SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
COMMISSION FILE NUMBER: 0-13368
FIRST MID-ILLINOIS BANCSHARES, INC.
(Exact name of Company 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
(Company's telephone number, including area code)
Indicate by check mark whether the Company (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 Company 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 April 30, 1999 2,018,483 common shares, $4.00 par value, were
outstanding.
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (unaudited) March 31, December 31,
(In thousands, except share data) 1999 1998
<S> <C> <C>
ASSETS
Cash and due from banks:
Non-interest bearing $ 13,388 $ 14,669
Interest bearing 106 103
Federal funds sold - 7,000
Cash and cash equivalents 13,494 21,772
Investment securities:
Available-for-sale, at fair value 151,283 153,534
Held-to-maturity, at amortized cost (estimated fair
value of $2,700 and $3,389 at March 31, 1999
and December 31, 1998, respectively) 2,659 3,322
Loans 331,625 349,065
Less allowance for loan losses 2,760 2,715
Net loans 328,865 346,350
Premises and equipment, net 13,214 13,226
Intangible assets, net 7,596 7,787
Other assets 8,126 8,672
TOTAL ASSETS $525,237 $554,663
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 55,618 $ 62,357
Interest bearing 370,035 387,279
Total deposits 425,653 449,636
Securities sold under agreements to repurchase 19,583 26,018
Federal Home Loan Bank advances 20,300 19,500
Long-term debt 4,325 4,700
Other liabilities 3,853 4,329
TOTAL LIABILITIES 473,714 504,183
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 2,034,572 shares in 1999 and
2,023,227 shares in 1998 8,138 8,093
Additional paid-in-capital 8,914 8,562
Retained earnings 32,310 31,025
Deferred compensation 1,023 950
Accumulated other comprehensive income (loss) (298) 261
Less treasury stock at cost, 17,859 shares
in 1999 and 15,539 shares in 1998 (1,634) (1,481)
TOTAL STOCKHOLDERS' EQUITY 51,523 50,480
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $525,237 $554,663
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(In thousands, except per share data) FOR THE THREE MONTHS ENDED
1999 1998
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 6,869 $ 7,365
Interest on investment securities 2,054 1,950
Interest on federal funds sold 55 81
Interest on deposits with other financial institutions 2 18
Total interest income 8,980 9,414
INTEREST EXPENSE:
Interest on deposits 3,700 4,307
Interest on securities sold under agreements
to repurchase 214 52
Interest on Federal Home Loan Bank advances 245 219
Interest on Federal funds purchased 2 15
Interest on long-term debt 70 105
Total interest expense 4,231 4,698
Net interest income 4,749 4,716
Provision for loan losses 150 150
Net interest income after provision for loan losses 4,599 4,566
OTHER INCOME:
Trust revenues 481 417
Brokerage revenues 120 64
Service charges 500 462
Securities gains, net - 12
Mortgage banking income 329 310
Other 338 284
Total other income 1,768 1,549
OTHER EXPENSE:
Salaries and employee benefits 2,253 2,124
Net occupancy and equipment expense 769 709
Amortization of intangible assets 191 191
Stationary and supplies 174 182
Legal and professional 224 207
Marketing and promotion 119 126
Other 638 577
Total other expense 4,368 4,116
Income before income taxes 1,999 1,999
Income taxes 643 665
Net income $ 1,356 $ 1,334
Per common share data:
Basic earnings per share $ .64 $ .64
Diluted earnings per share $ .60 $ .60
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED
(In thousands) 1999 1998
<S> <C> <C> <S>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,356 $ 1,334
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 150 150
Depreciation, amortization and accretion, net 541 502
Gain on sale of securities, net - (12)
(Gain) loss on sale of other real property owned, net (34) 6
Gain on sale of mortgage loans held for sale, net (307) (286)
Origination of mortgage loans held for sale (14,830) (20,918)
Proceeds from sale of mortgage loans held for sale 21,905 19,081
