UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2002 Commission
file number: 0-13368
FIRST MID-ILLINOIS BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State of incorporation)
37-1103704
(I.R.S. employer identification no.)
1515 Charleston Avenue, Mattoon, Illinois 61938
(Address and zip code of principal executive offices)
(217) 234-7454
(Registrant's telephone number, including area code)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
As of May 15, 2002, 3,381,524 common stock, $4.00 par value, were
outstanding. The outstanding shares have been adjusted to reflect a
three-for-two stock split payable on November 16, 2001. (See Notes to
Consolidated Financial Statements).
PART I
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited) March 31, December 31,
(In thousands, except share data) 2002 2001
------------ ------------
Assets
Cash and due from banks:
Non-interest bearing $ 17,952 $ 23,471
Interest bearing 1,008 5,400
Federal funds sold 5,400 4,225
------------ ------------
Cash and cash equivalents 24,360 33,096
Investment securities:
Available-for-sale, at fair value 160,791 160,096
Held-to-maturity, at amortized cost (estimated
fair value of $2,080 and $2,136 at March 31,
2002 and December 31, 2001, respectively) 2,071 2,071
Loans 471,722 473,243
Less allowance for loan losses (3,751) (3,702)
------------ ------------
Net loans 467,971 469,541
Premises and equipment, net 16,567 16,656
Accrued interest receivable 5,885 6,790
Goodwill, net 10,971 11,093
Intangible assets, net 3,093 1,299
Other assets 4,884 5,337
------------ ------------
Total assets $696,593 $ 705,979
============ ============
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 75,621 $ 80,265
Interest bearing 476,114 479,155
------------ ------------
Total deposits 551,735 559,420
Accrued interest payable 1,932 2,370
Securities sold under agreements to repurchase 29,570 38,879
Other borrowings 43,658 37,625
Other liabilities 3,646 3,760
------------ ------------
Total liabilities 630,541 642,054
------------ ------------
Stockholders' Equity:
Common stock, $4 par value; authorized 6,000,000
shares; issued 3,577,774 shares in 2002 and
3,546,060 shares in 2001 14,311 14,184
Additional paid-in-capital 13,898 13,288
Retained earnings 41,465 39,500
Deferred compensation 1,470 1,392
Accumulated other comprehensive income 688 740
Less treasury stock at cost, 195,412 shares
in 2002 and 174,216 shares in 2001 (5,780) (5,179)
------------ ------------
Total stockholders' equity 66,052 63,925
------------ ------------
Total liabilities and stockholders' equity $696,593 705,979
============ ============
See accompanying notes to unaudited consolidated financial statements.
Consolidated Statements of Income (unaudited) Three months ended
(In thousands, except per share data) March 31,
2002 2001
-------------- ------------
Interest income:
Interest and fees on loans $ 8,419 $ 9,015
Interest on investment securities 1,906 2,221
Interest on federal funds sold 30 34
Interest on deposits with
other financial institutions 10 1
-------------- ------------
Total interest income 10,365 11,271
Interest expense:
Interest on deposits 3,381 5,052
Interest on securities sold under agreements
to repurchase 86 292
Interest on Federal Home Loan Bank advances 450 404
Interest on federal funds purchased 1 6
Interest on debt 33 74
-------------- ------------
Total interest expense 3,951 5,828
-------------- ------------
Net interest income 6,414 5,443
Provision for loan losses 125 150
-------------- ------------
Net interest income after provision
for loan losses 6,289 5,293
Other income:
Trust revenues 478 500
Brokerage commissions 85 97
Insurance commissions 170 20
Service charges 737 717
Securities gains, net 43 58
Mortgage banking income 307 178
Other 484 426
-------------- ------------
Total other income 2,304 1,996
Other expense:
Salaries and employee benefits 3,006 2,552
Net occupancy and equipment expense 971 951
Amortization of goodwill 122 210
Amortization of intangible assets 110 84
Stationery and supplies 155 156
Legal and professional 238 235
Marketing and promotion 159 158
Other 922 819
-------------- ------------
Total other expense 5,683 5,165
-------------- ------------
Income before income taxes 2,910 2,124
Income taxes 945 659
-------------- ------------
Net income $ 1,965 $ 1,465
============== ============
Per common share data:
Basic earnings per share $.58 $.43
Diluted earnings per share $.58 $.43
============== ============
See accompanying notes to unaudited consolidated financial statements.
Consolidated Statements of Cash Flows (unaudited) Three months ended
March 31,
(In thousands) 2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 1,965 $ 1,465
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 125 150
Depreciation, amortization and accretion, net 903 738
Gain on sale of securities, net (43) (58)
Loss on sale of other real property owned, net 6 3
Gain on sale of mortgage loans held for sale, net (291) (116)
Origination of mortgage loans held for sale (19,593) (9,881)
Proceeds from sale of mortgage loans held for sale 22,688 8,402
(Increase) decrease in other assets (878) 2,383
Increase (decrease) in other liabilities (242)
------------ ------------
Net cash provided by operating activities 6,184 2,844
Cash flows from investing activities:
Capitalization of mortgage servicing rights (1) (35)
Purchases of premises and equipment (335) (260)
Net (increase) decrease in loans (1,359) 7,036
Proceeds from sales of securities available-for-sale 4,039 1,739
Proceeds from maturities of:
Securities available-for-sale 7,600 18,279
Securities held-to-maturity 246 -
Purchases of securities available-for-sale (12,728) (19,355)
Purchases of securities held-to-maturity (45) (54)
Net cash provided by acquisition 15 -
------------ ------------
Net cash provided by (used in) investing activities (2,568) 7,350
Cash flows from financing activities:
Net increase (decrease) in deposits (7,687) 13,522
Decrease in repurchase agreements (9,309) (5,690)
Decrease in short-term FHLB advances - (20,000)
Increase in long-term FHLB advances 5,000 3,000
Increase in other borrowings 239 -
Proceeds from issuance of common stock 259 94
Purchase of treasury stock (524) (258)
Dividends paid on common stock (330) (318)
------------ ------------
Net cash used in financing activities (12,352) (9,650)
------------ ------------
Increase (decrease) in cash and cash equivalents (8,736) 544
Cash and cash equivalents at beginning of period 33,096 24,840
------------ ------------
Cash and cash equivalents at end of period $24,360 $25,384
============ ============
Additional disclosures of cash flow information
Cash paid during the period for:
Interest $4,389 $ 5,460
Income taxes 218 -
Dividends reinvested in common stock 479 398
Loans transferred to real estate owned 116 -
============ ============
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"), First Mid-Illinois Bank
& Trust, N.A. ("First Mid Bank") and its wholly-owned subsidiary First
Mid-Illinois Insurance Services, Inc. ("First Mid Insurance") and The Checkley
Agency, Inc. ("Checkley"). 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,
2002 and 2001, and all such adjustments are of a normal recurring nature. The
results of the interim period ended March 31, 2002, are not necessarily
indicative of the results expected for the year ending December 31, 2002.
