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 September 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 November 10, 1999 2,033,143 common shares, $4.00 par value, were
outstanding.
1
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Consolidated Balance Sheets (unaudited) September 30, December 31,
(In thousands, except share data) 1999 1998
--------------- --------------
<S> <C> <C>
Assets Cash and due from banks:
Non-interest bearing $ 17,338 $ 14,669
Interest bearing 217 103
Federal funds sold 5,375 7,000
--------------- --------------
Cash and cash equivalents 22,930 21,772
Investment securities:
Available-for-sale, at fair value 156,132 153,534
Held-to-maturity, at amortized cost (estimated fair
value of $2,407 and $3,389 at September 30, 1999
and December 31, 1998, respectively) 2,444 3,322
Loans 379,667 349,065
Less allowance for loan losses 2,999 2,715
--------------- --------------
Net loans 376,668 346,350
Premises and equipment, net 16,240 13,226
Intangible assets, net 13,680 7,787
Other assets 12,367 8,672
--------------- --------------
Total assets $600,461 $554,663
--------------- --------------
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 62,388 $ 62,357
Interest bearing 438,380 387,279
--------------- --------------
Total deposits 500,768 449,636
Securities sold under agreements to repurchase 23,635 26,018
Federal Home Loan Bank advances 15,500 19,500
Long-term debt 4,325 4,700
Other liabilities 4,377 4,329
--------------- --------------
Total liabilities 548,605 504,183
--------------- --------------
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 2,051,109 shares in 1999 and
2,023,227 shares in 1998 8,204 8,093
Additional paid-in-capital 9,445 8,562
Retained earnings 34,234 31,025
Deferred compensation 1,090 950
Accumulated other comprehensive income (loss) (2,395) 261
Less treasury stock at cost, 20,402 shares
in 1999 and 15,539 shares in 1998 (1,792) (1,481)
--------------- --------------
Total stockholders' equity 51,856 50,480
--------------- --------------
Total liabilities and stockholders' equity $600,461 $554,663
--------------- --------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income Three months ended Nine months ended
(unaudited)
(In thousands, except per share data) September 30, September 30,
1999 1998 1999 1998
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 7,664 $ 7,277 $21,706 $21,887
Interest on investment securities 2,304 1,930 6,542 5,855
Interest on federal funds sold 180 122 372 283
Interest on deposits with
other financial institutions 18 8 67 28
---------- ---------- --------- ----------
Total interest income 10,166 9,337 28,687 28,053
Interest expense:
Interest on deposits 4,297 4,160 11,892 12,625
Interest on securities sold under agreements
to repurchase 243 137 631 250
Interest on Federal Home Loan Bank advances 197 273 695 745
Interest on Federal funds purchased 1 1 8 17
Interest on long-term debt 70 95 206 299
---------- ---------- --------- ----------
Total interest expense 4,808 4,666 13,432 13,936
---------- ---------- --------- ----------
Net interest income 5,358 4,671 15,255 14,117
Provision for loan losses 150 100 450 400
---------- ---------- --------- ----------
Net interest income after provision 5,208 4,571 14,805 13,717
Other income:
Trust revenues 514 426 1,459 1,257
Brokerage revenues 111 85 340 239
Service charges 617 470 1,690 1,410
Securities gains, net - 52 - 64
Mortgage banking income 42 209 566 826
Other 281 264 965 799
---------- ---------- --------- ----------
Total other income 1,565 1,506 5,020 4,595
Other expense:
Salaries and employee benefits 2,487 2,153 7,142 6,384
Net occupancy and equipment expense 903 754 2,524 2,192
Amortization of intangible assets 302 191 684 573
Stationary and supplies 141 148 504 498
Legal and professional 375 258 882 680
Marketing and promotion 154 108 468 371
Other 684 628 1,998 1,988
---------- ---------- --------- ----------
Total other expense 5,046 4,240 14,202 12,686
---------- ---------- --------- ----------
Income before income taxes 1,727 1,837 5,623 5,626
---------- ---------- --------- ----------
Income taxes 454 574 1,695 1,832
---------- ---------- --------- ----------
Net income $ 1,273 $ 1,263 $ 3,928 $ 3,794
---------- ---------- --------- ----------
Per common share data:
Basic earnings per share $ .59 $ .59 $ 1.84 $ 1.79
Diluted earnings per share $ .56 $ .56 $ 1.72 $ 1.68
---------- ---------- --------- ----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows (unaudited) For the nine months ended
September 30,
(In thousands) 1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,928 $ 3,794
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Provision for loan losses 450 400
Depreciation, amortization and accretion, net 1,748 1,537