Decrease in other assets 592 502
Increase in other liabilities 338 1,101
Net cash provided by operating activities 9,711 1,460
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of mortgage servicing rights (7) (41)
Purchases of premises and equipment (339) (395)
Net decrease in loans 10,567 9,743
Proceeds from sales of:
Securities available-for-sale - 2,327
Proceeds from maturities of:
Securities available-for-sale 15,205 12,119
Securities held-to-maturity 366 120
Purchases of:
Securities available-for-sale (13,282) (23,370)
Securities held-to-maturity (261) (34)
Net cash provided by investing activities 12,249 469
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits (23,983) (11,349)
Decrease in repurchase agreements (6,435) (7,460)
Increase in FHLB advances 800 10,000
Repayment of long-term debt (375) (375)
Proceeds from issuance of common stock 127 619
Purchase of treasury stock (80) -
Dividends paid on common stock (292) (249)
Net cash used in financing activities (30,238) (8,814)
Decrease in cash and cash equivalents (8,278) (6,885)
Cash and cash equivalents at beginning of period 21,772 26,661
Cash and cash equivalents at end of period $13,494 $19,776
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 3,965 $ 4,764
Income taxes - 250
Loans transferred to real estate owned 58 -
Dividends reinvested in common shares 270 260
See accompanying notes to unaudited 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. ("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 March 31, 1999 and 1998, and all such adjustments are of
a normal recurring nature. The results of the interim period ended March 31,
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
In 1998, the Company adopted Financial Accounting Standards Board's Statement
No. 130, "REPORTING COMPREHENSIVE INCOME" ("SFAS 130"). This statement
establishes standards for the reporting and display of comprehensive income and
its components in a full set of financial statements. Comprehensive income
consists of net income and net unrealized gains (losses) on available-for-sale
investment securities and is presented in the consolidated statements of
changes in stockholders' equity. SFAS 130 requires only additional disclosures
in the financial statements; it does not affect the Company's financial
position or results of operations. The Company's comprehensive income for the
period ended March 31, 1999 and 1998 is as follows:
THREE MONTHS ENDED
MARCH 31,
(In thousands) 1999 1998
Net income $1,356 $1,334
Other comprehensive income:
Unrealized gains(losses) during the period (847) 156
Reclassification adjustment for net
(gains)losses realized in net income - (12)
Tax effect 288 (50)
Comprehensive income $ 797 $1,428
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 periods ended March 31, 1999 and 1998 are as follows:
THREE MONTHS ENDED
March 31,
1999 1998
BASIC EARNINGS PER SHARE:
Net income $1,356,000 $1,334,000
Less preferred stock dividends (71,000) (72,000)
Net income available to common stockholders $1,285,000 $1,262,000
Weighted average common shares outstanding 2,015,105 1,979,282
Basic Earnings per Common Share $ .64 $ .64
DILUTED EARNINGS PER SHARE:
Net income available to common stockholders $1,285,000 $1,262,000
Assumed conversion of preferred stock 71,000 72,000
Net income available to common stock-
holders after assumed conversion $1,356,000 $1,334,000
Weighted average common shares outstanding 2,015,105 1,979,282
Assumed conversion of stock options 7,128 6,884
Assumed conversion of preferred stock 248,179 250,604
Diluted weighted average common
shares outstanding 2,270,412 2,236,770
Diluted Earnings per Common Share $ .60 $ .60
MERGERS AND ACQUISITIONs
In January, 1999, First Mid Bank announced an agreement to acquire the
Monticello, Taylorville and DeLand branch offices of Bank One Illinois, N.A.
The acquisition is expected to be completed May 7, 1999.
<PAGE>
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 March 31, 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, 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.
