-----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, Mr1Rfg5wsVXcg1NKvhVdKEF7X+eSyCwvj0rrPDKV4G8kkv/z7j9lPLDnz1fryEhZ Mkvv2EZ0fLiWNaqfN3rG7Q== 0000700565-99-000017.txt : 19991111 0000700565-99-000017.hdr.sgml : 19991111 ACCESSION NUMBER: 0000700565-99-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991110 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: 99745710 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 THIRD QUARTER 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 Commission file number: 0-13368 FIRST MID-ILLINOIS BANCSHARES, INC. (Exact name of Registrant as specified in its charter) Delaware 37-1103704 (State or other jurisdiction of (I.R.S. employer identification No.) incorporation or organization) 1515 Charleston Avenue, Mattoon, Illinois 61938 (Address and Zip Code of Principal Executive Offices) (217) 234-7454 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of November 10, 1999 2,033,143 common shares, $4.00 par value, were outstanding. 1 PART I ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited) September 30, December 31, (In thousands, except share data) 1999 1998 --------------- -------------- Assets Cash and due from banks: Non-interest bearing $ 17,338 $ 14,669 Interest bearing 217 103 Federal funds sold 5,375 7,000 --------------- -------------- Cash and cash equivalents 22,930 21,772 Investment securities: Available-for-sale, at fair value 156,132 153,534 Held-to-maturity, at amortized cost (estimated fair value of $2,407 and $3,389 at September 30, 1999 and December 31, 1998, respectively) 2,444 3,322 Loans 379,667 349,065 Less allowance for loan losses 2,999 2,715 --------------- -------------- Net loans 376,668 346,350 Premises and equipment, net 16,240 13,226 Intangible assets, net 13,680 7,787 Other assets 12,367 8,672 --------------- -------------- Total assets $600,461 $554,663 --------------- -------------- Liabilities and Stockholders' Equity Deposits: Non-interest bearing $ 62,388 $ 62,357 Interest bearing 438,380 387,279 --------------- -------------- Total deposits 500,768 449,636 Securities sold under agreements to repurchase 23,635 26,018 Federal Home Loan Bank advances 15,500 19,500 Long-term debt 4,325 4,700 Other liabilities 4,377 4,329 --------------- -------------- Total liabilities 548,605 504,183 --------------- -------------- Stockholders' Equity: Series A convertible preferred stock; no par value; authorized 1,000,000 shares; issued 614 shares with stated value of $5,000 per share 3,070 3,070 Common stock, $4 par value; authorized 6,000,000 shares; issued 2,051,109 shares in 1999 and 2,023,227 shares in 1998 8,204 8,093 Additional paid-in-capital 9,445 8,562 Retained earnings 34,234 31,025 Deferred compensation 1,090 950 Accumulated other comprehensive income (loss) (2,395) 261 Less treasury stock at cost, 20,402 shares in 1999 and 15,539 shares in 1998 (1,792) (1,481) --------------- -------------- Total stockholders' equity 51,856 50,480 --------------- -------------- Total liabilities and stockholders' equity $600,461 $554,663 --------------- --------------
See accompanying notes to unaudited consolidated financial statements. 2
Consolidated Statements of Income Three months ended Nine months ended (unaudited) (In thousands, except per share data) September 30, September 30, 1999 1998 1999 1998 ---------- ---------- --------- ---------- Interest income: Interest and fees on loans $ 7,664 $ 7,277 $21,706 $21,887 Interest on investment securities 2,304 1,930 6,542 5,855 Interest on federal funds sold 180 122 372 283 Interest on deposits with other financial institutions 18 8 67 28 ---------- ---------- --------- ---------- Total interest income 10,166 9,337 28,687 28,053 Interest expense: Interest on deposits 4,297 4,160 11,892 12,625 Interest on securities sold under agreements to repurchase 243 137 631 250 Interest on Federal Home Loan Bank advances 197 273 695 745 Interest on Federal funds purchased 1 1 8 17 Interest on long-term debt 70 95 206 299 ---------- ---------- --------- ---------- Total interest expense 4,808 4,666 13,432 13,936 ---------- ---------- --------- ---------- Net interest income 5,358 4,671 15,255 14,117 Provision for loan losses 150 100 450 400 ---------- ---------- --------- ---------- Net interest income after provision 5,208 4,571 14,805 13,717 Other income: Trust revenues 514 426 1,459 1,257 Brokerage revenues 111 85 340 239 Service charges 617 470 1,690 1,410 Securities gains, net - 52 - 64 Mortgage banking income 42 209 566 826 Other 281 264 965 799 ---------- ---------- --------- ---------- Total other income 1,565 1,506 5,020 4,595 Other expense: Salaries and employee benefits 2,487 2,153 7,142 6,384 Net occupancy and equipment expense 903 754 2,524 2,192 Amortization of intangible assets 302 191 684 573 Stationary and supplies 141 148 504 498 Legal and professional 375 258 882 680 Marketing and promotion 154 108 468 371 Other 684 628 1,998 1,988 ---------- ---------- --------- ---------- Total other expense 5,046 4,240 14,202 12,686 ---------- ---------- --------- ---------- Income before income taxes 1,727 1,837 5,623 5,626 ---------- ---------- --------- ---------- Income taxes 454 574 1,695 1,832 ---------- ---------- --------- ---------- Net income $ 1,273 $ 1,263 $ 3,928 $ 3,794 ---------- ---------- --------- ---------- Per common share data: Basic earnings per share $ .59 $ .59 $ 1.84 $ 1.79 Diluted earnings per share $ .56 $ .56 $ 1.72 $ 1.68 ---------- ---------- --------- ----------
See accompanying notes to unaudited consolidated financial statements. 3
Consolidated Statements of Cash Flows (unaudited) For the nine months ended September 30, (In thousands) 1999 1998 ------------ ------------ Cash flows from operating activities: Net income $ 3,928 $ 3,794 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for loan losses 450 400 Depreciation, amortization and accretion, net 1,748 1,537 Gain on sale of securities, net - (64) (Gain) loss on sale of other real property owned, net (88) 171 Gain on sale of mortgage loans held for sale, net (511) (634) Origination of mortgage loans held for sale (26,563) (52,123) Proceeds from sale of mortgage loans held for sale 34,559 51,143 (Increase) decrease in other assets (3,517) 925 Increase (decrease) in other liabilities 1,702 (1,896) ------------ ------------ Net cash provided by operating activities 11,708 3,253 ------------ ------------ Cash flows from investing activities: Capitalization of mortgage servicing rights (36) (75) Purchases of premises and equipment (2,369) (1,629) Net (increase) decrease in loans (28,284) 12,765 Proceeds from sales of: Securities available-for-sale - 6,848 Proceeds from maturities of: Securities available-for-sale 28,068 42,590 Securities held-to-maturity 135 420 Purchases of: Securities available-for-sale (33,847) (62,933) Securities held-to-maturity (332) (799) Purchase of financial organization, net of cash received 46,441 - ------------ ------------ Net cash provided by (used in) investing activities 9,776 (2,813) ------------ ------------ Cash flows from financing activities: Net decrease in deposits (13,181) (12,900) Increase (decrease) in repurchase agreements (2,383) 3,295 Increase (decrease) in FHLB advances (4,000) 12,500 Repayment of long-term debt (375) (1,125) Proceeds from issuance of common stock 344 878 Purchase of treasury stock (171) (403) Dividends paid on preferred stock (45) (16) Dividends paid on common stock (515) (475) ------------ ------------ Net cash provided by (used in) financing activities (20,326) 1,754 ------------ ------------ Increase in cash and cash equivalents 1,158 2,194 Cash and cash equivalents at beginning of period 21,772 26,661 ------------ ------------ Cash and cash equivalents at end of period $22,930 $28,855 ------------ ------------ Additional disclosures of cash flow information Cash paid during the period for: Interest $13,399 $13,651 Income taxes 1,989 2,088 Loans transferred to real estate owned 497 537 Dividends reinvested in common shares 650 623 ------------ ------------
