-----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, WlQsCeLtxRI3NwoDu85Swy/x2oXyL6vdPJoVwrKdbLEYiQaWJdPnTknlwdsA4DRb CmAzHRn+42CJ1HZvvnuJUw== 0000700565-99-000010.txt : 19990507 0000700565-99-000010.hdr.sgml : 19990507 ACCESSION NUMBER: 0000700565-99-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990506 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: 99612427 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 1ST QTR 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 COMMISSION FILE NUMBER: 0-13368 FIRST MID-ILLINOIS BANCSHARES, INC. (Exact name of Company as specified in its charter) DELAWARE 37-1103704 (State or other jurisdiction of (I.R.S. employer identification No.) incorporation or organization) 1515 CHARLESTON AVENUE, MATTOON, ILLINOIS 61938 (Address and Zip Code of Principal Executive Offices) (217) 234-7454 (Company's telephone number, including area code) Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of April 30, 1999 2,018,483 common shares, $4.00 par value, were outstanding. PART I ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (unaudited) March 31, December 31, (In thousands, except share data) 1999 1998 ASSETS Cash and due from banks: Non-interest bearing $ 13,388 $ 14,669 Interest bearing 106 103 Federal funds sold - 7,000 Cash and cash equivalents 13,494 21,772 Investment securities: Available-for-sale, at fair value 151,283 153,534 Held-to-maturity, at amortized cost (estimated fair value of $2,700 and $3,389 at March 31, 1999 and December 31, 1998, respectively) 2,659 3,322 Loans 331,625 349,065 Less allowance for loan losses 2,760 2,715 Net loans 328,865 346,350 Premises and equipment, net 13,214 13,226 Intangible assets, net 7,596 7,787 Other assets 8,126 8,672 TOTAL ASSETS $525,237 $554,663 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing $ 55,618 $ 62,357 Interest bearing 370,035 387,279 Total deposits 425,653 449,636 Securities sold under agreements to repurchase 19,583 26,018 Federal Home Loan Bank advances 20,300 19,500 Long-term debt 4,325 4,700 Other liabilities 3,853 4,329 TOTAL LIABILITIES 473,714 504,183 Stockholders' Equity: Series A convertible preferred stock; no par value; authorized 1,000,000 shares; issued 614 shares with stated value of $5,000 per share 3,070 3,070 Common stock, $4 par value; authorized 6,000,000 shares; issued 2,034,572 shares in 1999 and 2,023,227 shares in 1998 8,138 8,093 Additional paid-in-capital 8,914 8,562 Retained earnings 32,310 31,025 Deferred compensation 1,023 950 Accumulated other comprehensive income (loss) (298) 261 Less treasury stock at cost, 17,859 shares in 1999 and 15,539 shares in 1998 (1,634) (1,481) TOTAL STOCKHOLDERS' EQUITY 51,523 50,480 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $525,237 $554,663 See accompanying notes to unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (unaudited) (In thousands, except per share data) FOR THE THREE MONTHS ENDED 1999 1998 INTEREST INCOME: Interest and fees on loans $ 6,869 $ 7,365 Interest on investment securities 2,054 1,950 Interest on federal funds sold 55 81 Interest on deposits with other financial institutions 2 18 Total interest income 8,980 9,414 INTEREST EXPENSE: Interest on deposits 3,700 4,307 Interest on securities sold under agreements to repurchase 214 52 Interest on Federal Home Loan Bank advances 245 219 Interest on Federal funds purchased 2 15 Interest on long-term debt 70 105 Total interest expense 4,231 4,698 Net interest income 4,749 4,716 Provision for loan losses 150 150 Net interest income after provision for loan losses 4,599 4,566 OTHER INCOME: Trust revenues 481 417 Brokerage revenues 120 64 Service charges 500 462 Securities gains, net - 12 Mortgage banking income 329 310 Other 338 284 Total other income 1,768 1,549 OTHER EXPENSE: Salaries and employee benefits 2,253 2,124 Net occupancy and equipment expense 769 709 Amortization of intangible assets 191 191 Stationary and supplies 174 182 Legal and professional 224 207 Marketing and promotion 119 126 Other 638 577 Total other expense 4,368 4,116 Income before income taxes 1,999 1,999 Income taxes 643 665 Net income $ 1,356 $ 1,334 Per common share data: Basic earnings per share $ .64 $ .64 Diluted earnings per share $ .60 $ .60 See accompanying notes to unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED (In thousands) 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,356 $ 1,334 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 150 150 Depreciation, amortization and accretion, net 541 502 Gain on sale of securities, net - (12) (Gain) loss on sale of other real property owned, net (34) 6 Gain on sale of mortgage loans held for sale, net (307) (286) Origination of mortgage loans held for sale (14,830) (20,918) Proceeds from sale of mortgage loans held for sale 21,905 19,081 Decrease in other assets 592 502 Increase in other liabilities 338 1,101 Net cash provided by operating activities 9,711 1,460 CASH FLOWS FROM INVESTING ACTIVITIES: Capitalization of mortgage servicing rights (7) (41) Purchases of premises and equipment (339) (395) Net decrease in loans 10,567 9,743 Proceeds from sales of: Securities available-for-sale - 2,327 Proceeds from maturities of: Securities available-for-sale 15,205 12,119 Securities held-to-maturity 366 120 Purchases of: Securities available-for-sale (13,282) (23,370) Securities held-to-maturity (261) (34) Net cash provided by investing activities 12,249 469 CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in deposits (23,983) (11,349) Decrease in repurchase agreements (6,435) (7,460) Increase in FHLB advances 800 10,000 Repayment of long-term debt (375) (375) Proceeds from issuance of common stock 127 619 Purchase of treasury stock (80) - Dividends paid on common stock (292) (249) Net cash used in financing activities (30,238) (8,814) Decrease in cash and cash equivalents (8,278) (6,885) Cash and cash equivalents at beginning of period 21,772 26,661 Cash and cash equivalents at end of period $13,494 $19,776 ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 3,965 $ 4,764 Income taxes - 250 Loans transferred to real estate owned 58 - Dividends reinvested in common shares 270 260 See accompanying notes to unaudited consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING AND CONSOLIDATION The unaudited consolidated financial statements include the accounts of First Mid-Illinois Bancshares, Inc. ("Company") and its wholly-owned subsidiaries: Mid-Illinois Data Services, Inc. ("MIDS") and First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank") and its wholly-owned subsidiary First Mid-Illinois Insurance Services, Inc. ("First Mid Insurance"). All significant inter- company balances and transactions have been eliminated in consolidation. The financial information reflects all adjustments which, in the opinion of management, are necessary to present a fair statement of the results of the interim periods ended March 31, 1999 and 1998, and all such adjustments are of a normal recurring nature. The results of the interim period ended March 31, 1999, are not necessarily indicative of the results expected for the year ending December 31, 1999. The unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information required by generally accepted accounting principles for complete financial statements and related footnote disclosures. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1998 Form 10-K. COMPREHENSIVE INCOME In 1998, the Company adopted Financial Accounting Standards Board's Statement No. 130, "REPORTING COMPREHENSIVE INCOME" ("SFAS 130"). This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and net unrealized gains (losses) on available-for-sale investment securities and is presented in the consolidated statements of changes in stockholders' equity. SFAS 130 requires only additional disclosures in the financial statements; it does not affect the Company's financial position or results of operations. The Company's comprehensive income for the period ended March 31, 1999 and 1998 is as follows: THREE MONTHS ENDED MARCH 31, (In thousands) 1999 1998 Net income $1,356 $1,334 Other comprehensive income: Unrealized gains(losses) during the period (847) 156 Reclassification adjustment for net (gains)losses realized in net income - (12) Tax effect 288 (50) Comprehensive income $ 797 $1,428 EARNINGS PER SHARE Income for Basic Earnings per Share ("EPS") is adjusted for dividends attributable to preferred stock and is based on the weighted average number of common shares outstanding. Diluted EPS is computed by using the weighted average number of common shares outstanding, increased by the assumed conversion of the convertible preferred stock and the assumed conversion of the stock options. The components of basic and diluted earnings per common share for the three month periods ended March 31, 1999 and 1998 are as follows: THREE MONTHS ENDED March 31, 1999 1998 BASIC EARNINGS PER SHARE: Net income $1,356,000 $1,334,000 Less preferred stock dividends (71,000) (72,000) Net income available to common stockholders $1,285,000 $1,262,000 Weighted average common shares outstanding 2,015,105 1,979,282 Basic Earnings per Common Share $ .64 $ .64 DILUTED EARNINGS PER SHARE: Net income available to common stockholders $1,285,000 $1,262,000 Assumed conversion of preferred stock 71,000 72,000 Net income available to common stock- holders after assumed conversion $1,356,000 $1,334,000 Weighted average common shares outstanding 2,015,105 1,979,282 Assumed conversion of stock options 7,128 6,884 Assumed conversion of preferred stock 248,179 250,604 Diluted weighted average common shares outstanding 2,270,412 2,236,770 Diluted Earnings per Common Share $ .60 $ .60 MERGERS AND ACQUISITIONs In January, 1999, First Mid Bank announced an agreement to acquire the Monticello, Taylorville and DeLand branch offices of Bank One Illinois, N.A. The acquisition is expected to be completed May 7, 1999. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of the Company and its subsidiaries for the periods ended March 31, 1999 and 1998. This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes and selected financial data appearing elsewhere in this report. FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, such as, discussions of the Company's pricing and fee trends, credit quality and outlook, new business results, expansion plans, anticipated expenses and planned schedules and projected costs for Year 2000 work. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many uncertainties including: changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles, policies and guidelines. With respect to the Company's Year 2000 work, such uncertainties also include the Company's ability to continue to fund its Year 2000 renovation and to retain capable staff through the completion of its Year 2000 renovation and the ability of its vendors, clients, counter parties and customers to complete Year 2000 renovation efforts on a timely basis and in a manner that allows them to continue normal business operations or furnish products, services or data to the Company without disruption, as well as the Company's ability to accurately evaluate their readiness in this regard and, where necessary, develop and implement effective contingency plans. These risks and uncertainties should be considered in evaluating forward- looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. OVERVIEW Net income for the three months ended March 31, 1999 increased to $1,356,000, up 1.6% from $1,334,000 for the same period in 1998. Diluted earnings per share for the quarter ended was $.60 in 1999 and 1998. A summary of the factors which contributed to the changes in net income follows (in thousands): 1999 VS 1998 THREE MONTHS Net interest income $ 33 Other income, including securities transactions 219 Other expenses (252) Income taxes 22 Increase in net income $ 22 The following table shows the Company's annualized performance ratios for the three months ended March 31, 1999 as compared to the performance ratios for the year ended December 31, 1998: March 31, March 31, December 31, 1999 1998 1998 Return on average assets 1.02% 1.00% .95% Return on average equity 10.59% 11.44% 10.39% Return on average common equity 10.68% 11.59% 10.47% Average equity to average assets 9.60% 8.75% 9.16% RESULTS OF OPERATIONS NET INTEREST INCOME The largest source of operating revenue for the Company is net interest income. Net interest income represents the difference between total interest income earned on earning assets and total interest expense paid on interest-bearing liabilities. The amount of interest income is dependent upon many factors including the volume and mix of earning assets, the general level of interest rates and the dynamics of changes in interest rates. The cost of funds necessary to support earning assets varies with the volume and mix of interest- bearing liabilities and the rates paid to attract and retain such funds. For purposes of the following discussion and analysis, the interest earned on tax-exempt securities is adjusted to an amount comparable to interest subject to normal income taxes. The adjustment is referred to as the tax-equivalent ("TE") adjustment. The Company's average balances, interest income and expense and rates earned or paid for major balance sheet categories are set forth in the following table (dollars in thousands):
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 1999 MARCH 31, 1998 AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE ASSETS Interest-bearing deposits $ 161 $ 2 5.25% $ 1,323 $ 18 5.32% Federal funds sold 4,599 55 4.78% 5,944 81 5.45% Investment securities Taxable 122,425 1,748 5.71% 113,872 1,779 6.25% Tax-exempt 28,435 465 6.54% 12,637 259 8.20% Loans 337,216 6,869 8.15% 354,138 7,365 8.32% Total earning assets 492,836 9,139 7.42% 487,914 9,502 7.79% Cash and due from banks 14,608 18,155 Premises and equipment 13,277 12,132 Other assets 15,425 17,633 Allowance for loan losses (2,750) (2,700) Total assets $533,396 $533,134 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-Bearing Deposits Demand deposits $123,163 $ 707 2.30% $133,952 $ 985 2.94% Savings deposits 37,923 208 2.19% 38,018 212 2.23% Time deposits 215,670 2,785 5.17% 227,095 3,110 5.48% Securities sold under agreements to repurchase 21,747 214 3.93% 4,939 52 4.20% FHLB advances 18,998 245 5.16% 16,222 219 5.39% Federal funds purchased 125 2 4.88% 1,087 15 5.70% Long-term debt 4,696 70 5.97% 6,192 105 6.78% Total interest-bearing liabilities 422,322 4,231 4.01% 427,505 4,698 4.40% Demand deposits 56,097 53,420 Other liabilities 3,767 5,560 Stockholders' equity 51,210 46,649 Total liabilities & equity $533,396 $533,134 Net interest income (TE) $ 4,909 $ 4,804 Net interest spread 3.41% 3.39% Impact of non-interest bearing funds .57% .54% Net yield on interest- earning assets (TE) 3.98% 3.94% Interest income and rates are presented on a tax-equivalent basis ("TE") assuming a federal income tax rate of 34%. Loan fees are included in interest income and are not material. 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 period ended March 31, 1999 (in thousands):
1999 COMPARED TO 1998 INCREASE / (DECREASE) TOTAL RATE/ CHANGE VOLUME RATE VOLUME EARNING ASSETS: Interest-bearing deposits $ (16) $ (16) $ - $ - Federal funds sold (26) (18) (10) 2 Investment securities: Taxable (31) 134 (154) (11) Tax-exempt 206 324 (52) (66) Loans (496) (352) (152) 8 Total interest income (363) 72 (368) (67) Interest-Bearing Liabilities Interest-bearing deposits Demand deposits (278) (80) (215) 17 Savings deposits (4) - (4) - Time deposits (325) (155) (179) 9 Securities sold under agreements to repurchase 162 176 (3) (11) FHLB advances (26) 37 (9) (2) Federal funds purchased (13) (13) (2) 2 Long-term debt (35) (26) (12) 3 Total interest expense (467) (61) (424) 18 Net interest income $ 104 $ 133 $ 56 $ (85) 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 with the change in volume.
