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 September 30, 2005
Commission file number: 0-13368
FIRST MID-ILLINOIS BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 37-1103704
(State of incorporation)(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 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) YES. [ ] NO [X]
As of November 7, 2005, 4,403,275 common shares, $4.00 par value, were
outstanding.
PART I
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets September 30, 2005 December 31, 2004
(In thousands, except share data) (Unaudited)
------------------- -----------------
Assets
Cash and due from banks:
Non-interest bearing $ 16,895 $ 19,119
Interest bearing 752 1,985
Federal funds sold 4,440 2,450
------------------- -----------------
Cash and cash equivalents 22,087 23,554
Investment securities:
Available-for-sale, at fair value 150,212 168,821
Held-to-maturity, at amortized cost (estimated fair
value of $1,467 and $1,598 at September 30, 2005
and December 31, 2004, respectively) 1,432 1,552
Loans 631,840 597,849
Less allowance for loan losses (4,674) (4,621)
------------------- -----------------
Net loans 627,166 593,228
Premises and equipment, net 15,182 15,227
Accrued interest receivable 6,120 5,405
Goodwill, net 9,034 9,034
Intangible assets, net 2,916 3,346
Other assets 6,737 6,561
------------------- -----------------
Total assets $840,886 $ 826,728
=================== =================
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 94,699 $ 85,524
Interest bearing 573,050 564,716
------------------- -----------------
Total deposits 667,749 650,240
Accrued interest payable 1,754 1,506
Securities sold under agreements to repurchase 52,164 59,835
Junior subordinated debentures 10,310 10,310
Other borrowings 33,000 29,900
Other liabilities 3,934 5,783
------------------- -----------------
Total liabilities 768,911 757,574
------------------- -----------------
Stockholders' equity:
Common stock, $4 par value; authorized 18,000,000
shares; issued 5,631,181 shares in 2005 and
5,578,897 shares in 2004 22,525 22,316
Additional paid-in capital 19,355 17,845
Retained earnings 59,445 53,259
Deferred compensation 2,401 2,204
Accumulated other comprehensive income (loss) (122) 623
Less treasury stock at cost, 1,227,906 shares
in 2005 and 1,121,546 shares in 2004 (31,629) (27,093)
------------------- -----------------
Total stockholders' equity 71,975 69,154
------------------- -----------------
Total liabilities and stockholders' equity $840,886 $826,728
=================== =================
See accompanying notes to unaudited consolidated financial statements.
Consolidated Statements of Income (unaudited)
(In thousands, except per share data)
Three months ended September 30, Nine months ended September 30,
2005 2004 2005 2004
------------------ --------------- ----------------- ---------------
Interest income:
Interest and fees on loans $ 9,822 $ 8,570 $27,894 $ 24,941
Interest on investment securities 1,495 1,514 4,618 4,574
Interest on federal funds sold 99 14 183 62
Interest on deposits with other financial institutions 17 1 35 10
------------------ --------------- ----------------- ---------------
Total interest income 11,433 10,099 32,730 29,587
Interest expense:
Interest on deposits 3,167 2,340 8,318 6,634
Interest on securities sold under agreements
to repurchase 378 111 997 245
Interest on subordinated debentures 168 115 461 255
Interest on other borrowings 471 420 1,408 1,266
------------------ --------------- ----------------- ---------------
Total interest expense 4,184 2,986 11,184 8,400
------------------ --------------- ----------------- ---------------
Net interest income 7,249 7,113 21,546 21,187
Provision for loan losses 213 62 550 437
------------------ --------------- ----------------- ---------------
Net interest income after provision for loan losses 7,036 7,051 20,996 20,750
Other income:
Trust revenues 548 514 1,756 1,676
Brokerage commissions 72 71 284 298
Insurance commissions 352 336 1,264 1,112
Service charges 1,233 1,255 3,420 3,572
Securities gains, net 61 - 315 92
Mortgage banking revenue 284 138 605 384
Other 587 562 1,737 1,583
------------------ --------------- ----------------- ---------------
Total other income 3,137 2,876 9,381 8,717
Other expense:
Salaries and employee benefits 3,343 3,378 10,223 10,087
Net occupancy and equipment expense 1,119 1,078 3,199 3,237
Amortization of other intangible assets 143 149 430 472
Stationery and supplies 114 124 378 380
Legal and professional 342 309 1,200 861
Marketing and promotion 198 134 549 530
Other 1,134 1,080 3,214 3,089
------------------ --------------- ----------------- ---------------
Total other expense 6,393 6,252 19,193 18,656
------------------ --------------- ----------------- ---------------
Income before income taxes 3,780 3,675 11,184 10,811
Income taxes 1,335 1,246 3,942 3,630
------------------ --------------- ----------------- ---------------
Net income $ 2,445 $ 2,429 $ 7,242 $ 7,181
================== =============== ================= ===============
Per share data:
Basic earnings per share $ 0.55 $ 0.54 $ 1.63 $ 1.59
Diluted earnings per share $ 0.54 $ 0.53 $ 1.59 $ 1.56
================== =============== ================= ===============
See accompanying notes to unaudited consolidated financial statements.
Consolidated Statements of Cash Flows (unaudited) Nine months ended
(In thousands) September 30,
2005 2004
---------------- ----------------
Cash flows from operating activities:
Net income $ 7,242 $ 7,181
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 550 437
Depreciation, amortization and accretion, net 1,096 1,924
Gain on sale of securities, net (315) (92)
Loss on sale of other real property owned, net 204 29
Gain on sale of mortgage loans held for sale, net (686) (342)
Origination of loans held for sale (49,587) (26,360)
Proceeds from sale of loans held for sale 51,481 25,787
Increase in other assets (1,136) (140)
Decrease in other liabilities (528) (286)
---------------- ----------------
Net cash provided by operating activities 8,321 8,138
---------------- ----------------
Cash flows from investing activities:
Purchases of premises and equipment (1,044) (744)
Net increase in loans (35,696) (43,970)
Proceeds from sales of other real property owned 658 155
Proceeds from sales of securities available-for-sale 40,761 5,137
Proceeds from maturities of securities available-for-sale 74,246 60,076
Proceeds from maturities of securities held-to-maturity 120 110
Purchases of securities available-for-sale (96,668) (57,903)
Purchases of securities held-to-maturity (212) -
---------------- ----------------
Net cash used in investing activities (17,835) (37,139)
---------------- ----------------
Cash flows from financing activities:
Net increase in deposits 17,509 33,358
Decrease in repurchase agreements (7,671) (6,722)
Proceeds from FHLB advances 19,000 2,500
Repayment of FHLB advances (16,300) (5,000)
Issuance of junior subordinated debentures - 10,000
Proceeds from short-term debt 3,500 6,675
Repayment of short-term debt (3,100) (9,200)
Proceeds from issuance of common stock 844 524
Purchase of treasury stock (4,304) (9,479)
Dividends paid on common stock (1,431) (954)
---------------- ----------------
Net cash provided by financing activities 8,047 21,702
---------------- ----------------
Decrease in cash and cash equivalents (1,467) (7,299)
Cash and cash equivalents at beginning of period 23,554 24,949
---------------- ----------------
Cash and cash equivalents at end of period $22,087 $17,650
================ ================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $10,936 $8,187
Income taxes 3,971 3,365
Supplemental disclosures of noncash investing and financing activities
Loans transferred to real estate owned 286 982
Dividends reinvested in common stock 699 1,252
Net tax benefit related to option and deferred compensation plans 140 62
See accompanying notes to unaudited consolidated financial statements.
