,000, or 4.0% 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
decreases in the volume of interest-bearing liabilities, partially offset by the
effect of changes in interest rates. In 1997, the increase in net interest
income was due to the increase in the volume of earning assets and interest-
bearing liabilities.
For the first six months of 1998, average earning assets increased by
$3,737,000, or .8%, and average interest-bearing liabilities decreased
$6,867,000, or 1.6%, compared with 1997, as shown in Table 2. The higher
volumes of earning assets and interest-bearing liabilities were primarily the
result of investment growth in 1998. As a percentage of average earning assets,
average loans decreased from 73.8% in 1997 to 72.3% for the first six months of
1998, while average securities increased from 25.0% in 1997 to 26.4% for the
first six months of 1998.
The interest margin increased slightly from 3.96% in 1997 to 3.97% during the
first six months of 1998.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the first six months of 1998 was $300,000, an
increase of $50,000 from $250,000 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 six months of 1998 and 1997 (in thousands):
TABLE 4 OTHER INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
1998 1997 $ CHANGE 1998 1997 $ CHANGE
<S> <C> <C> <C> <C> <C> <C>
Trust $ 414 $ 452 $ (38) $ 831 $ 874 $ (43)
Brokerage 90 84 6 154 220 (66)
Securities gains(losses) - (6) 6 12 (6) 18
Service charges 478 457 21 940 861 79
Mortgage banking 307 100 207 617 169 448
Other 251 248 3 535 491 44
Total other income $1,540 $1,335 $ 205 $3,089 $2,609 $ 480
</TABLE>
The Registrant's other income increased to $3,089,000 in the first six months of
1998 as compared to $2,609,000 in the same period of 1997.
Trust revenues decreased to $831,000 in the first six months of 1998 from
$874,000 for the same period in 1997. This decrease of $43,000, or 4.9%, in
revenues was primarily a result of the timing of the farm management fees
relating to the sale of grain. Trust assets increased 2.4% to $334,802,000 at
June 30, 1998 from $326,935,000 at December 31, 1997 and $289,113,000 at June
30, 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 30.0% in the first six months 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 six months of 1998 were $12,000, as compared
to net securities losses of $6,000 for the same period of 1997.
Service charges amounted to $940,000 in the first six months of 1998, as
compared to $861,000 for the same period of 1997. This increase of $79,000 or
9.2% in service charges was primarily due to an increase in the number of
savings and transaction accounts, an increase in the service charges on ATM's,
an increase in the volume associated with these accounts, and an increase in
overdraft fees.
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 $617,000 in the first
six months of 1998 as compared to $169,000 for the same period of 1997. This
$448,000 increase in 1998 was attributed to an increase in the volume of loans
sold by First Mid Bank to $37.8 million (representing 469 loans) from $10.5
million in 1997 (representing 162 loans) and to re-financings by customers as a
result of a low interest rate environment.
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 six months of 1998 and 1997 (in thousands):
TABLE 5 OTHER EXPENSE
SIX MONTHS ENDED
1998 1997 $ CHANGE
Salaries and benefits $4,231 $3,918 $ 313
Occupancy and equipment 1,438 1,358 80
FDIC premiums 56 (15) 71
Amortization of intangibles 429 384 45
Stationery and supplies 350 302 48
Legal and professional fees 422 385 37
Marketing and promotion 263 289 (26)
Other operating expenses 1,257 1,078 179
Total other expense $8,446 $7,699 $ 747
The Registrant's non-interest expense amounted to $8,446,000 for the first six
months of 1998 as compared to $7,699,000 for the same period in 1997, an
increase of $747,000 or 9.7%.
Salaries and employee benefits, the largest component of other expense,
increased to $4,231,000 for the first six months of 1998 as compared to
$3,918,000 for the same period in 1997. This 8.0% increase was due to normal
annual salary adjustments to employees, commissions on loan sales, and higher
benefit costs.
Occupancy, furniture and equipment expense increased to $1,438,000 for the first
six months of 1998 as compared to $1,358,000 for the same period in 1997. This
$80,000, or 5.9%, increase included depreciation expense recorded on technology
equipment placed in service as well as items additions for 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 six months of 1998 was $56,000, remaining
fairly constant as compared to $54,000 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 11.7% when comparing the first six
months of 1998 to the same period in 1997. This increase was due to the
goodwill and core deposit intangibles associated with the purchase of the
Charleston branch in March, 1997.