The unaudited consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X
and do not include all of the information required by accounting principles
generally accepted in the United States of America 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 2001 Form 10-K.
Stock Split
On November 16, 2001 the Company effected a three-for-two stock split
in the form of a 50 percent stock dividend. Par value remained at $4 per share.
The stock split increased the Company's outstanding common shares from 2,250,714
to 3,376,071 shares. All prior period share and per share amounts have been
restated giving retroactive recognition to the stock split.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations,"
("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets," ("SFAS
142"). SFAS 141 requires that the purchase method of accounting be used for all
business combinations. SFAS 141 also specifies criteria that intangible assets
acquired in a business combination must meet to be recognized and reported
separately from goodwill. SFAS 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS 142. SFAS
142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."
The Company adopted the provisions of SFAS 141 as of July 1, 2001, and
SFAS 142 as of January 1, 2002. Goodwill and intangible assets, acquired in
business combinations completed before July 1, 2001, continued to be amortized
and tested for impairment prior to the full adoption of SFAS 142.
Since its adoption of SFAS 142 as of January 1, 2002, the Company is
required to evaluate its existing intangible assets and goodwill that were
acquired in purchase business combinations, and to make any necessary
reclassifications in order to conform with the new classification criteria in
SFAS 141 for recognition separate from goodwill. The Company is also required to
reassess the useful lives and residual values of all intangible assets acquired,
and make any necessary amortization period adjustments by the end of the first
interim period after adoption. If an intangible asset is identified as having an
indefinite useful life, the Company is required to test the intangible asset for
impairment in accordance with the provisions of SFAS 142 within the first
interim period. Impairment is measured as the excess of the carrying value over
the fair value of an intangible asset with an indefinite life. Any impairment
loss is measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period.
In connection with the SFAS 142 transitional goodwill impairment
evaluation, the Statement requires the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company must identify its reporting units and
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of January 1, 2002. The Company then has up to six months
from January 1, 2002 to determine the fair value of each reporting unit and
compare it to the carrying amount of the reporting unit. To the extent the
carrying amount of a reporting unit exceeds the fair value of the reporting
unit, an indication exists that the reporting unit goodwill may be impaired and
the Company must perform the second step of the transitional impairment test.
The second step is required to be completed as soon as possible, but no later
than the end of the year of adoption. In the second step, the Company must
compare the implied fair value of the reporting unit goodwill with the carrying
amount of the reporting unit goodwill, both of which would be measured as of the
date of adoption. The implied fair value of goodwill is determined by allocating
the fair value of the reporting unit to all of the assets (recognized and
unrecognized) and liabilities of the reporting unit in a manner similar to a
purchase price allocation, in accordance with SFAS 141. The residual fair value
after this allocation is the implied fair value of the reporting unit goodwill.
Any transitional impairment loss will be recognized as the cumulative effect of
a change in accounting principle in the Company's statement of income.
As of January 1, 2002, the date of adoption of SFAS 142, the Company
had unamortized goodwill in the amount of $11.1 million, of which $4 million
will be subject to the transition provisions of SFAS 142 and no longer
amortized. The remaining $7.1 million is for acquisition of branches whereby the
liabilities assumed were greater than the assets obtained and continues to be
amortized. The Company also had core deposit intangibles of $1.3 million, which
also continue to be amortized. As of March 31, 2002, the Company has added an
additional $1.9 million of amortizable intangibles as a result of the
acquisition of Checkley. The following table presents gross carrying amount and
accumulated amortization by major intangible asset class as of March 31, 2002
and December 31, 2001 (in thousands):
3/31/02 12/31/01
-------------------------------- --------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
------------- ------------------ -------------- -----------------
Goodwill not subject to amortization $4,035 $3,019 $4,035 $3,019
Goodwill from branch acquisitions 6,937 1,818 7,059 1,696
Core deposit intangibles 1,221 1,585 1,298 1,507
Other intangibles 1,872 32 - -
------------- ------------------ -------------- -----------------
$14,064 $6,454 $12,392 6,222
============= ================== ============== =================
Aggregate amortization for the current year and estimated amortization
expense for each of the five succeeding years is shown in the table below (in
thousands).
Aggregate amortization expense:
For year ended 12/31/02 $783
Estimated amortization expense:
For year ended 12/31/03 $770
For year ended 12/31/04 $669
For year ended 12/31/05 $649
For year ended 12/31/06 $649
For year ended 12/31/07 $596
The adoption of SFAS 142 resulted in a net income increase of $103,000
or $.03 in basic and diluted earnings per share for the quarter. For the period
ended March 31, 2002, amortization expense related to core deposit intangibles
was $78,000, amortization expense related to other intangibles was $32,000 and
amortization expense related to goodwill from branch acquisitions was $122,000.
For the period ended March 31, 2001, amortization expense related to goodwill no
longer amortizable due to adoption of SFAS 142 was $88,000, amortization expense
related to core deposit intangibles was $84,000 and amortization expense related
to goodwill from branch acquisitions was $122,000. The Company is evaluating its
goodwill for impairment in accordance with SFAS 142 and expects the assessment
to be complete by June 30, 2002.
