-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FGPSfyYmZr6H3OAurngqu2YVC5ArhGufHBx0EdZp6GXJrTuV9PnJx/5wf6Ca3FZr VyFsLw5ZBt6YJTttU4X1Ug== 0000700565-98-000014.txt : 19980814 0000700565-98-000014.hdr.sgml : 19980814 ACCESSION NUMBER: 0000700565-98-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST MID ILLINOIS BANCSHARES INC CENTRAL INDEX KEY: 0000700565 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 371103704 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13368 FILM NUMBER: 98686103 BUSINESS ADDRESS: STREET 1: 1515 CHARLESTON AVE STREET 2: PO BOX 499 CITY: MATTOON STATE: IL ZIP: 61938 BUSINESS PHONE: 2172347454 MAIL ADDRESS: STREET 1: 1515 CHARLESTON AVENUE STREET 2: PO BOX 499 CITY: MATTOON STATE: IL ZIP: 61938 10-Q 1 2ND QTR 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 COMMISSION FILE NUMBER: 0-13368 FIRST MID-ILLINOIS BANCSHARES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 37-1103704 (State or other jurisdiction of (I.R.S. employer identification No.) incorporation or organization) 1515 CHARLESTON AVENUE, MATTOON, ILLINOIS 61938 (Address and Zip Code of Principal Executive Offices) (217) 234-7454 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $4.00 PER SHARE (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of August 12, 1998, 2,011,492 common shares, $4.00 par value, were outstanding. PART I ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS June 30, December 31, (In thousands, except share data) 1998 1997 ASSETS Cash and due from banks: Non-interest bearing $ 18,433 $ 20,486 Interest bearing 297 250 Federal funds sold 5,600 5,925 Cash and cash equivalents 24,330 26,661 Investment securities: Available-for-sale, at fair value 126,346 116,782 Held-to-maturity, at amortized cost (estimated fair value of $3,595 and $3,057 at June 30, 1998 and December 31, 1997, respectively) 3,562 3,020 Loans 343,137 358,223 Less allowance for loan losses 2,837 2,636 Net loans 340,300 355,587 Premises and equipment, net 12,824 12,356 Intangible assets, net 8,169 8,550 Other assets 10,774 10,022 TOTAL ASSETS $526,305 $532,978 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing $ 65,166 $ 53,599 Interest bearing 373,860 403,999 Total deposits 439,026 457,598 Securities sold under agreements to repurchase 6,864 10,780 Federal Home Loan Bank advances 20,500 7,000 Long-term debt 5,450 6,200 Other liabilities 5,514 5,824 TOTAL LIABILITIES 477,354 487,402 Stockholders' Equity Series A convertible preferred stock; no par value; authorized 1,000,000 shares; issued 614 shares in 1998 and 620 shares in 1997 with stated value of $5,000 per share 3,070 3,100 Common stock, $4 par value; authorized 6,000,000 shares in 1998 and 1997; issued 2,013,181 shares in 1998 and 1,972,709 shares in 1997 8,053 7,891 Additional paid-in-capital 8,232 7,038 Retained earnings 29,270 27,271 Accumulated other comprehensive income 350 300 Less treasury stock at cost, 2,000 shares (24) (24) TOTAL STOCKHOLDERS' EQUITY 48,951 45,576 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $526,305 $532,978 See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) THREE MONTHS ENDED SIX MONTHS ENDED June 30, June 30, 1998 1997 1998 1997 INTEREST INCOME: Loans $ 7,245 $ 7,504 $14,610 $14,701 Investment securities 1,975 1,921 3,925 3,780 Federal funds sold 80 52 161 78 Deposits with financial institutions 2 13 20 23 Total interest income 9,302 9,490 18,716 18,582 INTEREST EXPENSE: Deposits 4,158 4,235 8,465 8,140 Securities sold under agreements to repurchase 61 125 113 283 Federal Home Loan Bank advances 253 344 472 699 Federal funds purchased 1 6 16 15 Long-term debt 99 120 204 224 Total interest expense 4,572 4,830 9,270 9,361 Net interest income 4,730 4,660 9,446 9,221 Provision for loan losses 150 150 300 250 Net interest income after provision for loan losses 4,580 4,510 9,146 8,971 OTHER INCOME: Trust revenues 414 452 831 874 Brokerage revenues 90 84 154 220 Service charges 478 457 940 861 Securities gains(losses), net - (6) 12 (6) Mortgage banking income 307 100 617 169 Other 251 248 535 491 Total other income 1,540 1,335 3,089 2,609 OTHER EXPENSE: Salaries and employee benefits 2,107 1,920 4,231 3,918 Occupancy, furniture, equipment, net 729 651 1,438 1,358 Intangible asset amortization 215 231 429 384 Stationary and supplies 168 140 350 302 Legal and professional 215 193 422 385 Marketing and promotion 137 172 263 289 Other 759 611 1,313 1,063 Total other expense 4,330 3,918 8,446 7,699 Income before income taxes 1,790 1,927 3,789 3,881 Income taxes 593 688 1,258 1,377 Net income $ 1,197 $ 1,239 $ 2,531 $ 2,504 Per common share data: Basic earnings per share $ .56 $ .61 $ 1.20 $ 1.24 Diluted earnings per share $ .53 $ .57 $ 1.13 $ 1.16 See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) SIX MONTHS ENDED June 30, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,531 $ 2,504 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 300 250 Depreciation, amortization and accretion, net 1,026 909 (Gain)loss on sale of securities, net (12) 6 Loss on sale of fixed assets and real estate owned, net 152 2 Gain on sale of loans held for sale, net (444) (116) Origination of loans held for sale (39,063) (10,992) Proceeds from sale of loans held for sale 38,228 10,608 (Increase)decrease in other assets (867) 91 Increase(decrease) in other liabilities 245 (5) Net cash provided by operating activities 2,096 3,257 CASH FLOWS FROM INVESTING ACTIVITIES: Capitalization of mortgage servicing rights (68) (42) Purchases of premises and equipment (1,058) (521) Net (increase) decrease in loans 16,266 (9,153) Proceeds from sales of: Securities available-for-sale 2,327 9,983 Proceeds from maturities of: Securities available-for-sale 24,030 6,936 Securities held-to-maturity 410 130 Purchases of: Securities available-for-sale (36,010) (20,173) Securities held-to-maturity (799) (170) Purchase of financial organization, net of cash - 22,416 Net cash provided by (used in) investing activities 5,098 9,406 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase(decrease) in deposits (18,572) 11,556 Increase (decrease) in securities sold under agreements to repurchase (3,916) (8,360) Increase(decrease) in FHLB advances 13,500 (9,426) Repayment of long-term debt (750) (500) Proceeds from issuance of long-term debt - 1,000 Proceeds from issuance of common stock 704 513 Dividends paid on preferred stock (16) (16) Dividends paid on common stock (475) (425) Net cash provided by (used in) financing activities (9,525) (5,658) Increase(decrease) in cash & cash equivalents (2,331) 7,005 Cash & cash equivalents at beginning of period 26,661 27,111 Cash and cash equivalents at end of period $24,330 $34,116 ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 9,158 $ 9,836 Income taxes $ 1,968 $ 1,695 Loans transferred to real estate owned $ 335 $ 495 Dividends reinvested in common shares $ 622 $ 529 See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Summary of Significant Accounting Policies BASIS OF ACCOUNTING AND CONSOLIDATION The unaudited consolidated financial statements include the accounts of First Mid-Illinois Bancshares, Inc. ("Registrant") and its wholly-owned subsidiaries: Mid-Illinois Data Services, Inc. ("MIDS") and First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank") and its wholly-owned subsidiary First Mid-Illinois Insurance Services ("First Mid Insurance"). First Mid Insurance began operations during the second quarter of 1998. All significant intercompany balances and transactions have been eliminated in consolidation. The financial information reflects all adjustments which, in the opinion of management, are necessary to present a fair statement of the results of the interim periods ended June 30, 1998 and 1997, and all such adjustments are of a normal recurring nature. The results of the interim periods ended June 30, 1998, are not necessarily indicative of the results expected for the year ending December 31, 1998. The unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information required by generally accepted accounting principles for complete financial statements and related footnote disclosures. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Registrant's 1997 Form 10-K. STOCK SPLIT On May 22, 1997, the Registrant declared a two-for-one stock split in the form of a 100% stock dividend. Par value remained at $4 per share. All references in the consolidated financial statements and notes thereto as to the number of common shares, per common share amounts and market prices of the Registrant's common stock have been restated giving retroactive recognition to the stock split. EARNINGS PER SHARE Effective December 31, 1997, the Registrant adopted Financial Accounting Standards Board's Statement No. 128, "EARNINGS PER SHARE" ("SFAS 128"). Income for Basic Earnings per Share ("EPS") is adjusted for dividends attributable to preferred stock and is based on the weighted average number of common shares outstanding. Diluted EPS is computed by using the weighted average number of common shares outstanding, increased by the assumed conversion of the convertible preferred stock and the assumed conversion of the stock options. The components of basic and diluted earnings per common share are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED June 30, 1998 1997 1998 1997 BASIC EARNINGS PER SHARE: Net income $1,197,000 $1,239,000 $2,531,000 $2,504,000 Less preferred stock dividends (72,000) (72,000) (143,000) (143,000) Net income available to common stockholders' equity $1,125,000 $1,167,000 $2,388,000 $2,361,000 Weighted average common shares outstanding 2,002,657 1,917,057 1,991,034 1,905,817 Basic Earnings per Common Share $ .56 $ .61 $ 1.20 $ 1.24 DILUTED EARNINGS PER SHARE: Net income available to common stockholders' equity $1,125,000 $1,167,000 $2,388,000 $2,361,000 Conversion of preferred stock 72,000 72,000 143,000 143,000 Net income available to common stockholders after conversion $1,197,000 $1,239,000 $2,531,000 $2,504,000 Weighted average common shares outstanding 2,002,657 1,917,057 1,991,034 1,905,817 Conversion of stock options 4,101 - 5,511 - Conversion of preferred stock 249,564 250,604 250,081 250,604 Diluted weighted average common shares outstanding 2,256,322 2,167,661 2,246,626 2,156,421 Diluted Earnings per Common Share $ .53 $ .57 $ 1.13 $ 1.16
COMPREHENSIVE INCOME The Financial Accounting Standards Board has issued Statement No. 130, "REPORTING COMPREHENSIVE INCOME" ("SFAS 130"), which is effective for fiscal years beginning after December 31, 1997. This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Registrant adopted SFAS 130 on January 1, 1998. The Registrant's comprehensive income is shown as follows:
THREE MONTHS ENDED SIX MONTHS ENDED June 30, 1998 1997 1998 1997 Net income $1,197 $1,239 $ 2,531 $ 2,504 Other comprehensive income, net of tax: Unrealized gains(losses) during the period (44) 516 58 (76) Reclassification adjustment for net (gains)losses realized in net income - 4 (8) 4 Comprehensive income $1,153 $1,759 $2,581 $2,432
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of the Registrant and its subsidiaries for the three months ended and six months ended June 30, 1998 and 1997. This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes and selected financial data appearing elsewhere in this report. FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Registrant intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Registrant, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Registrant's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Registrant and the subsidiaries include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Registrant's market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Registrant and its business, including additional factors that could materially affect the Registrant's financial results, is included in the Registrant's filings with the Securities and Exchange Commission. OVERVIEW Net income for the three months ended June 30, 1998, decreased to $1,197,000, down 3.4% from $1,239,000 for the same period of 1997. Diluted earnings per share for the quarter decreased 4 cents per share to $.53 as compared to $.57 per share earned in the same quarter of 1997. A summary of the factors which contributed to the changes in net income for the three months is shown in Table 1. Net income for the six months ended June 30, 1998, increased to $2,531,000, up 1.1% from $2,504,000 for the same period of 1997. Diluted earnings per share for the period decreased 3 cents per share to $1.13 as compared to $1.16 per share earned in the same period of 1997. A summary of the factors which contributed to the changes in net income for the six months is shown in Table 1. TABLE 1 EFFECT ON EARNINGS 1998 VS 1997 (in thousands) THREE MONTHS SIX MONTHS Net interest income $ 70 $ 225 Provision for loan losses - (50) Other income, including securities transactions 205 480 Other expenses (412) (747) Income taxes 95 119 Increase(decrease) in net income $ (42) $ 27 The following table shows the Registrant's annualized performance ratios for the six months ended June 30, 1998 and for the year ended December 31, 1997: June 30, December 31, 1998 1997 Return on average assets .96% .90% Return on average equity 10.66% 11.08% Return on average common equity 10.76% 11.23% Average equity to average assets 8.98% 8.11% On March 7, 1997, the Registrant acquired the Charleston, Illinois branch location and the deposit base of First of America Bank. This cash acquisition added approximately $28 million to total deposits, $500,000 to loans, $1.3 million to premises and equipment and $3.8 million to intangible assets. The acquisition of the branch was accounted for using the purchase method of accounting whereby the acquired assets and deposits of the branch were recorded at their fair values as of the acquisition date. The operating results have been combined with those of the Registrant since March 7, 1997. RESULTS OF OPERATIONS NET INTEREST INCOME The largest source of operating revenue for the Registrant is net interest income. Net interest income represents the difference between total interest income earned on earning assets and total interest expense paid on interest- bearing liabilities. The amount of interest income is dependent upon many factors including the volume and mix of earning assets, the general level of interest rates and the dynamics of changes in interest rates. The cost of funds necessary to support earning assets varies with the volume and mix of interest- bearing liabilities and the rates paid to attract and retain such funds. For purposes of the following discussion and analysis, the interest earned on tax-exempt securities is adjusted to an amount comparable to interest subject to normal income taxes. The adjustment is referred to as the tax-equivalent ("TE") adjustment. The Registrant's average balances, interest income and expense and rates earned or paid for major balance sheet categories are set forth in the following table (dollars in thousands): TABLE 2 DISTRIBUTION OF CONSOLIDATED ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY - INTEREST, RATES AND NET YIELDS