During the first six months of 1998, other operating expenses increased $179,000
or 16.6% to $1,257,000 from $1,078,000 for the same period in 1997. This
increase was primarily due to net losses of $152,000 on the sale of fixed assets
and other real estate owned, the implementation of the merchant debit card
program and the extension of the wide area network.
INCOME TAXES
Total income tax expense amounted to $1,258,000 for the first six months of 1998
as compared to $1,377,000 for the same period in 1997. Effective tax rates were
33.2% and 35.5% for the first six months 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 has completed 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. Management of the Registrant estimates that during 1998, approximately
$100,000 of costs will be incurred specifically related to the Year 2000 issue.
While there will likely be some Year 2000 expenses incurred during 1999, the
Registrant has not identified any additional situations 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 amortized cost of the securities for June 30,
1998 and December 31, 1997 (in thousands):
<PAGE>
TABLE 6 INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
JUNE 30, 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 $ 81,708 63% $ 80,509 67%
Obligations of states and
political subdivisions 15,408 12% 12,820 11%
Mortgage-backed securities 29,670 23% 23,272 20%
Other securities 2,591 2% 2,747 2%
Total securities $129,377 100% $119,348 100%
</TABLE>
At June 30, 1998, the Registrant's investment portfolio showed a slight decrease
in the composition of U.S. Government agency securities as well as an increase
in mortgage-backed securities and 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 June 30, 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
June 30, 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 $ 81,708 $ 168 $ (185) $ 81,691
Obligations of states and
political subdivisions 11,846 337 (11) 12,172
Mortgage-backed securities 29,670 261 (39) 29,892
Federal Home Loan Bank stock 1,925 - - 1,925
Other securities 666 - - 666
Total available-for-sale $125,815 $ 766 $ (235) $126,346
Held-to-maturity:
Obligations of states and
political subdivisions $ 3,562 $ 38 $ (4) $ 3,596
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
<S> <C> <C> <C> <C>
AMORTIZED UNREALIZED UNREALIZED FAIR
December 31, 1997 COST GAINS LOSSES VALUE
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 June 30, 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 $ 5,966 $49,704 $26,038 $ - $ 81,708
Obligations of state and
political subdivisions 1,762 4,072 1,911 4,101 11,846
Mortgage-backed securities 3,667 9,528 7,064 9,411 29,670
Other securities - - - 2,591 2,591
Total available-for-sale $11,395 $63,304 $35,013 $16,103 $125,815
Weighted average yield 5.68% 6.30% 6.20% 5.09% 6.20%
Full tax-equivalent yield 6.08% 6.49% 6.35% 5.78% 6.46%
Held-to-maturity:
Obligations of state and
political subdivisions $ 372 $ 1,701 $ 1,044 $ 445 $ 3,562
Weighted average yield 5.08% 5.14% 4.70% 5.74% 5.07%
Full tax-equivalent yield 7.70% 7.79% 7.13% 8.70% 7.68%
</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 June 30,
1998.
Proceeds from sales of investment securities and realized gains and losses were
as follows for the periods ended June 30, 1998 and December 31, 1997:
June 30, December 31,
(in thousands) 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 June 30, 1998 and December 31, 1997:
TABLE 9 COMPOSITION OF LOANS
June 30, DECEMBER 31,
(in thousands) 1998 1997
Commercial, financial
and agricultural $ 70,499 $ 73,854
Real estate - mortgage 244,976 252,312
Installment 26,767 29,266
Other 895 2,791
Total loans $343,137 $358,223
The Registrant had loan concentrations in agricultural industries of 14.3% at
June 30, 1998 and 13.8% at December 31, 1997. The Registrant had no further
industry loan concentrations in excess of 10% of outstanding loans.
<PAGE>
TABLE 10 LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY
The following table presents the balance of loans outstanding as of June 30,
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 $ 48,202 $ 20,859 $ 1,438 $ 70,499
Real estate - mortgage 54,988 136,292 53,696 244,976
Installment 6,211 19,825 731 26,767
Other 319 203 373 895
Total loans $109,720 $177,179 $ 56,238 $343,137
<FN>
<F1> Based on scheduled principal repayments.