<PAGE>
OVERVIEW
Net income for the three months ended March 31, 1999 increased to $1,356,000,
up 1.6% from $1,334,000 for the same period in 1998. Diluted earnings per
share for the quarter ended was $.60 in 1999 and 1998. A summary of the
factors which contributed to the changes in net income follows (in thousands):
1999 VS 1998
THREE MONTHS
Net interest income $ 33
Other income, including securities transactions 219
Other expenses (252)
Income taxes 22
Increase in net income $ 22
The following table shows the Company's annualized performance ratios for the
three months ended March 31, 1999 as compared to the performance ratios for the
year ended December 31, 1998:
March 31, March 31, December 31,
1999 1998 1998
Return on average assets 1.02% 1.00% .95%
Return on average equity 10.59% 11.44% 10.39%
Return on average common equity 10.68% 11.59% 10.47%
Average equity to average assets 9.60% 8.75% 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):
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing deposits $ 161 $ 2 5.25% $ 1,323 $ 18 5.32%
Federal funds sold 4,599 55 4.78% 5,944 81 5.45%
Investment securities
Taxable 122,425 1,748 5.71% 113,872 1,779 6.25%
Tax-exempt <F1> 28,435 465 6.54% 12,637 259 8.20%
Loans <F2><F3> 337,216 6,869 8.15% 354,138 7,365 8.32%
Total earning assets 492,836 9,139 7.42% 487,914 9,502 7.79%
Cash and due from banks 14,608 18,155
Premises and equipment 13,277 12,132
Other assets 15,425 17,633
Allowance for loan losses (2,750) (2,700)
Total assets $533,396 $533,134
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Deposits
Demand deposits $123,163 $ 707 2.30% $133,952 $ 985 2.94%
Savings deposits 37,923 208 2.19% 38,018 212 2.23%
Time deposits 215,670 2,785 5.17% 227,095 3,110 5.48%
Securities sold under
agreements to repurchase 21,747 214 3.93% 4,939 52 4.20%
FHLB advances 18,998 245 5.16% 16,222 219 5.39%
Federal funds purchased 125 2 4.88% 1,087 15 5.70%
Long-term debt 4,696 70 5.97% 6,192 105 6.78%
Total interest-bearing
liabilities 422,322 4,231 4.01% 427,505 4,698 4.40%
Demand deposits 56,097 53,420
Other liabilities 3,767 5,560
Stockholders' equity 51,210 46,649
Total liabilities & equity $533,396 $533,134
Net interest income (TE) $ 4,909 $ 4,804
Net interest spread 3.41% 3.39%
Impact of non-interest
bearing funds .57% .54%
Net yield on interest-
earning assets (TE) 3.98% 3.94%
<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>
<PAGE>
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 period
ended March 31, 1999 (in thousands):
<TABLE>
<CAPTION>
1999 COMPARED TO 1998
INCREASE / (DECREASE)
TOTAL RATE/
CHANGE VOLUME RATE VOLUME<F4>
<S> <C> <C> <C> <C> <C>
EARNING ASSETS:
Interest-bearing deposits $ (16) $ (16) $ - $ -
Federal funds sold (26) (18) (10) 2
Investment securities:
Taxable (31) 134 (154) (11)
Tax-exempt <F1> 206 324 (52) (66)
Loans <F2><F3> (496) (352) (152) 8
Total interest income (363) 72 (368) (67)
Interest-Bearing Liabilities
Interest-bearing deposits
Demand deposits (278) (80) (215) 17
Savings deposits (4) - (4) -
Time deposits (325) (155) (179) 9
Securities sold under
agreements to repurchase 162 176 (3) (11)
FHLB advances (26) 37 (9) (2)
Federal funds purchased (13) (13) (2) 2
Long-term debt (35) (26) (12) 3
Total interest expense (467) (61) (424) 18
Net interest income $ 104 $ 133 $ 56 $ (85)
<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 annualized tax equivalent basis, net interest income increased $366,000,
or 1.9% for the three months ended March 31, 1999, compared to an increase of
$181,000, or 1.0% for the same period in 1998. The increase in net interest
income for the three months ended March 31, 1999, was primarily due to funding
sources relative to the yields achieved on earning assets.
For the three months ended, March 31, 1999, average earning assets increased by
$3,051,000, or .6%, and average interest-bearing liabilities increased
$1,893,000, or .5%, compared with average balances for the year ended December
31, 1998.
<PAGE>
Changes in average balances, as a percent of average earnings assets, are shown
below:
* average loans (as a percent of average earnings assets) decreased 2.8%
to 68.4% at March 31, 1999 from 71.2% at December 31, 1998
* average securities (as a percent of average earnings assets) increased
3.6% to 30.6% at March 31, 1999 from 27.0% at December 31, 1998
* net interest margin, on a tax equivalent basis, increased to 3.98% at
March 31, 1999, from 3.93% at December 31, 1998 and 3.96% at December
31, 1997
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended March 31, 1999 and 1998
was $150,000. 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 period
ended March 31, 1999 and 1998 (in thousands):
THREE MONTHS ENDED
1999 1998 $ CHANGE
Trust $ 481 $ 417 $ 64
Brokerage 120 64 56
Securities gains(losses) - 12 (12)
Service charges 500 462 38
Mortgage banking 329 310 19
Other 338 284 54
Total other income $ 1,768 $ 1,549 $ 219
* Total non-interest income increased to $1,768,000 for the three months
ended March 31, 1999, compared to $1,549,000 for the same period in 1998.
