10-Q 1 0001.txt 3RD QUARTER REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 COMMISSION FILE NUMBER: 0-13368 FIRST MID-ILLINOIS BANCSHARES, INC. (Exact name of Registrant as specified in its charter) DELAWARE (State of incorporation) 37-1103704 (I.R.S. employer identification No.) 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 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 November 10, 2000, 2,242,294 common shares, $4.00 par value, were outstanding. PART I ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (unaudited) September 30, December 31, (In thousands, except share data) 2000 1999 ASSETS Cash and due from banks: Non-interest bearing .............................................. $ 16,515 $ 21,054 Interest bearing .................................................. -- 78 Federal funds sold .................................................. 112 710 Cash and cash equivalents ......................................... 16,627 21,842 Investment securities: Available-for-sale, at fair value ................................. 151,001 150,157 Held-to-maturity, at amortized cost (estimated fair value of $3,109 and $2,077 at September 30, 2000 and December 31, 1999, respectively) ............................ 3,102 2,132 Loans ............................................................... 423,181 388,319 Less allowance for loan losses ...................................... 3,182 2,939 Net loans ......................................................... 419,999 385,380 Premises and equipment, net ......................................... 15,589 16,153 Intangible assets, net .............................................. 12,444 13,340 Other assets ........................................................ 13,016 12,099 TOTAL ASSETS ...................................................... $ 631,778 $ 601,103 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing .............................................. $ 61,474 $ 60,555 Interest bearing .................................................. 429,747 424,456 Total deposits .................................................... 491,221 485,011 Federal funds purchased ............................................. 500 1,175 Securities sold under agreements to repurchase ...................... 22,676 32,308 Federal Home Loan Bank advances-short term .......................... 40,900 3,000 Federal Home Loan Bank advances-long term ........................... 12,300 18,500 Long-term debt ...................................................... 4,325 4,325 Other liabilities ................................................... 4,693 5,266 TOTAL LIABILITIES ................................................. 576,615 549,585 Stockholders' Equity: Common stock, $4 par value; authorized 6,000,000 shares; issued 2,323,965 shares in 2000 and 2,302,022 shares in 1999 .......................................... 9,296 9,208 Additional paid-in-capital .......................................... 12,257 11,608 Retained earnings ................................................... 38,435 34,835 Deferred compensation ............................................... 1,212 1,123 Accumulated other comprehensive loss ................................ (2,320) (3,265) Less treasury stock at cost, 77,078 shares in 2000 and 25,235 shares in 1999 ................................. (3,717) (1,991) TOTAL STOCKHOLDERS' EQUITY .......................................... 55,163 51,518 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................... $ 631,778 $ 601,103 See accompanying notes to unaudited consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME (unaudited) THREE MONTHS ENDED NINE MONTHS ENDED (In thousands, except per share data) September 30, September 30, 2000 1999 2000 1999 INTEREST INCOME: Interest and fees on loans ........................... $ 8,983 $ 7,664 $ 25,641 $ 21,706 Interest on investment securities .................... 2,286 2,304 6,856 6,542 Interest on federal funds sold ....................... 28 180 91 439 Interest on deposits with other financial institutions ....................... 2 18 6 -- Total interest income .............................. 11,299 10,166 32,594 28,687 INTEREST EXPENSE: Interest on deposits ................................. 4,776 4,297 13,386 11,892 Interest on securities sold under agreements to repurchase ...................................... 343 243 943 631 Interest on Federal Home Loan Bank advances .......... 726 197 1,721 695 Interest on Federal funds purchased .................. 10 1 57 8 Interest on long-term debt ........................... 86 70 244 206 Total interest expense ............................. 5,941 4,808 16,351 13,432 Net interest income ................................ 5,358 5,358 16,243 15,255 Provision for loan losses ............................ 100 150 400 450 Net interest income after provision ................ 5,258 5,208 15,843 14,805 OTHER INCOME: Trust revenues ....................................... 401 514 1,362 1,459 Brokerage revenues ................................... 95 111 370 340 Service charges ...................................... 628 617 1,836 1,690 Securities losses .................................... (3) -- (3) -- Mortgage banking income .............................. 92 42 261 566 Other ................................................ 