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, 1999
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)
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 13, 1999 2,092,332 common shares, $4.00 par value, were
outstanding.
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (unaudited) JUNE 30, December 31,
(In thousands, except share data) 1999 1998
<S> <C> <C>
ASSETS
Cash and due from banks:
Non-interest bearing $ 16,224 $ 14,669
Interest bearing 6,668 103
Federal funds sold 15,143 7,000
Cash and cash equivalents 38,035 21,772
Investment securities:
Available-for-sale, at fair value 153,489 153,534
Held-to-maturity, at amortized cost (estimated fair
value of $2,448 and $3,389 at June 30, 1999
and December 31, 1998, respectively) 2,444 3,322
Loans 359,337 349,065
Less allowance for loan losses 2,973 2,715
Net loans 356,364 346,350
Premises and equipment, net 15,320 13,226
Intangible assets, net 13,979 7,787
Other assets 10,379 8,672
TOTAL ASSETS $590,010 $554,663
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 66,317 $ 62,357
Interest bearing 426,861 387,279
Total deposits 493,178 449,636
Securities sold under agreements to repurchase 21,465 26,018
Federal Home Loan Bank advances 15,500 19,500
Long-term debt 4,325 4,700
Other liabilities 4,410 4,329
TOTAL LIABILITIES 538,878 504,183
Stockholders' Equity:
Series A convertible preferred stock; no par value;
authorized 1,000,000 shares; issued 614 shares
with stated value of $5,000 per share 3,070 3,070
Common stock, $4 par value; authorized 6,000,000
shares; issued 2,049,683 shares in 1999 and
2,023,227 shares in 1998 8,199 8,093
Additional paid-in-capital 9,396 8,562
Retained earnings 33,104 31,025
Deferred compensation 1,084 950
Accumulated other comprehensive income (loss) (1,947) 261
Less treasury stock at cost, 20,051 shares
in 1999 and 15,539 shares in 1998 (1,774) (1,481)
TOTAL STOCKHOLDERS' EQUITY 51,132 50,480
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $590,010 $554,663
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (unaudited) THREE MONTHS ENDED SIX MONTHS ENDED
(In thousands, except per share data) June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 7,173 $ 7,245 $14,042 $14,610
Interest on investment securities 2,184 1,975 4,238 3,925
Interest on federal funds sold 137 80 192 161
Interest on deposits with
other financial institutions 47 2 49 20
Total interest income 9,541 9,302 18,521 18,716
INTEREST EXPENSE:
Interest on deposits 3,895 4,158 7,595 8,465
Interest on securities sold under agreements
to repurchase 174 61 388 113
Interest on Federal Home Loan Bank advances 253 253 498 472
Interest on Federal funds purchased 5 1 7 16
Interest on long-term debt 66 99 136 204
Total interest expense 4,393 4,572 8,624 9,270
Net interest income 5,148 4,730 9,897 9,446
Provision for loan losses 150 150 300 300
Net interest income after provision 4,998 4,580 9,597 9,146
OTHER INCOME:
Trust revenues 464 414 945 831
Brokerage revenues 109 90 229 154
Service charges 573 478 1,073 940
Securities gains, net - - - 12
Mortgage banking income 195 307 524 617
Other 346 251 684 535
Total other income 1,687 1,540 3,455 3,089
OTHER EXPENSE:
Salaries and employee benefits 2,402 2,107 4,655 4,231
Net occupancy and equipment expense 852 729 1,621 1,438
Amortization of intangible assets 191 191 382 382
Stationary and supplies 189 168 363 350
Legal and professional 283 215 507 422
Marketing and promotion 195 137 314 263
Other 676 783 1,314 1,360
Total other expense 4,788 4,330 9,156 8,446
Income before income taxes 1,897 1,790 3,896 3,789
Income taxes 598 593 1,241 1,258
Net income $ 1,299 $ 1,197 $ 2,655 $ 2,531
Per common share data:
Basic earnings per share $ .61 $ .56 $ 1.25 $ 1.20
Diluted earnings per share $ .57 $ .53 $ 1.17 $ 1.13
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED
June 30,
(In thousands) 1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,655 $ 2,531
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Provision for loan losses 300 300
Depreciation, amortization and accretion, net 1,119 1,026
Gain on sale of securities, net - (12)
(Gain) loss on sale of other real property owned, net (77) 152
Gain on sale of mortgage loans held for sale, net (483) (444)
Origination of mortgage loans held for sale (24,940) (39,063)
Proceeds from sale of mortgage loans held for sale 32,717 38,228
Increase in other assets (1,543) (867)
Increase in other liabilities 1,592 245
Net cash provided by (used in) operating activities 11,340 2,096
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of mortgage servicing rights (30) (68)
Purchases of premises and equipment (1,068) (1,058)
Net (increase) decrease in loans (7,639) 16,266
Proceeds from sales of:
Securities available-for-sale - 2,327
Proceeds from maturities of:
Securities available-for-sale 24,302 24,030
Securities held-to-maturity 135 410
Purchases of:
Securities available-for-sale (26,758) (36,010)
Securities held-to-maturity (332) (799)
Purchase of financial organization, net of cash received 46,441 -
Net cash provided by investing activities 35,051 5,098
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits (20,771) (18,572)
(Decrease) in repurchase agreements (4,553) (3,916)
Increase (decrease) in FHLB advances (4,000) 13,500
Repayment of long-term debt (375) (750)
Proceeds from issuance of common stock 290 704
Purchase of treasury stock (159) -
Dividends paid on preferred stock (45) (16)
Dividends paid on common stock (515) (475)
Net cash used in financing activities (30,128) (9,525)
Increase (decrease) in cash and cash equivalents 16,263 (2,331)
Cash and cash equivalents at beginning of period 21,772 26,661
Cash and cash equivalents at end of period $38,035 $24,330
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 8,747 $ 9,158
Income taxes 1,524 1,968
Loans transferred to real estate owned 497 335
Dividends reinvested in common shares 651 622
See accompanying notes to unaudited 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. ("Company") 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, Inc. ("First Mid Insurance"). All significant
inter-company 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, 1999 and 1998, and all such adjustments are of a
normal recurring nature. The results of the interim period ended June 30,
1999, are not necessarily indicative of the results expected for the year
ending December 31, 1999.