<F2> Includes demand loans, past due loans and overdrafts.
</FN>
</TABLE>
As of June 30, 1998, loans with maturities over one year consisted of
$195,903,000 in fixed rate loans and $37,514,000 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
June 30, December 31,
1998 1997
Nonaccrual loans $1,801 $1,194
Loans past due ninety days
or more and still accruing 396 145
Restructured loans which are
performing in accordance
with revised terms 1,452 346
Total Nonperforming Loans $3,649 $1,685
The $1.1 million increase in restructured loans resulted from three individual,
collateral dependent loans to a single borrower that were restructured during
the first quarter of 1998. The $.6 million increase in nonaccrual loans was the
net result of a $1.1 million commercial loan becoming nonaccrual during the
second quarter of 1998 and of removing a $.4 million loan from the nonaccrual
list and transferring the balance to other real estate owned.
At June 30, 1998, there was approximately $.5 million of exposure associated
with the $1.1 million restructured loans and the $1.1 million nonaccrual loans.
This exposure was considered in determining the adequacy of the allowance for
possible loan losses as of June 30, 1998.
Interest income that would have been reported if nonaccrual and restructured
loans had been performing totaled $218,000 for the first six months of 1998.
Interest income that was included in income totaled $53,000 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 June 30, 1998, the
Registrant's loan portfolio included $49.1 million of loans to borrowers whose
businesses are directly related to agriculture. The balance decreased $.2
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 June 30, 1998, these
loans amounted to $168.3 million or 49.0% 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 six months ended June 30, 1998 and for the year
ended December 31, 1997 are as follows (dollars in thousands):
<PAGE>
TABLE 12 ALLOWANCE FOR LOAN LOSSES
June 30, December 31,
1998 1997
Average loans outstanding,
net of unearned income $350,309 $355,167
Allowance-beginning of year 2,636 2,684
Charge-offs:
Commercial, financial
and agricultural 34 588
Real estate-mortgage 21 69
Installment 68 145
Total charge-offs 123 802
Recoveries:
Commercial, financial
and agricultural 4 28
Real estate-mortgage - 1
Installment 20 25
Total recoveries 24 54
Net charge-offs 99 748
Provision for loan losses 300 700
Allowance-end of period $ 2,837 $ 2,636
Ratio of net charge-offs to
average loans .03% .21%
Ratio of allowance for loan
losses to loans outstanding
(less unearned interest
at end of period) .83% .74%
Ratio of allowance for loan
losses to nonperforming
loans 77.7% 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 review 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 six months of 1998, the Registrant had net charge-offs of
$99,000 as compared to $748,000 for the year ended December 31, 1997.
Management provided $300,000 for loan losses during the first six months of 1998
as compared to $250,000 for the same period in 1997.
On June 30, 1998, the allowance for loan losses amounted to $2,837,000, or .83%
of total loans, and 77.7% 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 77.7% at June 30,
1998 due to the aforementioned increases in nonperforming 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>
June 30, 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 $ 1,752 20.5% $ 1,699 20.6%
Real estate-mortgage 247 71.4% 245 70.4%
Installment 207 7.8% 192 8.2%
Other - .3% - .8%
Total allocated 2,206 2,136
Unallocated 631 N/A 500 N/A
Allowance at end of
reported period $ 2,837 100.0% $ 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 June 30, 1998 and December 31, 1997
(dollars in thousands):
TABLE 14 COMPOSITION OF DEPOSITS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C>
Demand deposits:
Non-interest bearing $ 56,922 - $ 52,660 -
Interest bearing 130,234 3.01% 125,666 2.93%
Savings 38,527 2.25% 38,642 2.59%
Time deposits 220,921 5.50% 226,431 5.50%
Total average deposits $446,604 3.79% $443,399 3.87%
</TABLE>
The following table sets forth the maturity of time deposits of $100,000 or more
as of June 30, 1998 and December 31, 1997 (in thousands):
<PAGE>
TABLE 15 MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
June 30, December 31,
1998 1997
3 months or less $ 10,089 $ 21,715
Over 3 through 6 months 8,649 12,287