302 281 915 965 Total other income ................................. 1,515 1,565 4,741 5,020 OTHER EXPENSE: Salaries and employee benefits ....................... 2,519 2,487 7,545 7,142 Net occupancy and equipment expense .................. 919 903 2,702 2,524 Amortization of intangible assets .................... 294 302 896 684 Stationery and supplies .............................. 126 141 398 504 Legal and professional ............................... 232 375 607 882 Marketing and promotion .............................. 205 154 611 468 Other ................................................ 658 684 2,142 1,998 Total other expense ................................ 4,953 5,046 14,901 14,202 Income before income taxes ........................... 1,820 1,727 5,683 5,623 Income taxes ......................................... 536 454 1,474 1,695 Net income ......................................... $ 1,284 $ 1,273 $ 4,209 $ 3,928 Per share data: Basic earnings per share ............................. $ .57 $ .58 $ 1.85 $ 1.83 Diluted earnings per share ........................... $ .57 $ .55 $ 1.85 $ 1.72 See accompanying notes to unaudited consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED September 30, (In thousands) 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net income ........................................................... $ 4,209 $ 3,928 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses .......................................... 400 450 Depreciation, amortization and accretion, net ...................... 2,192 1,748 Loss on sale of securities, net .................................... 3 -- (Gain) loss on sale of other real property owned, net .............. 47 (88) Gain on sale of mortgage loans held for sale, net .................. (204) (511) Origination of mortgage loans held for sale ........................ (11,025) (26,563) Proceeds from sale of mortgage loans held for sale ................. 11,929 34,559 Decrease in other assets ........................................... (908) (3,517) Increase (decrease) in other liabilities ........................... (486) 1,702 Net cash provided by operating activities ............................ 6,157 11,708 CASH FLOWS FROM INVESTING ACTIVITIES: Capitalization of mortgage servicing rights .......................... (111) (36) Purchases of premises and equipment .................................. (858) (2,369) Net increase in loans ................................................ (35,719) (28,284) Proceeds from sales of securities available-for-sale ................. 607 -- Proceeds from maturities of securities available-for-sale ............ 5,833 28,068 Proceeds from maturities of securities held-to-maturity .............. 30 135 Purchases of securities available-for-sale ........................... (4,817) (33,847) Purchases of securities held-to-maturity ............................. (1,746) (332) Purchase of financial organization, net of cash received ............. -- 46,441 Net cash provided by (used in) investing activities .................. (36,781) 9,776 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits .................................. 6,210 (13,181) Decrease in repurchase agreements .................................... (9,632) (2,383) Decrease in federal funds purchased .................................. (675) -- Increase (decrease) in short-term borrowings ......................... 37,900 (4,000) Decrease in long-term borrowings ..................................... (6,200) (375) Proceeds from issuance of common stock ............................... 12 344 Purchase of treasury stock ........................................... (1,637) (171) Dividends paid on preferred stock .................................... -- (45) Dividends paid on common stock ....................................... (569) (515) Net cash provided by (used in) financing activities .................. 25,409 (20,326) Increase (decrease) in cash and cash equivalents ..................... (5,215) 1,158 Cash and cash equivalents at beginning of period ..................... 21,842 21,772 Cash and cash equivalents at end of period ........................... $ 16,627 $ 22,930 ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest ........................................................... $ 16,587 $ 13,399 Income taxes ....................................................... 1,930 1,989 Loans transferred to real estate owned ............................... 102 497 Dividends reinvested in common stock ................................. 724 651 See accompanying notes to unaudited consolidated financial statements
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, 2000 and 1999, and all such adjustments are of a normal recurring nature. The results of the interim period ended September 30, 2000, are not necessarily indicative of the results expected for the year ending December 31, 2000. The unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X 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 1999 Form 10-K. COMPREHENSIVE INCOME The Company's comprehensive income for the three month and nine month periods ended September 30, 2000 and 1999 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED September 30, September 30, (In thousands) 2000 1999 2000 1999 Net income ............................... $ 1,284 $ 1,273 $ 4,209 $ 3,928 Other comprehensive income: Unrealized gain (loss) during the period 1,382 (679) 1,429 (4,024) Less: realized loss during the period .. 3 -- 3 -- Tax effect ............................. (471) 231 (487) 1,368 Comprehensive income ..................... $ 2,198 $ 825 $ 5,154 $ 1,272