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 Company's 1998 Form 10-K.
COMPREHENSIVE INCOME
The Company's comprehensive income for the period ended June 30, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
(In thousands) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $1,299 $1,197 $2,655 $2,531
Other comprehensive income(loss):
Unrealized gains(losses) during the period (2,498) (68) (3,345) 88
Reclassification adjustment for net
(gains)losses realized in net income - - - (12)
Tax effect 849 24 1,137 (26)
Comprehensive income(loss) $(350) $1,153 $ 447 $2,581
</TABLE>
EARNINGS PER SHARE
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 month and six month periods ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income $1,299,000 $1,197,000 $2,655,000 $2,531,000
Less preferred stock dividends (71,000) (72,000) (142,000) (143,000)
Net income available to common stockholders $1,228,000 $1,125,000 $2,513,000 $2,388,000
Weighted average common shares outstanding 2,020,682 2,002,657 2,017,909 1,991,034
Basic Earnings per Common Share $ .61 $ .56 $1.25 $1.20
DILUTED EARNINGS PER SHARE:
Net income available to common stockholders $1,228,000 $1,125,000 $2,513,000 $2,388,000
Assumed conversion of preferred stock 71,000 72,000 142,000 143,000
Net income available to common stock-
holders after assumed conversion $1,299,000 $1,197,000 $2,655,000 $2,531,000
Weighted average common shares outstanding 2,020,682 2,002,657 2,017,909 1,991,034
Assumed conversion of stock options 8,501 4,101 7,902 5,511
Assumed conversion of preferred stock 248,179 249,564 250,604 250,081
Diluted weighted average common
shares outstanding 2,277,362 2,256,322 2,276,416 2,246,626
Diluted Earnings per Common Share $ .57 $ .53 $1.17 $1.13
</TABLE>
MERGERS AND ACQUISITIONs
During the second quarter of 1999, the Company acquired the Monticello,
Taylorville and DeLand branch offices and deposit base of Bank One Illinois,
N.A. This cash acquisition added approximately $64 million to total deposits,
$10 million to loans, $1.7 million to premises and equipment and $6.5 million
to intangible assets. This acquisition was accounted for using the purchase
method of accounting whereby the acquired assets and deposits of the branches
were recorded at their fair values as of the acquisition date. The operating
results have been combined with those of the Company since May 7, 1999.
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 Company and its subsidiaries for the periods ended June 30, 1999 and
1998. 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, such as, discussions of
the Company's pricing and fee trends, credit quality and outlook, liquidity,
new business results, expansion plans, anticipated expenses and planned
schedules and projected costs for Year 2000 work. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation
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
Company, are identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. Actual results
could differ materially from the results indicated by these statements because
the realization of those results is subject to many uncertainties including:
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 Company's market area and
accounting principles, policies and guidelines. With respect to the Company's
Year 2000 work, such uncertainties also include the Company's ability to
continue to fund its Year 2000 renovation and to retain capable staff through
the completion of its Year 2000 renovation and the ability of its vendors,
clients, counter parties and customers to complete Year 2000 renovation efforts
on a timely basis and in a manner that allows them to continue normal business
operations or furnish products, services or data to the Company without
disruption, as well as the Company's ability to accurately evaluate their
readiness in this regard and, where necessary, develop and implement effective
contingency plans. 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 Company and its business,
including additional factors that could materially affect the Company's
financial results, is included in the Company's filings with the Securities and
Exchange Commission.
OVERVIEW
Net income for the three months ended June 30, 1999 was $1,299,000, an
increase of 8.5% from $1,197,000 for the same period in 1998. Diluted earnings
per share for the quarter ended was $.57 in 1999, an increase from $.53 in
1998. A summary of the factors which contributed to the changes in net income
for the three months is shown in the table below.
Net income for the six months ended June 30, 1999 was $2,655,000, an
increase of 4.9% from $2,531,000 for the same period in 1998. Diluted earnings
per share for the six month period ended was $1.17 in 1999, an increase from
$1.13 in 1998. A summary of the factors which contributed to the changes in
net income for the six month period is shown in the table below.
1999 VS 1998 1999 VS 1998
(in thousands) THREE MONTHS SIX MONTHS
Net interest income $ 418 $ 451
Other income, including
securities transactions 147 366
Other expenses (458) (710)
Income taxes (5) 17
Increase in net income $ 102 $ 124
The following table shows the Company's annualized performance ratios
for the six months ended June 30, 1999, as compared to the annualized
performance ratios for the six months ended June 30, 1998 and the performance
ratios for the year ended December 31, 1998:
June 30, June 30, December 31,
1999 1998 1998
Return on average assets .97% .96% .95%
Return on average equity 10.34% 10.66% 10.39%
Return on average common equity 10.41% 10.76% 10.47%
Average equity to average assets 9.34% 8.98% 9.16%
RESULTS OF OPERATIONS
NET INTEREST INCOME
The largest source of operating revenue for the Company 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 Company'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>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing deposits $ 1,986 $ 49 4.93% $ 797 $ 20 5.12%
Federal funds sold 8,272 192 4.64% 5,946 161 5.42%
Investment securities
Taxable 123,949 3,569 5.76% 113,879 3,572 6.27%
Tax-exempt <F1> 29,033 1,013 6.98% 13,894 534 7.69%
Loans <F2><F3> 341,868 14,042 8.21% 350,309 14,610 8.34%
Total earning assets 505,108 18,865 7.47% 484,825 18,897 7.80%
Cash and due from banks 15,577 16,513
Premises and equipment 13,872 12,429
Other assets 17,787 17,785
Allowance for loan losses (2,811) (2,744)
Total assets $549,533 $528,808
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Deposits
Demand deposits $132,046 $ 1,551 2.35% $130,234 $ 1,959 3.01%
Savings deposits 39,623 442 2.23% 38,527 433 2.25%
Time deposits 219,548 5,602 5.10% 220,921 6,073 5.50%
Securities sold under
agreements to repurchase 19,641 388 3.95% 5,222 113 4.34%
FHLB advances 19,788 498 5.04% 17,511 472 5.39%
Federal funds purchased 282 7 4.98% 565 16 5.66%
Long-term debt 4,509 136 6.02% 6,005 204 6.79%
Total interest-bearing
liabilities 435,437 8,624 3.96% 418,985 9,270 4.43%
Demand deposits 58,507 56,922
Other liabilities 4,258 5,415
Stockholders' equity 51,331 47,486
Total liabilities & equity $549,533 $528,808
Net interest income (TE) $10,241 $ 9,627
Net interest spread 3.51% 3.37%
Impact of non-interest
bearing funds .55% .60%
Net yield on interest-
earning assets (TE) 4.06% 3.97%
<FN>
<F1> Interest income and rates are presented on a tax-equivalent basis ("TE") assuming a
federal income tax rate of 34%.