* Trust revenues increased $64,000 or 15.3% to $481,000 for the three months
ended March 31, 1999, compared to $417,000 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 decreased 9.8% to $305 million at
March 31, 1999 from $338 million at December 31, 1998.
* Revenues from brokerage and annuity sales increased $56,000 or 87.5% for
the three months ended March 31, 1999, compared with the same period in
1998.
* There were no securities gains or losses during the three months ended
March 31, 1999 as compared to net securities gains of $12,000 for the same
period in 1998.
* Fees from service charges increased $38,000 or 8.2% to $500,000 for the
three months ended March 31, 1999, compared to $462,000 for the same
period in 1998. This increase was primarily due to an increase in the
number of savings and transaction accounts and increase in the service
charges on ATM's.
* Mortgage banking income increased $19,000 or 6.1% to $329,000 for the
three months ended March 31, 1999, compared to $310,000 for the same
period in 1998. This was attributed to the volume of loans sold by First
Mid Bank increasing to $21.6 million (representing 253 loans) as of March
31, 1999, from $18.8 million (representing 231 loans) as of the same
period in 1998. Such sales resulted in gains of $307,000 for the three
months ended March 31, 1999, compared to $286,000 for the same period in
1998.
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 March 31, 1999 and 1998 (in thousands):
THREE MONTHS ENDED
1999 1998 $ CHANGE
Salaries and benefits $ 2,253 $ 2,124 $ 129
Occupancy and equipment 769 709 60
FDIC premiums 27 28 (1)
Amortization of intangibles 191 191 -
Stationery and supplies 174 182 (8)
Legal and professional fees 224 207 17
Marketing and promotion 119 126 (7)
Other operating expenses 611 549 62
Total other expense $ 4,368 $ 4,116 $ 252
* Total non-interest expense increased to $4,368,000 for the three months
ended March 31, 1999, compared to $4,116,000 for the same period in 1998.
* Salaries and employee benefits, the largest component of other expense,
increased $129,000 or 6.1% to $2,253,000 for the three months ended March
31, 1999, compared to $2,124,000 for the same period in 1998. This
increase can be explained by:
* an increase of $13,000 in incentive compensation due to the
increase in the volume of mortgage loan originations
* an increase of $17,000 in contract labor
* an increase in FTE employees to 252 at March 31, 1999 from 249
at March 31, 1998
* merit increases for continuing employees
* Occupancy and equipment expense increased $60,000 or 8.4% to $769,000 for
the three months ended March 31, 1999, compared to $709,000 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 and Charleston.
* All other operating expenses increased $62,000 or 11.3% to $611,000 for
the three months ended March 31, 1999, compared to $549,000 for the same
period in 1998. This increase is due to training of employees and costs
associated with the acquisition of the Monticello, Taylorville and DeLand
branch offices of Bank One of Illinois.
<PAGE>
INCOME TAXES
Total income tax expense amounted to $643,000 for the period ended March 31,
1999, compared to $665,000 for the same period in 1998. Effective tax rates
were 32.2% and 33.3% for the periods ended March 31, 1999 and 1998.
ANALYSIS OF BALANCE SHEETS
LOANS
The loan portfolio (net of unearned discount) is the largest category of the
Company's earning assets. The following table summarizes the composition of the
loan portfolio as of March 31, 1999 and December 31, 1998 (in thousands):
March 31, DECEMBER 31,
1999 1998
Real estate - mortgage $232,853 $244,501
Commercial, financial
and agricultural 73,654 78,579
Installment 24,368 25,194
Other 750 791
Total loans $331,625 $349,065
At March 31, 1999, the Company had loan concentrations in agricultural
industries of $47.7 million, or 14.4%, 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.