EARNINGS PER SHARE Income for Basic Earnings per Share ("EPS") is adjusted for dividends attributable to preferred stock in 1999 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 Company's stock options and, for 1999 periods, by the assumed conversion of the convertible preferred stock. On November 15, 1999, the Company issued shares of its common stock to holders of its Series A Convertible preferred stock upon the Company's election to convert all such preferred stock into common stock. The components of basic and diluted earnings per common share for the three month and nine month periods ended September 30, 2000 and 1999 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED September 30, September 30, 2000 1999 2000 1999 BASIC EARNINGS PER SHARE: Net income ................................ $1,284,000 $1,273,000 $4,209,000 $3,928,000 Less preferred stock dividends ............. -- (71,000) -- (213,000) Net income available to common stockholders $1,284,000 $1,202,000 $4,209,000 $3,715,000 Weighted average common shares outstanding . 2,251,541 2,029,636 2,270,571 2,021,861 Basic Earnings per Common Share ............ $ .57 $ .58 $ 1.85 $ 1.83 DILUTED EARNINGS PER SHARE: Net income available to common stockholders $1,284,000 $1,202,000 $4,209,000 $3,715,000 Assumed conversion of preferred stock ...... -- 71,000 -- 213,000 Net income available to common stock- holders after assumed conversion ......... $1,284,000 $1,273,000 $4,209,000 $3,928,000 Weighted average common shares outstanding . 2,251,541 2,029,636 2,270,571 2,021,861 Assumed conversion of stock options ........ 3,127 8,273 4,308 7,711 Assumed conversion of preferred stock ...... -- 248,179 -- 250,604 Diluted weighted average common shares outstanding ....................... 2,254,668 2,286,088 2,274,879 2,280,176 Diluted Earnings per Common Share .......... $ .57 $ .55 $ 1.85 $ 1.72
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, 2000 and 1999. 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. 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. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. OVERVIEW Net income for the three months ended September 30, 2000 was $1,284,000 ($.57 diluted EPS), an increase of $11,000 from $1,273,000 ($.55 diluted EPS) for the same period in 1999. 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, 2000 was $4,209,000 ($1.85 diluted EPS), an increase of $281,000 from $3,928,000 ($1.72 diluted EPS) for the same period in 1999. A summary of the factors which contributed to the changes in net income for the nine months is shown in the table below. 2000 VERSUS 1999 (In thousands) THREE MONTHS NINE MONTHS Net interest income ........................... $ 50 $ 1,038 Other income, including securities transactions (50) (279) Other expenses ................................ 93 (699) Income taxes .................................. (82) 221 Increase in net income ........................ $ 11 $ 281 The following table shows the Company's annualized performance ratios for the nine months ended September 30, 2000 and 1999, as compared to the performance ratios for the year ended December 31, 1999: September 30, December 31, 2000 1999 1999 Return on average assets ....... .92% .92% .91% Return on average equity ....... 10.63% 10.18% 10.14% Return on average common equity 10.63% 10.19% 10.08% Average equity to average assets 8.65% 9.09% 8.96% 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):
NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE ASSETS Interest-bearing deposits $ 117 $ 6 6.27% $ 1,792 $ 67 4.95% Federal funds sold 2,015 91 6.03% 10,266 372 4.83% Investment securities Taxable 120,984 5,774 6.36% 125,676 5,506 5.84% Tax-exempt (1) 30,152 1,639 7.25% 29,617 1,569 7.06% Loans (2)(3) 403,638 25,641 8.47% 351,144 21,706 8.24% Total earning assets 556,906 33,151 7.94% 518,495 29,220 7.51% Cash and due from banks 16,483 16,336 Premises and equipment 15,897 14,399 Other assets 24,080 19,982 Allowance for loan losses (3,113) (2,879) Total assets $610,253 $566,333 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits Demand deposits $163,440 $ 3,765 3.07% $143,283 $ 2,678 2.49% Savings deposits 39,891 716 2.39% 40,585 694 2.28% Time deposits 222,889 8,905 5.33% 223,297 8,520 5.09% Securities sold under agreements to repurchase 23,349 943 5.38% 20,512 631 4.10% FHLB advances 35,559 1,721 6.45% 18,343 695 5.05% Federal funds purchased 1,223 57 6.23% 202 8 5.04% Long-term debt 4,325 244 7.53% 4,447 206 6.17% Total interest-bearing liabilities 490,676 16,351 4.44% 450,669 13,432 3.97% Demand deposits 62,148 60,013 Other liabilities 4,623 4,187 Stockholders' equity 52,806 51,464 Total liabilities & equity $610,253 $566,333 Net interest income (TE) $16,800 $15,787 Net interest spread 3.48% 3.54% Impact of non-interest bearing funds .53% .52% Net yield on interest- earning assets (TE) 4.02% 4.06% (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.