<F2> Loan fees are included in interest income and are not material.
<F3> Nonaccrual loans have been included in the average balances.
</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) for
the six months ended June 30, 1999 (in thousands) as compared to the six months
ended June 30, 1998:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
1999 COMPARED TO 1998
INCREASE / (DECREASE)
TOTAL RATE/
CHANGE VOLUME RATE VOLUME <F4>
<S> <C> <C> <C> <C> <C>
EARNING ASSETS:
Interest-bearing deposits $ 29 $ 28 $ 1 $ -
Federal funds sold 31 63 (23) (9)
Investment securities:
Taxable (3) 316 (293) (26)
Tax-exempt <F1> 479 582 (49) (54)
Loans <F2><F3> (568) (351) (222) 5
Total interest income (32) 638 (586) (84)
Interest-Bearing Liabilities
Interest-bearing deposits
Demand deposits (408) 27 (429) (6)
Savings deposits 9 12 (3) -
Time deposits (471) (38) (436) 3
Securities sold under
agreements to repurchase 275 313 (10) (28)
FHLB advances 26 60 (30) (4)
Federal funds purchased (9) (8) (2) 1
Long-term debt (68) (51) (23) 6
Total interest expense (646) 315 (933) (28)
Net interest income $ 614 $ 323 $ 347 $ (56)
<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 with the change in volume.
</FN>
</TABLE>
On an tax equivalent basis, net interest income increased $614,000, or
6.4% to $10,241,000 for the six months ended June 30, 1999, from $9,627,000 for
the same period in 1998. The increase in net interest income for the six months
ended June 30, 1999, was primarily due to the decrease in the deposit rates
combined with a higher deposit base.
For the six months ended June 30, 1999, average earning assets increased
by $20,283,000, or 4.2%, and average interest-bearing liabilities increased
$16,452,000, or 3.9%, compared with average balances for the six months ended
June 30, 1998.
Changes in average balances, as a percent of average earnings assets,
are shown below:
* average loans (as a percent of average earnings assets) decreased
4.6% to 67.7% at June 30, 1999 from 72.3% at June 30, 1998
* average securities (as a percent of average earnings assets)
increased 3.9% to 30.3% at June 30, 1999 from 26.4% at June 30,
1998
* net interest margin, on a tax equivalent basis, increased to 4.06%
at June 30, 1999, from 3.97% at June 30, 1998
PROVISION FOR LOAN LOSSES
The provision for loan losses for the six months ended June 30, 1999 and
1998 was $300,000. For information on loan loss experience and nonperforming
loans, see the "NONPERFORMING LOANS" and "LOAN QUALITY AND ALLOWANCE FOR LOAN
LOSSES" sections later in this document.
OTHER INCOME
An important source of the Company's revenue is derived from other
income. The following table sets forth the major components of other income
for the three months ended and six months ended June 30, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
1999 1998 $ CHANGE 1999 1998 $ CHANGE
<S> <C> <C> <C> <C> <C> <C>
Trust $ 464 $ 414 $ 50 $ 945 $ 831 $ 114
Brokerage 109 90 19 229 154 75
Securities gains(losses) - - - - 12 (12)
Service charges 573 478 95 1,073 940 133
Mortgage banking 195 307 (112) 524 617 (93)
Other 346 251 95 684 535 149
Total other income $ 1,687 $ 1,540 $ 147 $ 3,455 $ 3,089 $ 366
</TABLE>
* Total non-interest income increased to $3,455,000 for the six months
ended June 30, 1999, compared to $3,089,000 for the same period in 1998.
* Trust revenues increased $114,000 or 13.7% to $945,000 for the six
months ended June 30, 1999, compared to $831,000 for the same period in
1998. This increase is the net effect of increases in the fee structure
for trust accounts, growth in employee benefit accounts managed by the
Trust Department and by increased farm management fees partially offset
by the decrease in trust assets. Trust assets (reported at market
value) decreased 8.6% to $311 million at June 30, 1999 from $338 million
at December 31, 1998.
* Revenues from brokerage and annuity sales increased $75,000 or 48.7% for
the six months ended June 30, 1999, compared with the same period in
1998.
* There were no securities gains or losses during the six months ended
June 30, 1999 as compared to net securities gains of $12,000 for the
same period in 1998.
* Fees from service charges increased $133,000 or 14.1% to $1,073,000 for
the six months ended June 30, 1999, compared to $940,000 for the same
period in 1998. This increase was primarily due to an increase in the
number of savings and transaction accounts, an increase in the service
charges on ATM's, and an increase in the fee schedule on transactions.
* Mortgage banking income decreased $93,000 or 15.1% to $524,000 for the
six months ended June 30, 1999, compared to $617,000 for the same period
in 1998. This was attributed to the volume of loans sold by First Mid
Bank decreasing to $32.2 million (representing 415 loans) as of June 30,
1999, from $37.8 million (representing 469 loans) as of the same period
in 1998.
* Other income increased $149,000 or 27.9% to $684,000 for the six months
ended June 30, 1999, compared to $535,000 for the same period in 1998.