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 long-term commitment to residential real
estate lending. The 5% decrease in the residential real estate loan category
during 1999 was primarily due to the origination and subsequent sale of certain
fixed rate mortgage loans. First Mid Bank originates residential real estate
loans for its own portfolio and for sale to others. As of March 31, 1999, $21.6
million fixed rate mortgage loans, compared to $18.8 million for the same period
in 1998, were sold by First Mid Bank in the secondary market. This increase in
the volume of fixed rate loan originations is to a large degree the result of a
flat yield curve that enabled borrowers to lock in low long-term rates. If the
yield curve were to return to its historical norm, management anticipates that
the volume of loan originations (and therefore the amount of revenue recognized
from the sale of loans) would diminish.
The following table presents the balance of loans outstanding as of March 31,
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 $ 51,509 $149,403 $ 31,941 $232,853
Commercial, financial
and agricultural 47,472 23,033 3,149 73,654
Installment 5,791 17,944 633 24,368
Other 220 254 276 750
Total loans $104,992 $190,634 $35,999 $331,625
<FN>
<F1> Based on scheduled principal repayments.
<F2> Includes demand loans, past due loans and overdrafts.
</FN>
</TABLE>
As of March 31, 1999, loans with maturities over one year consisted of
$195,518,000 in fixed rate loans and $31,115,000 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 March 31, 1999 and December 31, 1998 (in thousands):
March 31, December 31,
1999 1998
Nonaccrual loans $1,847 $1,783
Loans past due ninety days
or more and still accruing 1,062 609
Renegotiated loans which are
performing in accordance
with revised terms 87 90
Total Nonperforming Loans $2,996 $2,482
At March 31, 1999, management has identified approximately $100,000 exposure
associated with the $1,847,000 nonaccrual loans. This exposure was considered
in determining the adequacy of the allowance for loan losses as of March 31,
1999.
Interest income that would have been reported if nonaccrual and renegotiated
loans had been performing totaled $64,000 for the first three months of 1999.
Interest income that was included in income totaled $2,000 for this same period
in 1999.
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 March 31, 1999, the Company's loan
portfolio included $47.7 million of loans to borrowers whose businesses are
directly related to agriculture. The balance decreased $3.2 million from $50.9
million at December 31, 1998. During 1998, cash flows for many of the Company's
agricultural borrowers declined as a result of lower commodity prices. 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 three months ended March 31, 1999 and 1998, are
summarized as follows (dollars in thousands):
March 31, March 31,
1999 1998
Average loans outstanding,
net of unearned income $337,216 $354,138
Allowance-beginning of year $ 2,715 $ 2,636
Charge-offs:
Real estate-mortgage - 10
Commercial, financial & agricultural 105 24
Installment 11 31
Total charge-offs 116 65
Recoveries:
Real estate-mortgage - -
Commercial, financial & agricultural 5 2
Installment 6 11
Total recoveries 11 13
Net charge-offs 105 52
Provision for loan losses 150 150
Allowance-end of period $ 2,760 $ 2,734
Ratio of net charge-offs to
average loans .03% .01%
Ratio of allowance for loan losses to
loans outstanding (less unearned
interest at end of period) .82% .78%
Ratio of allowance for loan losses
to nonperforming loans 92.1% 97.9%
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.
During the first three months of 1999, the Company had net charge-offs of
$105,000, compared to $471,000 for the year ended December 31, 1998. At March
31, 1999, the allowance for loan losses amounted to $2,760,000, or .83% of total
loans, and 92.1% of nonperforming loans. At December 31, 1998, the allowance
was $2,715,000, or .78% of total loans, and 109.4% of nonperforming loans. The
allowance for loan losses, in management's judgment, would be allocated as
follows to cover potential loan losses (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
ALLOWANCE % OF ALLOWANCE % OF
FOR LOANS FOR LOANS
LOAN TO TOTAL LOAN TO TOTAL
LOSSES LOANS LOSSES LOANS
<S> <C> <C> <C> <C>
Real estate-mortgage $ 232 70.2% $ 264 70.1%
Commercial, financial
and agricultural 1,553 22.2% 1,961 22.5%
Installment 169 7.4% 166 7.2%
Other - .2% - .2%
Total allocated 1,954 2,391
Unallocated 806 N/A 324 N/A
Allowance at end of
reported period $2,760 100.0% $2,715 100.0%
</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. Possible loan losses due to the Year 2000 issue
have been considered in this allocation calculation.