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, 2000, as compared to the same period in 1999 (in thousands):
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO 1999 INCREASE / (DECREASE) TOTAL RATE/ CHANGE VOLUME RATE VOLUME (4) EARNING ASSETS: Interest-bearing deposits ......... $ (61) $ (62) $ 18 $ (17) Federal funds sold ................ (281) (300) 93 (74) Investment securities: Taxable ......................... 268 (206) 492 (18) Tax-exempt (1) .................. 70 28 41 1 Loans (2)(3) ...................... 3,935 3,244 601 90 Total interest income ........... 3,931 2,704 1,245 (18) INTEREST-BEARING LIABILITIES: Interest-bearing deposits Demand deposits ................. 1,087 376 623 88 Savings deposits ................ 22 (12) 35 (1) Time deposits ................... 384 (16) 401 (1) Securities sold under agreements to repurchase ........ 312 88 197 27 FHLB advances ..................... 1,026 653 192 181 Federal funds purchased ........... 49 38 2 9 Long-term debt .................... 38 (6) 45 (1) Total interest expense .......... 2,918 1,121 1,495 302 Net interest income .............. $ 1,013 $ 1,583 $ (250) $ (320) (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 $1,013,000, or 6.4% to $16,800,000 for the nine months ended September 30, 2000, from $15,787,000 for the same period in 1999. The increase in net interest income for the nine months ended September 30, 2000, was primarily due to an increase in rates on earning assets combined with an increase in the volume of earning assets offset by an increase in the rates combined with higher average interest-bearing liabilities. For the nine months ended September 30, 2000, average earning assets increased by $38,411,000, or 7.4%, and average interest-bearing liabilities increased $40,007,000, or 8.9%, compared with average balances for the nine months ended September 30, 1999. Changes in average balances, as a percent of average earnings assets, are shown below: * average loans (as a percent of average earnings assets) increased 4.8% to 72.5% for the nine months ended September 30, 2000 from 67.7% for the nine months ended September 30, 1999. * average securities (as a percent of average earnings assets) decreased 2.9% to 27.1% for the nine months ended September 30, 2000 from 30.0% for the nine months ended September 30, 1999. * average interest-bearing liabilities (as a percent of average earnings assets) increased 1.2% to 88.1% for the nine months ended September 30, 2000 from 86.9% for the nine months ended September 30, 1999. * net interest margin, on a tax equivalent basis, decreased to 4.02% for the nine months ended September 30, 2000, from 4.06% for the nine months ended September 30, 1999. PROVISION FOR LOAN LOSSES The provision for loan losses for the three months ended September 30, 2000 and 1999 was $100,000 and $150,000, respectively, and was $400,000 and $450,000, respectively, for the nine months ended September 30, 2000 and 1999. 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, 2000 and 1999 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED 2000 1999 $ CHANGE 2000 1999 $ CHANGE Trust $ 401 $ 514 $ (113) $ 1,362 $ 1,459 $ (97) Brokerage 95 111 (16) 370 340 30 Service charges 628 617 11 1,836 1,690 146 Security gains (losses) (3) -- (3) (3) -- (3) Mortgage banking 92 42 50 261 566 (305) Other 302 281 21 915 965 (50) Total other income $ 1,515 $ 1,565 $ (50) $ 4,741 $ 5,020 $ (279)
* Total non-interest income decreased to $4,741,000 for the nine months ended September 30, 2000, compared to $5,020,000 for the same period in 1999. * Trust revenues decreased $97,000 or 6.6% to $1,362,000 for the nine months ended September 30, 2000, compared to $1,459,000 for the same period in 1999. Trust assets, reported at market value, were $307 million at September 30, 2000, $324 million at December 31, 1999 and $316 million at September 30, 1999. * Revenues from brokerage and annuity sales increased $30,000 or 8.8% for the nine months ended September 30, 2000, compared with the same period in 1999, as a result of increased sales of annuities. * Fees from service charges increased $146,000 or 8.4% to $1,836,000 for the nine months ended September 30, 2000, compared to $1,690,000 for the same period in 1999. This increase was primarily due to an increase in the number of savings and transaction accounts and an increase in the fees charged on deposit accounts. * Security gains (losses) showed a net loss of $3,000 for the nine months ended September 30, 2000 as compared with no net gain or loss for the same period in 1999. * Mortgage banking income decreased $305,000 or 53.9% to $261,000 for the nine months ended September 30, 2000, compared to $566,000 for the same period in 1999. This decrease was due to a lower number of fixed rate loans originated and sold by First Mid Bank. This decrease in volume is largely attributed to fewer re-financings by customers as a result of rising interest rates. Loans sold are as follows: * $11.7 million (representing 163 loans) for the nine months ended September 30, 2000. * $34.0 million (representing 439 loans) for the nine months ended September 30, 1999. * Other income decreased $50,000 or 5.2% to $915,000 for the nine months ended September 30, 2000, compared to $965,000 for the same period in 1999. This decrease was partially attributed to a gain on the sale of real property during second quarter 1999. 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 and nine months ended September 30, 2000 and 1999 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED 2000 1999 $ CHANGE 2000 1999 $ CHANGE Salaries and benefits $ 2,519 $ 2,487 $ 32 $ 7,545 $ 7,142 $ 403 Occupancy and equipment 919 903 16 2,702 2,524 178 FDIC premiums 25 24 1 76 78 (2) Amortization of intangibles 294 302 (8) 896 684 212 Stationery and supplies 126 141 (15) 398 504 (106) Legal and professional fees 232 375 (143) 607 882 (275) Marketing and promotion 205 154 51 611 468 143 Other operating expenses 633 660 (27) 2,066 1,920 146 Total other expense $ 4,953 $ 5,046 $ (93) $14,901 $14,202 $ 699