This increase was primarily due to a $93,000 gain on the sale of
property (net book value of $230,000) in Mattoon, Tuscola and
Charleston, Illinois.
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 three months ended and six months ended
June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
1999 1998 $ CHANGE 1999 1998 $ CHANGE
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits $ 2,402 $ 2,107 $ 295 $ 4,655 $ 4,231 $ 424
Occupancy and equipment 852 729 123 1,621 1,438 183
FDIC premiums 27 28 (1) 54 56 (2)
Amortization of intangibles 191 191 - 382 382 -
Stationery and supplies 189 168 21 363 350 13
Legal and professional fees 283 215 68 507 422 85
Marketing and promotion 195 137 58 314 263 51
Other operating expenses 649 755 (106) 1,260 1,304 (44)
Total other expense $ 4,788 $ 4,330 $ 458 $ 9,156 $ 8,446 $ 710
</TABLE>
* Total non-interest expense increased to $9,156,000 for the six months
ended June 30, 1999, compared to $8,446,000 for the same period in 1998.
* Salaries and employee benefits, the largest component of other expense,
increased $424,000 or 10.0% to $4,655,000 for the six months ended June
30, 1999, compared to $4,231,000 for the same period in 1998. This
increase can be explained by:
* an increase in FTE employees to 279 at June 30, 1999 from 251 at
June 30, 1998, and
* merit increases for continuing employees
* Occupancy and equipment expense increased $183,000 or 12.7% to
$1,621,000 for the six months ended June 30, 1999, compared to
$1,438,000 for the same period in 1998. This increase included
depreciation expense recorded on technology equipment placed in service
as well as the depreciation expense on remodeled buildings located in
Mattoon, Tuscola and Charleston.
* All other categories of operating expenses increased a net of $103,000
or 3.7% to $2,880,000 for the six months ended June 30, 1999, compared
to $2,777,000 for the same period in 1998. This increase is primarily
due to the training of new employees and costs associated with the new
branches in Monticello, Taylorville and DeLand.
INCOME TAXES
Total income tax expense amounted to $1,241,000 for the six months ended
June 30, 1999, compared to $1,258,000 for the same period in 1998. Effective
tax rates were 31.9% and 33.2% for the periods ended June 30, 1999 and 1998.
ANALYSIS OF BALANCE SHEETS
LOANS
The loan portfolio is the largest category of the Company's earning
assets. The following table summarizes the composition of the loan portfolio
as of June 30, 1999 and December 31, 1998 (in thousands):
June 30, DECEMBER 31,
1999 1998
Real estate - mortgage $246,149 $244,501
Commercial, financial
and agricultural 87,292 78,579
Installment 24,226 25,194
Other 1,670 791
Total loans $359,337 $349,065
At June 30, 1999, the Company had loan concentrations in agricultural
industries of $57.6 million, or 16.0%, of outstanding loans and $50.9 million,
or 14.6%, at December 31, 1998. The Company had no further industry loan
concentrations in excess of 10% of outstanding loans. The increase in out-
standing commercial and agricultural loans and the related increase in total
loans was primarily attributable to $10 million in loans acquired through the
May, 1999, purchase of the Bank One branches.
Real estate mortgage loans have averaged approximately 70% of the
Company's total loan portfolio for the past several years. This is the result
of a strong local housing market and the Company's historical focus on
residential real estate lending. The balance of real estate loans held for
sale amounted to $1.4 million as of June 30, 1999.
The following table presents the balance of loans outstanding as of June
30, 1999, 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>
Real estate - mortgage $ 48,692 $163,822 $ 33,635 $246,149
Commercial, financial
and agricultural 57,524 26,334 3,434 87,292
Installment 6,005 17,573 648 24,226
Other 572 353 745 1,670
Total loans $112,793 $208,082 $38,462 $359,337
<FN>
<F1> Based on scheduled principal repayments.
<F2> Includes demand loans, past due loans and overdrafts.
</FN>
</TABLE>
As of June 30, 1999, loans with maturities over one year consisted of
$211,876,000 in fixed rate loans and $34,668,000 in variable rate loans. The
loan maturities noted above are based on the contractual provisions of the
individual loans. The Company 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 "renegotiated loans".
The following table presents information concerning the aggregate amount
of nonperforming loans at June 30, 1999 and December 31, 1998 (in thousands):
June 30, December 31,
1999 1998
Nonaccrual loans $1,336 $1,783
Loans past due ninety days
or more and still accruing 1,291 609
Renegotiated loans which are
performing in accordance
with revised terms 85 90
Total Nonperforming Loans $2,712 $2,482
At June 30, 1999, management has identified approximately $100,000
exposure associated with the nonperforming loans. This exposure was considered
in determining the adequacy of the allowance for loan losses as of June 30,
1999. Approximately $856,000 of the loans past due ninety days or more and
still accruing resulted from three individual, collateral dependent,
agricultural-related loans to three separate borrowers.
Interest income that would have been reported if nonaccrual and
renegotiated loans had been performing totaled $84,000 for the first six months
of 1999. Interest income that was included in income for the first six months
of 1999 totaled $4,000.
The Company'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
Company'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 economic conditions
in the region where the Company operates.
Management recognizes that there are risk factors which are inherent in
the Company's loan portfolio. All financial institutions face risk factors in
their loan portfolios because risk exposure is a function of the business. The
Company'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 Company's success. At June 30, 1999, the Company's loan
portfolio included $57.6 million of loans to borrowers whose businesses are
directly related to agriculture. The balance increased $6.7 million from $50.9
million at December 31, 1998, due to decreased cash flows for many of the
Company's agricultural borrowers. While the Company adheres to sound
underwriting practices including collateralization of loans, an extended period
of low commodity prices could nevertheless result in an increase in the level
of problem agriculture loans.