Gain on sale of securities, net - (64)
(Gain) loss on sale of other real property owned, net (88) 171
Gain on sale of mortgage loans held for sale, net (511) (634)
Origination of mortgage loans held for sale (26,563) (52,123)
Proceeds from sale of mortgage loans held for sale 34,559 51,143
(Increase) decrease in other assets (3,517) 925
Increase (decrease) in other liabilities 1,702 (1,896)
------------ ------------
Net cash provided by operating activities 11,708 3,253
------------ ------------
Cash flows from investing activities:
Capitalization of mortgage servicing rights (36) (75)
Purchases of premises and equipment (2,369) (1,629)
Net (increase) decrease in loans (28,284) 12,765
Proceeds from sales of:
Securities available-for-sale - 6,848
Proceeds from maturities of:
Securities available-for-sale 28,068 42,590
Securities held-to-maturity 135 420
Purchases of:
Securities available-for-sale (33,847) (62,933)
Securities held-to-maturity (332) (799)
Purchase of financial organization, net of cash received 46,441 -
------------ ------------
Net cash provided by (used in) investing activities 9,776 (2,813)
------------ ------------
Cash flows from financing activities:
Net decrease in deposits (13,181) (12,900)
Increase (decrease) in repurchase agreements (2,383) 3,295
Increase (decrease) in FHLB advances (4,000) 12,500
Repayment of long-term debt (375) (1,125)
Proceeds from issuance of common stock 344 878
Purchase of treasury stock (171) (403)
Dividends paid on preferred stock (45) (16)
Dividends paid on common stock (515) (475)
------------ ------------
Net cash provided by (used in) financing activities (20,326) 1,754
------------ ------------
Increase in cash and cash equivalents 1,158 2,194
Cash and cash equivalents at beginning of period 21,772 26,661
------------ ------------
Cash and cash equivalents at end of period $22,930 $28,855
------------ ------------
Additional disclosures of cash flow information Cash paid during the period for:
Interest $13,399 $13,651
Income taxes 1,989 2,088
Loans transferred to real estate owned 497 537
Dividends reinvested in common shares 650 623
------------ ------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<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 September 30, 1999 and 1998, and all such adjustments are
of a normal recurring nature. The results of the interim period ended September
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 September 30, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
(In thousands) 1999 1998 1999 1998
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net income $1,273 $1,263 $3,928 $3,794
Other comprehensive income(loss):
Unrealized gains(losses) during the (679) 588 (4,024) 676
period
Reclassification adjustment for net
gains realized in net income - (52) - (64)
Tax effect 231 (182) 1,368 (208)
----------- ---------- ----------- ----------
Comprehensive income(loss) $ 825 $1,617 $1,272 $4,198
----------- ---------- ----------- ----------
</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.
5
<PAGE>
The components of basic and diluted earnings per common share for the
three month and nine month periods ended September 30, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Basic Earnings per Share:
Net income $1,273,000 $1,263,000 $3,928,000 $3,794,000
Less preferred stock dividends (71,000) (72,000) (213,000) (214,000)
----------- ---------- ----------- ----------
Net income available to common $1,202,000 $1,191,000 $3,715,000 $3,580,000
stockholders
----------- ---------- ----------- ----------
Weighted average common shares 2,029,636 2,008,549 2,021,861 1,996,937
outstanding
----------- ---------- ----------- ----------
Basic Earnings per Common Share $ .59 $ .59 $1.84 $1.79
----------- ---------- ----------- ----------
Diluted Earnings per Share:
Net income available to common $1,202,000 $1,191,000 $3,715,000 $3,580,000
stockholders
Assumed conversion of preferred stock 71,000 72,000 213,000 214,000
----------- ---------- ----------- ----------
Net income available to common stock-
holders after assumed conversion $1,273,000 $1,263,000 $3,928,000 $3,794,000
----------- ---------- ----------- ----------
Weighted average common shares 2,029,636 2,008,549 2,021,861 1,996,937
outstanding
Assumed conversion of stock options 8,273 9,180 7,711 8,551
Assumed conversion of preferred stock 248,179 248,179 250,604 249,440
----------- ---------- ----------- ----------
Diluted weighted average common
shares outstanding $2,286,088 $2,265,908 $2,280,176 $2,254,928
----------- ---------- ----------- ----------
Diluted Earnings per Common Share $ .56 $ .56 $1.72 $1.68
----------- ---------- ----------- ----------
</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.