* Total non-interest expense increased to $14,901,000 for the nine months ended September 30, 2000, compared to $14,202,000 for the same period in 1999. * Salaries and employee benefits, the largest component of other expense, increased $403,000 or 5.6% to $7,545,000 for the nine months ended September 30, 2000, compared to $7,142,000 for the same period in 1999. This increase can be explained by merit increases for continuing employees, addition of the employees of the Monticello, Taylorville and DeLand branches in May, 1999 and the addition of the employees of the Decatur branch in April, 2000. There were 269 FTE employees at September 30, 2000. * Occupancy and equipment expense increased $178,000 or 7.1% to $2,702,000 for the nine months ended September 30, 2000, compared to $2,524,000 for the same period in 1999. This increase included depreciation expense recorded on technology equipment placed in service as well as the depreciation expense on buildings in Monticello, Taylorville, DeLand, Tuscola and Decatur. * Amortization of intangible assets increased $212,000 or 31.0% to $896,000 for the nine months ended September 30, 2000, compared to $684,000 for the same period in 1999. 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. * All other categories of operating expenses decreased a net of $94,000 or 2.4% to $3,758,000 for the nine months ended September 30, 2000, compared to $3,852,000 for the same period in 1999. Most of this decrease is due to less expense for supplies, legal and other professional fees associated with the purchase of the Monticello, Taylorville and DeLand branch acquisition in May, 1999. INCOME TAXES Total income tax expense amounted to $1,474,000 for the nine months ended September 30, 2000, compared to $1,695,000 for the same period in 1999. Effective tax rates were 25.9% and 30.1% for the nine month periods ended September 30, 2000 and 1999. The Company donated property with a current market value in excess of the book value to the local school district during the second quarter of 2000, which led to a lower tax expense and effective tax rate in 2000. 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, 2000 and December 31, 1999 (in thousands): September 30, DECEMBER 31, 2000 1999 Real estate - mortgage $293,773 $273,293 Commercial, financial and agricultural 100,156 89,176 Installment 28,169 24,501 Other 1,083 1,349 Total loans $423,181 $388,319 At September 30, 2000, the Company had loan concentrations in agricultural industries of $67.1 million, or 15.9%, of outstanding loans and $59.5 million, or 15.3%, at December 31, 1999. 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 historical focus on residential real estate lending. The balance of real estate loans held for sale amounted to $649,000 as of September 30, 2000. The following table presents the balance of loans outstanding as of September 30, 2000, by maturities (dollars in thousands): MATURITY (1) OVER 1 ONE YEAR THROUGH OVER OR LESS (2) 5 YEARS 5 YEARS TOTAL Real estate - mortgage $ 66,732 $190,902 $ 36,139 $293,773 Commercial, financial and agricultural ... 64,028 32,918 3,210 100,156 Installment .......... 5,566 20,908 1,695 28,169 Other ................ 329 306 448 1,083 Total loans ........ $136,655 $245,034 $ 41,492 $423,181 (1) Based on scheduled principal repayments. (2) Includes demand loans, past due loans and overdrafts. As of September 30, 2000, loans with maturities over one year consisted of approximately $249,181,000 in fixed rate loans and $37,345,000 in variable rate loans. The loan maturities noted above are based on the contractual provisions of the individual loans. Rollovers and borrower requests 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, 2000 and December 31, 1999 (in thousands): September 30, December 31, 2000 1999 Nonaccrual loans $1,564 $1,430 Loans past due ninety days or more and still accruing 792 366 Renegotiated loans which are performing in accordance with revised terms 237 81 Total Nonperforming Loans $2,593 $1,877 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 probable losses in the loan portfolio. 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 September 30, 2000, the Company's loan portfolio included $67.1 million of loans to borrowers whose businesses are directly related to agriculture. The balance remained stable from $59.5 million at December 31, 1999. While the Company adheres to sound underwriting practices including collateralization of loans, an extended period of low commodity prices and/or significantly reduced yields on crops could nevertheless result in an increase in the level of problem agriculture loans. Loan loss experience for the nine month period ended September 30, 2000 and 1999, are summarized as follows (dollars in thousands): September 30, 2000 1999 Average loans outstanding, net of unearned income ............ $403,638 $351,144 Allowance-beginning of period ....... $ 2,939 $ 2,715 Balance of acquired branches ........ -- 150 Charge-offs: Real estate-mortgage ................ 