Loan loss experience for the six months ended June 30, 1999 and 1998,
are summarized as follows (dollars in thousands):
June 30, June 30,
1999 1998
Average loans outstanding,
net of unearned income $341,868 $350,309
Allowance-beginning of period $ 2,715 $ 2,636
Balance of acquired branches 150 -
Charge-offs:
Real estate-mortgage - 21
Commercial, financial & agricultural 170 34
Installment 40 68
Total charge-offs 210 123
Recoveries:
Real estate-mortgage - -
Commercial, financial & agricultural 7 4
Installment 11 20
Total recoveries 18 24
Net charge-offs 192 99
Provision for loan losses 300 300
Allowance-end of period $ 2,973 $ 2,837
Ratio of net charge-offs to
average loans (annualized) .06% .03%
Ratio of allowance for loan losses to
loans outstanding (less unearned
interest at end of period) .83% .83%
Ratio of allowance for loan losses
to nonperforming loans 109.6% 77.7%
The Company minimizes credit risk by adhering to sound underwriting and
credit review policies. These policies are reviewed at least annually, and
changes are approved by the board of directors. Senior management is actively
involved in business development efforts and the maintenance and monitoring of
credit underwriting and approval. The loan review system and controls are
designed to identify, monitor and address asset quality problems in an accurate
and timely manner. On a monthly basis, the board of directors reviews the
status of problem loans. In addition to internal policies and controls,
regulatory authorities periodically review asset quality and the overall
adequacy of the allowance for loan losses. The Company has recently learned of
potential problems concerning several loans to one customer. The Company's
investigation into these potential problems is in its initial phase, and it is
not possible to determine at this time whether any losses (and if so the amount
of the losses) will be incurred by the Company with respect to these loans. As
of August 12, 1999 there was an aggregate of $1.9 million in principal and
interest due from this borrower under these loans. As of August 12, 1999 the
borrower was current in all payments due on these loans.
During the first six months of 1999, the Company had net charge-offs of
$192,000, compared to $99,000 for the same period in 1998. The increase in
the charge-offs of commercial, financial and agricultural loans resulted
primarily from collateral dependent commercial loans from two borrowers. At
June 30, 1999, the allowance for loan losses amounted to $2,973,000, or .83% of
total loans, and 109.6% of nonperforming loans. At June 30, 1998, the allowance
was $2,837,000, or .83% of total loans, and 77.7% of nonperforming loans.
SECURITIES
The Company'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 Company's current
and projected liquidity and interest rate sensitivity positions. The following
table sets forth the amortized cost of the securities for June 30, 1999 and
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 90,111 57% $ 91,069 58%
Obligations of states and
political subdivisions 30,636 19% 27,674 18%
Mortgage-backed securities 35,785 22% 35,209 22%
Other securities 2,579 2% 2,509 2%
Total securities $159,111 100% $156,461 100%
</TABLE>
At June 30, 1999, the Company's investment portfolio showed an increase
in obligations of states and political subdivisions. While the volume of U.S.
Government agency securities decreased, mortgage-backed securities and all other
securities remained constant. This change in the portfolio mix improved the
repricing characteristics of the portfolio, helped mollify the Company's
exposure relating to market value 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, 1999 and December 31, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
June 30, 1999 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. Government corporations & agencies $ 90,111 $ 5 $ (2,450) $ 87,666
Obligations of states and political
subdivisions 28,192 177 (616) 27,753
Mortgage-backed securities 35,785 82 (376) 35,491
Federal Home Loan Bank stock 1,913 - - 1,913
Other securities 666 - - 666
Total available-for-sale $156,667 $ 264 $ (3,442) $153,489
Held-to-maturity:
Obligations of states and political
subdivisions $ 2,444 $ 21 $ (17) $ 2,448
DECEMBER 31, 1998
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. Government corporations & agencies $ 91,069 $ 333 $ (413) $ 90,989
Obligations of states and political
subdivisions 24,352 481 (48) 24,785
Mortgage-backed securities 35,209 142 (100) 35,251
Federal Home Loan Bank stock 1,843 - - 1,843
Other securities 666 - - 666
Total available-for-sale $153,139 $ 956 $ (561) $153,534
Held-to-maturity:
Obligations of states and political
subdivisions $ 3,322 $ 67 $ - $ 3,389
</TABLE>
The rise in interest rates during 1999 has reduced the market value of
the investment portfolio 2.3% since December 31, 1998. This compares favorably
to the negative 4.2% estimated change in the price of the five-year Treasury
Note over the same period.
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, 1999 (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>
<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 $ 2,009 $52,234 $31,731 $ 4,137 $ 90,111
Obligations of state and
political subdivisions 1,962 2,722 11,430 12,078 28,192
Mortgage-backed securities 2,375 19,466 11,427 2,517 35,785
Other securities - - - 2,579 2,579
Total Investments $ 6,346 $74,422 $54,588 $21,311 $156,667
Weighted average yield 5.86% 5.69% 5.70% 4.53% 5.27%
Full tax-equivalent yield 4.12% 5.79% 6.19% 5.89% 5.70%
Held-to-maturity:
Obligations of state and
political subdivisions $ 312 $ 1,286 $ 160 $ 686 $ 2,444
Weighted average yield 5.30% 5.06% 5.55% 5.46% 5.24%
Full tax-equivalent yield 8.03% 7.67% 8.40% 8.28% 7.93%
</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, 1999.
Proceeds from sales of investment securities and realized gains and
losses were as follows for the six months ended June 30, 1999 and June 30, 1998
(in thousands):
June 30, June 30,
1999 1998
Proceeds from sales $ - $ 2,327
Gross gains - 15
Gross losses - 3
Investment securities carried at approximately $92,881,000 and
$93,947,000 at June 30, 1999 and December 31, 1998, respectively, were pledged
to secure public deposits and repurchase agreements and for other purposes as
permitted or required by law.