On an annualized tax equivalent basis, net interest income increased $366,000, or 1.9% for the three months ended March 31, 1999, compared to an increase of $181,000, or 1.0% for the same period in 1998. The increase in net interest income for the three months ended March 31, 1999, was primarily due to funding sources relative to the yields achieved on earning assets. For the three months ended, March 31, 1999, average earning assets increased by $3,051,000, or .6%, and average interest-bearing liabilities increased $1,893,000, or .5%, compared with average balances for the year ended December 31, 1998. Changes in average balances, as a percent of average earnings assets, are shown below: * average loans (as a percent of average earnings assets) decreased 2.8% to 68.4% at March 31, 1999 from 71.2% at December 31, 1998 * average securities (as a percent of average earnings assets) increased 3.6% to 30.6% at March 31, 1999 from 27.0% at December 31, 1998 * net interest margin, on a tax equivalent basis, increased to 3.98% at March 31, 1999, from 3.93% at December 31, 1998 and 3.96% at December 31, 1997 PROVISION FOR LOAN LOSSES The provision for loan losses for the three months ended March 31, 1999 and 1998 was $150,000. For information on loan loss experience and nonperforming loans, see the "NONPERFORMING LOANS" and "LOAN QUALITY AND ALLOWANCE FOR LOAN LOSSES" sections later in this document. OTHER INCOME An important source of the Company's revenue is derived from other income. The following table sets forth the major components of other income for the period ended March 31, 1999 and 1998 (in thousands): THREE MONTHS ENDED 1999 1998 $ CHANGE Trust $ 481 $ 417 $ 64 Brokerage 120 64 56 Securities gains(losses) - 12 (12) Service charges 500 462 38 Mortgage banking 329 310 19 Other 338 284 54 Total other income $ 1,768 $ 1,549 $ 219 * Total non-interest income increased to $1,768,000 for the three months ended March 31, 1999, compared to $1,549,000 for the same period in 1998. * Trust revenues increased $64,000 or 15.3% to $481,000 for the three months ended March 31, 1999, compared to $417,000 for the same period in 1998. This increase is the net effect of increases in the fee structure for trust accounts,growth in employee benefit accounts managed by the Trust Department and by increased farm management fees partially offset by the decrease in trust assets. Trust assets decreased 9.8% to $305 million at March 31, 1999 from $338 million at December 31, 1998. * Revenues from brokerage and annuity sales increased $56,000 or 87.5% for the three months ended March 31, 1999, compared with the same period in 1998. * There were no securities gains or losses during the three months ended March 31, 1999 as compared to net securities gains of $12,000 for the same period in 1998. * Fees from service charges increased $38,000 or 8.2% to $500,000 for the three months ended March 31, 1999, compared to $462,000 for the same period in 1998. This increase was primarily due to an increase in the number of savings and transaction accounts and increase in the service charges on ATM's. * Mortgage banking income increased $19,000 or 6.1% to $329,000 for the three months ended March 31, 1999, compared to $310,000 for the same period in 1998. This was attributed to the volume of loans sold by First Mid Bank increasing to $21.6 million (representing 253 loans) as of March 31, 1999, from $18.8 million (representing 231 loans) as of the same period in 1998. Such sales resulted in gains of $307,000 for the three months ended March 31, 1999, compared to $286,000 for the same period in 1998. OTHER EXPENSE The major categories of other expense include salaries and employee benefits, occupancy and equipment expenses and other operating expenses associated with day-to-day operations. The following table sets forth the major components of other expense for the three months ended March 31, 1999 and 1998 (in thousands): THREE MONTHS ENDED 1999 1998 $ CHANGE Salaries and benefits $ 2,253 $ 2,124 $ 129 Occupancy and equipment 769 709 60 FDIC premiums 27 28 (1) Amortization of intangibles 191 191 - Stationery and supplies 174 182 (8) Legal and professional fees 224 207 17 Marketing and promotion 119 126 (7) Other operating expenses 611 549 62 Total other expense $ 4,368 $ 4,116 $ 252 * Total non-interest expense increased to $4,368,000 for the three months ended March 31, 1999, compared to $4,116,000 for the same period in 1998. * Salaries and employee benefits, the largest component of other expense, increased $129,000 or 6.1% to $2,253,000 for the three months ended March 31, 1999, compared to $2,124,000 for the same period in 1998. This increase can be explained by: * an increase of $13,000 in incentive compensation due to the increase in the volume of mortgage loan originations * an increase of $17,000 in contract labor * an increase in FTE employees to 252 at March 31, 1999 from 249 at March 31, 1998 * merit increases for continuing employees * Occupancy and equipment expense increased $60,000 or 8.4% to $769,000 for the three months ended March 31, 1999, compared to $709,000 for the same period in 1998. This increase included depreciation expense recorded on technology equipment placed in service as well as the depreciation expense on remodeled buildings located in Mattoon and Charleston. * All other operating expenses increased $62,000 or 11.3% to $611,000 for the three months ended March 31, 1999, compared to $549,000 for the same period in 1998. This increase is due to training of employees and costs associated with the acquisition of the Monticello, Taylorville and DeLand branch offices of Bank One of Illinois. INCOME TAXES Total income tax expense amounted to $643,000 for the period ended March 31, 1999, compared to $665,000 for the same period in 1998. Effective tax rates were 32.2% and 33.3% for the periods ended March 31, 1999 and 1998. ANALYSIS OF BALANCE SHEETS LOANS The loan portfolio (net of unearned discount) is the largest category of the Company's earning assets. The following table summarizes the composition of the loan portfolio as of March 31, 1999 and December 31, 1998 (in thousands): March 31, DECEMBER 31, 1999 1998 Real estate - mortgage $232,853 $244,501 Commercial, financial and agricultural 73,654 78,579 Installment 24,368 25,194 Other 750 791 Total loans $331,625 $349,065 At March 31, 1999, the Company had loan concentrations in agricultural industries of $47.7 million, or 14.4%, of outstanding loans and $50.9 million, or 14.6%, at December 31, 1998. The Company had no further industry loan concentrations in excess of 10% of outstanding loans. Real estate mortgage loans have averaged approximately 70% of the Company's total loan portfolio for the past several years. This is the result of a strong local housing market and the Company's long-term commitment to residential real estate lending. The 5% decrease in the residential real estate loan category during 1999 was primarily due to the origination and subsequent sale of certain fixed rate mortgage loans. First Mid Bank originates residential real estate loans for its own portfolio and for sale to others. As of March 31, 1999, $21.6 million fixed rate mortgage loans, compared to $18.8 million for the same period in 1998, were sold by First Mid Bank in the secondary market. This increase in the volume of fixed rate loan originations is to a large degree the result of a flat yield curve that enabled borrowers to lock in low long-term rates. If the yield curve were to return to its historical norm, management anticipates that the volume of loan originations (and therefore the amount of revenue recognized from the sale of loans) would diminish. The following table presents the balance of loans outstanding as of March 31, 1999, by maturities (dollars in thousands):