18 1 Commercial, financial & agricultural 55 275 Installment ......................... 115 68 Total charge-offs ................. 188 344 Recoveries: Real estate-mortgage ................ 1 1 Commercial, financial & agricultural 16 10 Installment ......................... 14 17 Total recoveries .................. 31 28 Net charge-offs ..................... 157 316 Provision for loan losses ........... 400 450 Allowance-end of period ............. $ 3,182 $ 2,999 Ratio of net charge-offs to average loans ..................... .04% .09% Ratio of allowance for loan losses to loans outstanding (less unearned interest at end of period) ........ .75% .79% Ratio of allowance for loan losses to nonperforming loans ............ 122.7% 115.8% 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 nine months of 2000, the Company had net charge-offs of $157,000, compared to $316,000 for the same period in 1999. At September 30, 2000, the allowance for loan losses amounted to $3,182,000, or .75% of total loans, and 122.7% of nonperforming loans. At September 30, 1999, the allowance was $2,999,000, or .79% of total loans, and 115.8% 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, 2000 and December 31, 1999 (in thousands):
SEPTEMBER 30, DECEMBER 31, 2000 1999 % OF % OF AMOUNT TOTAL AMOUNT TOTAL U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 90,824 58% $ 92,180 58% Obligations of states and political subdivisions 32,239 20% 30,281 19% Mortgage-backed securities 29,002 18% 32,578 21% Other securities 5,825 4% 2,579 2% Total securities $157,890 100% $157,618 100%
At September 30, 2000, the Company's investment portfolio showed a slight increase in obligations of states and political subdivisions and other securities. While the volume of mortgage-backed securities decreased, all other types of securities remained consistent. 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, 2000 and December 31, 1999 were as follows (in thousands):
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR September 30, 2000 COST GAINS LOSSES VALUE Available-for-sale: U.S. Treasury securities and obligations of U.S. Government corporations & agencies $ 90,824 $ 6 $ (2,894) $ 87,936 Obligations of states and political subdivisions ............................. 29,137 47 (775) 28,409 Mortgage-backed securities ................ 29,002 266 (405) 28,863 Federal Home Loan Bank stock .............. 2,660 -- -- 2,660 Other securities .......................... 3,165 -- (32) 3,133 Total available-for-sale ................. $154,788 $ 319 $ (4,106) $151,001 Held-to-maturity: Obligations of states and political subdivisions ............................. $ 3,102 $ 20 $ (13) $ 3,109 DECEMBER 31, 1999 Available-for-sale: U.S. Treasury securities and obligations of U.S. Government corporations & agencies $ 92,180 $ -- $ (3,748) $ 88,432 Obligations of states and political subdivisions ............................. 28,149 49 (1,108) 27,090 Mortgage-backed securities ................ 32,578 58 (580) 32,056 Federal Home Loan Bank stock .............. 1,913 -- -- 1,913 Other securities .......................... 666 -- -- 666 Total available-for-sale ................ $155,486 $ 107 $ (5,436) $150,157 Held-to-maturity: Obligations of states and political subdivisions ............................. $ 2,132 $ 8 $ (63) $ 2,077
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, 2000 (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.
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 .... $ 4,000 $ 78,087 $ 4,496 $ 4,242 $ 90,824 Obligations of state and political subdivisions ....... 1,513 4,673 13,070 9,882 29,137 Mortgage-backed securities ..... 214 1,411 1,307 26,070 29,002 Other securities ............... -- -- -- 5,825 5,825 Total Investments .............. $ 5,727 $ 84,171 $ 18,873 $ 46,019 $154,788 Weighted average yield ......... 5.52% 5.79% 5.14% 6.57% 5.95% Full tax-equivalent yield ...... 6.24% 5.91% 6.71% 7.11% 6.40% Held-to-maturity: Obligations of state and political subdivisions ....... $ 410 $ 1,376 $ 675 $ 641 $ 3,102 Weighted average yield ......... 5.07% 5.08% 5.49% 5.44% 5.25% Full tax-equivalent yield ...... 7.69% 7.70% 8.32% 8.25% 7.95%
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, 2000. Investment securities carried at approximately $135,827,000 and $124,368,000 at June 30, 2000 and December 31, 1999, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law. DEPOSITS Funding the Company's earning assets is substantially provided by a combination of consumer, commercial and public fund deposits. The Company continues to focus its strategies and emphasis on retail core deposits, the major component of funding sources. The following table sets forth the average deposits and weighted average rates for the nine months ended September 30, 2000 and for the year ended December 31, 1999 (dollars in thousands):
SEPTEMBER 30, DECEMBER 31, 2000 1999 WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE Demand deposits: Non-interest bearing . $ 62,148 -- $ 60,557 -- Interest bearing ..... 163,440 3.07% 147,753 2.58% Savings ................ 39,891 2.39% 40,875 2.31% Time deposits .......... 222,889 5.33% 225,451 5.09% Total average deposits $488,368 3.65% $474,636 3.42%