DEPOSITS
Funding the Company's earning assets is substantially provided by a
combination of consumer, commercial and public fund deposits. The Company
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 for the six months ended June 30, 1999 and
for the year ended December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C>
Demand deposits:
Non-interest bearing $ 58,507 - $ 59,069 -
Interest bearing 132,046 2.35% 125,586 2.93%
Savings 39,623 2.23% 37,831 2.26%
Time deposits 219,548 5.10% 222,562 5.51%
Total average deposits 449,724 3.38% $445,048 3.77%
</TABLE>
The following table sets forth the maturity of time deposits of $100,000
or more at June 30, 1999 and December 31, 1998 (in thousands):
JUNE 30, December 31,
1999 1998
3 months or less $ 14,421 $ 21,510
Over 3 through 6 months 6,553 8,285
Over 6 through 12 months 9,965 4,608
Over 12 months 7,080 8,995
Total $ 38,019 $ 43,398
The decrease in the time deposits of $100,000 or more during the first
six months of 1999 was attributable to the maturity of promotional time deposits
and public funds. This reduction was anticipated by management and is not
expected to continue.
Total deposit balances increased by approximately $44 million during the
first six months of 1999 due to the acquisition of the Bank One branches.
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 as of June 30, 1999 and
December 31, 1998 is presented below (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
<S> <C> <C>
Securities sold under agreements to repurchase $21,465 $26,018
Federal Home Loan Bank advances:
Overnight - -
Fixed term - due in one year or less - -
Fixed term - due after one year 15,500 19,500
Federal funds purchased - -
Total $36,965 $45,518
Average interest rate at end of period 4.52% 4.51%
Maximum Outstanding at Any Month-end
Securities sold under agreements to repurchase $22,506 $26,018
Federal Home Loan Bank advances:
Overnight 18,000 5,500
Fixed term - due in one year or less - -
Fixed term - due after one year 19,500 20,500
Federal funds purchased - 5,750
Total $60,006 $57,767
Averages for the Period Ended
Securities sold under agreements to repurchase $19,641 $ 9,717
Federal Home Loan Bank advances:
Overnight 2,962 236
Fixed term - due in one year or less - -
Fixed term - due after one year 16,826 18,504
Federal funds purchased 282 364
Total $39,711 $28,821
Average interest rate during the year 4.51% 5.07%
</TABLE>
Securities sold under agreements to repurchase are short-term obligations
of First Mid Bank. First Mid Bank pledges collateral, securing any obligation
to pay the amount due, certain government securities which are direct
obligations of the United States or one of its agencies. First Mid Bank offers
these retail repurchase agreements as a cash management service to its corporate
customers.
Federal Home Loan Bank advances represent borrowings by First Mid Bank to
fund agricultural loan demand. This loan demand was previously funded primarily
through deposits by the State of Illinois. The fixed term advances consists
primarily of $13.5 million which First Mid Bank is using to fund agricultural
loans. $10.0 million is a 10-year maturity with a one year call option by the
Federal Home Loan Bank. The advance bears interest at a rate of 4.85%. $3.5
million is a 10-year maturity which is callable quarterly after one year. The
advance bears interest at a rate of 5.00%.
INTEREST RATE SENSITIVITY
The Company 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 Company 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
Company's asset/liability management committee oversees the interest rate
sensitivity position and directs the overall allocation of funds.
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 Company's interest
rate repricing gaps for selected maturity periods at June 30, 1999 (in
thousands):
<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 $ - $ - $ - $ - $ -
Federal funds sold 21,811 - - - -
Taxable investment securities 14,770 8,485 2,779 7,526 92,175
Nontaxable investment securities - 251 1,660 467 27,819
Loans 51,982 21,878 31,520 51,563 202,393
Total $ 88,563 $ 30,614 $ 35,959 $ 59,556 $ 322,387
INTEREST BEARING LIABILITIES:
Savings and N.O.W. accounts 138,868 - - - -
Money market accounts 53,818 - - - -
Other time deposits 35,121 36,872 36,565 64,588 61,028
Other borrowings 21,465 - 13,500 2,000 -
Long-term debt 4,325 - - - -
Total $ 253,597 $ 36,872 $ 50,065 $ 66,588 $ 61,028
Periodic GAP $(165,034) $ (6,258) $(14,106) $ (7,032) $261,359
Cumulative GAP $(165,034) $(171,292) $(185,398) $(192,430) $ 68,929
GAP as a % of interest earning assets:
Periodic (30.7%) (1.2%) (2.6%) (1.3%) 48.7%
Cumulative (30.7%) (31.9%) (34.5%) (35.8%) 12.8%
</TABLE>
At June 30, 1999, the Company 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. The Company's ability to log the market in repricing deposits in a
rising interest rate environment mollify the implied liability sensitivity of
the Company.
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 Company. Its actual usefulness in assessing the effect of
changes in interest rates varies with the constant changes which occur in the
composition of the Company's earning assets and interest-bearing liabilities.
For this reason, the Company 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 Company's rate sensitive assets and
liabilities.
CAPITAL RESOURCES
At June 30, 1999, the Company's stockholders' equity increased $652,000
or 1.3% to $51,132,000 from $50,480,000 as of December 31, 1998. During the
first six months of 1999, net income contributed $2,655,000 to equity before the
payment of dividends to common and preferred stockholders. The change in net
unrealized gain/loss on available-for-sale investment securities decreased
stockholders' equity by $1,947,000, net of tax.
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Bank holding companies follow
minimum regulatory requirements established by the Federal Reserve Board, First
Mid Bank follows similar minimum regulatory requirements established for
national banks by the Office of the Comptroller of the Currency. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary action by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements.
Quantitative measures established by each regulatory agency to ensure
capital adequacy require the reporting institutions to maintain 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 minimum leverage ratio of 4%.
Management believes that as of June 30, 1999 and December 31, 1998 all capital
adequacy requirements have been met by the Company and First Mid Bank.