See accompanying notes to unaudited consolidated financial statements. 4 Notes To Consolidated Financial Statements (Unaudited) Summary of Significant Accounting Policies Basis of Accounting and Consolidation The unaudited consolidated financial statements include the accounts of First Mid- Illinois Bancshares, Inc. ("Company") and its wholly-owned subsidiaries: Mid-Illinois Data Services, Inc. ("MIDS") and First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank") and its wholly-owned subsidiary First Mid-Illinois Insurance Services, Inc. ("First Mid Insurance"). All significant inter-company balances and transactions have been eliminated in consolidation. The financial information reflects all adjustments which, in the opinion of management, are necessary to present a fair statement of the results of the interim periods ended September 30, 1999 and 1998, and all such adjustments are of a normal recurring nature. The results of the interim period ended September 30, 1999, are not necessarily indicative of the results expected for the year ending December 31, 1999. The unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information required by generally accepted accounting principles for complete financial statements and related footnote disclosures. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1998 Form 10-K. Comprehensive Income The Company's comprehensive income for the period ended September 30, 1999 and 1998 is as follows:
Three months ended Nine months ended September 30, September 30, ---------------------- ---------------------- (In thousands) 1999 1998 1999 1998 ----------- ---------- ----------- ---------- Net income $1,273 $1,263 $3,928 $3,794 Other comprehensive income(loss): Unrealized gains(losses) during the (679) 588 (4,024) 676 period Reclassification adjustment for net gains realized in net income - (52) - (64) Tax effect 231 (182) 1,368 (208) ----------- ---------- ----------- ---------- Comprehensive income(loss) $ 825 $1,617 $1,272 $4,198 ----------- ---------- ----------- ----------
Earnings Per Share Income for Basic Earnings per Share ("EPS") is adjusted for dividends attributable to preferred stock and is based on the weighted average number of common shares outstanding. Diluted EPS is computed by using the weighted average number of common shares outstanding, increased by the assumed conversion of the convertible preferred stock and the assumed conversion of the stock options. 5 The components of basic and diluted earnings per common share for the three month and nine month periods ended September 30, 1999 and 1998 are as follows:
Three months ended Nine months ended September 30, September 30, ---------------------- ---------------------- 1999 1998 1999 1998 ----------- ---------- ----------- ---------- Basic Earnings per Share: Net income $1,273,000 $1,263,000 $3,928,000 $3,794,000 Less preferred stock dividends (71,000) (72,000) (213,000) (214,000) ----------- ---------- ----------- ---------- Net income available to common $1,202,000 $1,191,000 $3,715,000 $3,580,000 stockholders ----------- ---------- ----------- ---------- Weighted average common shares 2,029,636 2,008,549 2,021,861 1,996,937 outstanding ----------- ---------- ----------- ---------- Basic Earnings per Common Share $ .59 $ .59 $1.84 $1.79 ----------- ---------- ----------- ---------- Diluted Earnings per Share: Net income available to common $1,202,000 $1,191,000 $3,715,000 $3,580,000 stockholders Assumed conversion of preferred stock 71,000 72,000 213,000 214,000 ----------- ---------- ----------- ---------- Net income available to common stock- holders after assumed conversion $1,273,000 $1,263,000 $3,928,000 $3,794,000 ----------- ---------- ----------- ---------- Weighted average common shares 2,029,636 2,008,549 2,021,861 1,996,937 outstanding Assumed conversion of stock options 8,273 9,180 7,711 8,551 Assumed conversion of preferred stock 248,179 248,179 250,604 249,440 ----------- ---------- ----------- ---------- Diluted weighted average common shares outstanding $2,286,088 $2,265,908 $2,280,176 $2,254,928 ----------- ---------- ----------- ---------- Diluted Earnings per Common Share $ .56 $ .56 $1.72 $1.68 ----------- ---------- ----------- ----------
Mergers and Acquisitions During the second quarter of 1999, the Company acquired the Monticello, Taylorville and DeLand branch offices and deposit base of Bank One Illinois, N.A. This cash acquisition added approximately $64 million to total deposits, $10 million to loans, $1.7 million to premises and equipment and $6.5 million to intangible assets. This acquisition was accounted for using the purchase method of accounting whereby the acquired assets and deposits of the branches were recorded at their fair values as of the acquisition date. The operating results have been combined with those of the Company since May 7, 1999. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of the Company and its subsidiaries for the periods ended September 30, 1999 and 1998. This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes and selected financial data appearing elsewhere in this report. Forward-Looking Statements This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, such as, discussions of the Company's pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses and planned schedules and projected costs for Year 2000 work. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many uncertainties including: changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles, policies and guidelines. With respect to the Company's Year 2000 work, such uncertainties also include the Company's ability to continue to fund its Year 2000 renovation and to retain capable staff through the completion of its Year 2000 renovation and the ability of its vendors, clients, counter parties and customers to complete Year 2000 renovation efforts on a timely basis and in a manner that allows them to continue normal business operations or furnish products, services or data to the Company without disruption, as well as the Company's ability to accurately evaluate their readiness in this regard and, where necessary, develop and implement effective contingency plans. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. 7 Overview Net income for the three months ended September 30, 1999 was $1,273,000, an increase of $10,000 from $1,263,000 for the same period in 1998. Diluted earnings per share for the third quarter ended 1999 and 1998 was $.56. A summary of the factors which contributed to the changes in net income for the three months is shown in the table below. Net income for the nine months ended September 30, 1999 was $3,928,000, an increase of 3.5% from $3,794,000 for the same period in 1998. Diluted earnings per share for the nine month period ended was $1.72 in 1999, an increase from $1.68 in 1998. A summary of the factors which contributed to the changes in net income for the nine month period is shown in the table below. 1999 vs 1998 1999 vs 1998 (in thousands) Three months Nine months --------------- --------------- Net interest income $ 637 $1,088 Other income, including securities 59 425 transactions Other expenses (806) (1,516) Income taxes 120 137 --------------- --------------- Increase in net income $ 10 $ 134 --------------- --------------- The following table shows the Company's annualized performance ratios for the nine months ended September 30, 1999, as compared to the annualized performance ratios for the nine months ended September 30, 1998 and the performance ratios for the year ended December 31, 1998: September 30, September 30, December 31, 1999 1998 1998 ------------- -------------- ------------- Return on average assets .92% .96% .95% Return on average equity 10.18% 10.50% 10.39% Return on average common equity 10.24% 10.59% 10.47% Average equity to average assets 9.09% 9.14% 9.16% Results of Operations Net Interest Income The largest source of operating revenue for the Company is net interest income. Net interest income represents the difference between total interest income earned on earning assets and total interest expense paid on interest-bearing liabilities. The amount of interest income is dependent upon many factors including the volume and mix of earning assets, the general level of interest rates and the dynamics of changes in interest rates. The cost of funds necessary to support earning assets varies with the volume and mix of interest-bearing liabilities and the rates paid to attract and retain such funds. For purposes of the following discussion and analysis, the interest earned on tax-exempt securities is adjusted to an amount comparable to interest subject to normal income taxes. The adjustment is referred to as the tax-equivalent ("TE") adjustment. The Company's average balances, interest income and expense and rates earned or paid for major balance sheet categories are set forth in the following table (dollars in thousands): 8 Nine Months Ended Nine Months Ended September 30, 1999 September 30, 1998 -------------------------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate -------------------------------------------------- ASSETS Interest-bearing deposits $ 1,792 $ 67 4.95% $ 713 $ 28 5.24% Federal funds sold 10,266 372 4.83% 7,055 284 5.36% Investment securities Taxable 125,676 5,506 5.84% 112,941 5,286 6.24% Tax-exempt (1) 29,617 1,569 7.06% 15,248 862 7.54% Loans (2)(3) 351,144 21,706 8.24% 348,850 21,887 8.37% -------------------------------------------------- Total earning assets 518,495 29,220 7.51% 484,807 28,347 7.80% -------------------------------------------------- Cash and due from banks 16,336 16,057 Premises and equipment 14,399 12,613 Other assets 19,982 16,206 Allowance for loan losses (2,879) (2,803) --------- --------- Total assets $566,333 $526,880 --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY --------- Interest-Bearing Deposits Demand deposits $143,283 $ 2,678 2.49% $126,153 $ 2,857 3.02% Savings deposits 40,585 693 2.28% 38,278 652 2.27% Time deposits 223,297 8,521 5.09% 220,386 9,116 5.51% Securities sold under agreements to repurchase 20,512 631 4.10% 7,107 250 4.69% FHLB advances 18,343 695 5.05% 18,434 745 5.39% Federal funds purchased 202 8 5.04% 431 17 5.20% Long-term debt 4,447 206 6.17% 5.817 299 6.85% -------------------------------------------------- Total interest-bearing liabilities 450,669 13,432 3.97% 416,606 13,936 4.46% -------------------------------------------------- Demand deposits 60,013 58,518 Other liabilities 4,187 3,600 Stockholders' equity 51,464 48,156 --------- --------- Total liabilities & equity $566,333 $526,880 --------- --------- Net interest income (TE) $15,788 $14,411 -------- -------- Net interest spread 3.54% 3.34% Impact of non-interest bearing funds .52% .63% -------- -------- Net yield on interest- earning assets (TE) 4.06% 3.97% -------- -------- (1) Interest income and rates are presented on a tax-equivalent basis ("TE") assuming a federal income tax rate of 34%. (2) Loan fees are included in interest income and are not material. (3) Nonaccrual loans have been included in the average balances. 9 Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income (TE) for the nine months ended September 30, 1999 (in thousands) as compared to the nine months ended September 30, 1998: For the nine months ended September 30, 1999 compared to 1998 Increase / (Decrease) ------------------------------------------ Total Rate/ Change Volume Rate Volume (4) ------------------------------------------ Earning Assets: Interest-bearing deposits $ 39 $ 42 $ (2) $ (1) Federal funds sold 88 129 (28) (13) Investment securities: Taxable 220 596 (338) (38) Tax-exempt (1) 707 813 (55) (51) Loans (2)(3) (181) 144 (323) (2) ------------------------------------------ Total interest income 873 1,724 (746) (105) ------------------------------------------ Interest-Bearing Liabilities Interest-bearing deposits Demand deposits (179) 388 (499) (68) Savings deposits 41 38 2 1 Time deposits (595) 120 (706) (9) Securities sold under agreements to repurchase 381 472 (31) (60) FHLB advances (50) (4) (47) 1 Federal funds purchased (9) (9) - - Long-term debt (93) (70) (30) 7 ------------------------------------------ Total interest expense (504) 935 (1,311) (128) ------------------------------------------ Net interest income $ 1,377 $ 789 $ 565 $ 23 ------------------------------------------ (1) Interest income and rates are presented on a tax-equivalent basis, assuming a federal income tax rate of 34%. (2) Loan fees are included in interest income and are not material. (3) Nonaccrual loans are not material and have been included in the average balances. (4) The changes in rate/volume are computed on a consistent basis by multiplying the change in rates with the change in volume. On an tax equivalent basis, net interest income increased $1,377,000, or 9.5% to $15,788,000 for the nine months ended September 30, 1999, from $14,411,000 for the same period in 1998. The increase in net interest income for the nine months ended September 30, 1999, was primarily due to the decrease in the deposit rates combined with a higher deposit base as well as the increase in interest income due from an increase in the volume of earning assets. For the nine months ended September 30, 1999, average earning assets increased by $33,688,000, or 6.9%, and average interest-bearing liabilities increased $34,063,000, or 8.2%, compared with average balances for the nine months ended September 30, 1998. 10 Changes in average balances, as a percent of average earnings assets, are shown below: o average loans (as a percent of average earnings assets) decreased 4.3% to 67.7% for the nine months ended September 30, 1999 from 72.0% for the nine months ended September 30, 1998 o average securities (as a percent of average earnings assets) increased 3.6% to 30.0% for the nine months ended September 30, 1999 from 26.4% for the nine months ended September 30, 1998 o net interest margin, on a tax equivalent basis, increased to 4.06% for the nine months ended September 30, 1999, from 3.97% for the nine months ended September 30, 1998 Provision for Loan Losses The provision for loan losses for the nine months ended September 30, 1999 and 1998 was $450,000 and $400,000, respectively. For information on loan loss experience and nonperforming loans, see the "Nonperforming Loans" and "Loan Quality and Allowance for Loan Losses" sections later in this document. Other Income An important source of the Company's revenue is derived from other income. The following table sets forth the major components of other income for the three months ended and nine months ended September 30, 1999 and 1998 (in thousands):
Three months ended Nine months ended 1999 1998 $ change 1999 1998 $ change --------- ---------- ---------- ---------- --------- ---------- Trust $ 514 $ 426 $ 88 $ 1,459 $ 1,257 $ 202 Brokerage 111 85 26 340 239 101 Securities gains - 52 (52) - 64 (64) Service charges 617 470 147 1,690 1,410 280 Mortgage banking 42 209 (167) 566 826 (260) Other 281 264 17 965 799 166 --------- ---------- ---------- ---------- --------- ---------- Total other income $ 1,565 $ 1,506 $ 59 $ 5,020 $ 4,595 $ 425 --------- ---------- ---------- ---------- --------- ----------
o Total non-interest income increased to $5,020,000 for the nine months ended September 30, 1999, compared to $4,595,000 for the same period in 1998. o Trust revenues increased $202,000 or 16.1% to $1,459,000 for the nine months ended September 30, 1999, compared to $1,257,000 for the same period in 1998 mostly due to the net effect of the following: o increase in the fee structure for trust accounts o growth in the employee benefit accounts managed by the Trust Department o increase in the farm management fees o decrease in trust assets that are reported at market value Trust assets decreased 7% to $316 million at September 30, 1999 from $338 million at December 31, 1998. o Revenues from brokerage and annuity sales increased $101,000 or 42.3% for the nine months ended September 30, 1999, compared with the same period in 1998. o There were no securities gains or losses during the nine months ended September 30, 1999 as compared to net securities gains of $64,000 for the same period in 1998. 11 o Fees from service charges increased $280,000 or 19.9% to $1,690,000 for the nine months ended September 30, 1999, compared to $1,410,000 for the same period in 1998. This increase was primarily due to an increase in the number of savings and transaction accounts, an increase in the service charges on ATM's, and an increase in the fee schedule on transactions. o Mortgage banking income decreased $260,000 or 31.5% to $566,000 for the nine months ended September 30, 1999, compared to $826,000 for the same period in 1998. This was attributed to the volume of loans sold by First Mid Bank decreasing by $16.5 million to $34.0 million (representing 439 loans) as of September 30, 1999, from $50.5 million (representing 616 loans) as of the same period in 1998. This decrease in the volume of fixed rate loan originations is largely the result of considerably less re-financings by customers. o Other income increased $166,000 or 20.8% to $965,000 for the nine months ended September 30, 1999, compared to $799,000 for the same period in 1998. This increase was primarily due to a $93,000 gain on the sale of property (net book value of $230,000) in Mattoon, Tuscola and Charleston, Illinois. Other Expense The major categories of other expense include salaries and employee benefits, occupancy and equipment expenses and other operating expenses associated with day-to-day operations. The following table sets forth the major components of other expense for the three months ended and nine months ended September 30, 1999 and 1998 (in thousands):