Notes to Consolidated Financial Statements
(unaudited)
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"), The Checkley Agency, Inc.
("Checkley") and First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank"). All
significant intercompany balances and transactions have been eliminated in
consolidation. The financial information reflects all adjustments, which, in the
opinion of management, are necessary for a fair presentation of the results of
the interim periods ended September 30, 2005 and 2004, and all such adjustments
are of a normal recurring nature. Certain amounts in the prior year's
consolidated financial statements have been reclassified to conform to the
September 30, 2005 presentation and there was no impact on net income or
stockholders' equity. The results of the interim period ended September 30, 2005
are not necessarily indicative of the results expected for the year ending
December 31, 2005. The Company operates as a one-segment entity for financial
reporting purposes.
The 2004 year-end consolidated balance sheet data was derived from audited
financial statements, but do not include all disclosures required by generally
accepted accounting principles.
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 U.S. generally accepted accounting
principles for complete financial statements and related footnote disclosures
although the Company believes that the disclosures made are adequate to make the
information not misleading. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 2004 Annual Report on Form 10-K.
Website
The Company maintains a website at www.firstmid.com. All periodic and current
reports of the Company and amendments to these reports filed with the Securities
and Exchange Commission ("SEC") can be accessed, free of charge, through this
website as soon as reasonably practicable after these materials are filed with
the SEC.
Recent Accounting Pronouncements
In March 2004, the Financial Accounting Standards Board ("FASB") reached a
consensus on Emerging Issues Task Force Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
("EITF 03-1"). EITF 03-1 provides guidance for determining when an investment is
impaired and whether the impairment is other than temporary. EITF 03-1 also
incorporates into its consensus the required disclosures about unrealized losses
on investments announced by the EITF in late 2003 and adds new disclosure
requirements relating to cost-method investments. The new disclosure
requirements were effective for annual reporting periods ending September 15,
2004 and the new impairment accounting guidance was to become effective for
reporting periods beginning after September 15, 2004. In September 2004, the
FASB delayed the effective date of EITF 03-1 for measurement and recognition of
impairment losses until implementation guidance is issued.
In June 2005, the FASB decided not to provide additional guidance on the meaning
of other-than-temporary impairment, but directed the FASB staff to issue a FASB
Staff Position ("FSP") which will be re-titled FSP FAS 115-1, "The Meaning of
Other-Than-Temporary Impairment and Its Applications to Certain Investments
("FSP FAS 115-1"). FSP FAS 115-1 will supercede EITF 03-1 and EITF Topic No.
D-44, "Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a
Security Whose Cost Exceeds Fair Value." FSP FAS 115-1 will replace guidance in
EITF 03-1 on loss recognition with references to existing other-than-temporary
impairment guidance, such as FASB Statement No. 115, Accounting For Certain
Investments in Debt and Equity Securities ("SFAS 115"). FSP FAS 115-1 will be
effective for other-than-temporary impairment analysis conducted in periods
beginning after September 15, 2005. The Company has consistently followed the
loss recognition guidance in SFAS 115, so the adoption of FSP FAS 115-1 is not
expected to have a significant impact on the Company's financial condition or
results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, "Accounting for Nonmonetary Assets"
("SFAS 153"). SFAS 153 amends the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged and more
broadly provides for exceptions regarding exchanges of nonmonetary assets that
do not have commercial substance. The provisions of SFAS 153 are effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after
September 15, 2005. The Company does not expect the requirements of SFAS 153 to
have a material impact on its financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised), "Accounting for
Stock-Based Compensation" ("SFAS 123R"). SFAS 123R establishes accounting
requirements for share-based compensation to employees and carries forward prior
guidance on accounting for awards to non-employees. SFAS 123R requires an entity
to recognize compensation expense based on an estimate of the number of awards
expected to actually vest, exclusive of awards expected to be forfeited. The
provisions of SFAS 123R will become effective January 1, 2006 for all equity
awards granted after the effective date, as well as the unvested portion of all
existing awards. The Company is evaluating the impact of SFAS 123R on its
financial position and results of operations.
In September 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3,"
("SFAS 154"). SFAS 154 changes the requirements for the accounting for and
reporting of a change in accounting principles and also applies to all voluntary
changes in accounting principles. SFAS 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. Comprehensive Income
The Company's comprehensive income for the three and nine-month periods ended
September 30, 2005 and 2004 was as follows (in thousands):
Three months ended Nine months ended
September 30, September 30,
----------------------- --------------------------
2005 2004 2005 2004
---------- ------------ ------------ -------------
Net income $2,445 $2,429 $7,242 $7,181
Other comprehensive income:
Unrealized gain (loss) during the period (272) 1,691 (906) (709)
Less realized gain during the period (61) - (315) (92)
Tax effect 129 (659) 476 312
---------- ------------ ------------ -------------
Comprehensive income $2,241 $3,461 $6,497 $6,692
========== ============ ============ =============
Earnings Per Share
Basic earnings per share ("EPS") is calculated as net income divided by 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 and
nine-month periods ended September 30, 2005 and 2004 were as follows:
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
2005 2004 2005 2004
--------------- -------------- -------------- ---------------
Basic Earnings per Share:
Net income $2,445,000 $2,429,000 $7,242,000 $7,181,000
Weighted average common shares outstanding 4,411,723 4,469,444 4,431,175 4,510,660
=============== ============== ============== ===============
Basic earnings per common share $ .55 $ .54 $1.63 $ 1.59
=============== ============== ============== ===============
Diluted Earnings per Share:
Weighted average common shares outstanding 4,411,723 4,469,444 4,431,175 4,510,660
Assumed conversion of stock options 126,819 97,771 125,064 86,668
--------------- -------------- -------------- ---------------
Diluted weighted average common shares outstanding 4,538,542 4,567,215 4,556,239 4,597,328
=============== ============== ============== ===============
Diluted earnings per common share $ .54 $ .53 $1.59 $ 1.56
=============== ============== ============== ===============
Goodwill and Intangible Assets
The Company has goodwill from business combinations, intangible assets from
branch acquisitions, identifiable intangible assets assigned to core deposit
relationships and customer lists of Checkley, and intangible assets arising from
the rights to service mortgage loans for others.
The following table presents gross carrying value and accumulated amortization
by major intangible asset class as of September 30, 2005 and December 31, 2004
(in thousands):
September 30, 2005 December 31, 2004
---------------------------------- ---------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
------------- -------------------- -------------- ------------------
Goodwill not subject to amortization (effective 1/1/02) $12,794 $3,760 $12,794 $3,760
Intangibles from branch acquisition 3,015 1,709 3,015 1,559
Core deposit intangibles 2,805 2,401 2,805 2,279
Mortgage servicing rights 608 608 608 593
Customer list intangibles 1,904 698 1,904 555
------------- -------------------- -------------- ------------------
$21,126 $9,176 $21,126 $8,746
============= ==================== ============== ==================
Total amortization expense for the nine months ended September 30, 2005 and 2004
was as follows (in thousands):
September 30,
2005 2004
-------------- -------------
Intangibles from branch acquisition $151 $151
Core deposit intangibles 121 150
Mortgage servicing rights 15 28
Customer list intangibles 143 143
-------------- -------------
$430 $472
============== =============
Aggregate amortization expense 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 period ended 9/30/05 $430
Estimated amortization expense:
For period 10/1/05-12/31/05 $138
For year ended 12/31/06 $579
For year ended 12/31/07 $515
For year ended 12/31/08 $454
For year ended 12/31/09 $417
For year ended 12/31/10 $391
In accordance with the provisions of SFAS 142, the Company performed testing of
goodwill for impairment as of September 30, 2005, and determined that, as of
that date, goodwill was not impaired. Management also concluded that the
remaining amounts and amortization periods were appropriate for all intangible
assets.