Comprehensive Income
The Company's comprehensive income for the three-month periods ended
March 31, 2002 and 2001 is as follows (in thousands):
Three months ended
March 31,
2002 2001
--------------- --------------
Net income $1,965 $1,465
Other comprehensive income:
Unrealized gain (loss) during the period (42) 1,909
Less: realized gains during the period (43) (58)
Tax effect 33 (717)
--------------- --------------
Comprehensive income $1,913 $2,599
=============== ==============
Earnings Per Share
A three-for-two common stock split was distributed in the form of a 50%
stock dividend payable on November 16, 2001 to the stockholders of record at the
close of the business day of October 26, 2001. Accordingly, information with
respect to shares of common stock and earnings per share has been restated for
all prior periods presented to fully reflect the stock split. Income for basic
earnings per share ("EPS") is based on the weighted average number of common
shares outstanding. Diluted EPS is computed using the weighted average number of
common shares outstanding increased by the assumed conversion of the Company's
stock options, unless anti-dilutive. The components of basic and diluted
earnings per common share for the three-month periods ended March 31, 2002 and
2001 are as follows:
Three months ended
March 31,
2002 2001
---------------- ----------------
Basic Earnings per Share:
Net income $1,965,000 $1,465,000
Weighted average common shares outstanding 3,384,619 3,377,364
================ ================
Basic earnings per common share $ .58 $ .43
================ ================
Diluted Earnings per Share:
Weighted average common shares outstanding 3,384,619 3,377,364
Assumed conversion of stock options 19,724 9,089
---------------- ----------------
Diluted weighted average common
shares outstanding 3,404,343 3,386,453
================ ================
Diluted earnings per common share $ .58 $ .43
================ ================
Mergers and Acquisitions
On April 20, 2001, First Mid Bank acquired all the outstanding stock of
American Bank of Illinois in Highland, for $3.7 million in cash. This
acquisition added approximately $30.8 million to total deposits, $24.9 million
to loans, $2 million to securities, $1.7 million to premises and equipment and
$1.4 million to intangible assets. The acquisition was accounted for using the
purchase method of accounting whereby the acquired assets and liabilities were
recorded at fair value as of the acquisition date and the excess cost over fair
value of net assets was recorded as goodwill. The consolidated financial
statements include the results of operations of American Bank of Illinois since
the acquisition date.
On January 29, 2002, the Company acquired all of the issued and
outstanding stock of Checkley, an insurance agency headquartered in Mattoon,
Illinois. Checkley was purchased for cash with a portion ($750,000) paid at
closing and the remainder ($1,000,000) to be paid over a five-year earn-out
agreement ending January 2007. Checkley operates as a separate subsidiary of the
Company and provides customers with commercial property, casualty, life, auto
and home insurance. In order to facilitate this acquisition, the Company became
a financial holding company under the Gramm-Leach-Bliley Act on December 14,
2001. The results of Checkley's operations are included in the consolidated
financial statements since that date.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition (in thousands):
At January 29, 2002:
- -----------------------------------------------------
Current assets $643
Property and equipment 76
Intangible assets 1,904
----------------
Total assets acquired 2,623
----------------
Current liabilities (771)
Debt (20)
----------------
Total liabilities (791)
----------------
Net assets acquired $1,832
================
The Company estimates that $1,904,000 of acquired intangible assets
were obtained. The identifiable intangible assets were allocated to customer
lists to be fully amortized over a period of ten years.
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 as of, and for the periods ended, March 31,
2002 and 2001. This discussion and analysis should be read in conjunction with
the consolidated financial statements, related notes and selected financial data
appearing elsewhere in this report.
Forward-Looking Statements
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, such as discussions of
the Company's pricing and fee trends, credit quality and outlook, liquidity, new
business results, expansion plans, anticipated expenses and planned schedules.
The Company intends such forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and is including this statement for
purposes of these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies and
expectations of the Company, are identified by use of the words "believe",
"expect", "intend", "anticipate", "estimate", "project", or similar expressions.
Actual results could differ materially from the results indicated by these
statements because the realization of those results is subject to many
uncertainties, including: changes in interest rates, general economic
conditions, legislative/regulatory changes, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
Overview
Net income for the three months ended March 31, 2002 was $1,965,000
($.58 diluted EPS), an increase of $500,000 from $1,465,000 ($.43 diluted EPS)
for the same period in 2001. Of this amount, $103,000 ($.03 diluted EPS)
resulted from adoption of SFAS 142. A summary of the factors that contributed to
the changes in net income follows (in thousands):
2002 vs. 2001
---------------
Net interest income $ 996
Other income, including securities transactions 308
Other expenses (518)
Income taxes (286)
---------------
Increase in net income $ 500
===============
The following table shows the Company's annualized performance ratios
for the three months ended March 31, 2002 and 2001, as compared to the
performance ratios for the year ended December 31, 2001:
Three months ended Year ended
----------------------------- --------------
March 31, March 31, December 31,
2002 2001 2001
-------------- -------------- --------------
Return on average assets 1.12% .93% .97%
Return on average equity 12.12% 9.91% 10.56%
Average equity to average assets 9.24% 9.37% 9.20%
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, 2002 March 31, 2001
-----------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------ ---------- ---------- ------------ ---------- ----------
ASSETS
Interest-bearing deposits $2,420 $ 10 1.65% $68 $ 1 5.84%
Federal funds sold 7,599 30 1.58% 2,577 34 5.31%
Investment securities
Taxable 134,516 1,572 4.67% 120,155 1,870 6.22%
Tax-exempt (1) 29,361 506 6.89% 30,681 532 6.93%
Loans (2)(3) 468,308 8,419 7.19% 427,476 9,015 8.44%
------------ ---------- ---------- ------------ ---------- ----------
Total earning assets 642,204 10,537 6.56% 580,957 11,452 7.88%
Cash and due from banks 19,113 15,965
Premises and equipment 16,646 15,319
Other assets 26,131 22,431
Allowance for loan losses (4,033) (3,332)
------------ ------------
Total assets $700,061 $631,340
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
Demand deposits $197,349 $ 692 1.40% $162,805 $ 1,238 3.04%
Savings deposits 48,717 194 1.59% 36,999 220 2.38%
Time deposits 232,448 2,495 4.29% 248,737 3,594 5.78%
Securities sold under
agreements to repurchase 32,616 86 1.05% 24,053 292 4.86%
FHLB advances 34,596 450 5.20% 27,094 404 5.96%
Federal funds purchased 210 1 1.90% 387 6 5.82%
Other debt 5,039 33 2.62% 4,325 74 6.84%
------------ ---------- ---------- ------------ ---------- ----------
Total interest-bearing
liabilities 550,975 3,951 2.87% 504,400 5,828 4.62%
------------ ---------- ---------- ------------ ---------- ----------
Demand deposits 75,936 62,358
Other liabilities 8,308 5,422
Stockholders' equity 64,842 59,160
------------ ------------
Total liabilities & equity $700,061 $631,340
============ ============
Net interest income (TE) $6,586 $5,624
========== ==========
Net interest spread 3.69% 3.26%
Impact of non-interest
bearing funds .41% .61%
---------- ----------
Net yield on interest-
earning assets (TE) 4.10% 3.87%
========== ==========
(1) Interest income and rates are presented on a tax-equivalent basis (`TE')
assuming a federal income tax rate of 34%.