Three months ended Nine months ended 1999 1998 $ change 1999 1998 $ change --------- --------- --------- --------- --------- --------- Salaries and benefits $ 2,487 $ 2,153 $ 334 $ 7,142 $ 6,384 $ 758 Occupancy and equipment 903 754 149 2,524 2,192 332 FDIC premiums 24 26 (2) 78 82 (4) Amortization of intangibles 302 191 111 684 573 111 Stationery and supplies 141 148 (7) 504 498 6 Legal and professional fees 375 258 117 882 680 202 Marketing and promotion 154 108 46 468 371 97 Other operating expenses 660 602 58 1,920 1,906 14 --------- --------- --------- --------- --------- --------- Total other expense $ 5,046 $ 4,240 $ 806 $14,202 $12,686 $1,516 --------- --------- --------- --------- --------- ---------
o Total non-interest expense increased to $14,202,000 for the nine months ended September 30, 1999, compared to $12,686,000 for the same period in 1998. o Salaries and employee benefits, the largest component of other expense, increased $758,000 or 11.9% to $7,142,000 for the nine months ended September 30, 1999, compared to $6,384,000 for the same period in 1998. This increase can be explained by: o an increase in FTE employees to 282 at September 30, 1999 from 249 at September 30, 1998, and o merit increases for continuing employees o Occupancy and equipment expense increased $332,000 or 15.1% to $2,524,000 for the nine months ended September 30, 1999, compared to $2,192,000 for the same period in 1998. This increase included depreciation expense recorded on technology equipment placed in service as well as the depreciation expense on remodeled buildings located in Mattoon, Tuscola and Charleston. o Amortization of intangible assets increased $111,000 or 19.4% to $684,000 for the nine months ended September 30, 1999, compared to $573,000 for the same period in 1998. This increase was due to the goodwill and core deposit intangibles associated with the purchase of the Monticello, Taylorville and DeLand branch acquisition in May, 1999. 12 o All other categories of operating expenses increased a net of $319,000 or 9.2% to $3,774,000 for the nine months ended September 30, 1999, compared to $3,455,000 for the same period in 1998. This increase is primarily due to the costs associated with the new branches in Monticello, Taylorville and DeLand. Income Taxes Total income tax expense amounted to $1,695,000 for the nine months ended September 30, 1999, compared to $1,832,000 for the same period in 1998. Effective tax rates were 30.1% and 32.6% for the periods ended September 30, 1999 and 1998. Analysis of Balance Sheets Loans The loan portfolio is the largest category of the Company's earning assets. The following table summarizes the composition of the loan portfolio as of September 30, 1999 and December 31, 1998 (in thousands): September 30,December 31, -------------------------- 1999 1998 -------------------------- Real estate - mortgage $262,175 $244,501 Commercial, financial and agricultural 92,165 78,579 Installment 23,947 25,194 Other 1,380 791 -------------------------- Total loans $379,667 $349,065 -------------------------- At September 30, 1999, the Company had loan concentrations in agricultural industries of $60.6 million, or 16.0%, of outstanding loans and $50.9 million, or 14.6%, at December 31, 1998. The Company had no further industry loan concentrations in excess of 10% of outstanding loans. The increase in outstanding commercial and agricultural loans and the related increase in total loans was partially attributable to the $10 million in loans acquired through the May, 1999, purchase of the Bank One branches. Real estate mortgage loans have averaged approximately 70% of the Company's total loan portfolio for the past several years. This is the result of a strong local housing market and the Company's historical focus on residential real estate lending. The balance of real estate loans held for sale amounted to $1.2 million as of September 30, 1999. The following table presents the balance of loans outstanding as of September 30, 1999, by maturities (dollars in thousands): Maturity (1) -------------------------------------------- Over 1 One year through Over or less (2) 5 years 5 years Total -------------------------------------------- Real estate - mortgage $ 48,962 $172,628 $ 40,585 $262,175 Commercial, financial and agricultural 59,679 28,749 3,737 92,165 Installment 5,888 17,539 520 23,947 Other 381 415 584 1,380 -------------------------------------------- Total loans $114,910 $219,331 $45,426 $379,667 -------------------------------------------- (1) Based on scheduled principal repayments. (2) Includes demand loans, past due loans and overdrafts. 13 As of September 30, 1999, loans with maturities over one year consisted of $229,346,000 in fixed rate loans and $35,410,000 in variable rate loans. The loan maturities noted above are based on the contractual provisions of the individual loans. The Company has no general policy regarding rollovers and borrower requests, which are handled on a case-by-case basis. Nonperforming Loans Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due ninety days or more as to interest or principal payments; and loans not included in (a) and (b) above which are defined as "renegotiated loans". The following table presents information concerning the aggregate amount of nonperforming loans at September 30, 1999 and December 31, 1998 (in thousands): September 30,December 31, 1999 1998 ------------------------- Nonaccrual loans $1,816 $1,783 Loans past due ninety days or more and still accruing 692 609 Renegotiated loans which are performing in accordance with revised terms 83 90 ------------------------- Total Nonperforming Loans $2,591 $2,482 ------------------------- At September 30, 1999, management has identified approximately $100,000 exposure associated with the nonperforming loans. This exposure was considered in determining the adequacy of the allowance for loan losses as of September 30, 1999. Approximately $1,116,000 of the nonperforming loans resulted from four individual, collateral dependent, commercial loans to a single borrower. Interest income that would have been reported if nonaccrual and renegotiated loans had been performing totaled $104,000 for the first nine months of 1999. Interest income that was included in income for the first nine months of 1999 totaled $5,000. The Company's policy generally is to discontinue the accrual of interest income on any loan for which principal or interest is ninety days past due and when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. Loan Quality and Allowance for Loan Losses The allowance for loan losses represents management's best estimate of the reserve necessary to adequately cover losses that could ultimately be realized from current loan exposures. The provision for loan losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate allowance for loan losses. In determining the adequacy of the allowance for loan losses, and therefore the provision to be charged to current earnings, management relies predominantly on a disciplined credit review and approval process which extends to the full range of the Company's credit exposure. The review process is directed by overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Once identified, the magnitude of exposure to individual borrowers is quantified in the form of specific allocations of the allowance for loan losses. Collateral values are considered by management in the determination of such specific allocations. Additional factors considered by management in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and renegotiated loans and the current economic conditions in the region where the Company operates. 