The following table sets forth the maturity of time deposits of $100,000 or more at September 30, 2000 and December 31, 1999 (in thousands): SEPTEMBER 30, December 31, 2000 1999 3 months or less ....... $18,279 $16,915 Over 3 through 6 months 12,647 11,708 Over 6 through 12 months 6,809 11,444 Over 12 months ......... 6,088 3,854 Total ................ $43,823 $43,921 OTHER BORROWINGS Other borrowings consist of securities sold under agreements to repurchase, Federal Home Loan Bank advances, and federal funds purchased. Information relating to other borrowings as of September 30, 2000 and December 31, 1999 is presented below (in thousands): September 30, December 31, 2000 1999 Securities sold under agreements to repurchase $22,676 $32,308 Federal Home Loan Bank advances: Overnight .................................. 40,900 3,000 Fixed term - due after one year ............ 12,300 18,500 Federal funds purchased ...................... 500 1,175 Total ...................................... $76,376 $54,983 Average interest rate at end of period ..... 6.40% 4.86% Maximum Outstanding at any Month-end Securities sold under agreements to repurchase $27,219 $32,308 Federal Home Loan Bank advances: Overnight .................................. 44,000 18,000 Fixed term - due after one year ............ 13,000 20,500 Federal funds purchased ...................... 1,000 1,175 Total ...................................... $85,219 $71,983 Averages for the Period Ended Securities sold under agreements to repurchase $23,349 $22,063 Federal Home Loan Bank advances: Overnight .................................. 25,214 1,486 Fixed term - due after one year ............ 10,345 17,116 Federal funds purchased ...................... 1,223 345 Total ...................................... $60,131 $41,010 Average interest rate during the period .... 6.03% 4.65% Securities sold under agreements to repurchase are short-term obligations of First Mid Bank. First Mid Bank collateralizes these obligations with 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 loan demand. This loan demand was previously funded primarily through time deposits by the State of Illinois. The fixed term advances consists primarily of the following: * $5 million advance with a 5- year maturity, no call option by the Federal Home Loan Bank for one year, first call 3/20/01, and an interest rate of 6.16%. * $5 million advance with a 5- year maturity, no call option by the Federal Home Loan Bank for six months and quarterly thereafter, first call 6/6/01, and an interest rate of 6.12%. * $2.3 million advance with a 5- year maturity, no call option by the Federal Home Loan Bank for nine months and quarterly thereafter, first call 1/7/01, and an interest rate of 6.10%. INTEREST RATE SENSITIVITY The Company seeks to maximize its net interest margin within an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to favorable or unfavorable movements in interest rates. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of assets differ significantly from the maturity or repricing characteristics of liabilities. The Company monitors its interest rate sensitivity position to maintain a balance between rate sensitive assets and rate sensitive liabilities. This balance serves to limit the adverse effects of changes in interest rates. The Company's asset/liability management committee oversees the interest rate sensitivity position and directs the overall allocation of funds. In the banking industry, a traditional measurement of interest rate sensitivity is known as "GAP" analysis, which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. The following table sets forth the Company's interest rate repricing gaps for selected maturity periods at September 30, 2000 (in thousands):
NUMBER OF MONTHS UNTIL NEXT REPRICING OPPORTUNITY 0-1 1-3 3-6 6-12 12+ INTEREST EARNING ASSETS: Federal funds sold ................... $ 112 $ -- $ -- $ -- $ -- Taxable investment securities ........ 13,193 8,820 9,859 8,729 81,991 Nontaxable investment securities ..... -- 2,465 101 395 28,550 Loans ................................ 51,218 57,884 56,478 44,589 213,015 Total .............................. $ 64,523 $ 69,169 $ 66,438 $ 53,710 $ 323,555 INTEREST BEARING LIABILITIES: Savings and N.O.W. accounts .......... 151,209 -- -- -- -- Money market accounts ................ 55,125 -- -- -- -- Other time deposits .................. 36,944 35,520 43,014 49,637 58,298 Other borrowings ..................... 63,532 -- -- -- 12,345 Long-term debt ....................... 4,325 -- -- -- -- Total .............................. $ 311,135 $ 35,520 $ 43,014 $ 49,637 $ 70,643 Periodic GAP ....................... $(246,612) $ (33,649) $ (23,424) $ 4,073 $ 252,913 Cumulative GAP ..................... $(246,612) $(212,963) $(189,539) $(185,466) $ 67,447 GAP as a % of interest earning assets: Periodic ........................... (42.7%) (5.8%) (4.1%) 0.7% 43.8% Cumulative ......................... (42.7%) (36.9%) (32.8%) (32.1%) 11.7%
At September 30, 2000, 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 rollovers of assets and liabilities, of which First Mid Bank represents substantially all of the Company's rate sensitive assets and liabilities. CAPITAL RESOURCES At September 30, 2000, the Company's stockholders' equity increased $3,645,000 or 7.1% to $55,163,000 from $51,518,000 as of December 31, 1999. During the first nine months of 2000, net income contributed $4,209,000 to equity before the payment of dividends to common stockholders. The change in net unrealized gain/loss on available-for-sale investment securities increased stockholders' equity by $945,000, 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, 2000 and December 31, 1999 all capital adequacy requirements have been met by the Company and First Mid Bank. As of September 30, 2000, 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.