(2) Loan fees are included in interest income and are not material.
(3) Nonaccrual loans have been included in the average balances.
Changes in net interest income may also be analyzed by segregating the
volume and rate components of interest income and interest expense. The
following table summarizes the approximate relative contribution of changes in
average volume and interest rates to changes in net interest income (TE) for the
three months ended March 31, 2002, as compared to the same period in 2001 (in
thousands):
For the three months ended March 31,
2002 compared to 2001
--------------------------------------
Total Rate/
Change Volume Rate Volume (4)
------- ------ ------- ----------
Earning Assets:
Interest-bearing deposits $ 9 $ 34 $ (1) $ (24)
Federal funds sold (4) 67 (24) (47)
Investment securities:
Taxable (298) 223 (466) (55)
Tax-exempt (1) (26) (23) (3) -
Loans (2)(3) (596) 862 (1,336) (122)
------- ------ ------- ----------
Total interest income (915) 1,163 (1,830) (248)
------- ------ ------- ----------
Interest-Bearing Liabilities:
Interest-bearing deposits
Demand deposits (546) 263 (668) (141)
Savings deposits (26) 70 (73) (23)
Time deposits (1,099) (235) (927) 63
Securities sold under
agreements to repurchase (206) 104 (229) (81)
FHLB advances 46 112 (51) (15)
Federal funds purchased (5) (3) (4) 2
Long-term debt (41) 12 (46) (7)
------- ------ ------- ----------
Total interest expense (1,877) 323 (1,998) (202)
------- ------ ------- ----------
Net interest income $ 962 $ 840 $ 168 $ (46)
======= ====== ======= ==========
(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 a tax equivalent basis, net interest income increased $962,000, or
17.10% to $6,586,000 for the three months ended March 31, 2002, from $5,624,000
for the same period in 2001. The increase in net interest income was primarily
due to a growth in interest earning assets, including the acquisition of
American Bank of Illinois.
For the three months ended March 31, 2002, average earning assets
increased by $61,247,000, or 10.5%, and average interest-bearing liabilities
increased $46,575,000, or 9.2%, compared with average balances for the same
period in 2001. Changes in average balances, as a percent of average earnings
assets, are shown below:
< average loans (as a percent of average earnings assets) decreased 0.7% to
72.9% for the three months ended March 31, 2002, from 73.6% for the same
period in 2001.
< average securities (as a percent of average earnings assets) decreased 0.5%
to 25.5% for the three months ended March 31, 2002, from 26.0% for the same
period in 2001.
Provision for Loan Losses
The provision for loan losses for the three months ended March 31, 2002
and 2001 was $125,000 and $150,000, 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 March 31, 2002 and 2001 (in thousands):
Three months ended March 31,
2002 2001 $ Change
--------------- ------------ -------------
Trust $478 $500 $ (22)
Brokerage 85 97 (12)
Service charges 737 717 20
Insurance commissions 170 20 150
Security gains 43 58 (15)
Mortgage banking 307 178 129
Other 484 426 58
--------------- ------------ -------------
Total other income $2,304 $1,996 $ 308
=============== ============ =============
The primary reasons for the more significant period-to-period changes
are as follows:
< Trust revenues decreased $22,000 or 4.4% to $478,000 from $500,000 mostly
due to the volatility in the stock market. Trust assets, reported at market
value, were $303 million at March 31, 2002 compared to $307 million at
March 31, 2001.
< Revenues from brokerage and annuity sales decreased $12,000 or 12.4% to
$85,000 from $97,000. This was primarily due to an overall downturn in the
stock market.
< Fees from service charges increased $20,000 or 2.8% to $737,000 from
$717,000. This was primarily the result of additional deposit accounts from
the acquisition of the American Bank of Illinois.
< Insurance commissions increased in 2002 as a result of the acquisition of
Checkley in January 2002.
< Sales of investment securities resulted in a net gain of $43,000, as
compared to a net gain of $58,000 for the same quarter in 2001. This net
gain resulted from sales and calls of several available-for-sale
securities.
< Mortgage banking income increased $129,000 or 72.5% to $307,000 from
$178,000. This increase was due to a higher number of fixed rate loans
originated and sold by First Mid Bank as a result of falling interest
rates. Loans sold balances are as follows:
< $22.4 million (representing 255 loans) for the 1st quarter 2002.
< $8.3 million (representing 97 loans) for the 1st quarter 2001.
First Mid Bank generally releases servicing on these loans, thereby
reducing the capitalization of originated mortgage servicing rights.
< Other income increased $38,000 or 8.5% to $484,000 from $446,000. This
increase is primarily due to an increase in late charge fees and an
increase in ATM service charges due to the number of ATMs increasing.
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, 2002 and 2001
(in thousands):
Three months ended March 31,
2002 2001 $ Change
------------- ------------ -------------
Salaries and benefits $ 3,006 $ 2,552 $454
Occupancy and equipment 971 951 20
Amortization of goodwill 122 210 (88)
Amortization of other intangibles 110 84 26
Stationery and supplies 155 156 (1)
Legal and professional fees 238 235 3
Marketing and promotion 159 158 1
Other operating expenses 922 819 103
------------- ------------ -------------
Total other expense $ 5,683 $ 5,165 $518
============= ============ =============
The primary reasons for the more significant period-to-period changes
are as follows:
< Salaries and employee benefits, the largest component of other expense,
increased $454,000 or 17.8% to $3,006,000 from $2,552,000. This increase
can be explained by merit increases for continuing employees, an increase
in the number of employees due to the acquisition of American Bank of
Illinois in April 2001, and the acquisition of Checkley in January 2002.
There were 305 full-time equivalent employees at March 31, 2002 compared to
275 at March 31, 2001.
< Occupancy and equipment expense increased $20,000 or 2.1% to $971,000 from
$951,000. This increase included building maintenance, utilities and
depreciation expense recorded on assets acquired in the American Bank of
Illinois acquisition.
< Amortization of goodwill expense decreased due to the adoption of SFAS No.
142, "Goodwill and Other Intangible Assets," effective January 1, 2002.
Goodwill totaling $4 million at January 1, 2002 will no longer be amortized
however, the Company continues to amortize goodwill for acquisition of
branches whereby the liabilities assumed were greater than the assets
obtained, which totaled $7.1 million at January 1, 2002. Amortization of
other intangibles expense increased $26,000 as a result of the acquisition
of Checkley ($32,000) and the reduction of core deposit intangible expense
($6,000).