PERIOD ENDED YEAR ENDED JUNE 30, 1998 DECEMBER 31, 1997 AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE ASSETS: Interest-bearing deposits $ 797 $ 41 5.12% $ 1,497 $ 75 5.01% Federal funds sold 5,946 322 5.42% 4,254 230 5.41% Investment securities Taxable 113,879 7,144 6.27% 107,124 6,759 6.31% Tax-exempt 13,894 1,068 7.69% 13,046 1,062 8.14% Loans 350,309 29,221 8.34% 355,167 30,040 8.46% Total earning assets 484,825 37,796 7.80% 481,088 38,166 7.93% Cash and due from banks 16,513 18,363 Premises and equipment 12,429 11,916 Other assets 17,785 17,056 Allowance for loan losses (2,744) (2,672) Total assets $528,808 $525,751 LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing deposits Demand deposits $130,234 3,918 3.01% $125,666 $ 3,684 2.93% Savings deposits 38,527 866 2.25% 38,642 999 2.59% Time deposits 220,921 12,146 5.50% 226,431 12,464 5.50% Securities sold under agreements to repurchase 5,222 226 4.34% 10,806 488 4.52% FHLB advances 17,511 944 5.39% 17,221 1,018 5.91% Federal funds purchased 565 32 5.66% 502 26 5.18% Long-term debt 6,005 408 6.79% 6,584 452 6.87% Total interest-bearing liabilities 418,985 18,540 4.43% 425,852 19,131 4.49% Demand deposits 56,922 52,660 Other liabilities 5,415 4,601 Stockholders' equity 47,486 42,638 Total liabilities & equity $528,808 $525,751 Net interest income (TE) $ 19,256 $ 19,035 Net interest spread 3.37% 3.44% Impact of non-interest bearing funds .60% .52% Net yield on interest-earning assets 3.97% 3.96% Interest income and rates are presented on a tax-equivalent basis ("TE") assuming a federal income tax rate of 34%. Loans fees are included in interest income and are not material. Nonaccrual loans have been included in the average balances. 1998 interest income and expense amounts have been annualized based on results through June 30, 1998. The annualized amounts are not necessarily indicative of the actual amounts that are expected or that will occur for the year ending December 31, 1998.
Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income (TE), on an annualized basis, for the six months ended June 30, 1998 and 1997 (in thousands): TABLE 3 ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
1998 COMPARED TO 1997 INCREASE - (DECREASE) TOTAL RATE/ CHANGE VOLUME RATE VOLUME EARNING ASSETS: Interest-bearing deposits $ (34) $ (35) $ 2 $ (1) Federal funds sold 92 91 1 - Investment securities: Taxable 385 426 (39) (2) Tax-exempt 6 69 (59) (4) Loans (819) (412) (413) 6 Total interest income (370) 139 (508) (1) INTEREST-BEARING LIABILITIES: Interest-bearing deposits Demand deposits 234 133 97 4 Savings deposits (133) (3) (130) - Time deposits (318) (303) (15) - Securities sold under agreements to repurchase (262) (252) (20) 10 FHLB advances (74) 17 (90) (1) Federal funds purchased 6 3 2 1 Long-term debt (44) (39) (5) - Total interest expense (591) (444) (161) 14 Net interest income $ 221 $ 583 $(347) $ (15) Interest income and rates are presented on a tax equivalent basis, assuming a federal income tax rate of 34%. Loan fees are included in interest income and are not material. Nonaccrual loans are not material and have been included in the average balances. The changes in rate/volume are computed on a consistent basis by multiplying the change in rates by the change in volume. 1998 interest income and expense amounts have been annualized based on results through June 30, 1998. The annualized amounts are not necessarily indicative of the actual amounts that are expected or that will occur for the year ending December 31, 1998.
On an annualized tax equivalent basis, net interest income increased $221,000, or 1.2% in 1998, compared to an annualized increase of $718,000, or 4.0% in 1997. As set forth in Table 3, the slight improvement in net interest income in 1998 was due primarily to the increases in the volume of earning assets and decreases in the volume of interest-bearing liabilities, partially offset by the effect of changes in interest rates. In 1997, the increase in net interest income was due to the increase in the volume of earning assets and interest- bearing liabilities. For the first six months of 1998, average earning assets increased by $3,737,000, or .8%, and average interest-bearing liabilities decreased $6,867,000, or 1.6%, compared with 1997, as shown in Table 2. The higher volumes of earning assets and interest-bearing liabilities were primarily the result of investment growth in 1998. As a percentage of average earning assets, average loans decreased from 73.8% in 1997 to 72.3% for the first six months of 1998, while average securities increased from 25.0% in 1997 to 26.4% for the first six months of 1998. The interest margin increased slightly from 3.96% in 1997 to 3.97% during the first six months of 1998. PROVISION FOR LOAN LOSSES The provision for loan losses for the first six months of 1998 was $300,000, an increase of $50,000 from $250,000 for the same period in 1997. For additional information on loan loss experience and nonperforming loans, see the "Nonperforming Loans" and "Loan Quality and Allowance for Loan Losses" sections later in this document. OTHER INCOME An important source of the Registrant's revenue is derived from other income. The following table sets forth the major components of other income for the first six months of 1998 and 1997 (in thousands): TABLE 4 OTHER INCOME
THREE MONTHS ENDED SIX MONTHS ENDED 1998 1997 $ CHANGE 1998 1997 $ CHANGE Trust $ 414 $ 452 $ (38) $ 831 $ 874 $ (43) Brokerage 90 84 6 154 220 (66) Securities gains(losses) - (6) 6 12 (6) 18 Service charges 478 457 21 940 861 79 Mortgage banking 307 100 207 617 169 448 Other 251 248 3 535 491 44 Total other income $1,540 $1,335 $ 205 $3,089 $2,609 $ 480
The Registrant's other income increased to $3,089,000 in the first six months of 1998 as compared to $2,609,000 in the same period of 1997. Trust revenues decreased to $831,000 in the first six months of 1998 from $874,000 for the same period in 1997. This decrease of $43,000, or 4.9%, in revenues was primarily a result of the timing of the farm management fees relating to the sale of grain. Trust assets increased 2.4% to $334,802,000 at June 30, 1998 from $326,935,000 at December 31, 1997 and $289,113,000 at June 30, 1997. The increase in trust assets during 1997 was due primarily to growth of the trust accounts under management and a market value adjustment upward for the agricultural-related properties. Revenues from brokerage operations decreased by 30.0% in the first six months of 1998, as compared to the same period in 1997, primarily as a result of intense competition from local brokerage firms. Net securities gains for the first six months of 1998 were $12,000, as compared to net securities losses of $6,000 for the same period of 1997. Service charges amounted to $940,000 in the first six months of 1998, as compared to $861,000 for the same period of 1997. This increase of $79,000 or 9.2% in service charges was primarily due to an increase in the number of savings and transaction accounts, an increase in the service charges on ATM's, an increase in the volume associated with these accounts, and an increase in overdraft fees. First Mid Bank originates residential real estate loans for its own portfolio and for sale to others. Mortgage banking income from loans originated and subsequently sold into the secondary market amounted to $617,000 in the first six months of 1998 as compared to $169,000 for the same