Over 6 through 12 7,637 6,438
Over 12 months 8,823 10,293
Total $ 35,198 $ 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 six months ended June 30, 1998
and the year ended December 31, 1997 is presented below (in thousands):
TABLE 16 SCHEDULE OF OTHER BORROWINGS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
End of period:
Securities sold under agreements to repurchase $ 6,864 $10,780
Federal Home Loan Bank advances:
Overnight - -
Fixed term - due in one year or less - -
Fixed term - due after one year 20,500 7,000
Federal funds purchased - -
Total $27,364 $17,780
Average interest rate at end of period 5.14% 5.01%
Maximum Outstanding at Any Month-end
Securities sold under agreements to repurchase $ 6,864 $17,710
Federal Home Loan Bank advances:
Overnight 5,500 23,733
Fixed term - due in one year or less - 16,000
Fixed term - due after one year 20,500 9,000
Federal funds purchased 5,750 -
Total $38,614 $66,443
Averages for the Period
Securities sold under agreements to repurchase $ 5,222 $10,806
Federal Home Loan Bank advances:
Overnight 356 6,933
Fixed term - due in one year or less - 3,455
Fixed term - due after one year 17,155 6,833
Federal funds purchased 565 502
Total $23,298 $28,529
Average interest rate during the period 5.16% 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 June 30, 1998 (in thousands):
TABLE 17 GAP TABLE
<TABLE>
<CAPTION>
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 $ 297 $ - $ - $ - $ -
Federal funds sold 5,600 - - - -
Taxable investment securities 26,135 17,045 10,218 16,181 44,592
Nontaxable investment securities - 110 1,690 668 13,268
Loans 44,739 12,904 24,773 48,084 212,637
Total $ 76,771 $ 30,059 $ 36,681 $ 64,993 $ 270,497
INTEREST BEARING LIABILITIES:
Savings and N.O.W. accounts 119,525 - - - -
Money market accounts 41,540 - - - -
Other time deposits 28,821 31,094 35,162 43,929 73,790
Other borrowings 6,864 1,000 - 17,500 2,000
Long-term debt 5,450 - - - -
Total $ 202,200 $ 32,094 $ 35,162 $ 61,429 $ 75,790
Periodic GAP $(125,429) $ (2,035) $ 1,519 $ 3,504 $194,707
Cumulative GAP $(125,429) $(127,464) $(125,945) $(122,441) $ 72,266
GAP as a % of interest earning assets:
Periodic (26.2%) (.4%) .3% .7% 40.7%
Cumulative (26.2%) (26.6%) (26.3%) (25.6%) 15.1%
</TABLE>
At June 30, 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 June 30, 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 June 30, 1998, the Registrant's stockholders' equity amounted to $48,951,000,
a $3,375,000 or 7.4% increase from the $45,576,000 balance as of December 31,
1997. During the six month period ended June 30, 1998, net income contributed
$2,531,000 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
$50,000, 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 six month period ended June 30, 1998, 2,519 shares were issued pursuant to
the Deferred Compensation Plan and 18,111 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 $1,113,000 in common
and preferred stock dividends paid during the first six months of 1998, $622,000
or 56% was reinvested into shares of common stock of the Registrant through the
Dividend Reinvestment Plan. This resulted in an additional 17,417 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 June 30, 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 June
30, 1998, the Registrant's leverage ratio was 7.83%.
A tabulation of the Registrant's and First Mid Bank's capital ratios as of June
30, 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
JUNE 30, 1998
<S> <C> <C> <C> <S><C> <C> <S><C>
Total Capital
(to risk-weighted assets)
Registrant $ 43,270 13.69% $ 25,277 > 8.00% $ 31,596 > 10.00%
First Mid Bank 44,954 14.39 24,985 > 8.00 31,231 > 10.00
Tier 1 Capital
(to risk-weighted assets)
Registrant 40,433 12.80 12,638 > 4.00 18,958 > 6.00
First Mid Bank 42,117 13.49 12,493 > 4.00 18,739 > 6.00
Tier 1 Capital
(to average assets)
Registrant 40,433 7.83 20,666 > 4.00 25,833 > 5.00
First Mid Bank 42,117 8.21 20,515 > 4.00 25,644 > 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> <S><C> <C> <S><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 June 30, 1998, the excess collateral at the Federal Home Loan Bank
will support approximately $78 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 affected 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, 1998, and is not expected to have a
material impact on the Registrant.