< All other categories of operating expenses increased a net of $44,000 or
26.0% to $1,706,000 from $1,662,000. This increase is primarily due to
higher expense for customer supplies and printing forms.
Income Taxes
Total income tax expense amounted to $945,000 (32.5% effective tax
rate) for the three months ended March 31, 2002, compared to $659,000 (31.1%
effective tax rate) for the same period in 2001. The increase in the effective
tax rate is due to a decrease in tax-exempt income from municipal securities.
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 March 31, 2002 and December 31, 2001 (in thousands):
March 31, December 31,
2002 2001
------------ ------------
Real estate - residential $125,031 $136,965
Real estate - agricultural 43,250 41,922
Real estate - commercial 157,610 152,986
------------ ------------
Total real estate - mortgage 325,891 331,873
Commercial and agricultural 113,304 107,620
Installment 31,235 32,522
Other 1,292 1,228
------------ ------------
Total loans $471,722 $473,243
============ ============
At March 31, 2002, the Company had loan concentrations in agricultural
industries of $80.1 million, or 17.2%, of outstanding loans and $82.6 million,
or 17.5%, at December 31, 2001. The Company had no further 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
the Company's focus on commercial real estate lending. The balance of real
estate loans held for sale amounted to $2,767,000 and $5,571,000 as of March 31,
2002 and December 31, 2001, respectively.
The following table presents the balance of loans outstanding as of
March 31, 2002, by maturities (in thousands):
Maturity (1)
---------------------------------------------
Over 1
One year through Over
or less (2) 5 years 5 years Total
------------ ---------- ---------- ----------
Real estate - residential $ 36,929 $ 73,212 $ 14,890 $125,031
Real estate - agricultural 8,368 28,618 6,264 43,250
Real estate - commercial 58,693 84,504 14,413 157,610
------------ ---------- ---------- ----------
Total real estate - mortgage $103,990 $186,334 $ 35,567 $325,891
Commercial and agricultural 68,598 42,084 2,622 113,304
Installment 5,751 23,452 2,032 31,235
Other 36 608 648 1,292
------------ ---------- ---------- ----------
Total loans $178,375 $252,478 $ 40,869 $471,722
============ ========== ========== ==========
(1) Based on scheduled principal repayments.
(2) Includes demand loans, past due loans and overdrafts.
As of March 31, 2002, loans with maturities over one year consisted of
approximately $266,734,000 in fixed rate loans and $26,613,000 in variable rate
loans. The loan maturities noted above are based on the contractual provisions
of the individual loans. Rollovers and borrower requests are handled on a
case-by-case basis.
Nonperforming Loans
Nonperforming loans include: (a) loans accounted for on a nonaccrual
basis; (b) accruing loans contractually past due ninety days or more as to
interest or principal payments; and loans not included in (a) and (b) above
which are defined as "renegotiated loans".
The following table presents information concerning the aggregate
amount of nonperforming loans at March 31, 2002 and December 31, 2001 (in
thousands):
March 31, December 31,
2002 2001
------------ ------------
Nonaccrual loans $2,640 $3,419
Renegotiated loans which are performing
in accordance with revised terms 185 188
------------ ------------
Total Nonperforming Loans $2,825 $3,607
============ ============
At March 31, 2002, approximately $457,000 of the nonperforming loans
resulted from collateral dependent loans to one borrower currently classified as
nonaccrual. 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. 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.
Interest income that would have been reported if nonaccrual and
renegotiated loans had been performing totaled $94,000 for the three months
ended March 31, 2002 and $247,000 for the year ended December 31, 2001. Interest
income on these loans that was included in income totaled $16,000 and $16,000
for the same periods.
Loan Quality and Allowance for Loan Losses
The allowance for loan losses represents management's best estimate of
the reserve necessary to adequately cover probable losses in the loan portfolio.
The provision for loan losses is the charge against current earnings that is
determined by management as the amount needed to maintain an adequate allowance
for loan losses. In determining the adequacy of the allowance for loan losses,
and therefore the provision to be charged to current earnings, management relies
predominantly on a disciplined credit review and approval process that 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. Management
considers collateral values 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 considers the
allowance for loan losses a critical accounting policy.
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, 2002 the Company's loan
portfolio included $80.1 million of loans to borrowers whose businesses are
directly related to agriculture. The balance decreased by $1.7 million from
$82.6 million at December 31, 2001. While the Company adheres to sound
underwriting practices, including collateralization of loans, an extended period
of low commodity prices and/or significantly reduced yields on crops could
nevertheless result in an increase in the level of problem agriculture loans.
Analysis of the allowance for loan losses as of March 31, 2002 and
2001, and of changes in the allowance for the three months ended March 31, 2002
and 2001, is as follows (dollars in thousands):
March 31,
2002 2001
---------- ----------
Average loans outstanding, net of unearned income $468,308 $427,476
Allowance-beginning of period $ 3,702 $ 3,262
Charge-offs:
Real estate-mortgage 31 -
Commercial, financial & agricultural 25 4
Installment 33 24
---------- ----------
Total charge-offs 89 28
Recoveries:
Real estate-mortgage - -
Commercial, financial & agricultural 1 6
Installment 12 13
---------- ----------
Total recoveries 13 19
---------- ----------
Net charge-offs 76 5
---------- ----------
Provision for loan losses 125 150
---------- ----------
Allowance-end of period $ 3,751 $ 3,403
========== ==========
Ratio of annualized net charge offs
to average loans .07% .01%
========== ==========
Ratio of allowance for loan losses to
loans outstanding (less unearned
interest at end of period) .80% .80%
========== ===========
Ratio of allowance for loan losses
to nonperforming loans 129.0% 85.7%
========== ===========
The Company minimizes credit risk by adhering to sound underwriting and
credit review policies. These policies are reviewed at least annually, and the
board of directors approves changes. 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. The board of directors and management review the status of problem loans
and determine the adequacy of the allowance. In addition to internal policies
and controls, regulatory authorities periodically review asset quality and the
overall adequacy of the allowance for loan losses.