period of 1997. This $448,000 increase in 1998 was attributed to an increase in the volume of loans sold by First Mid Bank to $37.8 million (representing 469 loans) from $10.5 million in 1997 (representing 162 loans) and to re-financings by customers as a result of a low interest rate environment. OTHER EXPENSE The major categories of other expense include salaries and employee benefits, occupancy and equipment expenses and other operating expenses associated with day-to-day operations. The following table sets forth the major components of other expense for the first six months of 1998 and 1997 (in thousands): TABLE 5 OTHER EXPENSE SIX MONTHS ENDED 1998 1997 $ CHANGE Salaries and benefits $4,231 $3,918 $ 313 Occupancy and equipment 1,438 1,358 80 FDIC premiums 56 (15) 71 Amortization of intangibles 429 384 45 Stationery and supplies 350 302 48 Legal and professional fees 422 385 37 Marketing and promotion 263 289 (26) Other operating expenses 1,257 1,078 179 Total other expense $8,446 $7,699 $ 747 The Registrant's non-interest expense amounted to $8,446,000 for the first six months of 1998 as compared to $7,699,000 for the same period in 1997, an increase of $747,000 or 9.7%. Salaries and employee benefits, the largest component of other expense, increased to $4,231,000 for the first six months of 1998 as compared to $3,918,000 for the same period in 1997. This 8.0% increase was due to normal annual salary adjustments to employees, commissions on loan sales, and higher benefit costs. Occupancy, furniture and equipment expense increased to $1,438,000 for the first six months of 1998 as compared to $1,358,000 for the same period in 1997. This $80,000, or 5.9%, increase included depreciation expense recorded on technology equipment placed in service as well as items additions for document imaging, report imaging, home banking and wide-area network projects. The cost of insurance premiums assessed by the Federal Deposit Insurance Corporation ("FDIC") for the first six months of 1998 was $56,000, remaining fairly constant as compared to $54,000 for the same period in 1997. However, during the first quarter of 1997, the Registrant received a refund of $69,000 on the 1996 assessments of the Savings Association Insurance Fund ("SAIF"). Amortization of intangible assets increased 11.7% when comparing the first six months of 1998 to the same period in 1997. This increase was due to the goodwill and core deposit intangibles associated with the purchase of the Charleston branch in March, 1997. During the first six months of 1998, other operating expenses increased $179,000 or 16.6% to $1,257,000 from $1,078,000 for the same period in 1997. This increase was primarily due to net losses of $152,000 on the sale of fixed assets and other real estate owned, the implementation of the merchant debit card program and the extension of the wide area network. INCOME TAXES Total income tax expense amounted to $1,258,000 for the first six months of 1998 as compared to $1,377,000 for the same period in 1997. Effective tax rates were 33.2% and 35.5% for the first six months of 1998 and 1997, respectively. THE YEAR 2000 ISSUE Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. The Year 2000 issue affects virtually all companies and organizations. The Registrant has considered the impact of the Year 2000 issue for its computer systems and applications as well as its general operations, customers and suppliers. The Registrant has developed a stratigic plan for Year 2000 compliance which is being administered by a committee with representation from all functional areas of the company as well as extensive involvement and oversite by the board of directors and senior management. The plan follows the guidelines set forth by the Federal Financial Institutions Examinations Council ("FFIEC"). The Registrant has completed its assessment phase, identifying hardware, software, networks, other processing platforms and customer and vendor interdependency affected by the Year 2000 date change. The plan calls for all mission critical items to be Year 2000 compliant by year-end 1998. Additionally, alarms, elevators, heating and cooling systems, and other computer-controlled mechanical devices on which the Registrant relies are being evaluated. Those found not to be in compliance will be modified or replaced with a compliant product. Management of the Registrant estimates that during 1998, approximately $100,000 of costs will be incurred specifically related to the Year 2000 issue. While there will likely be some Year 2000 expenses incurred during 1999, the Registrant has not identified any additional situations that will require material cost expenditures to become fully compliant. An unknown element at this time is the impact of the Year 2000 on the Registrant's borrowing customers and their ability to repay. The Registrant has initiated a program to communicate with key bank customers to ensure they are properly prepared for the Year 2000 and will not suffer serious adverse consequences. See also, "Recent Regulatory Developments." ANALYSIS OF BALANCE SHEETS SECURITIES The Registrant's overall investment goal is to maximize earnings while maintaining liquidity in securities having minimal credit risk. The types and maturities of securities purchased are primarily based on the Registrant's current and projected liquidity and interest rate sensitivity positions. The following table sets forth the amortized cost of the securities for June 30, 1998 and December 31, 1997 (in thousands): TABLE 6 INVESTMENT PORTFOLIO
JUNE 30, DECEMBER 31, 1998 1997 % OF % OF AMOUNT TOTAL AMOUNT TOTAL U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 81,708 63% $ 80,509 67% Obligations of states and political subdivisions 15,408 12% 12,820 11% Mortgage-backed securities 29,670 23% 23,272 20% Other securities 2,591 2% 2,747 2% Total securities $129,377 100% $119,348 100%
At June 30, 1998, the Registrant's investment portfolio showed a slight decrease in the composition of U.S. Government agency securities as well as an increase in mortgage-backed securities and obligations of states and political subdivisions. This change in the portfolio mix improved the repricing characteristics of the portfolio, helped mollify the Registrant's exposure relating to interest rate risk and improved the portfolio yield. The amortized cost, gross unrealized gains and losses and estimated fair values for available-for-sale and held-to-maturity securities by major security type at June 30, 1998 and December 31, 1997 were as follows (in thousands): TABLE 7 INVESTMENTS AT AMORTIZED COST / ESTIMATED FAIR VALUE
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR June 30, 1998 COST GAINS LOSSES VALUE Available-for-sale: U.S. Treasury securities and obligations of U.S. Government Agencies and corporations $ 81,708 $ 168 $ (185) $ 81,691 Obligations of states and political subdivisions 11,846 337 (11) 12,172 Mortgage-backed securities 29,670 261 (39) 29,892 Federal Home Loan Bank stock 1,925 - - 1,925 Other securities 666 - - 666 Total available-for-sale $125,815 $ 766 $ (235) $126,346 Held-to-maturity: Obligations of states and political subdivisions $ 3,562 $ 38 $ (4) $ 3,596
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 1997 COST GAINS LOSSES VALUE Available-for-sale: U.S. Treasury securities and obligations of U.S. Government Agencies and corporations $ 80,509 $ 198 $ (256) $ 80,451 Obligations of states and political subdivisions 9,800 373 - 10,173 Mortgage-backed securities 23,272 195 (56) 23,411 Federal Home Loan Bank stock 2,115 - - 2,115 Other securities 632 - - 632 Total available-for-sale $116,328 $ 766 $ (312) $116,782 Held-to-maturity: Obligations of states and political subdivisions $ 3,020 $ 41 $ (4) $ 3,057