6
<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 September 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.
7
<PAGE>
Overview
Net income for the three months ended September 30, 1999 was $1,273,000, an
increase of $10,000 from $1,263,000 for the same period in 1998. Diluted
earnings per share for the third quarter ended 1999 and 1998 was $.56. 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 nine months ended September 30, 1999 was $3,928,000, an
increase of 3.5% from $3,794,000 for the same period in 1998. Diluted earnings
per share for the nine month period ended was $1.72 in 1999, an increase from
$1.68 in 1998. A summary of the factors which contributed to the changes in net
income for the nine month period is shown in the table below.
1999 vs 1998 1999 vs 1998
(in thousands) Three months Nine months
--------------- ---------------
Net interest income $ 637 $1,088
Other income, including securities 59 425
transactions
Other expenses (806) (1,516)
Income taxes 120 137
--------------- ---------------
Increase in net income $ 10 $ 134
--------------- ---------------
The following table shows the Company's annualized performance ratios for
the nine months ended September 30, 1999, as compared to the annualized
performance ratios for the nine months ended September 30, 1998 and the
performance ratios for the year ended December 31, 1998:
September 30, September 30, December 31,
1999 1998 1998
------------- -------------- -------------
Return on average assets .92% .96% .95%
Return on average equity 10.18% 10.50% 10.39%
Return on average common equity 10.24% 10.59% 10.47%
Average equity to average assets 9.09% 9.14% 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):
8
<PAGE>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
--------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
--------------------------------------------------
ASSETS
Interest-bearing deposits $ 1,792 $ 67 4.95% $ 713 $ 28 5.24%
Federal funds sold 10,266 372 4.83% 7,055 284 5.36%
Investment securities
Taxable 125,676 5,506 5.84% 112,941 5,286 6.24%
Tax-exempt (1) 29,617 1,569 7.06% 15,248 862 7.54%
Loans (2)(3) 351,144 21,706 8.24% 348,850 21,887 8.37%
--------------------------------------------------
Total earning assets 518,495 29,220 7.51% 484,807 28,347 7.80%
--------------------------------------------------
Cash and due from banks 16,336 16,057
Premises and equipment 14,399 12,613
Other assets 19,982 16,206
Allowance for loan losses (2,879) (2,803)
--------- ---------
Total assets $566,333 $526,880
--------- ---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
---------
Interest-Bearing Deposits
Demand deposits $143,283 $ 2,678 2.49% $126,153 $ 2,857 3.02%
Savings deposits 40,585 693 2.28% 38,278 652 2.27%
Time deposits 223,297 8,521 5.09% 220,386 9,116 5.51%
Securities sold under
agreements to repurchase 20,512 631 4.10% 7,107 250 4.69%
FHLB advances 18,343 695 5.05% 18,434 745 5.39%
Federal funds purchased 202 8 5.04% 431 17 5.20%
Long-term debt 4,447 206 6.17% 5.817 299 6.85%
--------------------------------------------------
Total interest-bearing
liabilities 450,669 13,432 3.97% 416,606 13,936 4.46%
--------------------------------------------------
Demand deposits 60,013 58,518
Other liabilities 4,187 3,600
Stockholders' equity 51,464 48,156
--------- ---------
Total liabilities & equity $566,333 $526,880
--------- ---------
Net interest income (TE) $15,788 $14,411
-------- --------
Net interest spread 3.54% 3.34%
Impact of non-interest
bearing funds .52% .63%
-------- --------
Net yield on interest-
earning assets (TE) 4.06% 3.97%
-------- --------
(1) Interest income and rates are presented on a tax-equivalent basis ("TE")
assuming a federal income tax rate of 34%.
(2) Loan fees are included in interest income and are not material.
(3) Nonaccrual loans have been included in the average balances.