Stock Incentive Plan
The Company accounts for its Stock Incentive Plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
For Stock Issued to Employees," and related interpretations. Accordingly, as the
intrinsic value was zero, compensation cost based on fair value at grant date
has not been recognized for stock options in the consolidated financial
statements. As required by SFAS 123, "Accounting for Stock-Based Compensation"
as amended by SFAS 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure," the Company provides pro forma net income and pro forma earnings
per share disclosures for employee stock option grants.
The following table illustrates the effect on net income if the fair value based
method had been applied (in thousands, except per share data).
Three months ended September 30, Nine months ended September 30,
2005 2004 2005 2004
----------------- ---------------- ----------------- --------------
Net income, as reported $2,445 $2,429 $7,242 $7,181
Stock based compensation expense determined
under fair value based method, net of related
tax effect (68) (43) (249) (127)
----------------- ---------------- ----------------- --------------
Pro forma net income $2,377 $2,386 $6,993 $7,054
================= ================ ================= ==============
Basic Earnings Per Share:
As reported $.55 $.54 $ 1.63 $ 1.59
Pro forma .54 .53 1.58 1.56
Diluted Earnings Per Share:
As reported $.54 $.53 $ 1.59 $ 1.56
Pro forma .52 .52 1.53 1.53
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, September
30, 2005 and 2004. 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
This overview of management's discussion and analysis highlights selected
information in this document and may not contain all of the information that is
important to you. For a more complete understanding of trends, events,
commitments, uncertainties, liquidity, capital resources, and critical
accounting estimates, you should carefully read this entire document. These have
an impact on the Company's financial condition and results of operations.
Net income was $7,242,000 and $7,181,000 and diluted earnings per share was
$1.59 and $1.56 for the nine months ended September 30, 2005 and 2004,
respectively. The increase in net income was primarily the result of higher net
interest income and greater non-interest income during the first nine months of
2005 than the same period in 2004. The increase in earnings per share was the
result of improved net income and a decrease in the number of shares outstanding
due to share repurchases made through our stock buy-back program. During the
first nine months of 2005, the Company acquired 106,360 shares at a total cost
of $4,304,000. The following table shows the Company's annualized performance
ratios for the nine months ended September 30, 2005 and 2004, compared to the
performance ratios for the year ended December 31, 2004:
Nine months ended Year ended
September 30, September 30, December 31,
2005 2004 2004
-------------- --------------- ---------------
Return on average assets 1.17% 1.20% 1.20%
Return on average equity 13.59% 14.17% 14.24%
Average equity to average assets 8.58% 8.44% 8.44%
Total assets at September 30, 2005 and December 31, 2004 were $840.9 million and
$826.7 million, respectively. The increase in net assets was primarily the
result of an increase in net loan balances offset by a decrease in
available-for-sale securities that matured during the second quarter of 2005 and
were not replaced. Net loan balances were $627.2 million at September 30, 2005,
an increase of $34 million, or 5.7%, from $593.2 million at December 31, 2004,
primarily due to an increase in commercial real estate loans. Total deposit
balances increased to $667.7 million at September 30, 2005 from $650.2 million
at December 31, 2004 primarily due to a CD promotion during the third quarter of
2005.
Net interest margin, defined as net interest income divided by average
interest-earning assets, was 3.69% for the nine months ended September 30, 2005,
down from 3.78% for the same period in 2004. The decrease in the net interest
margin is attributable to a greater increase in borrowing and deposit rates
compared to the increase in interest-earning asset rates. Net interest income
before the provision for loan losses was $21.5 million for the nine months ended
September 30, 2005 compared to $21.2 million for the same period in 2004.
Noninterest income increased $664,000, or 7.6%, to $9.4 million for the nine
months ended September 30, 2005 compared to $8.7 million for the nine months
ended September 30, 2004. The primary reasons for this increase were $315,000 in
gains on the sale of securities during the first nine months of 2005 as market
conditions and investment portfolio liquidity were conducive to the sale
compared to $92,000 in gains during the second quarter of 2004 and an increase
in income on mortgage loans originated and sold due to lower long-term interest
rates. In addition, there were increases in ATM and bankcard service fees, check
printing income and insurance commissions during the first nine months of 2005
compared to the same period in 2004.
Noninterest expense increased 2.9% or $537,000, to $19.2 million for the nine
months ended September 30, 2005 compared to $18.7 million during the same period
in 2004. The primary factor in the expense increase was increased salaries and
benefits expense that resulted from additional employees for a new branch
location in Highland, and increases in accounting and legal professional fees.
Following is a summary of the factors that contributed to the changes in net
income (in thousands):
2005 versus 2004
---------------------------------------
Three months ended Nine months ended
September 30 September 30
-------------------- ------------------
Net interest income $ 136 $ 359
Provision for loan losses (151) (113)
Other income, including securities transactions 261 664
Other expenses (141) (537)
Income taxes (89) (312)
-------------------- ------------------
Increase (decrease) in net income $16 $61
==================== ==================
Credit quality is an area of importance to the Company. Total nonperforming
loans were $3.3 million at September 30, 2005, compared to $3.6 million at
September 30, 2004 and $3.1 million at December 31, 2004. The increase since
December 31, 2004 included a decline in credit quality of one commercial real
estate loan for a restaurant property. The Company's provision for loan loss for
the nine months ended September 30, 2005 and 2004 was $550,000 and $437,000,
respectively. At September 30, 2005, the composition of the loan portfolio
remained similar to the same period last year. During the nine months ended
September 30, 2005, net charge-offs were 0.11% of average loans compared to .07%
for the same period in 2004. Loans secured by both commercial and residential
real estate comprised 72% of the loan portfolio as of September 30, 2005 and
2004.
The Company's capital position remains strong and the Company has consistently
maintained regulatory capital ratios above the "well-capitalized" standards. The
Company's Tier 1 capital to risk weighted assets ratio calculated under the
regulatory risk-based capital requirements at September 30, 2005 and 2004 was
11.07% and 10.78%, respectively. The Company's total capital to risk weighted
assets ratio calculated under the regulatory risk-based capital requirements at
September 30, 2005 and 2004 was 11.81% and 11.54%, respectively.
The Company's liquidity position remains sufficient to fund operations and meet
the requirements of borrowers, depositors, and creditors. The Company maintains
various sources of liquidity to fund its cash needs. See discussion under the
heading "Liquidity" for a full listing of sources and anticipated significant
contractual obligations. The Company enters into financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include lines of credit,
letters of credit and other commitments to extend credit. The total outstanding
commitments at September 30, 2005 and 2004 were $117.2 million and $92.6
million, respectively. This increase is primarily attributable to an increase in
lines of credit to commercial customers and an increase in overdraft protection
amounts for consumer customers.