MATURITY OVER 1 ONE YEAR THROUGH OVER OR LESS 5 YEARS 5 YEARS TOTAL Real estate - mortgage $ 51,509 $149,403 $ 31,941 $232,853 Commercial, financial and agricultural 47,472 23,033 3,149 73,654 Installment 5,791 17,944 633 24,368 Other 220 254 276 750 Total loans $104,992 $190,634 $35,999 $331,625 Based on scheduled principal repayments. Includes demand loans, past due loans and overdrafts.
As of March 31, 1999, loans with maturities over one year consisted of $195,518,000 in fixed rate loans and $31,115,000 in variable rate loans. The loan maturities noted above are based on the contractual provisions of the individual loans. The Company has no general policy regarding rollovers and borrower requests, which are handled on a case-by-case basis. NONPERFORMING LOANS Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due ninety days or more as to interest or principal payments; and loans not included in (a) and (b) above which are defined as "renegotiated loans". The following table presents information concerning the aggregate amount of nonperforming loans at March 31, 1999 and December 31, 1998 (in thousands): March 31, December 31, 1999 1998 Nonaccrual loans $1,847 $1,783 Loans past due ninety days or more and still accruing 1,062 609 Renegotiated loans which are performing in accordance with revised terms 87 90 Total Nonperforming Loans $2,996 $2,482 At March 31, 1999, management has identified approximately $100,000 exposure associated with the $1,847,000 nonaccrual loans. This exposure was considered in determining the adequacy of the allowance for loan losses as of March 31, 1999. Interest income that would have been reported if nonaccrual and renegotiated loans had been performing totaled $64,000 for the first three months of 1999. Interest income that was included in income totaled $2,000 for this same period in 1999. The Company's policy generally is to discontinue the accrual of interest income on any loan for which principal or interest is ninety days past due and when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. LOAN QUALITY AND ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents management's best estimate of the reserve necessary to adequately cover losses that could ultimately be realized from current loan exposures. The provision for loan losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate allowance for loan losses. In determining the adequacy of the allowance for loan losses, and therefore the provision to be charged to current earnings, management relies predominantly on a disciplined credit review and approval process which extends to the full range of the Company's credit exposure. The review process is directed by overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Once identified, the magnitude of exposure to individual borrowers is quantified in the form of specific allocations of the allowance for loan losses. Collateral values are considered by management in the determination of such specific allocations. Additional factors considered by management in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and renegotiated loans and the current economic conditions in the region where the Company operates. Management recognizes that there are risk factors which are inherent in the Company's loan portfolio. All financial institutions face risk factors in their loan portfolios because risk exposure is a function of the business. The Company's operations (and therefore its loans) are concentrated in east central Illinois, an area where agriculture is the dominant industry. Accordingly, lending and other business relationships with agriculture-based businesses are critical to the Company's success. At March 31, 1999, the Company's loan portfolio included $47.7 million of loans to borrowers whose businesses are directly related to agriculture. The balance decreased $3.2 million from $50.9 million at December 31, 1998. During 1998, cash flows for many of the Company's agricultural borrowers declined as a result of lower commodity prices. While the Company adheres to sound underwriting practices including collateralization of loans, an extended period of low commodity prices could nevertheless result in an increase in the level of problem agriculture loans. Loan loss experience for the three months ended March 31, 1999 and 1998, are summarized as follows (dollars in thousands): March 31, March 31, 1999 1998 Average loans outstanding, net of unearned income $337,216 $354,138 Allowance-beginning of year $ 2,715 $ 2,636 Charge-offs: Real estate-mortgage - 10 Commercial, financial & agricultural 105 24 Installment 11 31 Total charge-offs 116 65 Recoveries: Real estate-mortgage - - Commercial, financial & agricultural 5 2 Installment 6 11 Total recoveries 11 13 Net charge-offs 105 52 Provision for loan losses 150 150 Allowance-end of period $ 2,760 $ 2,734 Ratio of net charge-offs to average loans .03% .01% Ratio of allowance for loan losses to loans outstanding (less unearned interest at end of period) .82% .78% Ratio of allowance for loan losses to nonperforming loans 92.1% 97.9% The Company minimizes credit risk by adhering to sound underwriting and credit review policies. These policies are reviewed at least annually, and changes are approved by the board of directors. Senior management is actively involved in business development efforts and the maintenance and monitoring of credit underwriting and approval. The loan review system and controls are designed to identify, monitor and address asset quality problems in an accurate and timely manner. On a monthly basis, the board of directors reviews the status of problem loans. In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for loan losses. During the first three months of 1999, the Company had net charge-offs of $105,000, compared to $471,000 for the year ended December 31, 1998. At March 31, 1999, the allowance for loan losses amounted to $2,760,000, or .83% of total loans, and 92.1% of nonperforming loans. At December 31, 1998, the allowance was $2,715,000, or .78% of total loans, and 109.4% of nonperforming loans. The allowance for loan losses, in management's judgment, would be allocated as follows to cover potential loan losses (in thousands):