9
<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
nine months ended September 30, 1999 (in thousands) as compared to the nine
months ended September 30, 1998:
For the nine months ended September 30,
1999 compared to 1998
Increase / (Decrease)
------------------------------------------
Total Rate/
Change Volume Rate Volume (4)
------------------------------------------
Earning Assets:
Interest-bearing deposits $ 39 $ 42 $ (2) $ (1)
Federal funds sold 88 129 (28) (13)
Investment securities:
Taxable 220 596 (338) (38)
Tax-exempt (1) 707 813 (55) (51)
Loans (2)(3) (181) 144 (323) (2)
------------------------------------------
Total interest income 873 1,724 (746) (105)
------------------------------------------
Interest-Bearing Liabilities
Interest-bearing deposits
Demand deposits (179) 388 (499) (68)
Savings deposits 41 38 2 1
Time deposits (595) 120 (706) (9)
Securities sold under
agreements to repurchase 381 472 (31) (60)
FHLB advances (50) (4) (47) 1
Federal funds purchased (9) (9) - -
Long-term debt (93) (70) (30) 7
------------------------------------------
Total interest expense (504) 935 (1,311) (128)
------------------------------------------
Net interest income $ 1,377 $ 789 $ 565 $ 23
------------------------------------------
(1) Interest income and rates are presented on a tax-equivalent basis, assuming
a federal income tax rate of 34%.
(2) Loan fees are included in interest income and are not material.
(3) Nonaccrual loans are not material and have been included in the average
balances.
(4) The changes in rate/volume are computed on a consistent basis by
multiplying the change in rates with the change in volume.
On an tax equivalent basis, net interest income increased $1,377,000, or
9.5% to $15,788,000 for the nine months ended September 30, 1999, from
$14,411,000 for the same period in 1998. The increase in net interest income for
the nine months ended September 30, 1999, was primarily due to the decrease in
the deposit rates combined with a higher deposit base as well as the increase in
interest income due from an increase in the volume of earning assets.
For the nine months ended September 30, 1999, average earning assets
increased by $33,688,000, or 6.9%, and average interest-bearing liabilities
increased $34,063,000, or 8.2%, compared with average balances for the nine
months ended September 30, 1998.
10
<PAGE>
Changes in average balances, as a percent of average earnings assets, are
shown below:
o average loans (as a percent of average earnings assets) decreased 4.3%
to 67.7% for the nine months ended September 30, 1999 from 72.0% for
the nine months ended September 30, 1998
o average securities (as a percent of average earnings assets) increased
3.6% to 30.0% for the nine months ended September 30, 1999 from 26.4%
for the nine months ended September 30, 1998
o net interest margin, on a tax equivalent basis, increased to 4.06% for
the nine months ended September 30, 1999, from 3.97% for the nine
months ended September 30, 1998
Provision for Loan Losses
The provision for loan losses for the nine months ended September 30, 1999
and 1998 was $450,000 and $400,000, respectively. 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 nine months ended September 30, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
1999 1998 $ change 1999 1998 $ change
--------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Trust $ 514 $ 426 $ 88 $ 1,459 $ 1,257 $ 202
Brokerage 111 85 26 340 239 101
Securities gains - 52 (52) - 64 (64)
Service charges 617 470 147 1,690 1,410 280
Mortgage banking 42 209 (167) 566 826 (260)
Other 281 264 17 965 799 166
--------- ---------- ---------- ---------- --------- ----------
Total other income $ 1,565 $ 1,506 $ 59 $ 5,020 $ 4,595 $ 425
--------- ---------- ---------- ---------- --------- ----------
</TABLE>
o Total non-interest income increased to $5,020,000 for the nine months
ended September 30, 1999, compared to $4,595,000 for the same period
in 1998.
o Trust revenues increased $202,000 or 16.1% to $1,459,000 for the nine
months ended September 30, 1999, compared to $1,257,000 for the same
period in 1998 mostly due to the net effect of the following:
o increase in the fee structure for trust accounts
o growth in the employee benefit accounts managed by the Trust
Department
o increase in the farm management fees
o decrease in trust assets that are reported at market value
Trust assets decreased 7% to $316 million at September 30, 1999 from
$338 million at December 31, 1998.
o Revenues from brokerage and annuity sales increased $101,000 or 42.3%
for the nine months ended September 30, 1999, compared with the same
period in 1998.
o There were no securities gains or losses during the nine months ended
September 30, 1999 as compared to net securities gains of $64,000 for
the same period in 1998.