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 March 31, 1999 and December 31,
1998 (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 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 $ 85,800 55% $ 91,069 58%
Obligations of states and
political subdivisions 29,237 19% 27,674 18%
Mortgage-backed securities 36,882 24% 35,209 22%
Other securities 2,509 2% 2,509 2%
Total securities $154,428 100% $156,461 100%
</TABLE>
At March 31, 1999, the Company's investment portfolio showed an increase in
mortgage-backed securities and obligations of states and political subdivisions,
while the percentage of U.S. Government agency securities decreased. This
change in the portfolio mix improved the repricing characteristics of the
portfolio, helped mollify the Company's exposure relating to interest rate risk
and improved the portfolio yield.
The amortized cost, gross unrealized gains and losses and estimated fair values
for available-for-sale and held-to-maturity securities by major security type at
March 31, 1999 and December 31, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
March 31, 1999
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. Government corporations & agencies $ 85,800 $ 48 $ (876) $ 84,972
Obligations of states and political
subdivisions 26,578 408 (92) 26,894
Mortgage-backed securities 36,882 141 (115) 36,908
Federal Home Loan Bank stock 1,843 - - 1,843
Other securities 666 - - 666
Total available-for-sale $151,769 $ 597 $ (1,083) $151,283
Held-to-maturity:
Obligations of states and political
subdivisions $ 2,659 $ 41 $ - $ 2,700
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 following table indicates the expected maturities of investment securities
classified as available-for-sale and held-to-maturity, presented at amortized
cost, at March 31, 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.
<PAGE>
<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 $ 1,002 $ 54,976 $ 27,822 $ 2,000 $ 85,800
Obligations of state and
political subdivisions 1,972 2,587 10,598 11,420 26,577
Mortgage-backed securities 6,550 22,567 5,067 2,698 36,882
Other securities - - - 2,509 2,509
Total Investments $ 9,524 $ 80,130 $ 43,487 $ 18,627 $151,768
Weighted average yield 5.78% 5.68% 5.54% 4.55% 5.17%
Full tax-equivalent yield 4.72% 5.76% 6.10% 6.00% 5.60%
Held-to-maturity:
Obligations of state and
political subdivisions $ 312 $ 1,286 $ 160 $ 901 $ 2,659
Weighted average yield 5.30% 8.06% 5.55% 5.31% 5.20%
Full tax-equivalent yield 8.03% 7.67% 8.40% 8.04% 7.88%
</TABLE>
The weighted average yields are calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each security. Full
tax-equivalent yields have been calculated using a 34% tax rate.
The maturities of, and yields on, mortgage-backed securities have been
calculated using actual repayment history. However, where securities have call
features, and have a market value in excess of par value, the call date has been
used to determine the expected maturity.
With the exception of obligations of the U.S. Treasury and other U.S. Government
agencies and corporations, there were no investment securities of any single
issuer the book value of which exceeded 10% of stockholders' equity at March 31,
1999.
Proceeds from sales of investment securities and realized gains and losses were
as follows for the periods ended March 31, 1999 and December 31, 1998 (in
thousands):
March 31, DECEMBER 31,
1999 1998
Proceeds from sales $ - $ 10,485
Gross gains - 157
Gross losses - 3
Investment securities carried at approximately $91,297,000 and $93,947,000 at
March 31, 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.
<PAGE>
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 at March 31, 1999 and December 31, 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C>
Demand deposits:
Non-interest bearing $ 56,067 - $ 59,069 -
Interest bearing 123,163 2.30% 125,586 2.93%
Savings 37,923 2.19% 37,831 2.26%
Time deposits 215,670 5.17% 222,562 5.51%
Total average deposits 432,823 3.42% $445,048 3.77%
</TABLE>
The following table sets forth the maturity of time deposits of $100,000 or more
at March 31, 1999 and December 31, 1998 (in thousands):
MARCH 31, December 31,
1999 1998
3 months or less $ 13,900 $ 21,510
Over 3 through 6 months 8,047 8,285
Over 6 through 12 months 7,267 4,608
Over 12 months 8,830 8,995
Total $38,044 $ 43,398
The decrease in deposit balances during the first quarter of 1999 were
attributable to the maturity of promotional time deposits, seasonal commercial
deposits and public funds. This reduction in the deposit balances was
anticipated by management and is not considered to be a trend.