The following table indicates the expected maturities of investment securities classified as available-for-sale and held-to-maturity, presented at amortized cost, at June 30, 1998 (dollars in thousands) and the weighted average yield for each range of maturities. Mortgage-backed securities are aged according to their weighted average life. All other securities are shown at their contractual maturity. TABLE 8 INVESTMENT MATURITY SCHEDULE
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 $ 5,966 $49,704 $26,038 $ - $ 81,708 Obligations of state and political subdivisions 1,762 4,072 1,911 4,101 11,846 Mortgage-backed securities 3,667 9,528 7,064 9,411 29,670 Other securities - - - 2,591 2,591 Total available-for-sale $11,395 $63,304 $35,013 $16,103 $125,815 Weighted average yield 5.68% 6.30% 6.20% 5.09% 6.20% Full tax-equivalent yield 6.08% 6.49% 6.35% 5.78% 6.46% Held-to-maturity: Obligations of state and political subdivisions $ 372 $ 1,701 $ 1,044 $ 445 $ 3,562 Weighted average yield 5.08% 5.14% 4.70% 5.74% 5.07% Full tax-equivalent yield 7.70% 7.79% 7.13% 8.70% 7.68%
The weighted average yields are calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. Full tax-equivalent yields have been calculated using a 34% tax rate. The maturities of, and yields on, mortgage-backed securities have been calculated using actual repayment history. However, where securities have call features, and have a market value in excess of par value, the call date has been used to determine the expected maturity. With the exception of obligations of the U.S. Treasury and other U.S. Government agencies and corporations, there were no investment securities of any single issuer the book value of which exceeded 10% of stockholders' equity at June 30, 1998. Proceeds from sales of investment securities and realized gains and losses were as follows for the periods ended June 30, 1998 and December 31, 1997: June 30, December 31, (in thousands) 1998 1997 Proceeds from sales $ 2,327 $ 9,983 Gains 15 20 Losses 3 26 LOANS The loan portfolio (net of unearned discount) is the largest category of the Registrant's earning assets. The following table summarizes the composition of the loan portfolio for the periods ended June 30, 1998 and December 31, 1997: TABLE 9 COMPOSITION OF LOANS June 30, DECEMBER 31, (in thousands) 1998 1997 Commercial, financial and agricultural $ 70,499 $ 73,854 Real estate - mortgage 244,976 252,312 Installment 26,767 29,266 Other 895 2,791 Total loans $343,137 $358,223 The Registrant had loan concentrations in agricultural industries of 14.3% at June 30, 1998 and 13.8% at December 31, 1997. The Registrant had no further industry loan concentrations in excess of 10% of outstanding loans. TABLE 10 LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY The following table presents the balance of loans outstanding as of June 30, 1998, by maturities (dollars in thousands):
MATURITY OVER 1 ONE YEAR THROUGH OVER OR LESS 5 YEARS 5 YEARS TOTAL Commercial, financial and agricultural $ 48,202 $ 20,859 $ 1,438 $ 70,499 Real estate - mortgage 54,988 136,292 53,696 244,976 Installment 6,211 19,825 731 26,767 Other 319 203 373 895 Total loans $109,720 $177,179 $ 56,238 $343,137 Based on scheduled principal repayments. Includes demand loans, past due loans and overdrafts.
As of June 30, 1998, loans with maturities over one year consisted of $195,903,000 in fixed rate loans and $37,514,000 in variable rate loans. The loan maturities noted above are based on the contractual provisions of the individual loans. The Registrant has no general policy regarding rollovers and borrower requests, which are handled on a case-by-case basis. NONPERFORMING LOANS Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due ninety days or more as to interest or principal payments; and loans not included in (a) and (b) above which are defined as "troubled debt restructurings". The following table presents information concerning the aggregate amount of nonperforming loans (in thousands): TABLE 11 NONPERFORMING LOANS June 30, December 31, 1998 1997 Nonaccrual loans $1,801 $1,194 Loans past due ninety days or more and still accruing 396 145 Restructured loans which are performing in accordance with revised terms 1,452 346 Total Nonperforming Loans $3,649 $1,685 The $1.1 million increase in restructured loans resulted from three individual, collateral dependent loans to a single borrower that were restructured during the first quarter of 1998. The $.6 million increase in nonaccrual loans was the net result of a $1.1 million commercial loan becoming nonaccrual during the second quarter of 1998 and of removing a $.4 million loan from the nonaccrual list and transferring the balance to other real estate owned. At June 30, 1998, there was approximately $.5 million of exposure associated with the $1.1 million restructured loans and the $1.1 million nonaccrual loans. This exposure was considered in determining the adequacy of the allowance for possible loan losses as of June 30, 1998. Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $218,000 for the first six months of 1998. Interest income that was included in income totaled $53,000 for this same period. The Registrant's policy generally is to discontinue the accrual of interest income on any loan for which principal or interest is ninety days past due and when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. LOAN QUALITY AND ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents management's best estimate of the reserve necessary to adequately cover losses that could ultimately be realized from current loan exposures. The provision for loan losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate allowance for loan losses. In determining the adequacy of the allowance for loan losses, and therefore the provision to be charged to current earnings, management relies predominantly on a disciplined credit review and approval process which extends to the full range of the Registrant's credit exposure. The review process is directed by overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Once identified, the magnitude of exposure to individual borrowers is quantified in the form of specific allocations of the allowance for loan losses. Collateral values are considered by management in the determination of such specific allocations. Additional factors considered by management in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and renegotiated loans and the current and anticipated economic conditions in the region where the Registrant operates. Management recognizes that there are risk factors which are inherent in the Registrant's loan portfolio. All financial institutions face risk factors in their loan portfolios because risk exposure is a function of the business. The Registrant's operations (and therefore its loans) are concentrated in east central Illinois, an area where agriculture is the dominant industry. Accordingly, lending and other business relationships with agriculture-based businesses are critical to the Registrant's success. At June 30, 1998, the Registrant's loan portfolio included $49.1 million of loans to borrowers whose businesses are directly related to agriculture. The balance decreased $.2 million from $49.3 million at December 31, 1997. In addition to agricultural lending, the