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO SEPTEMBER 30, 2000 Total Capital (to risk-weighted assets) Company ................. $48,220 11.77% $32,789 > 8.00% $40,986 > 10.00% First Mid Bank .......... 49,228 12.11% 32,511 > 8.00% 40,639 > 10.00% Tier 1 Capital (to risk-weighted assets) Company ................. 45,038 10.99% 16,394 > 4.00% 24,591 > 6.00% First Mid Bank .......... 46,046 11.33% 16,255 > 4.00% 24,383 > 6.00% Tier 1 Capital (to average assets) Company ................. 45,038 7.32% 24,595 > 4.00% 30,744 > 5.00% First Mid Bank .......... 46,046 7.52% 24,479 > 4.00% 30,598 > 5.00%
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO DECEMBER 31, 1999 Total Capital (to risk-weighted assets) Company ................. $44,381 11.98% $29,648 > 8.00% $37,060 > 10.00% First Mid Bank .......... 45,409 12.40 29,305 > 8.00% 36,631 > 10.00% Tier 1 Capital (to risk-weighted assets) Company ................. 41,442 11.18 14,824 > 4.00% 22,236 > 6.00% First Mid Bank .......... 42,470 11.59 14,652 > 4.00% 21,979 > 6.00% Tier 1 Capital (to average assets) Company ................. 41,442 6.96 24,347 > 4.00% 30,434 > 5.00% First Mid Bank .......... 42,470 7.19 23,630 > 4.00% 29,538 > 5.00%
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 plans through which Company stock may be purchased by participants, 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 1999 Form 10-K. * 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. * 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. * 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 stock dividends paid by the Company into newly-issued common shares of the Company. All holders of record of the Company's common stock are eligible to 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. The Company announced a Stock Repurchase Program in August, 1998 to allow the Company to repurchase up to 3% of its common stock. In March, 2000, the Board of Directors of the Company authorized the repurchase of 5% in addition to the original 3% of its common stock under the current Stock Repurchase Program. The shares will be repurchased at the most recent market price of the stock. The Company repurchased 51,843 shares (2.2%) at a total price of $1,637,000 during the nine months ended September 30, 2000 and 9,696 shares (.4%) at a total price of $337,000 for the year ended December 31, 1999. A total of 75,078 shares have been repurchased from the inception of this program to September 30, 2000, and are held in treasury. 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, 2000, the excess collateral at the Federal Home Loan Bank will support approximately $47 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 provisions on U.S. Government Treasuries and Agencies. * operating activities, including scheduled 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 In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS 133"). 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 balance sheet at fair value. The accounting for changes in fair value 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. The gain or loss due to changes in fair value is recognized in earnings or as other comprehensive income in the statement of stockholders' equity, depending on the type of instrument and whether or not it is considered a hedge. In June, 1999, the FASB issued SFAS 137, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- DEFERRAL OF THE EFFECTIVE DATE OF STATEMENT NO. 133." This statement defers the adoption of SFAS 133 to fiscal years beginning after June 15, 2000. The FASB issued SFAS No. 138, "ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, AN AMENDMENT OF FASB STATEMENT NO. 133" in June 2000, which addressed various implementation issues relating to SFAS 133. Adoption of the above statements is not expected to have a material impact on the Company's financial position, results of operation or liquidity. Statement of Financial Accounting Standards ("SFAS") No. 140 "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES", was issued by the Financial Accounting Standards Board (FASB) in September of 2000. SFAS No. 140 supersedes and replaces FASB SFAS No. 125, "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES". Accordingly, SFAS No. 140 is now the authoritative accounting literature for transfers and servicing of financial assets and extinguishments of liabilities. SFAS No. 140 also includes several additional disclosure requirements in the area of securitized financial assets and collateral arrangements. The provisions of SFAS No. 140 related to transfers of financial assets are to be applied to all transfers of financial assets occurring after March 31, 2001. The collateral recognition and disclosure provisions in SFAS No. 140 are effective for fiscal years ending after December 15, 2000. The Company anticipates that the adoption of SFAS No. 140 will not have a material impact on the Company's results of operations. 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 change in the market risks faced by the Company since December 31, 1999. 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, 1999. PART II ITEM 1. LEGAL PROCEEDINGS Since First Mid Bank acts a depository of funds, it is named from time to time as a defendant in lawsuits (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 U.S. 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, if any, 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 None. ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Exhibits: The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit Index which follows the Signature Page and immediately precedes the exhibits filed. (b) Reports on Form 8-K: There were no reports on Form 8-K filed by the Company during the quarter ended September 30, 2000. 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/ Michael L. Taylor -------------------------------------* Michael L. Taylor Chief Financial Officer Dated: November 10, 2000 *---------------------* 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)