14 Management recognizes that there are risk factors which are inherent in the Company's loan portfolio. All financial institutions face risk factors in their loan portfolios because risk exposure is a function of the business. The Company's operations (and therefore its loans) are concentrated in east central Illinois, an area where agriculture is the dominant industry. Accordingly, lending and other business relationships with agriculture-based businesses are critical to the Company's success. At September 30, 1999, the Company's loan portfolio included $60.6 million of loans to borrowers whose businesses are directly related to agriculture. The balance increased $9.7 million from $50.9 million at December 31, 1998. While the Company adheres to sound underwriting practices including collateralization of loans, an extended period of low commodity prices could nevertheless result in an increase in the level of problem agriculture loans. Loan loss experience for the nine months ended September 30, 1999 and 1998, are summarized as follows (dollars in thousands): September 30, 1999 1998 ------------------------- Average loans outstanding, net of unearned income $351,144 $348,850 Allowance-beginning of period $ 2,715 $ 2,636 Balance relating to acquired loans from branch purchase 150 - Charge-offs: Real estate-mortgage 1 158 Commercial, financial & agricultural 275 21 Installment 68 98 ------------------------- Total charge-offs 344 277 Recoveries: Real estate-mortgage 1 25 Commercial, financial & agricultural 10 30 Installment 17 23 ------------------------- Total recoveries 28 78 ------------------------- Net charge-offs 316 199 ------------------------- Provision for loan losses 450 400 ------------------------- Allowance-end of period $ 2,999 $ 2,837 ------------------------- Ratio of net charge-offs to average loans (annualized) .09% .08% ------------------------- Ratio of allowance for loan losses to loans outstanding (less unearned interest at end of period) .79% .82% ------------------------- Ratio of allowance for loan losses to nonperforming loans 115.8% 82.4% ------------------------- The Company minimizes credit risk by adhering to sound underwriting and credit review policies. These policies are reviewed at least annually, and changes are approved by the board of directors. Senior management is actively involved in business development efforts and the maintenance and monitoring of credit underwriting and approval. The loan review system and controls are designed to identify, monitor and address asset quality problems in an accurate and timely manner. On a monthly basis, the board of directors reviews the status of problem loans. In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for loan losses. In August, 1999, the Company learned of potential problems concerning certain loans to one borrower whose total indebtedness to the Company, including principal and interest, totaled $1.9 million. 15 The borrower has subsequently paid off a portion of these loans and the Company has secured additional collateral and guarantees. As of November 10, 1999, the balance outstanding totaled $798,000, and all payments due on these loans were current. The Company believes that the total loss, if any, relating to these loans would not exceed $250,000. These loans have been considered in determining the adequacy of the balance in the allowance for loan losses as of September 30, 1999. During the first nine months of 1999, the Company had net charge-offs of $316,000, compared to $199,000 for the same period in 1998. The increase in the charge-offs of commercial, financial and agricultural loans resulted primarily from collateral dependent commercial loans from two borrowers. At September 30, 1999, the allowance for loan losses amounted to $2,999,000, or .79% of total loans, and 115.8% of nonperforming loans. At September 30, 1998, the allowance was $2,837,000, or .82% of total loans, and 82.4% of nonperforming loans. Securities The Company's overall investment goal is to maximize earnings while maintaining liquidity in securities having minimal credit risk. The types and maturities of securities purchased are primarily based on the Company's current and projected liquidity and interest rate sensitivity positions. The following table sets forth the amortized cost of the securities for September 30, 1999 and December 31, 1998 (in thousands): September 30, December 31, 1999 1998 ------------------ ------------------- % of % of Amount Total Amount Total ---------- ------- ---------- -------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 94,972 58% $ 91,069 58% Obligations of states and political subdivisions 31,710 20% 27,674 18% Mortgage-backed securities 33,223 20% 35,209 22% Other securities 2,579 2% 2,509 2% ---------- ------- ---------- -------- Total securities $162,484 100% $156,461 100% ---------- ------- ---------- -------- At September 30, 1999, the Company's investment portfolio showed an increase in obligations of states and political subdivisions and U.S. Government agency securities. While the volume of mortgage-backed securities decreased, all other securities remained constant. This change in the portfolio mix improved the repricing characteristics of the portfolio, helped steady the Company's exposure relating to market value risk and improved the portfolio yield. The amortized cost, gross unrealized gains and losses and estimated fair values for available-for-sale and held-to-maturity securities by major security type at September 30, 1999 and December 31, 1998 were as follows (in thousands): 16
Gross Gross Estimated Amortized Unrealized Unrealized Fair September 30, 1999 Cost Gains Losses Value - ----------------------------------------- ----------- ---------- ----------- ---------- Available-for-sale: U.S. Treasury securities and obligations of U.S. Government corporations & $ 94,972 $ 9 $ (2,813) $ 92,168 agencies Obligations of states and political subdivisions 29,266 102 (820) 28,548 Mortgage-backed securities 33,224 68 (455) 32,837 Federal Home Loan Bank stock 1,913 - - 1,913 Other securities 666 - - 666 ----------- ---------- ----------- ---------- Total available-for-sale $160,041 $ 179 $ (4,088) $156,132 ----------- ---------- ----------- ---------- Held-to-maturity: Obligations of states and political subdivisions $ 2,444 $ 13 $ (50) $ 2,407 ----------- ---------- ----------- ---------- December 31, 1998 Available-for-sale: U.S. Treasury securities and obligations of U.S. Government corporations & $ 91,069 $ 333 $ (413) $ 90,989 agencies Obligations of states and political subdivisions 24,352 481 (48) 24,785 Mortgage-backed securities 35,209 142 (100) 35,251 Federal Home Loan Bank stock 1,843 - - 1,843 Other securities 666 - - 666 ----------- ---------- ----------- ---------- Total available-for-sale $153,139 $ 956 $ (561) $153,534 ----------- ---------- ----------- ---------- Held-to-maturity: Obligations of states and political subdivisions $ 3,322 $ 67 $ - $ 3,389 ----------- ---------- ----------- ----------
The rise in interest rates during 1999 has reduced the market value of the investment portfolio 2.3% since December 31, 1998. The following table indicates the expected maturities of investment securities classified as available-for-sale and held-to-maturity, presented at amortized cost, at September 30, 1999 (dollars in thousands) and the weighted average yield for each range of maturities. Mortgage-backed securities are aged according to their weighted average life. All other securities are shown at their contractual maturity. 17 One After 1 After 5 After year through through ten or less 5 years 10 years years Total ------------------------------------------------ Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 3,006 $56,996 $30,812 $ 4,158 $ 94,972 Obligations of state and political subdivisions 2,036 2,303 11,664 13,263 29,266 Mortgage-backed securities 1,718 20,378 10,224 904 33,224 Other securities - - - 2,579 2,579 ------------------------------------------------ Total Investments $ 6,760 $79,677 $52,700 $20,904 $160,041 ------------------------------------------------ Weighted average yield 5.57% 5.81% 5.79% 4.21% 5.54% Full tax-equivalent yield 6.51% 5.88% 6.29% 5.74% 5.98% ------------------------------------------------ Held-to-maturity: Obligations of state and political subdivisions $ 342 $ 1,256 $ 160 $ 686 $ 2,444 ------------------------------------------------ Weighted average yield 5.20% 5.08% 5.55% 5.46% 5.23% Full tax-equivalent yield 8.03% 7.69% 8.40% 8.28% 7.93% ------------------------------------------------ The weighted average yields are calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. Full tax-equivalent yields have been calculated using a 34% tax rate. The maturities of, and yields on, mortgage-backed securities have been calculated using actual repayment history. However, where securities have call features, and have a market value in excess of par value, the call date has been used to determine the expected maturity. With the exception of obligations of the U.S. Treasury and other U.S. Government agencies and corporations, there were no investment securities of any single issuer the