<PAGE>
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 March 31, 1999 and December 31,
1998 is presented below (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
<S> <C> <C>
Securities sold under agreements to repurchase $19,583 $26,018
Federal Home Loan Bank advances:
Overnight 4,800 -
Fixed term - due in one year or less - -
Fixed term - due after one year 15,500 19,500
Federal funds purchased - -
Total $39,883 $45,518
Average interest rate at end of period 4.58% 4.51%
Maximum Outstanding at Any Month-end
Securities sold under agreements to repurchase $22,506 $26,018
Federal Home Loan Bank advances:
Overnight 4,800 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 $46,806 $57,767
Averages for the Year
Securities sold under agreements to repurchase $21,747 $ 9,717
Federal Home Loan Bank advances:
Overnight 831 236
Fixed term - due in one year or less - -
Fixed term - due after one year 18,167 18,504
Federal funds purchased 125 364
Total $40,870 $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
economically fund agricultural loan demand. This loan demand was previously
funded primarily through deposits by the State of Illinois. The increase in
fixed term advances results primarily from $13.5 million in advances 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%. The remainder of the balance represents outstanding fixed term advances
due in 1 - 3 years.
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 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 Company's interest rate repricing
gaps for selected maturity periods at March 31, 1999 (in thousands):
<TABLE>
<CAPTION>
NUMBER OF MONTHS UNTIL NEXT REPRICING OPPORTUNITY
<S> <C> <C> <C> <C> <C> <S>
INTEREST EARNING ASSETS: 0-1 1-3 3-6 6-12 12+
Deposits with other financial
institutions $ - $ - $ - $ - $ -
Federal funds sold 106 - - - -
Taxable investment securities 18,396 9,848 2,534 22,464 71,148
Nontaxable investment securities - 165 383 1,930 27,076
Loans 43,465 21,456 24,572 36,422 205,711
Total $ 61,967 $ 31,469 $ 27,489 $ 60,816 $ 303,935
INTEREST BEARING LIABILITIES:
Savings and N.O.W. accounts 127,137 - - - -
Money market accounts 35,708 - - - -
Other time deposits 26,579 28,077 46,990 41,145 64,401
Other borrowings 24,383 - - 15,500 -
Long-term debt 4,325 - - - -
Total $ 218,132 $ 28,077 $ 46,990 $ 56,645 $ 64,401
Periodic GAP $(156,165) $ 3,392 $(19,501) $ 4,171 $239,534
Cumulative GAP $(156,165) $(152,773) $(172,274) $(168,103) $ 71,431
GAP as a % of interest earning assets:
Periodic (32.2%) .7% (4.0%) .9% 49.3%
Cumulative (32.2%) (31.5%) (35.5%) (34.6%) 14.7%
</TABLE>
At March 31, 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.
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.
<PAGE>
CAPITAL RESOURCES
At March 31, 1999, the Company's stockholders' equity increased $1,043,000 or
2.1% to $51,523,000 from $50,480,000 as of December 31, 1998. During the first
three months of 1999, net income contributed $1,356,000 to equity before the
payment of dividends to common and preferred stockholders. The change in net
unrealized gain on available-for-sale investment securities decreased
stockholders' equity by $559,000, 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 ratio of Tier 1 capital to total risk-
weighted assets of 4%. Management believes that as of March 31, 1999 and
December 31, 1998 all capital adequacy requirements have been met by the Company
and First Mid Bank.
As of March 31, 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.