Critical Accounting Policies
The Company has established various accounting policies that govern the
application of U.S. generally accepted accounting principles in the preparation
of the Company's financial statements. The significant accounting policies of
the Company are described in the footnotes to the consolidated financial
statements included in the Company's 2004 Annual Report on Form 10-K. Certain
accounting policies involve significant judgments and assumptions by management
that have a material impact on the carrying value of certain assets and
liabilities; management considers such accounting policies to be critical
accounting policies. The judgments and assumptions used by management are based
on historical experience and other factors, which are believed to be reasonable
under the circumstances. Because of the nature of the judgments and assumptions
made by management, actual results could differ from these judgments and
assumptions, which could have a material impact on the carrying values of assets
and liabilities and the results of operations of the Company.
The Company believes the allowance for loan losses is the critical accounting
policy that requires the most significant judgments and assumptions used in the
preparation of its consolidated financial statements. In estimating the
allowance for loan losses, management utilizes historical experience, as well as
other factors, including the effect of changes in the local real estate market
on collateral values, the effect on the loan portfolio of current economic
indicators and their probable impact on borrowers, and increases or decreases in
nonperforming and impaired loans. Changes in these factors may cause
management's estimate of the allowance for loan losses to increase or decrease
and result in adjustments to the Company's provision for loan losses. See
heading "Loan Quality and Allowance for Loan Losses" for a more detailed
description of the Company's estimation process and methodology related to the
allowance for loan losses.
Results of Operations
Net Interest Income
The largest source of 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.
The Company's average balances, interest income and expense and rates earned or
paid for major balance sheet categories are set forth in the following table
(dollars in thousands):
Nine months ended Nine months ended
September 30, 2005 September 30, 2004
------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------
ASSETS
Interest-bearing deposits $1,594 $ 35 2.90% $1,486 $ 10 0.90%
Federal funds sold 8,725 183 2.80% 8,748 62 0.95%
Investment securities
Taxable 141,758 3,942 3.71% 143,482 3,685 3.42%
Tax-exempt 20,166 676 4.47% 26,951 889 4.40%
Loans (1) 605,347 27,894 6.16% 566,007 24,941 5.88%
------------------------------------------------------------------------
Total earning assets 777,590 32,730 5.63% 746,674 29,587 5.28%
------------------------------------------------------------------------
Cash and due from banks 18,139 18,921
Premises and equipment 15,112 15,815
Other assets 22,499 24,254
Allowance for loan losses (4,733) (4,543)
------------ ---------------
Total assets $828,607 $801,121
============ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
Demand deposits $229,537 $ 2,036 1.19% $226,753 $ 1,076 .63%
Savings deposits 60,714 181 .40% 59,822 177 .39%
Time deposits 267,215 6,101 3.05% 259,154 5,381 2.77%
Securities sold under
agreements to repurchase 57,537 997 2.32% 53,786 245 .61%
FHLB advances 32,511 1,202 4.94% 27,727 1,121 5.39%
Federal funds purchased 708 18 3.40% 290 3 1.38%
Junior subordinated debt 10,310 461 5.98% 8,165 255 4.16%
Other debt 5,817 188 4.32% 7,327 142 2.58%
------------------------------------------------------------------------
Total interest-bearing
liabilities 664,349 11,184 2.25% 643,024 8,400 1.74%
------------------------------------------------------------------------
Non interest-bearing demand deposits 88,525 84,857
Other liabilities 4,662 5,647
Stockholders' equity 71,071 67,593
------------ ---------------
Total liabilities & equity $828,607 $801,121
============ ===============
Net interest income $21,546 $21,187
============ ===========
Net interest spread 3.38% 3.54%
Impact of non-interest
bearing funds .31% .24%
------------ ------------
Net yield on interest-
earning assets 3.69% 3.78%
============ ============
(1) Nonaccrual loans are not material and 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 for the nine months ended
September 30, 2005, compared to the same period in 2004 (in thousands):
For the nine months ended September 30,
2005 compared to 2004
Increase / (Decrease)
Total
Change Volume (1) Rate (1)
-------------------------------------------
Earning Assets:
Interest-bearing deposits $ 25 $ 1 $ 24
Federal funds sold 121 - 121
Investment securities:
Taxable 257 (42) 299
Tax-exempt (213) (227) 14
Loans (2) 2,953 1,779 1,174
-------------------------------------------
Total interest income 3,143 1,511 1,632
-------------------------------------------
Interest-Bearing Liabilities:
Interest-bearing deposits
Demand deposits 960 13 947
Savings deposits 4 (2) 6
Time deposits 720 211 509
Securities sold under
agreements to repurchase 752 18 734
FHLB advances 81 161 (80)
Federal funds purchased 15 8 7
Junior subordinated debt 206 77 129
Other debt 46 (20) 66
-------------------------------------------
Total interest expense 2,784 466 2,318
-------------------------------------------
Net interest income $359 $1,043 $ (684)
===========================================
(1) Changes attributable to the combined impact of volume and rate have been
allocated proportionately to the change due to volume and the change due to
rate.
(2) Nonaccrual loans are not material and have been included in the average
balances.
Net interest income increased $359,000, or 1.7% to $21.5 million for the nine
months ended September 30, 2005, from $21.2 million for the same period in 2004.
The increase in net interest income was due to growth in earning assets
primarily composed of loan growth that was largely offset by an increase in the
cost of interest-bearing liabilities.
For the nine months ended September 30, 2005, average earning assets increased
by $30.9 million, or 4.1%, and average interest-bearing liabilities increased
$21.3 million, or 3.3%, compared with average balances for the same period in
2004. The changes in average balances for these periods are shown below:
> Average loans increased by $39.3 million or 6.9%.
> Average securities decreased by $8.5 million or 5.0%.
> Average interest-bearing deposits increased by $11.7 million or 2.1%.
> Average securities sold under agreements to repurchase increased by
$3.8 million or 7.1%.
> Average borrowings and other debt increased by $5.8 million or 16.4%.
> Net interest margin decreased to 3.69% for the first nine months of
2005 from 3.78% for the first nine months of 2004.
To compare the tax-exempt yields on interest-earning assets to taxable yields,
the Company also computes non-GAAP net interest income on a tax equivalent basis
(TE) where the interest earned on tax-exempt securities is adjusted to an amount
comparable to interest subject to normal income taxes assuming a federal tax
rate of 34% (referred to as the tax equivalent adjustment). The net yield on
interest-earning assets (TE) was 3.75% for the first nine months of 2005 and
3.87% for the first nine months of 2004. The TE adjustments to net interest
income for September 30, 2005 and 2004 were $348,000 and $463,000, respectively.
Provision for Loan Losses
The provision for loan losses for the nine months ended September 30, 2005 and
2004 was $550,000 and $437,000, respectively. Nonperforming loans decreased from
$3,606,000 as of September 30, 2004 to $3,338,000 as of September 30, 2005. Net
charge-offs were $497,000 for the nine months ended September 30, 2005 compared
to $303,000 during the same period in 2004. For information on loan loss
experience and nonperforming loans, see discussion under the "Nonperforming
Loans" and "Loan Quality and Allowance for Loan Losses" sections below.