Statement of Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES," ("SFAS 133") was issued by the FASB in June
1998. SFAS 133 standardizes the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts. Under the
standard, entities are required to carry all derivative instruments in the
statement of financial position at fair value. The accounting for changes in
the fair value (i.e., gains of losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship
and, if so, on the reason for holding it. If certain conditions are met,
entities may elect to designate a derivative instrument as a hedge of exposures
to changes in fair values, cash flows, or foreign currencies. If the hedged
exposure is a fair value exposure, the gain or loss on the derivative instrument
is recognized in earnings in the period of change together with the offsetting
loss or gain on the hedged item attributable to the risk being hedged. If the
hedged exposure is a cash flow exposure, the effective portion of the gain or
loss on the derivative instrument is reported initially as a component of other
comprehensive income (outside earnings) and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts excluded
from the assessment of hedge effectiveness as well as the ineffective portion of
the gain or loss is reported in earnings immediately. Accounting for foreign
currency hedges is similar to the accounting for fair value and cash flow
hedges. If the derivative instrument is not designated as a hedge, the gain or
loss is recognized in earnings in the period of change. The Registrant has not
determined the impact that SFAS 133 will have on its financial statements and
believes that such determination will not be meaningful until closer to the date
of initial adoption.
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.
<PAGE>
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 Savings Bank
("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
The Annual Meeting of Stockholders was held on May 20, 1998. At the meeting,
Charles A. Adams, Daniel E. Marvin, Jr., and Ray Anthony Sparks were elected to
serve as Class III directors with terms expiring in 2001. Continuing Class I
directors (term expiring in 1999) are Kenneth R. Diepholz and Gary W. Melvin and
continuing Class II directors (term expiring in 2000) are Richard Anthony
Lumpkin, William G. Roley and William S. Rowland. The stockholders also
approved the adoption of the First Mid-Illinois Bancshares, Inc. 1997 Stock
Incentive Plan and ratified the appointment of KPMG Peat Marwick LLP as the
Registrant's independent public accountants for the year ending December 31,
1998.
There were 2,000,167 issued and outstanding shares of Common Stock at the time
of the Annual Meeting. The voting at the meeting, on the items listed below,
was as follows:
Election of directors For Withheld
Charles A. Adams 1,740,997 5,123
Daniel E. Marvin, Jr. 1,740,997 5,123
Ray Anthony Sparks 1,740,997 5,123
Approval of adoption of Stock Incentive Plan
For Against Withheld Broker Non Vote
1,607,720 84,789 17,570 36,040
Approval of KPMG Peat Marwick LLP as independent public accountants
For Against Withheld Broker Non Vote
1,723,875 8,089 14,156 -
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 June 30, 1998.
<PAGE>
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 August,
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: August 12, 1998
*---------------------*
<PAGE>
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)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 18433
<INT-BEARING-DEPOSITS> 297
<FED-FUNDS-SOLD> 5600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 126346
<INVESTMENTS-CARRYING> 3562
<INVESTMENTS-MARKET> 3595
<LOANS> 343137
<ALLOWANCE> 2837
<TOTAL-ASSETS> 526305
<DEPOSITS> 439026
<SHORT-TERM> 6864
<LIABILITIES-OTHER> 5514
<LONG-TERM> 25950
0
3070
<COMMON> 8053
<OTHER-SE> 37828
<TOTAL-LIABILITIES-AND-EQUITY> 526305
<INTEREST-LOAN> 14610
<INTEREST-INVEST> 3925
<INTEREST-OTHER> 181
<INTEREST-TOTAL> 18716
<INTEREST-DEPOSIT> 8465
<INTEREST-EXPENSE> 9270
<INTEREST-INCOME-NET> 9446
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 12
<EXPENSE-OTHER> 8446
<INCOME-PRETAX> 3789
<INCOME-PRE-EXTRAORDINARY> 3789
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2531
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.13
<YIELD-ACTUAL> 3.97
<LOANS-NON> 1801
<LOANS-PAST> 396
<LOANS-TROUBLED> 1452
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2636
<CHARGE-OFFS> 123
<RECOVERIES> 24
<ALLOWANCE-CLOSE> 2837
<ALLOWANCE-DOMESTIC> 2837
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 631
</TABLE>