March 31, 1999 December 31, 1998 ALLOWANCE % OF ALLOWANCE % OF FOR LOANS FOR LOANS LOAN TO TOTAL LOAN TO TOTAL LOSSES LOANS LOSSES LOANS Real estate-mortgage $ 232 70.2% $ 264 70.1% Commercial, financial and agricultural 1,553 22.2% 1,961 22.5% Installment 169 7.4% 166 7.2% Other - .2% - .2% Total allocated 1,954 2,391 Unallocated 806 N/A 324 N/A Allowance at end of reported period $2,760 100.0% $2,715 100.0%
The allowance is allocated to the individual loan categories by a specific allocation for all classified loans plus a percentage of loans not classified based on historical losses. Possible loan losses due to the Year 2000 issue have been considered in this allocation calculation. SECURITIES The Company's overall investment goal is to maximize earnings while maintaining liquidity in securities having minimal credit risk. The types and maturities of securities purchased are primarily based on the Company's current and projected liquidity and interest rate sensitivity positions. The following table sets forth the amortized cost of the securities for March 31, 1999 and December 31, 1998 (in thousands):
MARCH 31, DECEMBER 31, 1999 1998 % OF % OF AMOUNT TOTAL AMOUNT TOTAL U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 85,800 55% $ 91,069 58% Obligations of states and political subdivisions 29,237 19% 27,674 18% Mortgage-backed securities 36,882 24% 35,209 22% Other securities 2,509 2% 2,509 2% Total securities $154,428 100% $156,461 100%
At March 31, 1999, the Company's investment portfolio showed an increase in mortgage-backed securities and obligations of states and political subdivisions, while the percentage of U.S. Government agency securities decreased. This change in the portfolio mix improved the repricing characteristics of the portfolio, helped mollify the Company's exposure relating to interest rate risk and improved the portfolio yield. The amortized cost, gross unrealized gains and losses and estimated fair values for available-for-sale and held-to-maturity securities by major security type at March 31, 1999 and December 31, 1998 were as follows (in thousands):
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE March 31, 1999 Available-for-sale: U.S. Treasury securities and obligations of U.S. Government corporations & agencies $ 85,800 $ 48 $ (876) $ 84,972 Obligations of states and political subdivisions 26,578 408 (92) 26,894 Mortgage-backed securities 36,882 141 (115) 36,908 Federal Home Loan Bank stock 1,843 - - 1,843 Other securities 666 - - 666 Total available-for-sale $151,769 $ 597 $ (1,083) $151,283 Held-to-maturity: Obligations of states and political subdivisions $ 2,659 $ 41 $ - $ 2,700 DECEMBER 31, 1998 Available-for-sale: U.S. Treasury securities and obligations of U.S. Government corporations & agencies $ 91,069 $ 333 $ (413) $ 90,989 Obligations of states and political subdivisions 24,352 481 (48) 24,785 Mortgage-backed securities 35,209 142 (100) 35,251 Federal Home Loan Bank stock 1,843 - - 1,843 Other securities 666 - - 666 Total available-for-sale $153,139 $ 956 $ (561) $153,534 Held-to-maturity: Obligations of states and political subdivisions $ 3,322 $ 67 $ - $ 3,389
The following table indicates the expected maturities of investment securities classified as available-for-sale and held-to-maturity, presented at amortized cost, at March 31, 1999 (dollars in thousands) and the weighted average yield for each range of maturities. Mortgage-backed securities are aged according to their weighted average life. All other securities are shown at their contractual maturity.
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 $ 1,002 $ 54,976 $ 27,822 $ 2,000 $ 85,800 Obligations of state and political subdivisions 1,972 2,587 10,598 11,420 26,577 Mortgage-backed securities 6,550 22,567 5,067 2,698 36,882 Other securities - - - 2,509 2,509 Total Investments $ 9,524 $ 80,130 $ 43,487 $ 18,627 $151,768 Weighted average yield 5.78% 5.68% 5.54% 4.55% 5.17% Full tax-equivalent yield 4.72% 5.76% 6.10% 6.00% 5.60% Held-to-maturity: Obligations of state and political subdivisions $ 312 $ 1,286 $ 160 $ 901 $ 2,659 Weighted average yield 5.30% 8.06% 5.55% 5.31% 5.20% Full tax-equivalent yield 8.03% 7.67% 8.40% 8.04% 7.88%
The weighted average yields are calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. Full tax-equivalent yields have been calculated using a 34% tax rate. The maturities of, and yields on, mortgage-backed securities have been calculated using actual repayment history. However, where securities have call features, and have a market value in excess of par value, the call date has been used to determine the expected maturity. With the exception of obligations of the U.S. Treasury and other U.S. Government agencies and corporations, there were no investment securities of any single issuer the book value of which exceeded 10% of stockholders' equity at March 31, 1999. Proceeds from sales of investment securities and realized gains and losses were as follows for the periods ended March 31, 1999 and December 31, 1998 (in thousands): March 31, DECEMBER 31, 1999 1998 Proceeds from sales $ - $ 10,485 Gross gains - 157 Gross losses - 3 Investment securities carried at approximately $91,297,000 and $93,947,000 at March 31, 1999 and December 31, 1998, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law. DEPOSITS Funding the Company's earning assets is substantially provided by a combination of consumer, commercial and public fund deposits. The Company continues to focus its strategies and emphasis on retail core deposits, the major component of funding sources. The following table sets forth the average deposits and weighted average rates at March 31, 1999 and December 31, 1998 (dollars in thousands):
MARCH 31, DECEMBER 31, 1999 1998 WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE Demand deposits: Non-interest bearing $ 56,067 - $ 59,069 - Interest bearing 123,163 2.30% 125,586 2.93% Savings 37,923 2.19% 37,831 2.26% Time deposits 215,670 5.17% 222,562 5.51% Total average deposits 432,823 3.42% $445,048 3.77%
The following table sets forth the maturity of time deposits of $100,000 or more at March 31, 1999 and December 31, 1998 (in thousands): MARCH 31, December 31, 1999 1998 3 months or less $ 13,900 $ 21,510 Over 3 through 6 months 8,047 8,285 Over 6 through 12 months 7,267 4,608 Over 12 months 8,830 8,995 Total $38,044 $ 43,398 The decrease in deposit balances during the first quarter of 1999 were attributable to the maturity of promotional time deposits, seasonal commercial deposits and public funds. This reduction in the deposit balances was anticipated by management and is not considered to be a trend. OTHER BORROWINGS Other borrowings consist of securities sold under agreements to repurchase, Federal Home Loan Bank ("FHLB") advances, and federal funds purchased. Information relating to other borrowings as of March 31, 1999 and December 31, 1998 is presented below (in thousands):