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 nine
months ended September 30, 2005 and 2004 (in thousands):
Three months ended September 30, Nine months ended September 30,
2005 2004 $ Change 2005 2004 $ Change
------------- ------------- ------------- ------------- ------------- -------------
Trust $548 $514 $ 34 $1,756 $1,676 $ 80
Brokerage 72 71 1 284 298 (14)
Insurance commissions 352 336 16 1,264 1,112 152
Service charges 1,233 1,255 (22) 3,420 3,572 (152)
Security gains 61 - 61 315 92 223
Mortgage banking 284 138 146 605 384 221
Other 587 562 25 1,737 1,583 154
------------- ------------- ------------- ------------- ------------- -------------
Total other income $3,137 $2,876 $ 261 $9,381 $8,717 $ 664
============= ============= ============= ============= ============= =============
Following are explanations for the three months ended September 30, 2005
compared to the same period in 2004:
> Trust revenues increased $34,000 or 6.6% to $548,000 from $514,000.
Trust assets, at market value, were $392 million at September 30, 2005
compared to $354 million at September 30, 2004. The increase in trust
revenues was the result of new business and an increase in equity
prices.
> Revenues from brokerage increased $1,000 or 1.4% to $72,000 from
$71,000.
> Insurance commissions increased $16,000 or 4.8% to $352,000 from
$336,000 due to an increase in commissions received on sales of
business property and casualty insurance.
> Fees from service charges decreased $22,000 or 1.8% to $1,233,000 from
$1,255,000. This was primarily the result of decreases in transaction
account service charges due to increased balances in free-checking
products.
> The sale of securities during the three months ended September 30,
2005 resulted in net securities gains of $61,000. There were no
securities sold during the same period of 2004.
> Mortgage banking income increased $146,000 or 105.8% to $284,000 from
$138,000. This increase was due to the increased volume of fixed rate
loans originated and sold by First Mid Bank. Loans sold balances were
as follows:
> $23.4 million (representing 204 loans) for the third quarter of
2005.
> $10.3 million (representing 105 loans) for the third quarter of
2004.
First Mid Bank generally releases the servicing rights on loans sold into the
secondary market.
> Other income increased $25,000 or 4.4% to $587,000 from $562,000. This
increase was primarily due to increased ATM and bankcard service fees
and increased check printing income.
Following are explanations for the nine months ended September 30, 2005 compared
to the same period in 2004:
> Trust revenues increased $80,000 or 4.8% to $1,756,000 from
$1,676,000. Trust assets, at market value, were $392 million at
September 30, 2005 compared to $354 million at September 30, 2004. The
increase in trust revenues was the result of new business and an
increase in equity prices.
> Revenues from brokerage decreased $14,000 or 4.7% to $284,000 from
$298,000 as a result of a decrease in the number of stock
transactions.
> Insurance commissions increased $152,000 or 13.7% to $1,264,000 from
$1,112,000 due to an increase in commissions received on sales of
business property and casualty insurance and contingency fees received
in the first nine months of 2005.
> Fees from service charges decreased $152,000 or 4.3% to $3,420,000
from $3,572,000. This was primarily the result of decreases in
overdraft fees due to a decline in the number of overdraft items and
decreases in transaction account service charges due to increased
balances in free-checking products.
> The sale of securities during the nine months ended September 30, 2005
resulted in net securities gains of $315,000 compared to $92,000
during the same period of 2004.
> Mortgage banking income increased $221,000 or 57.6% to $605,000 from
$384,000. This increase was due to the increased volume of fixed rate
loans originated and sold by First Mid Bank. Loans sold balances were
as follows:
> $50.8 million (representing 472 loans) for the first nine months
of 2005.
> $32.9 million (representing 348 loans) for the first nine months
of 2004.
First Mid Bank generally releases the servicing rights on loans sold into the
secondary market.
> Other income increased $154,000 or 9.7% to $1,737,000 from $1,583,000.
This increase was primarily due to increased ATM and bankcard service
fees and increased check printing income.
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 nine months ended September 30, 2005 and 2004 (in
thousands):
Three months ended September 30, Nine months ended September 30,
2005 2004 $ Change 2005 2004 $ Change
------------ ------------- ------------- ----------- ------------ -------------
Salaries and benefits $ 3,343 $ 3,378 $ (35) $10,223 $10,087 $136
Occupancy and equipment 1,119 1,078 41 3,199 3,237 (38)
Amortization of intangibles 143 149 (6) 430 472 (42)
Stationery and supplies 114 124 (10) 378 380 (2)
Legal and professional fees 342 309 33 1,200 861 339
Marketing and promotion 198 134 64 549 530 19
Other operating expenses 1,134 1,080 54 3,214 3,089 125
------------ ------------- ------------- ----------- ------------ -------------
Total other expense $ 6,393 $ 6,252 $ 141 $19,193 $18,656 $ 537
============ ============= ============= =========== ============ =============
Following are explanations for the three months ended September 30, 2005
compared to the same period in 2004:
> Salaries and employee benefits, the largest component of other
expense, decreased $35,000 or 1.0% to $3,343,000 from $3,378,000. This
decrease is due to a deferral of salary and benefit expenses related
to the cost of loan originations offset by merit increases for
continuing employees and additional employees hired due to the
addition of a branch in Highland. There were 314 full-time equivalent
employees at September 30, 2005 compared to 312 at September 30, 2004.
> Occupancy and equipment expense increased $41,000 or 3.8% to
$1,119,000 from $1,078,000 due to an increase in rent expense for
Checkley offices offset by a decrease in depreciation expense for
computer equipment fully depreciated in 2004.
> Expense for amortization of intangible assets decreased $6,000 or 4.0%
to $143,000 from $149,000.
> Other operating expenses increased $54,000 or 5.0% to $1,134,000 in
2005 from $1,080,000 in 2004 due to an increase in expenses associated
with other real estate owned.
> All other categories of operating expenses increased a net of $87,000
or 15.3% to $654,000 from $567,000. The increase was primarily due to
increases in various professional fees.
Following are explanations for the nine months ended September 30, 2005 compared
to the same period in 2004:
> Salaries and employee benefits, the largest component of other
expense, increased $136,000 or 1.3% to $10,223,000 from $10,087,000.
This increase is primarily due to merit increases for continuing
employees and additional employees hired due to the addition of a
branch in Highland. There were 314 full-time equivalent employees at
September 30, 2005 compared to 312 at September 30, 2004.
> Occupancy and equipment expense decreased $38,000 or 1.2% to
$3,199,000 from $3,237,000 due to a decrease in depreciation expense
for computer equipment fully depreciated in 2004.
> Expense for amortization of intangible assets decreased $42,000 or
8.9% to $430,000 from $472,000 due to an intangible asset that was
fully amortized in 2004.
> Other operating expenses increased $125,000 or 4.0% to $3,214,000 in
2005 from $3,089,000 in 2004 due to an increase in expenses associated
with other real estate owned.
> All other categories of operating expenses increased a net of $356,000
or 20.1% to $2,127,000 from $1,771,000. The increase was primarily due
to increases in various professional fees.
Income Taxes
Total income tax expense amounted to $3,942,000 (35.2% effective tax rate) for
the nine months ended September 30, 2005, compared to $3,630,000 (33.6%
effective tax rate) for the same period in 2004. The change in the effective tax
rate in 2005 is due to a reduction in the tax expense accrual in 2004 to more
accurately reflect the estimated tax liability and deferred tax position. There
was no similar reduction made in 2005.