11
<PAGE>
o Fees from service charges increased $280,000 or 19.9% to $1,690,000
for the nine months ended September 30, 1999, compared to $1,410,000
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.
o Mortgage banking income decreased $260,000 or 31.5% to $566,000 for
the nine months ended September 30, 1999, compared to $826,000 for the
same period in 1998. This was attributed to the volume of loans sold
by First Mid Bank decreasing by $16.5 million to $34.0 million
(representing 439 loans) as of September 30, 1999, from $50.5 million
(representing 616 loans) as of the same period in 1998. This decrease
in the volume of fixed rate loan originations is largely the result of
considerably less re-financings by customers.
o Other income increased $166,000 or 20.8% to $965,000 for the nine
months ended September 30, 1999, compared to $799,000 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 nine months ended
September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
1999 1998 $ change 1999 1998 $ change
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits $ 2,487 $ 2,153 $ 334 $ 7,142 $ 6,384 $ 758
Occupancy and equipment 903 754 149 2,524 2,192 332
FDIC premiums 24 26 (2) 78 82 (4)
Amortization of intangibles 302 191 111 684 573 111
Stationery and supplies 141 148 (7) 504 498 6
Legal and professional fees 375 258 117 882 680 202
Marketing and promotion 154 108 46 468 371 97
Other operating expenses 660 602 58 1,920 1,906 14
--------- --------- --------- --------- --------- ---------
Total other expense $ 5,046 $ 4,240 $ 806 $14,202 $12,686 $1,516
--------- --------- --------- --------- --------- ---------
</TABLE>
o Total non-interest expense increased to $14,202,000 for the nine
months ended September 30, 1999, compared to $12,686,000 for the same
period in 1998.
o Salaries and employee benefits, the largest component of other
expense, increased $758,000 or 11.9% to $7,142,000 for the nine months
ended September 30, 1999, compared to $6,384,000 for the same period
in 1998. This increase can be explained by:
o an increase in FTE employees to 282 at September 30, 1999 from
249 at September 30, 1998, and
o merit increases for continuing employees
o Occupancy and equipment expense increased $332,000 or 15.1% to
$2,524,000 for the nine months ended September 30, 1999, compared to
$2,192,000 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.
o Amortization of intangible assets increased $111,000 or 19.4% to
$684,000 for the nine months ended September 30, 1999, compared to
$573,000 for the same period in 1998. This increase was due to the
goodwill and core deposit intangibles associated with the purchase of
the Monticello, Taylorville and DeLand branch acquisition in May,
1999.
12
<PAGE>
o All other categories of operating expenses increased a net of $319,000
or 9.2% to $3,774,000 for the nine months ended September 30, 1999,
compared to $3,455,000 for the same period in 1998. This increase is
primarily due to the costs associated with the new branches in
Monticello, Taylorville and DeLand.
Income Taxes
Total income tax expense amounted to $1,695,000 for the nine months ended
September 30, 1999, compared to $1,832,000 for the same period in 1998.
Effective tax rates were 30.1% and 32.6% for the periods ended September 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
September 30, 1999 and December 31, 1998 (in thousands):
September 30,December 31,
--------------------------
1999 1998
--------------------------
Real estate - mortgage $262,175 $244,501
Commercial, financial
and agricultural 92,165 78,579
Installment 23,947 25,194
Other 1,380 791
--------------------------
Total loans $379,667 $349,065
--------------------------
At September 30, 1999, the Company had loan concentrations in agricultural
industries of $60.6 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
outstanding commercial and agricultural loans and the related increase in total
loans was partially attributable to the $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 $1.2
million as of September 30, 1999.
The following table presents the balance of loans outstanding as of
September 30, 1999, by maturities (dollars in thousands):
Maturity (1)
--------------------------------------------
Over 1
One year through Over
or less (2) 5 years 5 years Total
--------------------------------------------
Real estate - mortgage $ 48,962 $172,628 $ 40,585 $262,175
Commercial, financial
and agricultural 59,679 28,749 3,737 92,165
Installment 5,888 17,539 520 23,947
Other 381 415 584 1,380
--------------------------------------------
Total loans $114,910 $219,331 $45,426 $379,667
--------------------------------------------
(1) Based on scheduled principal repayments. (2) Includes demand loans, past
due loans and overdrafts.
13
<PAGE>
As of September 30, 1999, loans with maturities over one year consisted of
$229,346,000 in fixed rate loans and $35,410,000 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 September 30, 1999 and December 31, 1998 (in thousands):
September 30,December 31,
1999 1998
-------------------------
Nonaccrual loans $1,816 $1,783
Loans past due ninety days
or more and still accruing 692 609
Renegotiated loans which are
performing in accordance
with revised terms 83 90
-------------------------
Total Nonperforming Loans $2,591 $2,482
-------------------------
At September 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 September 30,
1999. Approximately $1,116,000 of the nonperforming loans resulted from four
individual, collateral dependent, commercial loans to a single borrower.