March 31, December 31, 1999 1998 Securities sold under agreements to repurchase $19,583 $26,018 Federal Home Loan Bank advances: Overnight 4,800 - Fixed term - due in one year or less - - Fixed term - due after one year 15,500 19,500 Federal funds purchased - - Total $39,883 $45,518 Average interest rate at end of period 4.58% 4.51% Maximum Outstanding at Any Month-end Securities sold under agreements to repurchase $22,506 $26,018 Federal Home Loan Bank advances: Overnight 4,800 5,500 Fixed term - due in one year or less - - Fixed term - due after one year 19,500 20,500 Federal funds purchased - 5,750 Total $46,806 $57,767 Averages for the Year Securities sold under agreements to repurchase $21,747 $ 9,717 Federal Home Loan Bank advances: Overnight 831 236 Fixed term - due in one year or less - - Fixed term - due after one year 18,167 18,504 Federal funds purchased 125 364 Total $40,870 $28,821 Average interest rate during the year 4.51% 5.07%
Securities sold under agreements to repurchase are short-term obligations of First Mid Bank. First Mid Bank pledges collateral, securing any obligation to pay the amount due, certain government securities which are direct obligations of the United States or one of its agencies. First Mid Bank offers these retail repurchase agreements as a cash management service to its corporate customers. Federal Home Loan Bank advances represent borrowings by First Mid Bank to economically fund agricultural loan demand. This loan demand was previously funded primarily through deposits by the State of Illinois. The increase in fixed term advances results primarily from $13.5 million in advances which First Mid Bank is using to fund agricultural loans. $10.0 million is a 10-year maturity with a one year call option by the Federal Home Loan Bank. The advance bears interest at a rate of 4.85%. $3.5 million is a 10-year maturity which is callable quarterly after one year. The advance bears interest at a rate of 5.00%. The remainder of the balance represents outstanding fixed term advances due in 1 - 3 years. INTEREST RATE SENSITIVITY The Company seeks to maximize its net interest margin within an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to favorable or unfavorable movements in interest rates. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of assets differ significantly from the maturity or repricing characteristics of liabilities. The Company monitors its interest rate sensitivity position to maintain a balance between rate sensitive assets and rate sensitive liabilities. This balance serves to limit the adverse effects of changes in interest rates. The Company's asset/liability management committee oversees the interest rate sensitivity position and directs the overall allocation of funds in an effort to maintain a cumulative one-year gap to earning assets ratio of less than 30% of total earning assets. In the banking industry, a traditional measurement of interest rate sensitivity is known as "GAP" analysis, which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. The following table sets forth the Company's interest rate repricing gaps for selected maturity periods at March 31, 1999 (in thousands):
NUMBER OF MONTHS UNTIL NEXT REPRICING OPPORTUNITY INTEREST EARNING ASSETS: 0-1 1-3 3-6 6-12 12+ Deposits with other financial institutions $ - $ - $ - $ - $ - Federal funds sold 106 - - - - Taxable investment securities 18,396 9,848 2,534 22,464 71,148 Nontaxable investment securities - 165 383 1,930 27,076 Loans 43,465 21,456 24,572 36,422 205,711 Total $ 61,967 $ 31,469 $ 27,489 $ 60,816 $ 303,935 INTEREST BEARING LIABILITIES: Savings and N.O.W. accounts 127,137 - - - - Money market accounts 35,708 - - - - Other time deposits 26,579 28,077 46,990 41,145 64,401 Other borrowings 24,383 - - 15,500 - Long-term debt 4,325 - - - - Total $ 218,132 $ 28,077 $ 46,990 $ 56,645 $ 64,401 Periodic GAP $(156,165) $ 3,392 $(19,501) $ 4,171 $239,534 Cumulative GAP $(156,165) $(152,773) $(172,274) $(168,103) $ 71,431 GAP as a % of interest earning assets: Periodic (32.2%) .7% (4.0%) .9% 49.3% Cumulative (32.2%) (31.5%) (35.5%) (34.6%) 14.7%
At March 31, 1999, the Company was liability sensitive on a cumulative basis through the twelve-month time horizon. Accordingly, future increases in interest rates, if any, could have an unfavorable effect on the net interest margin. Interest rate sensitivity using a static GAP analysis basis is only one of several measurements of the impact of interest rate changes on net interest income used by the Company. Its actual usefulness in assessing the effect of changes in interest rates varies with the constant changes which occur in the composition of the Company's earning assets and interest-bearing liabilities. For this reason, the Company uses financial models to project interest income under various rate scenarios and assumptions relative to the prepayments, reinvestment and roll overs of assets and liabilities, of which First Mid Bank represents substantially all of the Company's rate sensitive assets and liabilities. CAPITAL RESOURCES At March 31, 1999, the Company's stockholders' equity increased $1,043,000 or 2.1% to $51,523,000 from $50,480,000 as of December 31, 1998. During the first three months of 1999, net income contributed $1,356,000 to equity before the payment of dividends to common and preferred stockholders. The change in net unrealized gain on available-for-sale investment securities decreased stockholders' equity by $559,000, net of tax. The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Bank holding companies follow minimum regulatory requirements established by the Federal Reserve Board, First Mid Bank follows similar minimum regulatory requirements established for national banks by the Office of the Comptroller of the Currency. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Quantitative measures established by each regulatory agency to ensure capital adequacy require the reporting institutions to maintain a minimum total risk- based capital ratio of 8% and a minimum leverage ratio of 3% for the most highly-rated banks that do not expect significant growth. All other institutions are required to maintain a minimum ratio of Tier 1 capital to total risk- weighted assets of 4%. Management believes that as of March 31, 1999 and December 31, 1998 all capital adequacy requirements have been met by the Company and First Mid Bank. As of March 31, 1999, the most recent notification from the primary regulators categorized the Company and First Mid Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios must be maintained as set forth in the table. There are no conditions or events since that notification that management believes have changed these categories.