Analysis of Balance Sheets
Loans
The loan portfolio (net of unearned interest) is the largest category of the
Company's earning assets. The following table summarizes the composition of the
loan portfolio as of September 30, 2005 and December 31, 2004 (in thousands):
September 30, December 31,
2005 2004
------------------ -----------------
Real estate - residential $117,153 $121,567
Real estate - agricultural 51,244 50,215
Real estate - commercial 283,214 255,372
------------------ -----------------
Total real estate - mortgage $451,611 $427,154
Commercial and agricultural 142,847 137,733
Installment 34,616 30,587
Other 2,766 2,375
------------------ -----------------
Total loans $631,840 $597,849
================== =================
Overall loans increased $34.0 million, or 5.7% primarily as a result of an
increase in commercial real estate loans. Total real estate mortgage loans have
averaged approximately 72% 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 and long-term commitment to residential real estate lending. The
balance of real estate loans held for sale amounted to $1,481,000 and $2,689,000
as of September 30, 2005 and December 31, 2004, respectively.
At September 30, 2005, the Company had loan concentrations in agricultural
industries of $91.9 million, or 14.6%, of outstanding loans and $91.5 million,
or 15.3%, at December 31, 2004. In addition, the Company had loan concentrations
in the following industries as of September 30, 2005 compared to December 31,
2004 (dollars in thousands):
September 30, 2005 December 31, 2004
Principal % Outstanding Principal % Outstanding
balance loans Balance loans
---------------- --------------- ----------------- ---------------
Operators of non-residential buildings $25,086 3.97% $18,864 3.16%
Apartment building owners 42,161 6.67% 23,111 3.87%
Motels, hotels & tourist courts 28,345 4.49% 25,756 4.31%
Subdividers & developers (1) 18,579 2.94% 14,302 2.39%
(1) At December 31, 2004, this industry was not a concentration for the
Company. The December 31, 2004 balance for this industry is included for
comparative purposes only.
The Company had no further loan concentrations in excess of 25% of total
risk-based capital.
The following table presents the balance of loans outstanding as of September
30, 2005, by maturities (in thousands):
Maturity (1)
Over 1
One year through Over
or less (2) 5 years 5 years Total
----------------------------------------------------------------
Real estate - residential $ 52,725 $ 56,504 $7,924 $117,153
Real estate - agricultural 9,406 34,688 7,150 51,244
Real estate - commercial 71,032 185,645 26,537 283,214
----------------------------------------------------------------
Total real estate - mortgage $133,163 $276,837 $ 41,611 $451,611
Commercial and agricultural 97,927 41,618 3,302 142,847
Installment 17,357 16,965 294 34,616
Other 780 1,590 396 2,766
----------------------------------------------------------------
Total loans $249,227 $337,010 $ 45,603 $631,840
================================================================
(1) Based on scheduled principal repayments. (2) Includes demand loans, past
due loans and overdrafts.
As of September 30, 2005, loans with maturities over one year consisted of
approximately $288.0 million fixed rate loans and $94.6 million 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 are defined as: (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 (c) loans not included in (a) and (b) above
which are defined as "renegotiated loans". The Company's policy is to cease
accrual of interest on all loans that become ninety days past due as to
principal or interest. 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.
The following table presents information concerning the aggregate amount of
nonperforming loans at September 30, 2005 and December 31, 2004 (in thousands):
September 30, December 31,
2005 2004
-----------------------------------
Nonaccrual loans $3,338 $3,106
Renegotiated loans which are performing
in accordance with revised terms - -
-----------------------------------
Total nonperforming loans $3,338 $3,106
===================================
The $232,000 increase in nonaccrual loans during the nine months ended September
30, 2005 resulted from the net of $763,000 of loans put on nonaccrual status,
$274,000 of loans brought current or paid-off, $114,000 of loans transferred to
other real estate owned and $143,000 of loans charged-off.
Interest income that would have been reported if nonaccrual and renegotiated
loans had been performing totaled $5,000 and $69,000 for the quarters ended
September 30, 2005 and 2004 and $65,000 and $148,000 for the nine months ended
September 30, 2005 and 2004, respectively.
Loan Quality and Allowance for Loan Losses
The allowance for loan losses represents management's best estimate of the
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 the 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 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. The portion of the allowance tied to nonclassified loans
is determined primarily by historical losses. Additional factors considered by
management include variable rainfall, low commodity prices and increased
operating costs of agricultural borrowers, predicted high energy costs related
to natural gas which will affect both businesses and consumers during the coming
winter months and the expected increase in bankruptcy filings as the provisions
of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 become
effective. Other factors considered by management in evaluating the overall
adequacy of the allowance for loan losses 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 to be a critical accounting policy.
Management recognizes that there are risk factors that 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, 2005, the Company's loan
portfolio included $91.9 million of loans to borrowers whose businesses are
directly related to agriculture. The balance increased by $.4 million from $91.5
million at December 31, 2004. While the Company adheres to sound underwriting
practices, including collateralization of loans, any extended period of low
commodity prices, significantly reduced yields on crops and/or reduced levels of
government assistance to the agricultural industry could result in an increase
in the level of problem agriculture loans and potentially result in loan losses
within the agricultural portfolio.
The Company has $28.3 million of loans to motels, hotels and tourist courts. The
performance of these loans is dependent on borrower-specific issues as well as
the general level of business and personal travel within the region. While the
Company adheres to sound underwriting standards, a prolonged period of reduced
business or personal travel could result in an increase in nonperforming loans
to this business segment and potentially in loan losses. The Company also has
$25.1 million of loans to operators of non-residential buildings, $42.2 million
of loans to apartment building owners and $18.6 million of loans to subdividers
and developers.
Analysis of the allowance for loan losses as of September 30, 2005 and 2004, and
of changes in the allowance for the three and nine-month periods ended September
30, 2005 and 2004, is as follows (dollars in thousands):
Three months ended September 30, Nine months ended September 30,
2005 2004 2005 2004
-------------------------------- ------------------------------
Average loans outstanding,
net of unearned income $621,864 $585,667 $605,347 $566,007
Allowance-beginning of period $ 4,687 $ 4,505 $ 4,621 $ 4,426
Charge-offs:
Real estate-mortgage 54 53 116 204
Commercial, financial & agricultural 162 38 348 178
Installment 15 18 104 68
Other 43 - 66 -
-------------------------------- ------------------------------
Total charge-offs 274 109 634 450
Recoveries:
Real estate-mortgage 2 - 57 12
Commercial, financial & agricultural 22 95 33 107
Installment 7 7 27 28
Other 17 - 20 -
-------------------------------- ------------------------------
Total recoveries 48 102 137 147
-------------------------------- ------------------------------
Net charge-offs (recoveries) 226 7 497 303
Provision for loan losses 213 62 550 437
-------------------------------- ------------------------------
Allowance-end of period $ 4,674 $ 4,560 $ 4,674 $ 4,560
================================ ==============================
Ratio of annualized net charge-offs
to average loans .15% .01% .11% .07%
================================ ==============================
Ratio of allowance for loan losses to
loans outstanding (less unearned
interest at end of period) .74% .76% .74% .76%
================================ ==============================
Ratio of allowance for loan losses
to nonperforming loans 140.0% 126.5% 140.0% 126.5%
================================ ==============================
During the first nine months of 2005, the Company had charge-offs of $53,000 on
two agricultural loans of a single borrower and charge-offs of $234,000 on
commercial loans of four borrowers. The Company also recovered $56,000 on a
commercial real estate loan that had been charged-off in a prior period. During
the first nine months of 2004, the Company had charge-offs of $118,000 on two
commercial loans of a single borrower and charge-offs of $124,000 on two
commercial real estate loans of a single borrower. The Company also recovered
$85,000 in interest on an agricultural real estate loan that had been
charged-off in a prior period and $68,500 on two commercial loans that were
previously charged-off.