Interest income that would have been reported if nonaccrual and
renegotiated loans had been performing totaled $104,000 for the first nine
months of 1999. Interest income that was included in income for the first nine
months of 1999 totaled $5,000.
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.
14
<PAGE>
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 September 30, 1999, the Company's loan
portfolio included $60.6 million of loans to borrowers whose businesses are
directly related to agriculture. The balance increased $9.7 million from $50.9
million at December 31, 1998. 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 nine months ended September 30, 1999 and 1998,
are summarized as follows (dollars in thousands):
September 30,
1999 1998
-------------------------
Average loans outstanding,
net of unearned income $351,144 $348,850
Allowance-beginning of period $ 2,715 $ 2,636
Balance relating to acquired
loans from branch purchase 150 -
Charge-offs:
Real estate-mortgage 1 158
Commercial, financial & agricultural 275 21
Installment 68 98
-------------------------
Total charge-offs 344 277
Recoveries:
Real estate-mortgage 1 25
Commercial, financial & agricultural 10 30
Installment 17 23
-------------------------
Total recoveries 28 78
-------------------------
Net charge-offs 316 199
-------------------------
Provision for loan losses 450 400
-------------------------
Allowance-end of period $ 2,999 $ 2,837
-------------------------
Ratio of net charge-offs to
average loans (annualized) .09% .08%
-------------------------
Ratio of allowance for loan losses to
loans outstanding (less unearned
interest at end of period) .79% .82%
-------------------------
Ratio of allowance for loan losses
to nonperforming loans 115.8% 82.4%
-------------------------
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. In August, 1999, the Company learned of potential
problems concerning certain loans to one borrower whose total indebtedness to
the Company, including principal and interest, totaled $1.9 million.
15
<PAGE>
The borrower has subsequently paid off a portion of these loans and the Company
has secured additional collateral and guarantees. As of November 10, 1999, the
balance outstanding totaled $798,000, and all payments due on these loans were
current. The Company believes that the total loss, if any, relating to these
loans would not exceed $250,000. These loans have been considered in determining
the adequacy of the balance in the allowance for loan losses as of September 30,
1999.
During the first nine months of 1999, the Company had net charge-offs of
$316,000, compared to $199,000 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 September 30,
1999, the allowance for loan losses amounted to $2,999,000, or .79% of total
loans, and 115.8% of nonperforming loans. At September 30, 1998, the allowance
was $2,837,000, or .82% of total loans, and 82.4% 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 September 30, 1999 and
December 31, 1998 (in thousands):
September 30, December 31,
1999 1998
------------------ -------------------
% of % of
Amount Total Amount Total
---------- ------- ---------- --------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 94,972 58% $ 91,069 58%
Obligations of states and
political subdivisions 31,710 20% 27,674 18%
Mortgage-backed securities 33,223 20% 35,209 22%
Other securities 2,579 2% 2,509 2%
---------- ------- ---------- --------
Total securities $162,484 100% $156,461 100%
---------- ------- ---------- --------
At September 30, 1999, the Company's investment portfolio showed an
increase in obligations of states and political subdivisions and U.S. Government
agency securities. While the volume of mortgage-backed securities decreased, all
other securities remained constant. This change in the portfolio mix improved
the repricing characteristics of the portfolio, helped steady 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 September 30, 1999 and December 31, 1998 were as follows (in thousands):
16
<PAGE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
September 30, 1999 Cost Gains Losses Value
- ----------------------------------------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. Government corporations & $ 94,972 $ 9 $ (2,813) $ 92,168
agencies
Obligations of states and political
subdivisions 29,266 102 (820) 28,548
Mortgage-backed securities 33,224 68 (455) 32,837
Federal Home Loan Bank stock 1,913 - - 1,913
Other securities 666 - - 666
----------- ---------- ----------- ----------
Total available-for-sale $160,041 $ 179 $ (4,088) $156,132
----------- ---------- ----------- ----------
Held-to-maturity:
Obligations of states and political
subdivisions $ 2,444 $ 13 $ (50) $ 2,407
----------- ---------- ----------- ----------
December 31, 1998 Available-for-sale:
U.S. Treasury securities and obligations
of U.S. Government corporations & $ 91,069 $ 333 $ (413) $ 90,989
agencies
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.