book value of which exceeded 10% of stockholders' equity at September 30, 1999. Proceeds from sales of investment securities and realized gains and losses were as follows for the nine months ended September 30, 1999 and September 30, 1998 (in thousands): September 30, 1999 1998 -------------- ------------- Proceeds from sales $ - $ 6,848 Gross gains - 67 Gross losses - 3 -------------- ------------- Investment securities carried at approximately $120,515,000 and $93,947,000 at September 30, 1999 and December 31, 1998, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law. 18 Deposits Funding the Company's earning assets is substantially provided by a combination of consumer, commercial and public fund deposits. The Company continues to focus its strategies and emphasis on retail core deposits, the major component of funding sources. The following table sets forth the average deposits and weighted average rates for the nine months ended September 30, 1999 and for the year ended December 31, 1998 (dollars in thousands): September 30, December 31, 1999 1998 ------------------------------------------ Weighted Weighted Average Average Amount Rate Amount Rate ------------------------------------------ Demand deposits: Non-interest bearing $ 60,013 - $ 59,069 - Interest bearing 143,283 2.49% 125,586 2.93% Savings 40,585 2.28% 37,831 2.26% Time deposits 223,297 5.09% 222,562 5.51% ------------------------------------------ Total average deposits 467,178 3.39% $445,048 3.77% ------------------------------------------ The following table sets forth the maturity of time deposits of $100,000 or more at September 30, 1999 and December 31, 1998 (in thousands): September 30, December 31, 1999 1998 -------------------------------- 3 months or less $ 15,871 $ 21,510 Over 3 through 6 months 11,544 8,285 Over 6 through 12 months 11,794 4,608 Over 12 months 4,802 8,995 ----------------------------- Total $ 44,011 $ 43,398 ----------------------------- Total deposit balances increased by approximately $50 million during the first nine months of 1999 primarily due to the acquisition of the deposits from the Bank One branches. 19 Other Borrowings Other borrowings consist of securities sold under agreements to repurchase, Federal Home Loan Bank ("FHLB") advances, and federal funds purchased. Information relating to other borrowings as of September 30, 1999 and December 31, 1998 is presented below (in thousands): September 30, December 31, 1999 1998 ------------- -------------- Securities sold under agreements to $23,635 $26,018 repurchase Federal Home Loan Bank advances: Overnight - - Fixed term - due in one year or less - - Fixed term - due after one year 15,500 19,500 Federal funds purchased - - ------------- -------------- Total $39,135 $45,518 ------------- -------------- Average interest rate at end of period 4.72% 4.51% Maximum Outstanding at Any Month-end Securities sold under agreements to $24,496 $26,018 repurchase Federal Home Loan Bank advances: Overnight 18,000 5,500 Fixed term - due in one year or less - - Fixed term - due after one year 19,500 20,500 Federal funds purchased - 5,750 ------------- -------------- Total $61,996 $57,768 ------------- -------------- Averages for the Period Ended Securities sold under agreements to $20,512 $ 9,717 repurchase Federal Home Loan Bank advances: Overnight 1,964 236 Fixed term - due in one year or less - - Fixed term - due after one year 16,379 18,504 Federal funds purchased 202 364 ------------- -------------- Total $39,057 $28,821 ------------- -------------- Average interest rate during the period 4.55% 5.07% Securities sold under agreements to repurchase are short-term obligations of First Mid Bank. First Mid Bank pledges collateral, securing any obligation to pay the amount due, certain government securities which are direct obligations of the United States or one of its agencies. First Mid Bank offers these retail repurchase agreements as a cash management service to its corporate customers. Federal Home Loan Bank advances represent borrowings by First Mid Bank to fund agricultural loan demand. This loan demand was previously funded primarily through deposits by the State of Illinois. The fixed term advances consists primarily of $13.5 million which First Mid Bank is using to fund agricultural loans. $10.0 million is a 10- year maturity with a one year call option by the Federal Home Loan Bank. The advance bears interest at a rate of 4.85%. $3.5 million is a 10-year maturity which is callable quarterly after one year. The advance bears interest at a rate of 5.00%. Interest Rate Sensitivity The Company seeks to maximize its net interest margin within an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to favorable or unfavorable movements in interest rates. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of assets differ significantly from the maturity or repricing characteristics of liabilities. 20 The Company monitors its interest rate sensitivity position to maintain a balance between rate sensitive assets and rate sensitive liabilities. This balance serves to limit the adverse effects of changes in interest rates. The Company's asset/liability management committee oversees the interest rate sensitivity position and directs the overall allocation of funds. In the banking industry, a traditional measurement of interest rate sensitivity is known as "GAP" analysis, which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. The following table sets forth the Company's interest rate repricing gaps for selected maturity periods at September 30, 1999 (in thousands):
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 5,593 - - - - Taxable investment 23,328 3,939 4,217 5,267 90,831 securities Nontaxable investment - 1,627 679 276 28,410 securities Loans 53,141 24,195 39,901 40,068 222,360 ---------- ----------- ---------- ----------- --------- Total $ 82,062 $ 29,761 $ 44,797 $ 45,611 $ 341,601 ---------- ----------- ---------- ----------- --------- Interest bearing liabilities: Savings and N.O.W. accounts 151,919 - - - - Money market accounts 54,180 - - - - Other time deposits 21,951 32,408 62,078 62,534 53,312 Other borrowings 23,590 13,500 2,000 - - Long-term debt 4,325 - - - - ---------- ----------- ---------- ----------- --------- Total $ 255,965 $ 45,908 $ 64,078 $ 62,534 $ 53,312 ---------- ----------- ---------- ----------- --------- Periodic GAP $(173,903) $ (16,147) $(19,281) $ (16,923) $288,289 ---------- ----------- ---------- ----------- --------- Cumulative GAP $(173,903) $(190,050) $(209,331) $(226,254) $ 62,035 ---------- ----------- ---------- ----------- --------- GAP as a % of interest earning assets: ---------- ----------- ---------- ----------- --------- Periodic (32.0%) (3.0%) (3.5%) (3.1%) 53.0% Cumulative (32.0%) (34.9%) (38.5%) (41.6%) 11.4% ---------- ----------- ---------- ----------- ---------
At September 30, 1999, the Company was liability sensitive on a cumulative basis through the twelve-month time horizon. Accordingly, future increases in interest rates, if any, could have an unfavorable effect on the net interest margin. The Company's ability to lag the market in repricing deposits in a rising interest rate environment eases the implied liability sensitivity of the Company. Interest rate sensitivity using a static GAP analysis basis is only one of several measurements of the impact of interest rate changes on net interest income used by the Company. Its actual usefulness in assessing the effect of changes in interest rates varies with the constant changes which occur in the composition of the Company's earning assets and interest-bearing liabilities. For this reason, the Company uses financial models to project interest income under various rate scenarios and assumptions relative to the prepayments, reinvestment and roll overs of assets and liabilities, of which First Mid Bank represents substantially all of the Company's rate sensitive assets and liabilities. 21 Capital Resources At September 30, 1999, the Company's stockholders' equity increased $1,376,000 or 2.7% to $51,856,000 from $50,480,000 as of December 31, 1998. During the first nine months of 1999, net income contributed $3,928,000 to equity before the payment of dividends to common and preferred stockholders. The change in net unrealized gain/loss on available-for-sale investment securities decreased stockholders' equity by $2,656,000, net of tax. The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Bank holding companies follow minimum regulatory requirements established by the Federal Reserve Board, First Mid Bank follows similar minimum regulatory requirements established for national banks by the Office of the Comptroller of the Currency. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Quantitative measures established by each regulatory agency to ensure capital adequacy require the reporting institutions to maintain a minimum total risk-based capital ratio of 8% and a minimum leverage ratio of 3% for the most highly-rated banks that do not expect significant growth. All other institutions are required to maintain a minimum leverage ratio of 4%. Management believes that as of September 30, 1999 and December 31, 1998 all capital adequacy requirements have been met by the Company and First Mid Bank. As of September 30, 1999, the most recent notification from the primary regulators categorized the Company and First Mid Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios must be maintained as set forth in the table. There are no conditions or events since that notification that management believes have changed these categories.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------- ------------------- ------------------- Amount Ratio Amount Ratio Amount Ratio --------- --------- --------- --------- --------- --------- September 30, 1999 Total Capital (to risk-weighted assets) Company $ 43,570 11.89% $ 29,323 > 8.00% $ 36,654 > 10.00% First Mid Bank 44,108 12.17% 28,985 > 8.00% 36,232 > 10.00% Tier 1 Capital (to risk-weighted assets) Company 40,571 11.07% 14,661 > 4.00% 21,992 > 6.00% First Mid Bank 41,109 11.35% 14,493 > 4.00% 21,739 > 6.00% Tier 1 Capital (to average assets) Company 40,571 6.89% 23,555 > 4.00% 29,444 > 5.00% First Mid Bank 41,109 7.03% 23,393 > 4.00% 29,241 > 5.00% --------- --------- --------- --------- --------- ---------
22
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. o The Deferred Compensation Plan was effective as of September, 1984. Its purpose is to allow directors, advisory directors, and key officers to defer a portion of the fees and cash compensation paid by the Company as a means of maximizing the effectiveness and flexibility of compensation arrangements. o The First Retirement and Savings Plan was effective beginning in 1985. Employees are eligible to participate in this plan after nine months of service to the Company. o The Dividend Reinvestment Plan was effective as of October, 1994. The purpose of this plan is to provide participating stockholders with a simple and convenient method of investing cash common and preferred stock dividends paid by the Company into newly-issued common shares of the Company. All holders of record of the Company's common or preferred stock are eligible to voluntarily participate. This plan is administered by Harris Trust and Savings Bank and offers a way to increase one's investment in the Company. o The Stock Incentive Plan was established by the Company in December, 1997, and is intended to provide a means whereby directors and certain officers can acquire shares of the Company's common stock. A maximum of 100,000 shares have been authorized under this plan. Options to acquire shares will be awarded at an exercise price equal to the fair market value of the shares on the date of grant. Options to acquire shares have a 10-year term. Options granted to employees vest over a four year period and those options granted to directors vest at the time they are issued. 23 On August 5, 1998, the Company announced a stock repurchase program of up to 3% of its common stock. The shares will be repurchased at the most recent market price of the stock. As of September 30, 1999, 18,402 shares (.9%) at a total price of $678,000 and as of December 31, 1998, 13,539 shares (.7%) at a total price of $507,000 have been repurchased by the Company. Treasury Stock is further affected by activity in the Deferred Compensation Plan. Effective November 15, 1999, the Company's Series A preferred stock will be converted to common stock. This preferred stock was originally issued in a 1992 private placement to enable the Company to acquire Heartland Federal Savings & Loan Association. This conversion of the preferred stock will not impact reported earnings nor change the way in which the common stock is traded. Liquidity Liquidity represents the ability of the Company and its subsidiaries to meet the requirements of customers for loans and deposit withdrawals. Liquidity management focuses on the ability to obtain funds economically for these purposes and to maintain assets which may be converted into cash at minimal costs. Other sources for cash include deposits of the State of Illinois and Federal Home Loan Bank advances. At September 30, 1999, the excess collateral at the Federal Home Loan Bank will support approximately $82 million of additional advances. Management monitors its expected liquidity requirements carefully, focusing primarily on cash flows from: o lending activities, including loan commitments, letters of credit and mortgage prepayment assumptions o deposit activities, including seasonal demand of private and public funds o investing activities, including prepayments of mortgage-backed securities and call assumptions on U.S. Government Treasuries and Agencies o operating activities, including schedule debt repayments and dividends to shareholders Effects of Inflation Unlike industrial companies, virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or experience the same magnitude of changes as goods and services, since such prices are effected by inflation. In the current economic environment, liquidity and interest rate adjustments are features of the Company's assets and liabilities which are important to the maintenance of acceptable performance levels. The Company attempts to maintain a balance between monetary assets and monetary liabilities, over time, to offset these potential effects. Future Accounting Changes Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") was issued by the FASB in September 1998. SFAS 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If certain conditions are 24 met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss is reported in earnings immediately. Accounting for foreign currency hedges is similar to the accounting for fair value and cash flow hedges. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change. During September, 1999, the FASB issued the Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - -- Deferral of the Effective Date of FASB Statement No. 133 -an amendment of FASB Statement No. 133," ("SFAS 137") that delays SFAS 133 until fiscal years beginning after September 15, 2000. Adoption of SFAS 133 is not expected to have a material impact on the Company's financial statements. In October 1998, the FASB issued Statement of Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS 134"). SFAS 134 amends Statement No.65, "Accounting for Certain Mortgage Banking Activities" to conform the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the subsequent accounting for securities retained after the securitization of other types of assets by a non-mortgage banking enterprise. SFAS 134 was effective for the first quarter of 1999. The adoption of SFAS 134 did not have a material impact on the Company. The Year 2000 Issue Like other businesses dependent upon computerized information processing, the Company must deal with "Year 2000" issues, which stem from using two digits to reflect the year in many computer programs and data. Computer programmers and other designers of equipment that use microprocessors have abbreviated dates by eliminating the first two digits of the year. As the year 2000 approaches, many systems may be unable to distinguish years beginning with 20 from years beginning with 19, and so may not accurately process certain date-based information, which could cause a variety of operational problems for businesses. The Company's data processing software and hardware provide essential support to virtually all of its businesses, so successfully addressing Year 2000 issues is of the highest importance. Failure to complete renovation of the critical systems used by the Company on a timely basis could have a materially adverse affect on its operations and financial performance, as could Year 2000 problems experienced by others with whom the Company does business. Because of the range of possible issues and the large number of variables involved, it is impossible to quantify the potential cost of problems should the Company's remediation efforts or the efforts of those with whom it does business not be successful. The Company has a dedicated Year 2000 project team whose members have significant experience on the Company's applications which run on both main frame and desk top applications. Virtually all applications used by the Company were developed by third party vendors who have represented that their systems were developed using four digit years. The Company completed the information technology portion of the assessment and inventory phases of its Year 2000 project in early 1998. Full time renovation began in the first quarter of 1998. Testing and implementation activities have been underway on mission critical applications since late 1997. 