The Company minimizes credit risk by adhering to sound underwriting and credit
review policies. Management and the board of directors of the Company review
these policies at least annually. 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 quarterly basis, the board of directors and management review the
status of problem loans and determine a best estimate 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 objectives are to insulate the investment
portfolio from undue credit risk, maintain adequate liquidity, insulate capital
against changes in market value and control excessive changes in earnings while
optimizing investment performance. 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
September 30, 2005 and December 31, 2004 (dollars in thousands):
September 30, 2005 December 31, 2004
----------------------------- ---------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Yield
-------------- -------------- ------------- -------------
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 94,694 3.33% $ 92,369 2.81%
Obligations of states and
political subdivisions 17,597 4.63% 25,133 4.54%
Mortgage-backed securities 21,523 4.24% 34,032 3.82%
Other securities 18,030 6.76% 17,817 6.02%
-------------- -------------- ------------- -------------
Total securities $151,844 4.02% $169,351 3.61%
============== ============== ============= =============
At September 30, 2005, the Company's investment portfolio showed a decrease in
mortgage-backed securities and obligations of states and political subdivisions
securities and an increase in U.S. Treasury securities and obligations of U.S.
government corporations and agencies. There was a slight increase in other
securities. 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, 2005 and December 31, 2004 were as follows (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------- --------------- ---------------- --------------
September 30, 2005
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. government corporations & agencies $ 94,694 $ 16 $(971) $ 93,739
Obligations of states and political subdivisions 16,165 349 (1) 16,513
Mortgage-backed securities 21,523 34 (210) 21,347
Federal Home Loan Bank stock 5,505 - - 5,505
Other securities 12,525 583 - 13,108
--------------- --------------- ---------------- --------------
Total available-for-sale $150,412 $ 982 $(1,182) $150,212
=============== =============== ================ ==============
Held-to-maturity:
Obligations of states and political subdivisions $ 1,432 $ 35 $ - $1,467
=============== =============== ================ ==============
December 31, 2004
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. government corporations & agencies $92,369 $ 35 $(507) $91,897
Obligations of states and political subdivisions 23,581 755 (2) 24,334
Mortgage-backed securities 34,032 220 (54) 34,198
Federal Home Loan Bank stock 5,293 - - 5,293
Other securities 12,524 575 - 13,099
--------------- --------------- ---------------- --------------
Total available-for-sale $167,799 $ 1,585 $(563) $168,821
=============== =============== ================ ==============
Held-to-maturity:
Obligations of states and political subdivisions $ 1,552 $ 48 $ (2) $ 1,598
=============== =============== ================ ==============
At September 30, 2005, there was one mortgage-backed security with a fair value
of $2,089,000 and an unrealized loss of $19,000, and five obligations of U.S.
government agencies with a fair value of $21,394,000 and an unrealized loss of
$250,000, in a continuous unrealized loss position for twelve months or more.
This position is due to short-term and intermediate rates increasing since the
purchase of these securities resulting in the market value of the security being
lower than book value. Management does not believe any individual unrealized
loss as of September 30, 2005 represents an other than temporary impairment.
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, 2005 and the weighted average yield for each range of
maturities. Mortgage-backed securities are included based on their weighted
average life. All other securities are shown at their contractual maturity
(dollars in thousands).
One year After 1 through After 5 through After 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 $29,796 $ 51,414 $ 8,493 $ 4,991 $94,694
Obligations of state and
political subdivisions 1,456 7,512 5,925 1,272 16,165
Mortgage-backed securities 2,166 19,357 - - 21,523
Federal Home Loan Bank stock - - - 5,505 5,505
Other securities - - - 12,525 12,525
--------------------------------------------------------------------------------
Total investments $33,418 $78,283 $14,418 $24,293 $150,412
================================================================================
Weighted average yield 2.41% 3.83% 4.49% 5.90% 4.00%
Full tax-equivalent yield 2.50% 4.02% 5.32% 6.00% 4.21%
================================================================================
Held-to-maturity:
Obligations of state and
political subdivisions $ 140 $ 650 $ 140 $ 502 $ 1,432
================================================================================
Weighted average yield 4.26% 4.64% 4.74% 4.50% 4.63%
Full tax-equivalent yield 6.23% 6.64% 6.78% 6.54% 6.64%
================================================================================
The weighted average yields are calculated on the basis of the amortized cost
and effective yields weighted for the scheduled maturity of each security.
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 September 30, 2005.
Investment securities carried at approximately $130,272,000 and $143,560,000 at
September 30, 2005 and December 31, 2004, 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 nine months ended September 30, 2005
and for the year ended December 31, 2004 (dollars in thousands):
September 30, 2005 December 31, 2004
--------------------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------------------------------------------------------------
Demand deposits:
Non-interest-bearing $ 88,525 - $ 85,437 -
Interest-bearing 229,537 1.19% 230,300 .68%
Savings 60,714 .40% 61,144 .39%
Time deposits 267,215 3.05% 261,564 2.80%
--------------------------------------------------------------
Total average deposits $645,991 1.72% $638,445 1.43%
==============================================================
The following table sets forth the maturity of time deposits of $100,000 or more
at September 30, 2005 and December 31, 2004 (in thousands):
September 30, December 31,
2005 2004
--------------------------------------
3 months or less $28,595 $ 26,916
Over 3 through 6 months 11,298 17,560
Over 6 through 12 months 41,094 22,826
Over 12 months 40,732 48,031
--------------------------------------
Total $121,719 $115,333
======================================
During the first nine months of 2005, the balance of time deposits of $100,000
or more increased by $6.4 million. The increase in balances was primarily
attributable to an increase in CD balances due to a promotion run in the third
quarter of 2005.
Balances of time deposits of $100,000 or more include brokered CDs, time
deposits maintained for public fund entities, and consumer time deposits. The
balance of brokered CDs was $41.4 million and $42.1 million as of September 30,
2005 and December 31, 2004, respectively. The Company also maintained time
deposits for the State of Illinois with balances of $3.4 million and $4.4
million as of September 30, 2005 and December 31, 2004, respectively. The State
of Illinois deposits are subject to bid annually and could increase or decrease
in any given year.
Repurchase Agreements and Other Borrowings
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. Other borrowings consist of
Federal Home Loan Bank ("FHLB") advances, federal funds purchased and loans
(short-term or long-term debt) that the Company has outstanding and junior
subordinated debentures.