As of June 30, 1999, the most recent notification from the primary
regulators categorized the Company and First Mid Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized, minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios must be maintained as set forth in the table. There are no
conditions or events since that notification that management believes have
changed these categories.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
JUNE 30, 1999
<S> <C> <C> <C> <S><C> <C> <S><C>
Total Capital
(to risk-weighted assets)
Company $ 42,073 12.04% $ 27,961 > 8.00% $ 34,951 > 10.00%
First Mid Bank 43,263 12.51 27,675 > 8.00 34,594 > 10.00
Tier 1 Capital
(to risk-weighted assets)
Company 39,100 11.19 13,980 > 4.00 20,971 > 6.00
First Mid Bank 40,290 11.65 13,838 > 4.00 20,756 > 6.00
Tier 1 Capital
(to average assets)
Company 39,100 7.06 22,155 > 4.00 27,694 > 5.00
First Mid Bank 40,290 7.33 21,977 > 4.00 27,472 > 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, 1998
<S> <C> <C> <C> <S><C> <C> <S><C>
Total Capital
(to risk-weighted assets)
Company $ 45,218 13.89% $ 26,036 > 8.00% $ 32,545 > 10.00%
First Mid Bank 46,704 14.46 25,831 > 8.00 32,289 > 10.00
Tier 1 Capital
(to risk-weighted assets)
Company 42,503 13.06 13,018 > 4.00 19,527 > 6.00
First Mid Bank 43,989 13.62 12,916 > 4.00 19,373 > 6.00
Tier 1 Capital
(to average assets)
Company 42,503 7.90 21,528 > 4.00 26,910 > 5.00
First Mid Bank 43,989 8.20 21,448 > 4.00 26,810 > 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 Company to operate without capital
adequacy concerns.
STOCK PLANS
The Company has four stock plans, the Deferred Compensation Plan, the
First Retirement and Savings Plan, the Dividend Reinvestment Plan, and the Stock
Incentive Plan. For more detailed information on these plans, refer to the
Company's 1998 Form 10-K.
* The DEFERRED COMPENSATION PLAN was effective as of June, 1984, in which
its purpose is to enable directors, advisory directors, and key officers
the opportunity to defer a portion of the fees and cash compensation paid
by the Company as a means of maximizing the effectiveness and flexibility
of compensation arrangements.
* The FIRST RETIREMENT AND SAVINGS PLAN was effective beginning in 1985.
Employees are eligible to participate in this plan after six months of
service to the Company.
* The DIVIDEND REINVESTMENT PLAN was effective as of October, 1994. The
purpose of this plan is to provide participating stockholders with a
simple and convenient method of investing cash common and preferred stock
dividends paid by the Company into newly-issued common shares of the
Company. All holders of record of the Company's common or preferred
stock are eligible to voluntarily participate. This plan is administered
by Harris Trust and Savings Bank and offers a way to increase one's
investment in the Company.
* The STOCK INCENTIVE PLAN was established by the Company in December,
1997, and is intended to provide a means whereby directors and certain
officers can acquire shares of the Company's common stock. A maximum of
100,000 shares have been authorized under this plan. Options to acquire
shares will be awarded at an exercise price equal to the fair market
value of the shares on the date of grant. Options to acquire shares have
a 10-year term. Options granted to employees vest over a four year
period and those options granted to directors vest at the time they are
issued.
On August 5, 1998, the Company announced a stock repurchase program of up
to 3% of its common stock. The shares will be repurchased at the most recent
market price of the stock. As of June 30, 1999, 18,051 shares (.9%) at a total
price of $666,000 and as of December 31, 1998, 13,539 shares (.7%) at a total
price of $507,000 have been repurchased by the Company. Treasury Stock is
further affected by activity in the Deferred Compensation Plan.
LIQUIDITY
Liquidity represents the ability of the Company 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. Other sources for cash include deposits of the State of Illinois and
Federal Home Loan Bank advances. At June 30, 1999, the excess collateral at the
Federal Home Loan Bank will support approximately $76 million of additional
advances.
Management monitors its expected liquidity requirements carefully,
focusing primarily on cash flows from:
* lending activities, including loan commitments, letters of credit
and mortgage prepayment assumptions
* deposit activities, including seasonal demand of private and public
funds
* investing activities, including prepayments of mortgage-backed
securities and call assumptions on U.S. Government Treasuries and
Agencies
* operating activities, including schedule debt repayments and
dividends to shareholders
EFFECTS OF INFLATION
Unlike industrial companies, virtually all of the assets and liabilities
of the Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company'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
Company's assets and liabilities which are important to the maintenance of
acceptable performance levels. The Company attempts to maintain a balance
between monetary assets and monetary liabilities, over time, to offset these
potential effects.
FUTURE ACCOUNTING CHANGES
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 or 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.
During June, 1999, the FASB issued the Statement of Financial Accounting
Standards No. 137, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
-- DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133 -- AN AMENDMENT OF
FASB STATEMENT NO. 133," ("SFAS 137") that delays SFAS 133 until fiscal years
beginning after June 15, 2000. The Company will evaluate the impact at that
time.
In October 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, "ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED AFTER THE
SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE"
("SFAS 134"). SFAS 134 amends Statement No.65, "ACCOUNTING FOR CERTAIN MORTGAGE
BANKING ACTIVITIES" to conform the subsequent accounting for securities retained
after the securitization of mortgage loans by a mortgage banking enterprise with
the subsequent accounting for securities retained after the securitization of
other types of assets by a non-mortgage banking enterprise. SFAS 134 was
effective for the first quarter of 1999. The adoption of SFAS 134 did not have
a material impact on the Company.
THE YEAR 2000 ISSUE
Like other businesses dependent upon computerized information processing,
the Company must deal with "Year 2000" issues, which stem from using two digits
to reflect the year in many computer programs and data. Computer programmers
and other designers of equipment that use microprocessors have abbreviated dates
by eliminating the first two digits of the year. As the year 2000 approaches,
many systems may be unable to distinguish years beginning with 20 from years
beginning with 19, and so may not accurately process certain date-based
information, which could cause a variety of operational problems for businesses.
The Company's data processing software and hardware provide essential
support to virtually all of its businesses, so successfully addressing Year 2000
issues is of the highest importance. Failure to complete renovation of the
critical systems used by the Company on a timely basis could have a materially
adverse affect on its operations and financial performance, as could Year 2000
problems experienced by others with whom the Company does business. Because of
the range of possible issues and the large number of variables involved, it is
impossible to quantify the potential cost of problems should the Company's
remediation efforts or the efforts of those with whom it does business not be
successful.