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 as of March 31, 2002 and
December 31, 2001 (dollars in thousands):
March 31, December 31,
2002 2001
---------------------- ----------------------
% of % of
Amount Total Amount Total
----------- ---------- ----------- ----------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 64,986 42% $ 60,852 38%
Obligations of states and
political subdivisions 28,489 21% 29,211 18%
Mortgage-backed securities 51,666 29% 54,306 34%
Other securities 16,598 8% 16,591 10%
----------- ---------- ----------- ----------
Total securities $161,739 100% $160,960 100%
=========== ========== =========== ==========
At March 31, 2002, the Company's investment portfolio showed an
increase in U.S. Treasury securities and a slight decrease in mortgage-backed
securities. All other types of securities remained consistent. The amortized
cost, gross unrealized gains and losses and estimated fair values for
available-for-sale and held-to-maturity securities by major security type at
March 31, 2002 and December 31, 2001 were as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ---------
March 31, 2002
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. Government corporations & agencies $ 64,986 $ 754 $ (422) $ 65,318
Obligations of states and political
subdivisions 26,418 497 (36) 26,879
Mortgage-backed securities 51,666 467 (87) 52,041
Federal Home Loan Bank stock 3,147 - - 3,147
Other securities 13,451 181 (225) 13,406
---------- ---------- ---------- ---------
Total available-for-sale $159,668 $ 1,894 $ (771) $160,791
========== ========== ========== =========
Held-to-maturity:
Obligations of states and political
subdivisions $ 2,071 $ 26 $(17) $ 2,080
========== ========== ========== =========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ---------
December 31, 2001
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. Government corporations & agencies $ 60,852 $ 1,165 $(181) $ 61,836
Obligations of states and political
subdivisions 27,140 247 (212) 27,175
Mortgage-backed securities 54,306 427 (242) 54,491
Federal Home Loan Bank stock 3,102 - - 3,102
Other securities 13,489 23 (20) 13,492
---------- ---------- ---------- ---------
Total available-for-sale $158,889 $ 1,862 $(655) $160,096
========== ========== ========== =========
Held-to-maturity:
Obligations of states and political
subdivisions $ 2,071 $ 70 $ (5) $ 2,136
========== ========== ========== =========
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, 2002 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
(Dollars in thousands) or less 5 years 10 years years Total
-------- --------- -------- -------- --------
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 996 $61,699 $ 1,500 $ 791 $ 64,986
Obligations of state and
political subdivisions - 6,511 11,138 8,769 26,418
Mortgage-backed securities 507 39,436 11,723 - 51,666
Federal Home Loan Bank stock - - - 3,147 3,147
Other securities - 2,044 - 11,407 13,451
-------- --------- -------- -------- --------
Total Investments 1,503 $109,690 $24,361 $24,114 $159,668
======== ========= ======== ======== ========
Weighted average yield 5.99% 4.37% 4.91% 6.04% 4.72%
Full tax-equivalent yield 5.99% 4.48% 5.80% 6.99% 5.06%
======== ========= ======== ======== ========
Held-to-maturity:
Obligations of state and
political subdivisions $ 85 $ 839 $ 555 $ 592 $ 2,071
======== ========= ======== ======== ========
Weighted average yield 5.88% 5.29% 5.56% 5.42% 5.42%
Full tax-equivalent yield 8.56% 7.65% 8.07% 7.85% 7.86%
======== ========= ======== ======== ========
The weighted average yields are calculated on the basis of the
amortized cost and effective yields weighted for the scheduled maturity of each
security. Full tax-equivalent yields have been calculated using a 34% tax rate.
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,
2002.
Investment securities carried at approximately $132,296,000 and
$133,208,000 at March 31, 2002 and December 31, 2001, respectively, were pledged
to secure public deposits and repurchase agreements and for other purposes as
permitted or required by law.
Deposits
Funding of 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 three months ended March 31, 2002
and for the year ended December 31, 2001 (dollars in thousands):
March 31, December 31,
2002 2001
---------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
---------- -------- ---------- --------
Demand deposits:
Non-interest bearing $ 75,936 - $ 69,020 -
Interest bearing 197,349 1.40% 182,404 2.40%
Savings 48,717 1.59% 41,437 2.23%
Time deposits 232,448 4.29% 247,348 5.45%
---------- -------- ---------- --------
Total average deposits $554,450 2.44% $540,209 3.48%
========== ======== ========== ========
The following table sets forth the maturity of time deposits of
$100,000 or more at March 31, 2002 and December 31, 2001 (in thousands):
March 31, December 31,
2002 2001
------------ ------------
3 months or less $ 26,269 $ 25,503
Over 3 through 6 months 21,705 20,228
Over 6 through 12 months 22,697 10,913
Over 12 months 7,183 4,794
------------ ------------
Total $ 77,854 $ 61,438
============ ============
Other Borrowings
Other borrowings consist of securities sold under agreements to
repurchase, Federal Home Loan Bank ("FHLB") advances, federal funds purchased,
and loans (short-term or long-term debt) that the Company has outstanding.
Information relating to other borrowings as of March 31, 2002 and December 31,
2001 is presented below (dollars in thousands):
March 31, December 31,
2002 2001
------------- --------------
Securities sold under agreements to repurchase $29,570 $38,879
Federal Home Loan Bank advances:
Fixed term - due in one year or less 8,000 33,300
Fixed term - due after one year 30,300 33,300
Other debt:
Loans due in one year or less 4,558 4,325
Loans due after one year 800 -
------------- --------------
Total $73,228 $76,504
============= ==============
Average interest rate at end of period 3.24% 3.15%
Maximum Outstanding at any Month-end
Securities sold under agreements to repurchase $36,303 $40,646
Federal Home Loan Bank advances:
Overnight - 12,800
Fixed term - due in one year or less 8,000 5,000
Fixed term - due after one year 30,300 28,300
Federal funds purchased - 2,850
Other debt:
Loans due in one year or less 4,564 4,325
Loans due after one year 800 -
------------- --------------
Total $79,967 $93,921
============= ==============
Averages for the Period Ended
Securities sold under agreements to repurchase $32,616 $29,547
Federal Home Loan Bank advances:
Overnight 1,018 2,161
Fixed term - due in one year or less 3,278 3,356
Fixed term - due after one year 30,300 23,349
Federal funds purchased 210 236
Other debt:
Loans due in one year or less 4,488 4,325
Loans due after one year 551 -
------------- --------------
Total $72,461 $62,974
============= ==============
Weighted average interest rate during the period 3.15% 4.47%
Securities sold under agreements to repurchase are short-term
obligations of First Mid Bank. First Mid Bank collateralizes these obligations
with certain government securities that 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.