The following table indicates the expected maturities of investment
securities classified as available-for-sale and held-to-maturity, presented at
amortized cost, at September 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.
17
<PAGE>
One After 1 After 5 After
year through through ten
or less 5 years 10 years years Total
------------------------------------------------
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 3,006 $56,996 $30,812 $ 4,158 $ 94,972
Obligations of state and
political subdivisions 2,036 2,303 11,664 13,263 29,266
Mortgage-backed securities 1,718 20,378 10,224 904 33,224
Other securities - - - 2,579 2,579
------------------------------------------------
Total Investments $ 6,760 $79,677 $52,700 $20,904 $160,041
------------------------------------------------
Weighted average yield 5.57% 5.81% 5.79% 4.21% 5.54%
Full tax-equivalent yield 6.51% 5.88% 6.29% 5.74% 5.98%
------------------------------------------------
Held-to-maturity:
Obligations of state and
political subdivisions $ 342 $ 1,256 $ 160 $ 686 $ 2,444
------------------------------------------------
Weighted average yield 5.20% 5.08% 5.55% 5.46% 5.23%
Full tax-equivalent yield 8.03% 7.69% 8.40% 8.28% 7.93%
------------------------------------------------
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
September 30, 1999.
Proceeds from sales of investment securities and realized gains and losses
were as follows for the nine months ended September 30, 1999 and September 30,
1998 (in thousands):
September 30,
1999 1998
-------------- -------------
Proceeds from sales $ - $ 6,848
Gross gains - 67
Gross losses - 3
-------------- -------------
Investment securities carried at approximately $120,515,000 and $93,947,000
at September 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.
18
<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 for the nine months ended September 30, 1999
and for the year ended December 31, 1998 (dollars in thousands):
September 30, December 31,
1999 1998
------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------------------------------------------
Demand deposits:
Non-interest bearing $ 60,013 - $ 59,069 -
Interest bearing 143,283 2.49% 125,586 2.93%
Savings 40,585 2.28% 37,831 2.26%
Time deposits 223,297 5.09% 222,562 5.51%
------------------------------------------
Total average deposits 467,178 3.39% $445,048 3.77%
------------------------------------------
The following table sets forth the maturity of time deposits of $100,000 or
more at September 30, 1999 and December 31, 1998 (in thousands):
September 30, December 31,
1999 1998
--------------------------------
3 months or less $ 15,871 $ 21,510
Over 3 through 6 months 11,544 8,285
Over 6 through 12 months 11,794 4,608
Over 12 months 4,802 8,995
-----------------------------
Total $ 44,011 $ 43,398
-----------------------------
Total deposit balances increased by approximately $50 million during the
first nine months of 1999 primarily due to the acquisition of the deposits from
the Bank One branches.
19
<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 September 30, 1999 and December
31, 1998 is presented below (in thousands):
September 30, December 31,
1999 1998
------------- --------------
Securities sold under agreements to $23,635 $26,018
repurchase
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 $39,135 $45,518
------------- --------------
Average interest rate at end of period 4.72% 4.51%
Maximum Outstanding at Any Month-end
Securities sold under agreements to $24,496 $26,018
repurchase
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 $61,996 $57,768
------------- --------------
Averages for the Period Ended
Securities sold under agreements to $20,512 $ 9,717
repurchase
Federal Home Loan Bank advances:
Overnight 1,964 236
Fixed term - due in one year or less - -
Fixed term - due after one year 16,379 18,504
Federal funds purchased 202 364
------------- --------------
Total $39,057 $28,821
------------- --------------
Average interest rate during the period 4.55% 5.07%
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.