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO MARCH 31, 1999 Total Capital (to risk-weighted assets) Company $ 46,985 15.09% $ 24,915 > 8.00% $ 31,144 > 10.00% First Mid Bank 48,405 15.65 24,737 > 8.00 30,921 > 10.00 Tier 1 Capital (to risk-weighted assets) Company 44,225 14.20 12,458 > 4.00 18,686 > 6.00 First Mid Bank 45,645 14.76 12,368 > 4.00 18,553 > 6.00 Tier 1 Capital (to average assets) Company 44,225 8.42 21,010 > 4.00 26,263 > 5.00 First Mid Bank 45,645 8.72 20,939 > 4.00 26,174 > 5.00
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO DECEMBER 31, 1998 Total Capital (to risk-weighted assets) Company $ 45,218 13.89% $ 26,036 > 8.00% $ 32,545 > 10.00% First Mid Bank 46,704 14.46 25,831 > 8.00 32,289 > 10.00 Tier 1 Capital (to risk-weighted assets) Company 42,503 13.06 13,018 > 4.00 19,527 > 6.00 First Mid Bank 43,989 13.62 12,916 > 4.00 19,373 > 6.00 Tier 1 Capital (to average assets) Company 42,503 7.90 21,528 > 4.00 26,910 > 5.00 First Mid Bank 43,989 8.20 21,448 > 4.00 26,810 > 5.00
Banks and bank holding companies are generally expected to operate at or above the minimum capital requirements. These ratios are in excess of regulatory minimums and will allow the Company to operate without capital adequacy concerns. STOCK PLANS The Company has four stock plans, the Deferred Compensation Plan, the First Retirement and Savings Plan, the Dividend Reinvestment Plan, and the Stock Incentive Plan. For more detailed information on these plans, refer to the Company's 1998 Form 10-K. * The DEFERRED COMPENSATION PLAN was effective as of June, 1984, in which its purpose is to enable directors, advisory directors, and key officers the opportunity to defer a portion of the fees and cash compensation paid by the Company as a means of maximizing the effectiveness and flexibility of compensation arrangements. * The FIRST RETIREMENT AND SAVINGS PLAN was effective beginning in 1985. Employees are eligible to participate in this plan after six months of service to the Company. * The DIVIDEND REINVESTMENT PLAN was effective as of October, 1994. The purpose of this plan is to provide participating stockholders with a simple and convenient method of investing cash dividends paid by the Company on its shares of common and preferred shareholders into newly- issued common shares of the Company. All holders of record of the Company's common or preferred stock are eligible to voluntarily participate. This plan is administered by Harris Trust and Savings Bank and offers a way to increase one's investment in the Company. * The STOCK INCENTIVE PLAN was established by the Company in December, 1997, and is intended to provide a means whereby directors and certain officers can acquire shares of the Company's common stock. A maximum of 100,000 shares have been authorized under this plan. Options to acquire shares will be awarded at an exercise price equal to the fair market value of the shares on the date of grant. Options to acquire shares have a 10-year term. Options granted to employees vest over a four year period and those options granted to directors vest at the time they are issued. On August 5, 1998, the Company announced a stock repurchase program of up to 3% of its common stock. The shares will be repurchased at the most recent market price of the stock. As of March 31, 1999, 17,859 shares (.8%) at a total price of $587,000 and as of December 31, 1998, 13,539 shares (.7%) at a total price of $507,000 were repurchased by the Company. Treasury Stock is further affected by activity in the Deferred Compensation Plan. LIQUIDITY Liquidity represents the ability of the Company and its subsidiaries to meet the requirements of customers for loans and deposit withdrawals. Liquidity management focuses on the ability to obtain funds economically for these purposes and to maintain assets which may be converted into cash at minimal costs. Other sources for cash include deposits of the State of Illinois and Federal Home Loan Bank advances. At March 31, 1999, the excess collateral at the Federal Home Loan Bank will support approximately $70 million of additional advances. Management monitors its expected liquidity requirements carefully, focusing primarily on cash flows from: * lending activities, including loan commitments, letters of credit and mortgage prepayment assumptions * deposit activities, including seasonal demand of private and public funds * investing activities, including prepayments of mortgage-backed securities and call assumptions on U.S. Government Treasuries and Agencies * operating activities, including schedule debt repayments and dividends to shareholders EFFECTS OF INFLATION Unlike industrial companies, virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or experience the same magnitude of changes as goods and services, since such prices are effected by inflation. In the current economic environment, liquidity and interest rate adjustments are features of the Company's assets and liabilities which are important to the maintenance of acceptable performance levels. The Company attempts to maintain a balance between monetary assets and monetary liabilities, over time, to offset these potential effects. FUTURE ACCOUNTING CHANGES Statement of Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," ("SFAS 133") was issued by the FASB in June 1998. SFAS 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss is reported in earnings immediately. Accounting for foreign currency hedges is similar to the accounting for fair value and cash flow hedges. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change. The Company has not determined the impact that SFAS 133 will have on its financial statements and believes that such determination will not be meaningful until closer to the date of initial adoption. In October 1998, the FASB issued Statement of Financial Accounting Standards No. 134, "ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE" ("SFAS 134"). SFAS 134 amends Statement No.65, "ACCOUNTING FOR CERTAIN MORTGAGE BANKING ACTIVITIES" to conform the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the subsequent accounting for securities retained after the securitization of other types of assets by a non-mortgage banking enterprise. SFAS 134 was effective for the first quarter of 1999. The adoption of SFAS 134 did not have a material impact on the Company. THE YEAR 2000 ISSUE Like other businesses dependent upon computerized information processing, the Company must deal with "Year 2000" issues, which stem from using two digits to reflect the year in many computer programs and data. Computer programmers and other designers of equipment that use microprocessors have abbreviated dates by eliminating the first two digits of the year. As the year 2000 approaches, many systems may be unable to distinguish years beginning with 20 from years beginning with 19, and so may not accurately process certain date-based information, which could cause a variety of operational problems for businesses. The Company's data processing software and hardware provide essential support to virtually all of its businesses, so successfully addressing Year 2000 issues is of the highest importance. Failure to complete renovation of the critical systems used by the Company on a timely basis could have a materially adverse affect on its operations and financial performance, as could Year 2000 problems experienced by others with whom the Company does business. Because of the range of possible issues and the large number of variables involved, it is impossible to quantify the potential cost of problems should the Company's remediation efforts or the efforts of those with whom it does business not be successful. The Company has a dedicated Year 2000 project team whose members have significant