Registrant has historically had substantial residential mortgage lending activity in and around east central Illinois. At June 30, 1998, these loans amounted to $168.3 million or 49.0% of total loans. Such residential mortgage loans amounted to $181.3 million or 50.6% of total loans at December 31, 1997. Loan loss experience for the six months ended June 30, 1998 and for the year ended December 31, 1997 are as follows (dollars in thousands): TABLE 12 ALLOWANCE FOR LOAN LOSSES June 30, December 31, 1998 1997 Average loans outstanding, net of unearned income $350,309 $355,167 Allowance-beginning of year 2,636 2,684 Charge-offs: Commercial, financial and agricultural 34 588 Real estate-mortgage 21 69 Installment 68 145 Total charge-offs 123 802 Recoveries: Commercial, financial and agricultural 4 28 Real estate-mortgage - 1 Installment 20 25 Total recoveries 24 54 Net charge-offs 99 748 Provision for loan losses 300 700 Allowance-end of period $ 2,837 $ 2,636 Ratio of net charge-offs to average loans .03% .21% Ratio of allowance for loan losses to loans outstanding (less unearned interest at end of period) .83% .74% Ratio of allowance for loan losses to nonperforming loans 77.7% 156.4% The Registrant minimizes credit risk by adhering to sound underwriting and credit review policies. These policies are reviewed at least annually, and changes are approved by the board of directors. Senior management is actively involved in business development efforts and the maintenance and monitoring of credit underwriting and approval. The loan review system and controls are designed to identify, monitor and address asset quality problems in an accurate and timely manner. On a monthly basis, the board of directors review the status of problem loans. In addition to internal policies and controls, regulatory authorities and external auditors periodically review asset quality and the overall adequacy of the allowance for loan losses. During the first six months of 1998, the Registrant had net charge-offs of $99,000 as compared to $748,000 for the year ended December 31, 1997. Management provided $300,000 for loan losses during the first six months of 1998 as compared to $250,000 for the same period in 1997. On June 30, 1998, the allowance for loan losses amounted to $2,837,000, or .83% of total loans, and 77.7% of nonperforming loans. At December 31, 1997, the allowance was $2,636,000, or .74% of total loans and 156.4% of nonperforming loans. The ratio of the allowance for loan loss to total nonperforming loans decreased substantially from 156.4% at December 31, 1997 to 77.7% at June 30, 1998 due to the aforementioned increases in nonperforming loans. The allowance for loan losses, in management's judgment, would be allocated as follows to cover potential loan losses (in thousands): TABLE 13 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
June 30, 1998 December 31, 1997 ALLOWANCE % OF ALLOWANCE % OF FOR LOANS FOR LOANS LOAN TO TOTAL LOAN TO TOTAL LOSSES LOANS LOSSES LOANS Commercial, financial and agricultural $ 1,752 20.5% $ 1,699 20.6% Real estate-mortgage 247 71.4% 245 70.4% Installment 207 7.8% 192 8.2% Other - .3% - .8% Total allocated 2,206 2,136 Unallocated 631 N/A 500 N/A Allowance at end of reported period $ 2,837 100.0% $ 2,636 100.0%
The allowance is allocated to the individual loan categories by a specific allocation for all classified loans plus a percentage of loans not classified based on historical losses. DEPOSITS Funding the Registrant's earning assets is substantially provided by a combination of consumer, commercial and public fund deposits. The Registrant continues to focus its strategies and emphasis on retail core deposits, the major component of funding sources. The following table sets forth the average deposits and weighted average rates at June 30, 1998 and December 31, 1997 (dollars in thousands): TABLE 14 COMPOSITION OF DEPOSITS
JUNE 30, DECEMBER 31, 1998 1997 WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE Demand deposits: Non-interest bearing $ 56,922 - $ 52,660 - Interest bearing 130,234 3.01% 125,666 2.93% Savings 38,527 2.25% 38,642 2.59% Time deposits 220,921 5.50% 226,431 5.50% Total average deposits $446,604 3.79% $443,399 3.87%
The following table sets forth the maturity of time deposits of $100,000 or more as of June 30, 1998 and December 31, 1997 (in thousands): TABLE 15 MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE June 30, December 31, 1998 1997 3 months or less $ 10,089 $ 21,715 Over 3 through 6 months 8,649 12,287 Over 6 through 12 7,637 6,438 Over 12 months 8,823 10,293 Total $ 35,198 $ 50,733 OTHER BORROWINGS Other borrowings consist of securities sold under agreements to repurchase, Federal Home Loan Bank ("FHLB") advances, and Federal funds purchased. Information relating to other borrowings for the six months ended June 30, 1998 and the year ended December 31, 1997 is presented below (in thousands): TABLE 16 SCHEDULE OF OTHER BORROWINGS
June 30, December 31, 1998 1997 End of period: Securities sold under agreements to repurchase $ 6,864 $10,780 Federal Home Loan Bank advances: Overnight - - Fixed term - due in one year or less - - Fixed term - due after one year 20,500 7,000 Federal funds purchased - - Total $27,364 $17,780 Average interest rate at end of period 5.14% 5.01% Maximum Outstanding at Any Month-end Securities sold under agreements to repurchase $ 6,864 $17,710 Federal Home Loan Bank advances: Overnight 5,500 23,733 Fixed term - due in one year or less - 16,000 Fixed term - due after one year 20,500 9,000 Federal funds purchased 5,750 - Total $38,614 $66,443 Averages for the Period Securities sold under agreements to repurchase $ 5,222 $10,806 Federal Home Loan Bank advances: Overnight 356 6,933 Fixed term - due in one year or less - 3,455 Fixed term - due after one year 17,155 6,833 Federal funds purchased 565 502 Total $23,298 $28,529 Average interest rate during the period 5.16% 5.02%
Securities sold under agreements to repurchase primarily represent borrowings originated as part of cash management services offered to corporate customers. The remaining balance of securities sold under agreements to repurchase represents term repurchase agreements with the State of Illinois. FHLB advances represent borrowings by First Mid Bank to fund loan demand. INTEREST RATE SENSITIVITY The Registrant seeks to maximize its net interest margin within an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to favorable or unfavorable movements in interest rates. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of assets differ significantly from the maturity or repricing characteristics of liabilities. The Registrant monitors its interest rate sensitivity position to maintain a balance between rate sensitive assets and rate sensitive liabilities. This balance serves to limit the adverse effects of changes in interest rates. The Registrant's asset/liability management committee oversees the interest rate sensitivity position and directs the overall allocation of funds in an effort to maintain a cumulative one-year gap to earning assets ratio of less than 30% of total earning assets. In the banking industry, a traditional measurement of interest rate sensitivity is known as "GAP" analysis, which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. The following table sets forth the Registrant's interest rate repricing gaps for selected maturity periods at June 30, 1998 (in thousands): TABLE 17 GAP TABLE