20
<PAGE>
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 September 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 5,593 - - - -
Taxable investment 23,328 3,939 4,217 5,267 90,831
securities
Nontaxable investment - 1,627 679 276 28,410
securities
Loans 53,141 24,195 39,901 40,068 222,360
---------- ----------- ---------- ----------- ---------
Total $ 82,062 $ 29,761 $ 44,797 $ 45,611 $ 341,601
---------- ----------- ---------- ----------- ---------
Interest bearing
liabilities:
Savings and N.O.W. accounts 151,919 - - - -
Money market accounts 54,180 - - - -
Other time deposits 21,951 32,408 62,078 62,534 53,312
Other borrowings 23,590 13,500 2,000 - -
Long-term debt 4,325 - - - -
---------- ----------- ---------- ----------- ---------
Total $ 255,965 $ 45,908 $ 64,078 $ 62,534 $ 53,312
---------- ----------- ---------- ----------- ---------
Periodic GAP $(173,903) $ (16,147) $(19,281) $ (16,923) $288,289
---------- ----------- ---------- ----------- ---------
Cumulative GAP $(173,903) $(190,050) $(209,331) $(226,254) $ 62,035
---------- ----------- ---------- ----------- ---------
GAP as a % of interest earning assets:
---------- ----------- ---------- ----------- ---------
Periodic (32.0%) (3.0%) (3.5%) (3.1%) 53.0%
Cumulative (32.0%) (34.9%) (38.5%) (41.6%) 11.4%
---------- ----------- ---------- ----------- ---------
</TABLE>
At September 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 lag the market in repricing deposits in a
rising interest rate environment eases 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.
21
<PAGE>
Capital Resources
At September 30, 1999, the Company's stockholders' equity increased
$1,376,000 or 2.7% to $51,856,000 from $50,480,000 as of December 31, 1998.
During the first nine months of 1999, net income contributed $3,928,000 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 $2,656,000, 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 September 30, 1999 and December 31, 1998 all capital adequacy
requirements have been met by the Company and First Mid Bank.
As of September 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
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1999
Total Capital
(to risk-weighted assets)
Company $ 43,570 11.89% $ 29,323 > 8.00% $ 36,654 > 10.00%
First Mid Bank 44,108 12.17% 28,985 > 8.00% 36,232 > 10.00%
Tier 1 Capital
(to risk-weighted assets)
Company 40,571 11.07% 14,661 > 4.00% 21,992 > 6.00%
First Mid Bank 41,109 11.35% 14,493 > 4.00% 21,739 > 6.00%
Tier 1 Capital
(to average assets)
Company 40,571 6.89% 23,555 > 4.00% 29,444 > 5.00%
First Mid Bank 41,109 7.03% 23,393 > 4.00% 29,241 > 5.00%
--------- --------- --------- --------- --------- ---------
</TABLE>
22
<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> <C> <C> <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.
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.
o The Deferred Compensation Plan was effective as of September, 1984. Its
purpose is to allow directors, advisory directors, and key officers 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.
o The First Retirement and Savings Plan was effective beginning in 1985.
Employees are eligible to participate in this plan after nine months of
service to the Company.
o 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.
o 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.
23
<PAGE>
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 September 30, 1999, 18,402 shares (.9%) at a
total price of $678,000 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.
Effective November 15, 1999, the Company's Series A preferred stock will be
converted to common stock. This preferred stock was originally issued in a 1992
private placement to enable the Company to acquire Heartland Federal Savings &
Loan Association. This conversion of the preferred stock will not impact
reported earnings nor change the way in which the common stock is traded.
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 September 30, 1999, the excess collateral at
the Federal Home Loan Bank will support approximately $82 million of additional
advances.
Management monitors its expected liquidity requirements carefully, focusing
primarily on cash flows from:
o lending activities, including loan commitments, letters of credit and
mortgage prepayment assumptions
o deposit activities, including seasonal demand of private and public
funds
o investing activities, including prepayments of mortgage-backed
securities and call assumptions on U.S. Government Treasuries and
Agencies o 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 September 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
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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 September, 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 September 15, 2000. Adoption of SFAS 133 is not expected to have
a material impact on the Company's financial statements.
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.
25
<PAGE>
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 September 30, 1999, testing results indicate that the
Company's critical systems are capable of processing transactions through the
Year 2000. All testing renovation, and implementation for existing critical
applications (including vended and out-sourced applications) is complete. All
implementation include 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 implemented 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 estimated to be approximately $150,000, virtually all of
which have been expensed as incurred. This estimate includes the cost of
purchasing licenses for software programming tools but does not reflect the cost
of the time of internal staff.
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.
26
<PAGE>
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
None.
ITEM 5. OTHER INFORMATION
In September, 1999, Mr. John W. Hedges joined the Company as President of
First Mid Bank. Most recently, Mr. Hedges was Senior Vice President at National
City Bank in Decatur, the successor company to Citizens National Bank of
Decatur, which he joined in 1976.
27
<PAGE>
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
A Form 8-K was filed by the Company on September 23, 1999, disclosing the
adoption by the Company of a stockholder rights plan.
28
<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)
/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: November 10, 1999
-----------------------
29
<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)
30
<PAGE>
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