FHLB advances represent borrowings by First Mid Bank to economically
fund loan demand. The fixed term advances consists of $38.3 million which First
Mid is using to fund loans:
< $3 million advance at 6.58% with a 2-year maturity, due 10/10/02
< $5 million advance at 2.54% with a 1-year maturity, due 02/28/03
< $5 million advance at 3.45% with a 2-year maturity, due 02/28/04
< $5 million advance at 6.16% with a 5-year maturity, due 03/20/05
< $2.3 million advance at 6.10% with a 5-year maturity, due 04/07/05
< $5 million advance at 6.12% with a 5-year maturity, due 09/06/05
< $5 million advance at 5.34% with a 5-year maturity, due 12/14/05
< $3 million advance at 5.98% with a 10-year maturity, due 03/01/11
< $5 million advance at 4.33% with a 10-year maturity, due 11/23/11
Other debt, both short-term and long-term, represents the outstanding
loan balances for the Company. At March 31, 2002, outstanding loan balances
include $4,325,000 on a revolving credit agreement with The Northern Trust
Company with a floating interest rate of 1.25% over the Federal Funds rate (3.0%
as of March 31, 2002) and set to mature November 19, 2002. The balance also
includes a $1 million note payable resulting from the acquisition of Checkley
with an annual interest rate equal to the prime rate listed in the money rate
section of the Wall Street Journal (4.75% as of March 31, 2002) and principal
payable annually over five years, with a final maturity of January 2007. The
balance also includes a $33,000 note payable on an operating loan assumed with
the Checkley acquisition.
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 a "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, 2002 (dollars in
thousands):
Number of Months Until Next Repricing Opportunity
0-1 1-3 3-6 6-12 12+
---------- ---------- ---------- ---------- ----------
Interest earning assets:
Deposits with other financial institutions $ 1,008 $ - $ - $ - $ -
Federal funds sold 5,400 - - - -
Taxable investment securities 16,546 3,527 4,557 2,283 106,999
Nontaxable investment securities 300 837 206 120 27,486
Loans 109,126 25,968 37,299 59,405 239,925
---------- ---------- ---------- ---------- ----------
Total $ 132,381 $ 30,332 $ 42,062 $ 61,808 $ 374,410
---------- ---------- ---------- ---------- ----------
Interest bearing liabilities:
Savings and N.O.W. accounts 97,480 654 1,091 3,747 78,164
Money market accounts 28,429 533 799 1,515 25,961
Other time deposits 33,265 38,697 56,985 63,689 45,106
Other borrowings 29,364 - - 12,559 -
Long-term debt - - - - 31,100
---------- ---------- ---------- ---------- ----------
Total $ 188,744 $ 39,884 $ 58,875 $ 81,510 $180,331
---------- ---------- ---------- ---------- ----------
Periodic GAP $ (56,363) $ (9,552) $(16,813) $ (19,702) $194,079
---------- ---------- ---------- ---------- ----------
Cumulative GAP $ (56,363) $(65,915) $(82,728) $(102,430) $ 91,649
========== ========== ========== ========== ==========
GAP as a % of interest earning assets:
Periodic (8.8%) (1.5%) (2.6%) (3.1%) 30.3%
Cumulative (8.8%) (10.3%) (12.9%) (16.0%) 14.3%
========== ========== ========== ========== ==========
At March 31, 2002, 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 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 that occur in the
composition of the Company's earning assets and interest-bearing liabilities.
For this reason, the Company uses financial models to project interest income
under various rate scenarios and assumptions relative to the prepayments,
reinvestment and rollovers of assets and liabilities, of which First Mid Bank
represents substantially all of the Company's rate sensitive assets and
liabilities.
Capital Resources
At March 31, 2002, the Company's stockholders' equity had increased
$2,127,000 or 3.3% to $66,052,000 from $63,925,000 as of December 31, 2001.
During the first three months of 2002, net income contributed $1,965,000 to
equity before the payment of dividends to common stockholders. The change in net
unrealized gain/loss on available-for-sale investment securities decreased
stockholders' equity by $52,000, net of tax.
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Financial holding companies and
bank holding companies follow minimum regulatory requirements established by the
Federal Reserve Board, and 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 March 31, 2002 and December 31, 2001, the Company and First Mid Bank
have met all capital adequacy requirements.
As of March 31, 2002, the most recent notification from the primary
regulator categorized 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 the Bank's category.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------- ---------- -------- ---------- ---------
March 31, 2002
Total Capital
(to risk-weighted assets)
Company $56,924 11.72% $38,861 > 8.00% N/A N/A
-
First Mid Bank 55,485 11.49% 38,618 > 8.00% $48,272 > 10.00%
- -
Tier 1 Capital
(to risk-weighted assets)
Company 53,173 10.95% 19,430 > 4.00% N/A N/A
-
First Mid Bank 51,734 10.72% 19,309 > 4.00% 28,963 > 6.00%
- -
Tier 1 Capital
(to average assets)
Company 53,173 7.74% 27,493 > 4.00% N/A N/A
-
First Mid Bank 51,734 7.61% 27,190 > 4.00% 33,988 > 5.00%
- -
December 31, 2001
Total Capital
(to risk-weighted assets)
Company $54,498 11.23% $38,810 > 8.00% N/A N/A
-
First Mid Bank 54,139 11.24% 38,521 > 8.00% $48,152 > 10.00%
- -
Tier 1 Capital
(to risk-weighted assets)
Company 50,796 10.47% 19,405 > 4.00% N/A N/A
-
First Mid Bank 50,437 10.47% 19,261 > 4.00% 28,891 > 6.00%
- -
Tier 1 Capital
(to average assets)
Company 50,796 7.34% 27,669 > 4.00% N/A N/A
-
First Mid Bank 50,437 7.36% 27,427 > 4.00% 34,284 > 5.00%
- -
Banks and financial holding companies and bank holding companies are
expected to operate at or above the minimum capital requirements. These ratios
are in excess of regulatory minimums and allow the Company to operate without
capital adequacy concerns.
Stock Plans
Participants may purchase Company stock under the following four plans
of the Company: 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 2001 Form 10-K.