The Company has a dedicated Year 2000 project team whose members have
significant experience on the Company's applications which run on both main
frame and desk top applications. Virtually all applications used by the Company
were developed by third party vendors who have represented that their systems
were developed using four digit years.
The Company completed the information technology portion of the
assessment and inventory phases of its Year 2000 project in early 1998. Full
time renovation began in the first quarter of 1998. Testing and implementation
activities have been underway on mission critical applications since late 1997.
The Company has a highly centralized data processing environment, with the vast
majority of its data processing needs serviced out of a consolidated data center
in Mattoon. As of June 30, 1999, the Company had completed all of its testing
and 95% of its renovation, implementation, and re-testing for mission critical
applications (including vended and out-sourced applications). All
implementation includes testing with dates into the Year 2000 and internal user
acceptance.
The Year 2000 project team is also responsible for addressing issues that
are not directly related to data processing systems. The project team has
coordinated a review of various infrastructure issues, such as checking
elevators and heating, ventilation and air-conditioning equipment, some of which
include embedded systems, to verify that they will function in the Year 2000.
The project team is also coordinating a review of the Year 2000 status of power
and telecommunications providers at each important location, as these services
are critical to its business.
Although the Company is monitoring and validating the Year 2000 readiness
of its vendors and suppliers, it cannot control the success of these efforts.
Contingency plans have being developed to provide the Company with alternatives
in situations where an entity furnishing a critical product or service
experiences significant Year 2000 difficulties that will affect the Company.
The actions taken pursuant to these contingency plans will depend in part on the
Company's assessment of the readiness of specific providers in the power and
telecommunications industries. Also, contingency plans for the critical
business and environmental functions have been developed that establish
alternative means of delivery of products and services to customers if a Year
2000 event is experienced.
As part of its credit analysis process, the Company is assessing the Year
2000 readiness of its significant credit customers and is using this information
in the methodology of assessing the adequacy of the allowance for loan losses.
The inability of these credit customers to make payments when due could
negatively impact the Company's short term liquidity. Similar Year 2000
problems could affect the cash flows of certain of the Company's business
depositors resulting in their inability to maintain historical deposit balance
levels in their accounts. In addition, the Company could experience other
unusual deposit outflow before December 31, 1999 as a result of increased
currency demands of its customers. The potential increase in cash requirements
as the Year 2000 approaches has been considered by the Company in analyzing and
planning for its future short term liquidity needs. In addition, as part of its
fiduciary activities, the Company has developed and is implementing a plan for
taking the Year 2000 issue into consideration, and to evaluate and deal with
Year 2000 issues associated with property held in trust. The Company's
personnel have also conducted several workshops for its customers, as well as
for the community as a whole, to explain the Year 2000 issues and the Company's
Year 2000 program.
The Company conducts an ongoing review of its estimated Year 2000
external expenditures which are currently estimated to be approximately
$150,000. This estimate includes the cost of purchasing licenses for software
programming tools but does not reflect the cost of the time of internal staff.
All Year 2000 costs are expensed as incurred. As of June 30, 1999,
approximately 80% of project costs have been incurred. The remaining costs are
expected to be incurred roughly evenly over the next 6 months.
The cost of the time of internal staff devoted to the Year 2000 project
is significant. This expense is not included in the above statement. Because
of the priority given to the Year 2000 work by the Company, some other
technology-related projects have been delayed. However, such delays are not
expected to have a material effect on the ongoing business operations of the
Company.
PENDING LITIGATION
Heartland Savings Bank, a subsidiary of the Company that merged with
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. Refer to "PART II, ITEM 1, LEGAL PROCEEDINGS".
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material changes in the market risks faced by the
Company since December 31, 1998. For information regarding the Company's market
risk, refer to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
PART II
ITEM 1. LEGAL PROCEEDINGS
Since First Mid Bank acts as depositories 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 Company's
consolidated financial condition.
In addition to the normal proceedings referred to above, Heartland
Savings Bank ("Heartland"), a subsidiary of the Company that merged with 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. On August 6, 1998, First Mid
Bank filed a motion with the U.S. Court of Federal claims to grant summary
judgement on liability for breach of contract in this matter. On August 13,
1998, the U.S. Government filed a motion to stay such proceedings. At this
time, it is too early to tell if First Mid Bank will prevail in its motion and,
if so, what damages may be recovered.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 19, 1999. At the
meeting, Kenneth R. Diepholz and Gary W. Melvin were elected to serve as Class I
directors with terms expiring in 2002. Continuing Class II directors (term
expiring in 2000) are Richard Anthony Lumpkin, William G. Roley and William S.
Rowland and continuing Class III directors (term expiring in 2001) are Charles
A. Adams, Daniel E. Marvin, Jr., and Ray Anthony Sparks.
There were 2,017,513 issued and outstanding shares of Common Stock at the
time of the Annual Meeting. The voting at the meeting, on the items listed
below, was as follows:
ELECTION OF DIRECTORS FOR WITHHELD
Kenneth R. Diepholz 1,738,202 6,900
Gary W. Melvin 1,744,702 400
ITEM 5. OTHER INFORMATION
In May, 1999, the Company announced the appointment of William S. Rowland
as Chairman, President, Chief Executive Officer. Mr. Rowland, who succeeds
Daniel E. Marvin, Jr., who retired from that position, had previously served as
Chief Financial Officer of the Company since 1989 and as Executive Vice
President since 1997.
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(3) -- Exhibits
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 Company during the quarter
ended June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST MID-ILLINOIS BANCSHARES, INC.
(Company)
/s/ William S. Rowland
-------------------------------------*
William S. Rowland
President and Chief Executive Officer
/s/ Laurel G. Allenbaugh
-------------------------------------*
Laurel G. Allenbaugh
Vice President and Controller
(Chief Accounting Officer)
Dated: August 13, 1999
*---------------------*
EXHIBIT INDEX TO FORM 10-Q
EXHIBIT
NUMBER DESCRIPTION AND FILING OR INCORPORATION REFERENCE
11.1 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(Filed herewith)
27.1 FINANCIAL DATA SCHEDULE
(Filed herewith)
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