NUMBER OF MONTHS UNTIL NEXT REPRICING OPPORTUNITY INTEREST EARNING ASSETS: 0-1 1-3 3-6 6-12 12+ Deposits with other financial institutions $ 297 $ - $ - $ - $ - Federal funds sold 5,600 - - - - Taxable investment securities 26,135 17,045 10,218 16,181 44,592 Nontaxable investment securities - 110 1,690 668 13,268 Loans 44,739 12,904 24,773 48,084 212,637 Total $ 76,771 $ 30,059 $ 36,681 $ 64,993 $ 270,497 INTEREST BEARING LIABILITIES: Savings and N.O.W. accounts 119,525 - - - - Money market accounts 41,540 - - - - Other time deposits 28,821 31,094 35,162 43,929 73,790 Other borrowings 6,864 1,000 - 17,500 2,000 Long-term debt 5,450 - - - - Total $ 202,200 $ 32,094 $ 35,162 $ 61,429 $ 75,790 Periodic GAP $(125,429) $ (2,035) $ 1,519 $ 3,504 $194,707 Cumulative GAP $(125,429) $(127,464) $(125,945) $(122,441) $ 72,266 GAP as a % of interest earning assets: Periodic (26.2%) (.4%) .3% .7% 40.7% Cumulative (26.2%) (26.6%) (26.3%) (25.6%) 15.1%
At June 30, 1998, the Registrant was liability sensitive on a cumulative basis through the twelve-month time horizon. Accordingly, future increases in interest rates, if any, could have an unfavorable effect on the net interest margin. However, the Registrant's historical repricing of N.O.W. and savings accounts has not, and is not expected to change on a frequent basis. To some extent, this would mitigate the negative effect of an upturn in rates. Over the past years, management has placed an emphasis on growing core deposits, which are considered to be less sensitive to changes in interest rates. Interest rate sensitivity using a static GAP analysis basis is only one of several measurements of the impact of interest rate changes on net interest income used by the Registrant. Its actual usefulness in assessing the effect of changes in interest rates varies with the constant changes which occur in the composition of the Registrant's earning assets and interest-bearing liabilities. For this reason, the Registrant uses financial models to project interest income under various rate scenarios and assumptions relative to the prepayments, reinvestment and roll overs of assets and liabilities, of which First Mid Bank represents substantially all of the Registrant's rate sensitive assets and liabilities. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Based on the financial analysis performed as of June 30, 1998, which takes into account how the specific interest rate scenario would be expected to impact each interest-earning asset and each interest-bearing liability, the Registrant estimates that no material changes from the December 31, 1997 analysis would occur. See the Registrant's December 31, 1997 Form 10-K for details. CAPITAL RESOURCES At June 30, 1998, the Registrant's stockholders' equity amounted to $48,951,000, a $3,375,000 or 7.4% increase from the $45,576,000 balance as of December 31, 1997. During the six month period ended June 30, 1998, net income contributed $2,531,000 to equity before the declaration of dividends to preferred stockholders amounting to $143,000. The change in net unrealized gain on available-for-sale investment securities increased stockholders' equity by $50,000, net of tax. The Registrant issues common stock as part of a deferred compensation plan for its directors and certain senior officers and as an investment option under the Registrant's 401-K (First Retirement and Savings Plan) for its employees. For the six month period ended June 30, 1998, 2,519 shares were issued pursuant to the Deferred Compensation Plan and 18,111 shares were issued pursuant to the First Retirement and Savings Plan. For the year ended December 31, 1997, 11,403 shares were issued pursuant to the Deferred Compensation Plan and 44,893 shares were issued pursuant to the First Retirement and Savings Plan. The Registrant has a Dividend Reinvestment Plan whereby common and preferred shareholders can elect to have their cash dividends automatically reinvested into newly-issued common shares of the Registrant. Of the $1,113,000 in common and preferred stock dividends paid during the first six months of 1998, $622,000 or 56% was reinvested into shares of common stock of the Registrant through the Dividend Reinvestment Plan. This resulted in an additional 17,417 shares of common stock being issued during this period of 1998. As of the year ended December 31, 1997, 32,781 shares of common stock were issued pursuant to the Dividend Reinvestment Plan. In 1997, the Registrant established an Incentive Stock Option Plan ("ISO Plan") intended to provide a means whereby directors and certain officers can acquire shares of the Registrant's common stock. A maximum of 100,000 shares have been authorized under the ISO Plan. The shares will be awarded at an exercise price equal to the fair market value of the shares on the date of grant. The options are granted for a 10 year term and vest over a period of four years. In October, 1997, the Registrant granted 19,500 options at an option price of $23.51. In December, 1997, the Registrant granted 11,500 options at an option price of $33.73. The Registrant applied APB Opinion No. 25 in accounting for the ISO Plan and, accordingly, compensation cost based on fair value at grant date has not been recognized for its stock options in the consolidated financial statements for the periods ended June 30, 1998 and December 31, 1997. The Registrant and First Mid Bank have capital ratios above the regulatory capital requirements. These requirements call for a minimum total risk-based capital ratio of 8% and a minimum leverage ratio of 3% for the most highly-rated banks that do not expect significant growth. All other institutions are required to maintain a ratio of Tier 1 capital to total risk-weighted assets of 4% to 5% depending on their particular circumstances and risk profiles. At June 30, 1998, the Registrant's leverage ratio was 7.83%. A tabulation of the Registrant's and First Mid Bank's capital ratios as of June 30, 1998 and December 31, 1997 follows: TABLE 18 CAPITAL RATIOS
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO JUNE 30, 1998 Total Capital (to risk-weighted assets) Registrant $ 43,270 13.69% $ 25,277 > 8.00% $ 31,596 > 10.00% First Mid Bank 44,954 14.39 24,985 > 8.00 31,231 > 10.00 Tier 1 Capital (to risk-weighted assets) Registrant 40,433 12.80 12,638 > 4.00 18,958 > 6.00 First Mid Bank 42,117 13.49 12,493 > 4.00 18,739 > 6.00 Tier 1 Capital (to average assets) Registrant 40,433 7.83 20,666 > 4.00 25,833 > 5.00 First Mid Bank 42,117 8.21 20,515 > 4.00 25,644 > 5.00
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO DECEMBER 31, 1997 Total Capital (to risk-weighted assets) Registrant $ 39,416 12.20% $ 25,842 > 8.00% $ 32,303 > 10.00% First Mid Bank 42,105 13.17 25,584 > 8.00 31,980 > 10.00 Tier 1 Capital (to risk-weighted assets) Registrant 36,780 11.39 12,921 > 4.00 19,382 > 6.00 First Mid Bank 39,469 12.34 12,792 > 4.00 19,188 > 6.00 Tier 1 Capital (to average assets) Registrant 36,780 7.05 20,879 > 4.00 26,099 > 5.00 First Mid Bank 39,469 7.59 20,807 > 4.00 26,009 > 5.00