On August 5, 1998, the Company announced a stock repurchase program of
up to 3% of its common stock. In March 2000, the Board approved the repurchase
of an additional 5% of the Company's common stock. In September 2001, the Board
authorized the repurchase of $3 million additional shares of the authorized
common stock, bringing the aggregate total to 8% of the Company's common stock
plus $3 million additional shares. During the period ending March 31, 2002, the
Company repurchased 21,195 shares (.6%) at a total price of $524,000. Since
inception, the Company has repurchased 195,412 shares (5.8%) at a total price of
$5,780,000. As of March 31, 2002, the Company was authorized per all repurchase
programs to purchase an additional 193,989 shares. 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 all present and future financial obligations arising in the daily
operations of the business. Financial obligations consist of the need for funds
to meet extensions of credit, deposit withdrawals and debt servicing. The
Company's liquidity management focuses on the ability to obtain funds
economically through assets that may be converted into cash at minimal costs or
through other sources. The Company's other sources for cash include overnight
Federal Fund lines, Federal Home Loan Bank advances, deposits of the State of
Illinois, the ability to borrow at the Federal Reserve Bank, and the Company's
operating line of credit with The Northern Trust Company. Details for the
sources include:
< First Mid Bank has $17 million available in overnight Federal Fund lines
including $10 million from Harris Trust and Savings Bank of Chicago and $7
million from The Northern Trust Company. Availability of the funds is
subject to the First Mid Bank's meeting minimum regulatory capital
requirements for total capital to risk-weighted assets and tier 1 capital
to total assets. As of March 31, 2002, the First Mid Bank's ratios of total
capital to risk-weighted assets of 11.49% and tier 1 capital to total
assets of 7.61% exceeded minimum regulatory requirements.
< First Mid Bank can also borrow from the Federal Home Loan Bank as a source
of Liquidity. Availability of the funds is subject to the pledging of
collateral to the Federal Home Loan Bank. Collateral that can be pledged
includes one-to-four family residential real estate loans and securities. A
March 31, 2002, the excess collateral at the Federal Home Loan Bank will
support approximately $39 million of additional advances.
< First Mid Bank also receives deposits from the State of Illinois. The
receipt of these funds is subject to competitive bid and requires
collateral to be pledged at the time of placement.
< First Mid Bank is also a member of the Federal Reserve System and can
borrow funds provided that sufficient collateral is pledged.
< In addition, the Company has a revolving credit agreement in the amount of
$10 million with The Northern Trust Company. The Company has an outstanding
balance of $4,325,000 as of March 31, 2002, and $5,675,000 in available
funds. The credit agreement matures on November 19, 2002. The agreement
contains requirements for the Company and First Mid Bank to maintain
various operating and capital ratios and also contains requirements for the
Company and First Mid Bank to maintain various operating and capital ratios
and also contains requirements for prior lender approval for certain sales
of assets, merger activity, the acquisition or issuance of debt, and the
acquisition of treasury stock. The Company and First Mid Bank were in
compliance with the existing covenants at March 31, 2002.
Management monitors its expected liquidity requirements carefully,
focusing primarily on cash flows from:
< lending activities, including loan commitments, letters of credit and
mortgage prepayment assumptions.
< deposit activities, including seasonal demand of private and public funds.
< investing activities, including prepayments of mortgage-backed securities
and call provisions on U.S. Government Treasuries and agency securities.
< operating activities, including scheduled debt repayments and dividends to
shareholders.
The following table summarizes significant contractual obligations and
other commitments at March 31, 2002 (in thousands):
Time Operating
Deposits Borrowings* Leases Total
----------- ------------ --------- ----------
2002 $195,667 $54,428 $155 $250,250
2003 29,551 5,200 130 34,881
2004 7,099 5,200 130 12,429
2005 6,471 200 78 6,749
2006 2,443 5,200 52 7,695
Thereafter 139 3,000 3 3,142
----------- ------------ --------- ----------
Total $241,370 $73,228 $548 $315,146
=========== ============ ========= ==========
Commitments to extend credit $ 86,494
*Borrowings included at earlier of call date or maturity
For the three month-period ended March 31, 2002, net cash of $6.2
million was provided from operating activities, while investing activities and
financing activities used net cash of $2.6 million and $12.3 million,
respectively. Thus, cash and cash equivalents decreased by $8.7 million since
year-end 2001. Generally, during 2002, the decreases in deposits and customer
repurchase agreements due to seasonal outflow reduced cash balances. Also,
declines in residential real estate loan balances due to the low rate
environment were greater than the growth in commercial loans and securities
since year-end 2001.
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 affected 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the market risks faced by the
Company since December 31, 2001. 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, 2001.
PART II
ITEM 1. LEGAL PROCEEDINGS
Since First Mid Bank acts a depository of funds, it is named from time
to time as a defendant in lawsuits (such as garnishment proceedings) involving
claims to the ownership of funds in particular accounts. Management believes
that all such litigation as well as other pending legal proceedings in which the
Company is involved constitute ordinary, routine litigation incidental to the
business of the Company and that such litigation will not materially adversely
affect the Company's consolidated financial condition.
In addition to the normal proceedings referred to above, Heartland
Savings Bank ("Heartland"), a subsidiary of the Company that merged with First
Mid Bank during 1997, filed a complaint on December 5, 1995, against the U.S.
Government which is now pending in the U.S. Court of Federal Claims in
Washington D.C. This complaint relates to Heartland's interest as successor to
Mattoon Federal Savings and Loan Association which incurred a significant amount
of supervisory goodwill when it acquired Urbana Federal Savings and Loan in
1982. The complaint alleges that the U.S. Government breached its contractual
obligations when, in 1989, it issued new rules which eliminated supervisory
goodwill from inclusion in regulatory capital. On August 6, 1998, First Mid Bank
filed a motion with the U.S. Court of Federal Claims to grant summary judgment
on liability for breach of contract in this matter. On August 13, 1998, the U.S.
Government filed a motion to stay such proceedings. On March 26, 2002, the
Company's Board of Directors voted to withdraw the complaint based on advice of
legal counsel.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits: The exhibits required by Item 601 of Regulation S-K and filed
herewith are listed in the Exhibit Index which follows the Signature Page and
immediately precedes the exhibits filed.
(b) Reports on Form 8-K: Form 8-Ks were filed on January 10, 2002 and February
4, 2002 regarding the acquisition of the Checkley Agency, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
FIRST MID-ILLINOIS BANCSHARES, INC.
(Company)
/s/ William S. Rowland
- --------------------------------------
William S. Rowland
President and Chief Executive Officer
/s/ Michael L. Taylor
- --------------------------------------
Michael L. Taylor
Chief Financial Officer
Dated: May 15, 2002
-----------------------
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 on page 7)