25 The Company has a highly centralized data processing environment, with the vast majority of its data processing needs serviced out of a consolidated data center in Mattoon. As of September 30, 1999, testing results indicate that the Company's critical systems are capable of processing transactions through the Year 2000. All testing renovation, and implementation for existing critical applications (including vended and out-sourced applications) is complete. All implementation include testing with dates into the Year 2000 and internal user acceptance. The Year 2000 project team is also responsible for addressing issues that are not directly related to data processing systems. The project team has coordinated a review of various infrastructure issues, such as checking elevators and heating, ventilation and air-conditioning equipment, some of which include embedded systems, to verify that they will function in the Year 2000. The project team is also coordinating a review of the Year 2000 status of power and telecommunications providers at each important location, as these services are critical to its business. Although the Company is monitoring and validating the Year 2000 readiness of its vendors and suppliers, it cannot control the success of these efforts. Contingency plans have being developed to provide the Company with alternatives in situations where an entity furnishing a critical product or service experiences significant Year 2000 difficulties that will affect the Company. The actions taken pursuant to these contingency plans will depend in part on the Company's assessment of the readiness of specific providers in the power and telecommunications industries. Also, contingency plans for the critical business and environmental functions have been developed that establish alternative means of delivery of products and services to customers if a Year 2000 event is experienced. As part of its credit analysis process, the Company is assessing the Year 2000 readiness of its significant credit customers and is using this information in the methodology of assessing the adequacy of the allowance for loan losses. The inability of these credit customers to make payments when due could negatively impact the Company's short term liquidity. Similar Year 2000 problems could affect the cash flows of certain of the Company's business depositors resulting in their inability to maintain historical deposit balance levels in their accounts. In addition, the Company could experience other unusual deposit outflow before December 31, 1999 as a result of increased currency demands of its customers. The potential increase in cash requirements as the Year 2000 approaches has been considered by the Company in analyzing and planning for its future short term liquidity needs. In addition, as part of its fiduciary activities, the Company has implemented a plan for taking the Year 2000 issue into consideration, and to evaluate and deal with Year 2000 issues associated with property held in trust. The Company's personnel have also conducted several workshops for its customers, as well as for the community as a whole, to explain the Year 2000 issues and the Company's Year 2000 program. The Company conducts an ongoing review of its estimated Year 2000 external expenditures which are estimated to be approximately $150,000, virtually all of which have been expensed as incurred. This estimate includes the cost of purchasing licenses for software programming tools but does not reflect the cost of the time of internal staff. The cost of the time of internal staff devoted to the Year 2000 project is significant. This expense is not included in the above statement. Because of the priority given to the Year 2000 work by the Company, some other technology-related projects have been delayed. However, such delays are not expected to have a material effect on the ongoing business operations of the Company. 26 Pending Litigation Heartland Savings Bank, a subsidiary of the Company that merged with First Mid Bank during 1997, filed a complaint on December 5, 1995, against the U.S. Government which is now pending in the U.S. Court of Federal claims in Washington D.C. Refer to "Part II, Item 1, Legal Proceedings". ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material changes in the market risks faced by the Company since December 31, 1998. For information regarding the Company's market risk, refer to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. PART II ITEM 1. LEGAL PROCEEDINGS Since First Mid Bank acts as depositories of funds, it is named from time to time as a defendant in law suits (such as garnishment proceedings) involving claims to the ownership of funds in particular accounts. Management believes that all such litigation as well as other pending legal proceedings constitute ordinary routine litigation incidental to the business of First Mid Bank and that such litigation will not materially adversely affect the Company's consolidated financial condition. In addition to the normal proceedings referred to above, Heartland Savings Bank ("Heartland"), a subsidiary of the Company that merged with First Mid Bank during 1997, filed a complaint on December 5, 1995, against the U.S. Government which is now pending in the U.S. Court of Federal claims in Washington D.C. This complaint relates to Heartland's interest as successor to Mattoon Federal Savings and Loan Association which incurred a significant amount of supervisory goodwill when it acquired Urbana Federal Savings and Loan in 1982. The complaint alleges that the Government breached its contractual obligations when, in 1989, it issued new rules which eliminated supervisory goodwill from inclusion in regulatory capital. On August 6, 1998, First Mid Bank filed a motion with the U.S. Court of Federal claims to grant summary judgement on liability for breach of contract in this matter. On August 13, 1998, the U.S. Government filed a motion to stay such proceedings. At this time, it is too early to tell if First Mid Bank will prevail in its motion and, if so, what damages may be recovered. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION In September, 1999, Mr. John W. Hedges joined the Company as President of First Mid Bank. Most recently, Mr. Hedges was Senior Vice President at National City Bank in Decatur, the successor company to Citizens National Bank of Decatur, which he joined in 1976. 27 ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(3) -- Exhibits The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit Index which follows the Signature Page and immediately precedes the exhibits filed. (b) Reports on Form 8-K A Form 8-K was filed by the Company on September 23, 1999, disclosing the adoption by the Company of a stockholder rights plan. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST MID-ILLINOIS BANCSHARES, INC. (Company) /s/ William S. Rowland -------------------------------------- William S. Rowland President and Chief Executive Officer /s/ Laurel G. Allenbaugh -------------------------------------- Laurel G. Allenbaugh Vice President and Controller (Chief Accounting Officer) Dated: November 10, 1999 ----------------------- 29 Exhibit Index to Form 10-Q Exhibit Number Description and Filing or Incorporation Reference - ----------------------------------------------------------------------------- 11.1 Statement re: Computation of Earnings Per Share (Filed herewith) 27.1 Financial Data Schedule (Filed herewith) 30 EX-27 2 FDS FOR SEPT 10-Q 1999
9 1,000 9-MOS DEC-31-1999 SEP-30-1999 17,338 217 5,375 0 156,132 2,444 2,407 379,667 2,999 600,461 500,768 23,635 4,377 19,825 0 3,070 8,204 40,582 600,461 21,706 6,542 439 28,687 11,892 13,432 15,255 450 0 14,202 5,623 5,623 0 0 3,928 1.84 1.72 4.06 1,816 692 83 0 2,715 344 28 2,999 2,999 0 0
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