Banks and bank holding companies are generally expected to operate at or above the minimum capital requirements. These ratios are in excess of regulatory minimums and will allow the Registrant to operate without capital adequacy concerns. LIQUIDITY Liquidity represents the ability of the Registrant and its subsidiaries to meet the requirements of customers for loans and deposit withdrawals. Liquidity management focuses on the ability to obtain funds economically for these purposes and to maintain assets which may be converted into cash at minimal costs. At June 30, 1998, the excess collateral at the Federal Home Loan Bank will support approximately $78 million of additional advances. Management monitors its expected liquidity requirements carefully, focusing primarily on cash flows from operating, investing and financing activities. EFFECTS OF INFLATION Unlike industrial companies, virtually all of the assets and liabilities of the Registrant are monetary in nature. As a result, interest rates have a more significant impact on the Registrant's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or experience the same magnitude of changes as goods and services, since such prices are affected by inflation. In the current economic environment, liquidity and interest rate adjustments are features of the Registrant's assets and liabilities which are important to the maintenance of acceptable performance levels. The Registrant attempts to maintain a balance between monetary assets and monetary liabilities, over time, to offset these potential effects. FUTURE ACCOUNTING CHANGES In June, 1997, the FASB issued Statement No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION," ("SFAS 131"). SFAS 131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. SFAS 131 is effective for financial periods beginning after December 15, 1998, and is not expected to have a material impact on the Registrant. Statement of Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," ("SFAS 133") was issued by the FASB in June 1998. SFAS 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains of losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss is reported in earnings immediately. Accounting for foreign currency hedges is similar to the accounting for fair value and cash flow hedges. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change. The Registrant has not determined the impact that SFAS 133 will have on its financial statements and believes that such determination will not be meaningful until closer to the date of initial adoption. RECENT REGULATORY DEVELOPMENTS The federal banking regulators have issued several statements providing guidance to financial institutions on the steps the regulators expect financial institutions to take to become Year 2000 compliant. Each of the federal banking regulators is also examining the financial institutions under its jurisdiction to assess each institutions's compliance with the outstanding guidance. If an institution's progress in addressing the Year 2000 problem is deemed by its primary federal regulator to be less than satisfactory, the institution will be required to enter into memorandum of understanding with the regulator which will, among other things, require the institution to promptly develop and submit an acceptable plan for becoming Year 2000 compliant and to provide periodic reports describing the institution's progress in implementing the plan. Failure to satisfactorily address the Year 2000 problem may also expose a financial institution to other forms of enforcement action that its primary federal regulator deems appropriate to address the deficiencies in the institution's Year 2000 remediation program. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Since First Mid Bank acts as a depository of funds, it is named from time to time as a defendant in law suits (such as garnishment proceedings) involving claims to the ownership of funds in particular accounts. Management believes that all such litigation as well as other pending legal proceedings constitute ordinary routine litigation incidental to the business of First Mid Bank and that such litigation will not materially adversely affect the Registrant's consolidated financial condition. In addition to the normal proceedings referred to above, Heartland Savings Bank ("Heartland"), a subsidiary of the Registrant that merged will First Mid Bank during 1997, filed a complaint on December 5, 1995, against the U.S. Government which is now pending in the U.S. Court of Federal claims in Washington D.C. This complaint relates to Heartland's interest as successor to Mattoon Federal Savings and Loan Association which incurred a significant amount of supervisory goodwill when it acquired Urbana Federal Savings and Loan in 1982. The complaint alleges that the Government breached its contractual obligations when, in 1989, it issued new rules which eliminated supervisory goodwill from inclusion in regulatory capital. At this time, it is too early to tell whether First Mid Bank will ultimately prevail in the suit and if so, what damages my be recovered. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders was held on May 20, 1998. At the meeting, Charles A. Adams, Daniel E. Marvin, Jr., and Ray Anthony Sparks were elected to serve as Class III directors with terms expiring in 2001. Continuing Class I directors (term expiring in 1999) are Kenneth R. Diepholz and Gary W. Melvin and continuing Class II directors (term expiring in 2000) are Richard Anthony Lumpkin, William G. Roley and William S. Rowland. The stockholders also approved the adoption of the First Mid-Illinois Bancshares, Inc. 1997 Stock Incentive Plan and ratified the appointment of KPMG Peat Marwick LLP as the Registrant's independent public accountants for the year ending December 31, 1998. There were 2,000,167 issued and outstanding shares of Common Stock at the time of the Annual Meeting. The voting at the meeting, on the items listed below, was as follows: Election of directors For Withheld Charles A. Adams 1,740,997 5,123 Daniel E. Marvin, Jr. 1,740,997 5,123 Ray Anthony Sparks 1,740,997 5,123 Approval of adoption of Stock Incentive Plan For Against Withheld Broker Non Vote 1,607,720 84,789 17,570 36,040 Approval of KPMG Peat Marwick LLP as independent public accountants For Against Withheld Broker Non Vote 1,723,875 8,089 14,156 - ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K. (a)(3) -- Exhibits (a)(3) -- The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit Index which follows the Signature Page and immediately precedes the exhibits filed. (b) Reports on Form 8-K There were no reports on Form 8-K filed by the Registrant during the quarter ended June 30, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on this 12th day of August, 1998. FIRST MID-ILLINOIS BANCSHARES, INC. (Registrant) /s/ Daniel E. Marvin, Jr. *-------------------------------------* Daniel E. Marvin, Jr. President and Chief Executive Officer /s/ William S. Rowland *-------------------------------------* William S. Rowland Chief Financial Officer Dated: August 12, 1998 *---------------------* EXHIBIT INDEX TO FORM 10-K REGISTRATION STATEMENT EXHIBIT NUMBER DESCRIPTION AND FILING OR INCORPORATION REFERENCE 3.1 RESTATED CERTIFICATE OF INCORPORATION AND AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION OF FIRST MID-ILLINOIS BANCSHARES, INC. Exhibit 3(a) to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987 (File No. 0-13688) 3.2 RESTATED BYLAWS OF FIRST MID-ILLINOIS BANCSHARES, INC. Exhibit 3(b) to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987 (File No 0-13368) 11.1 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE (Filed herewith) 27.1 FINANCIAL DATA SCHEDULE (Filed herewith) EX-27 2 EXHIBIT 27
9 1000 6-MOS DEC-31-1998 JUN-30-1998 18433 297 5600 0 126346 3562 3595 343137 2837 526305 439026 6864 5514 25950 0 3070 8053 37828 526305 14610 3925 181 18716 8465 9270 9446 300 12 8446 3789 3789 0 0 2531 1.20 1.13 3.97 1801 396 1452 0 2636 123 24 2837 2837 0 631
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