<PAGE>
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <S><C> <C> <S><C>
MARCH 31, 1999
Total Capital
(to risk-weighted assets)
Company $ 46,985 15.09% $ 24,915 > 8.00% $ 31,144 > 10.00%
First Mid Bank 48,405 15.65 24,737 > 8.00 30,921 > 10.00
Tier 1 Capital
(to risk-weighted assets)
Company 44,225 14.20 12,458 > 4.00 18,686 > 6.00
First Mid Bank 45,645 14.76 12,368 > 4.00 18,553 > 6.00
Tier 1 Capital
(to average assets)
Company 44,225 8.42 21,010 > 4.00 26,263 > 5.00
First Mid Bank 45,645 8.72 20,939 > 4.00 26,174 > 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
<S> <C> <C> <C> <S><C> <C> <S><C>
DECEMBER 31, 1998
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.
<PAGE>
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 dividends paid by the
Company on its shares of common and preferred shareholders 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 March 31, 1999, 17,859 shares (.8%) at a total price
of $587,000 and as of December 31, 1998, 13,539 shares (.7%) at a total price of
$507,000 were 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 March 31, 1999, the excess collateral at
the Federal Home Loan Bank will support approximately $70 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. The Company 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.
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.
<PAGE>
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 March 31, 1999, the Company had completed approximately 90% of its
renovation, testing and implementation 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 balance
of these applications are planned to be renovated, tested and implemented in
early 1999. With respect to non-mission critical applications, the Company's
target for completion of Year 2000 work is mid-1999.
The Year 2000 project team is also responsible for addressing issues that are
not directly related to data processing systems. The project team is
coordinating 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. Contingency plans are being developed for the
Company's important locations. The actions taken pursuant to these plans will
depend in part on the Company's assessment of the readiness of specific
providers in the power and telecommunications industries.
The project team is also monitoring programs to contact vendors and suppliers to
determine their Year 2000 readiness. Although the Company is attempting to
monitor and validate the efforts of other parties, it cannot control the success
of these efforts. Contingency plans are being developed where practical 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. Contingency planning is expected to be completed by
mid-1999.
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. 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 $125,000. 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 March 31, 1999, approximately 75% of
project costs have been incurred. The remaining costs are expected to be
incurred roughly evenly over the next 12 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.
<PAGE>
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
None.
ITEM 5. OTHER INFORMATION
In January, 1999, First Mid Bank announced an agreement to acquire the
Monticello, Taylorville and DeLand branch offices of Bank One Illinois, N.A.
The acquisition is expected to be completed May 7, 1999.
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
The Company filed a Form 8-K on January 7, 1999 relating to its announcement of
a definitive agreement to acquire the Monticello, Taylorville and DeLand offices
of Bank One Illinois, N.A.
<PAGE>
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)
By: /s/ Daniel E. Marvin, Jr.
-------------------------------------*
Daniel E. Marvin, Jr.
President and Chief Executive Officer
By: /s/ William S. Rowland
-------------------------------------*
William S. Rowland
Executive Vice President and Chief Financial Officer
Dated: May 6, 1999
*---------------------*
<PAGE>
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)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 13388
<INT-BEARING-DEPOSITS> 106
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 151283
<INVESTMENTS-CARRYING> 2659
<INVESTMENTS-MARKET> 2700
<LOANS> 331625
<ALLOWANCE> 2760
<TOTAL-ASSETS> 525237
<DEPOSITS> 425653
<SHORT-TERM> 24383
<LIABILITIES-OTHER> 3853
<LONG-TERM> 19825
0
3070
<COMMON> 8138
<OTHER-SE> 41315
<TOTAL-LIABILITIES-AND-EQUITY> 525237
<INTEREST-LOAN> 6869
<INTEREST-INVEST> 2054
<INTEREST-OTHER> 57
<INTEREST-TOTAL> 8980
<INTEREST-DEPOSIT> 3700
<INTEREST-EXPENSE> 531
<INTEREST-INCOME-NET> 4749
<LOAN-LOSSES> 150
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4368
<INCOME-PRETAX> 1999
<INCOME-PRE-EXTRAORDINARY> 1999
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1356
<EPS-PRIMARY> .64
<EPS-DILUTED> .60
<YIELD-ACTUAL> 3.98
<LOANS-NON> 1847
<LOANS-PAST> 1062
<LOANS-TROUBLED> 87
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2715
<CHARGE-OFFS> 116
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 2760
<ALLOWANCE-DOMESTIC> 2760
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 806
</TABLE>