experience on the Company's applications which run on both main frame and desk top applications. Virtually all applications used by the Company were developed by third party vendors who have represented that their systems were developed using four digit years. The Company completed the information technology portion of the assessment and inventory phases of its Year 2000 project in early 1998. Full time renovation began in the first quarter of 1998. Testing and implementation activities have been underway on mission critical applications since late 1997. The Company has a highly centralized data processing environment, with the vast majority of its data processing needs serviced out of a consolidated data center in Mattoon. As of March 31, 1999, the Company had completed approximately 90% of its renovation, testing and implementation for mission critical applications (including vended and out-sourced applications). All implementation includes testing with dates into the Year 2000 and internal user acceptance. The balance of these applications are planned to be renovated, tested and implemented in early 1999. With respect to non-mission critical applications, the Company's target for completion of Year 2000 work is mid-1999. The Year 2000 project team is also responsible for addressing issues that are not directly related to data processing systems. The project team is coordinating a review of various infrastructure issues, such as checking elevators and heating, ventilation and air-conditioning equipment, some of which include embedded systems, to verify that they will function in the Year 2000. The project team is also coordinating a review of the Year 2000 status of power and telecommunications providers at each important location, as these services are critical to its business. Contingency plans are being developed for the Company's important locations. The actions taken pursuant to these plans will depend in part on the Company's assessment of the readiness of specific providers in the power and telecommunications industries. The project team is also monitoring programs to contact vendors and suppliers to determine their Year 2000 readiness. Although the Company is attempting to monitor and validate the efforts of other parties, it cannot control the success of these efforts. Contingency plans are being developed where practical to provide the Company with alternatives in situations where an entity furnishing a critical product or service experiences significant Year 2000 difficulties that will affect the Company. Contingency planning is expected to be completed by mid-1999. As part of its credit analysis process, the Company is assessing the Year 2000 readiness of its significant credit customers and is using this information in the methodology of assessing the adequacy of the allowance for loan losses. In addition, as part of its fiduciary activities, the Company has developed and is implementing a plan for taking the Year 2000 issue into consideration, and to evaluate and deal with Year 2000 issues associated with property held in trust. The Company's personnel have also conducted several workshops for its customers, as well as for the community as a whole, to explain the Year 2000 issues and the Company's Year 2000 program. The Company conducts an ongoing review of its estimated Year 2000 external expenditures which are currently estimated to be approximately $125,000. This estimate includes the cost of purchasing licenses for software programming tools but does not reflect the cost of the time of internal staff. All Year 2000 costs are expensed as incurred. As of March 31, 1999, approximately 75% of project costs have been incurred. The remaining costs are expected to be incurred roughly evenly over the next 12 months. The cost of the time of internal staff devoted to the Year 2000 project is significant. This expense is not included in the above statement. Because of the priority given to the Year 2000 work by the Company, some other technology- related projects have been delayed. However, such delays are not expected to have a material effect on the ongoing business operations of the Company. PENDING LITIGATION Heartland Savings Bank, a subsidiary of the Company that merged with First Mid Bank during 1997, filed a complaint on December 5, 1995, against the U.S. Government which is now pending in the U.S. Court of Federal claims in Washington D.C. Refer to "PART II, ITEM 1, LEGAL PROCEEDINGS". ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material changes in the market risks faced by the Company since December 31, 1998. For information regarding the Company's market risk, refer to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. PART II ITEM 1. LEGAL PROCEEDINGS Since First Mid Bank acts as depositories of funds, it is named from time to time as a defendant in law suits (such as garnishment proceedings) involving claims to the ownership of funds in particular accounts. Management believes that all such litigation as well as other pending legal proceedings constitute ordinary routine litigation incidental to the business of First Mid Bank and that such litigation will not materially adversely affect the Company's consolidated financial condition. In addition to the normal proceedings referred to above, Heartland Savings Bank ("Heartland"), a subsidiary of the Company that merged with First Mid Bank during 1997, filed a complaint on December 5, 1995, against the U.S. Government which is now pending in the U.S. Court of Federal claims in Washington D.C. This complaint relates to Heartland's interest as successor to Mattoon Federal Savings and Loan Association which incurred a significant amount of supervisory goodwill when it acquired Urbana Federal Savings and Loan in 1982. The complaint alleges that the Government breached its contractual obligations when, in 1989, it issued new rules which eliminated supervisory goodwill from inclusion in regulatory capital. On August 6, 1998, First Mid Bank filed a motion with the U.S. Court of Federal claims to grant summary judgement on liability for breach of contract in this matter. On August 13, 1998, the U.S. Government filed a motion to stay such proceedings. At this time, it is too early to tell if First Mid Bank will prevail in its motion and, if so, what damages may be recovered. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION In January, 1999, First Mid Bank announced an agreement to acquire the Monticello, Taylorville and DeLand branch offices of Bank One Illinois, N.A. The acquisition is expected to be completed May 7, 1999. ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(3) -- Exhibits The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit Index which follows the Signature Page and immediately precedes the exhibits filed. (b) Reports on Form 8-K The Company filed a Form 8-K on January 7, 1999 relating to its announcement of a definitive agreement to acquire the Monticello, Taylorville and DeLand offices of Bank One Illinois, N.A. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST MID-ILLINOIS BANCSHARES, INC. (Company) By: /s/ Daniel E. Marvin, Jr. -------------------------------------* Daniel E. Marvin, Jr. President and Chief Executive Officer By: /s/ William S. Rowland -------------------------------------* William S. Rowland Executive Vice President and Chief Financial Officer Dated: May 6, 1999 *---------------------* 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) EX-27 2 EXHIBIT 27
9 1000 3-MOS DEC-31-1999 MAR-31-1999 13388 106 0 0 151283 2659 2700 331625 2760 525237 425653 24383 3853 19825 0 3070 8138 41315 525237 6869 2054 57 8980 3700 531 4749 150 0 4368 1999 1999 0 0 1356 .64 .60 3.98 1847 1062 87 0 2715 116 11 2760 2760 0 806
-----END PRIVACY-ENHANCED MESSAGE-----