Information relating to securities sold under agreements to repurchase and other
borrowings as of September 30, 2005 and December 31, 2004 is presented below
(dollars in thousands):
September 30, December 31,
2005 2004
--------------- --------------
Securities sold under agreements to repurchase $52,164 $ 59 835
Federal Home Loan Bank advances:
Overnight - -
Fixed term - due in one year or less 8,000 17,300
Fixed term - due after one year 20,000 8,000
Debt:
Loans due in one year or less 5,000 4,200
Loans due after one year - 400
Junior subordinated debentures 10,310 10,310
--------------- --------------
Total $ 95,474 $ 100,045
=============== ==============
Average interest rate at end of period 3.57% 2.59%
Maximum outstanding at any month-end
Securities sold under agreements to repurchase $65,715 $63,517
Federal Home Loan Bank advances:
Overnight 12,014 7,000
Fixed term - due in one year or less 20,000 17,300
Fixed term - due after one year 20,000 25,300
Federal funds purchased 2,000 -
Debt:
Loans due in one year or less 6,200 9,025
Loans due after one year 200 400
Junior subordinated debentures 10,310 10,310
Averages for the period (YTD)
Securities sold under agreements to repurchase $57,537 $55,645
Federal Home Loan Bank advances:
Overnight 2,713 997
Fixed term - due in one year or less 13,656 8,200
Fixed term - due after one year 16,142 17,920
Federal funds purchased 708 218
Debt:
Loans due in one year or less 5,678 6,746
Loans due after one year 139 415
Junior subordinated debentures 10,310 8,704
--------------- --------------
Total $ 106,883 $98,845
=============== ==============
Average interest rate during the period 3.92% 2.63%
FHLB advances represent borrowings by First Mid Bank to economically fund loan
demand. The fixed term advances consist of $28 million as follows:
> $5 million advance at 5.34% with a 5-year maturity, due December 14,
2005, callable quarterly
> $3 million advance at 3.73% with a 1-year maturity, due March 21, 2006
> $7 million advance at 4.00% with a 2-year maturity, due April 15, 2007
> $5 million advance at 4.58% with a 5-year maturity, due March 22, 2010
> $3 million advance at 5.98% with a 10-year maturity, due March 1,
2011, callable quarterly
> $5 million advance at 4.33% with a 10-year maturity, due November 23,
2011, five year lockout, one time call 11/23/06
At September 30, 2005, outstanding debt balances include $5,000,000 on a
revolving credit agreement with The Northern Trust Company with a floating
interest rate of 1.25% over the federal funds rate (4.98% as of September 30,
2005) that matured on October 22, 2005. This loan was renewed under the same
terms and conditions on October 22, 2005 and is set to mature on October 21,
2006 with a maximum available balance of $15 million. The borrowing agreement
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 September 30, 2005
and 2004 and December 31, 2004.
On February 27, 2004, the Company completed the issuance and sale of $10 million
of floating rate trust preferred securities through First Mid-Illinois Statutory
Trust I (the "Trust"), a statutory business trust and wholly-owned subsidiary of
the Company, as part of a pooled offering. The Company established the Trust for
the purpose of issuing the trust preferred securities. Upon adoption of FIN 46R,
the Company was required to de-consolidate its investment in the Trust. The $10
million in proceeds from the trust preferred issuance and an additional $310,000
for the Company's investment in common equity of the Trust, a total of $10,310
000, was invested in junior subordinated debentures of the Company. The
underlying junior subordinated debentures issued by the Company to the Trust
mature in 2034, bear interest at nine-month London Interbank Offered Rate
("LIBOR") plus 280 basis points, reset quarterly, and are callable, at the
option of the Company, at par on or after April 7, 2009. The Company intends to
use the proceeds of the offering for general corporate purposes. The trust
preferred securities issued by the Trust are included as Tier 1 capital of the
Company for regulatory capital purposes. On March 1, 2005, the Federal Reserve
Board adopted a final rule that allows the continued limited inclusion of trust
preferred securities in the calculation of Tier 1 capital for regulatory
purposes. The final rule provides a five-year transition period, ending March
31, 2009, for application of the quantitative limits. The Company does not
expect the application of the quantitative limits to have an impact on its
calculation of Tier 1 capital for regulatory purposes or its classification as
well-capitalized.
Interest Rate Sensitivity
The Company seeks to maximize its net interest margin while maintaining 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
changes in the interest rate environment, a variable over which management has
no control. Interest rate risk, or sensitivity, arises when the maturity or
repricing characteristics of interest-bearing assets differ significantly from
the maturity or repricing characteristics of interest-bearing 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 (ALCO) oversees the interest rate
sensitivity position and directs the overall allocation of funds.
In the banking industry, a traditional way to measure potential net interest
income exposure to changes in interest rates is through a technique known as
"static GAP" analysis which measures the cumulative differences between the
amounts of assets and liabilities maturing or repricing at various intervals. By
comparing the volumes of interest-bearing assets and liabilities that have
contractual maturities and repricing points at various times in the future,
management can gain insight into the amount of interest rate risk embedded in
the balance sheet.
The following table sets forth the Company's interest rate repricing GAP for
selected maturity periods at September 30, 2005 (dollars in thousands):
Rate Sensitive Within
1 year 1-2 years 2-3 years 3-4 years 4-5 years Thereafter Total
----------- ------------- ----------- ----------- ------------ ------------ -----------
Interest-earning assets:
Federal funds sold and other
interest-bearing deposits $ 5,192 $ - $ - $ - $ - $ - $ 5,192
Taxable investment securities 33,475 24,824 20,814 27,294 - 27,489 133,896
Nontaxable investment securities 8,184 1,709 1,467 1,034 1,509 3,845 17,748
Loans 316,131 80,119 100,267 64,755 56,421 14,147 631,840
----------- ------------- ----------- ----------- ------------ ------------ -----------
Total $362,982 $106,652 $122,548 $93,083 $57,930 $45,481 $788,676
=========== ============= =========== =========== ============ ============ ===========
Interest-bearing liabilities:
Savings and N.O.W. accounts $ 40,061 $ 10,065 $ 10,509 $ 15,399 $ 15,926 $ 95,441 $187,401
Money market accounts 59,747 2,234 2,296 2,978 3,040 16,070 86.365
Other time deposits 185,889 64,388 35,777 4,517 8,639 74 299,284
Short-term borrowings/debt 65,164 - - - - - 65,164
Long-term borrowings/debt - 7,000 - - 15,310 8,000 30,310
----------- ------------- ----------- ----------- ------------ ------------ -----------
Total $350,861 $ 83,687 $48,582 $22,894 $ 42,915 $ 119,585 $668,524
=========== ============= =========== =========== ============ ============ ===========
Rate sensitive assets -
rate sensitive liabilities $ 12,121 $ 22,965 $73,966 $70,189 $15,015 $(74,104) $120,152
Cumulative GAP $ 12,121 $ 35,086 $109,052 $179,241 $194,256 $120,152
Cumulative amounts as % of total
rate sensitive assets 1.5% 2.9% 9.4% 8.9% 1.9% -9.4%
Cumulative Ratio 1.5% 4.4% 13.8% 22.7% 24.6% 15.2%
The static GAP analysis shows that at September 30, 2005, the Company was asset
sensitive, on a cumulative basis, through the twelve-month time horizon. This
indicates that future increases in interest rates, if any, could have a positive
effect on net interest income. Conversely, future decreases in interest rates
could have an adverse effect on net interest income.
There are several ways the Company measures and manages the exposure to interest
rate sensitivity, including static GAP analysis. The Company's ALCO also uses
other financial models to project interest income under various rate scenarios
and prepayment/extension assumptions consistent with First Mid Bank's historical
experience and with known industry trends. ALCO meets at least monthly to review
the Company's exposure to interest rate changes as indicated by the various
techniques and to make necessary changes in the composition terms and/or rates
of the assets and liabilities. Based on all information available, management
does not believe that changes in interest rates, which might reasonably be
expected to occur in the next twelve months, will have a material adverse effect
on the Company's net interest income.
Capital Resources
At September 30, 2005, the Company's stockholders' equity had increased
$2,821,000 or 4.0% to $71,975,000 from $69,154,000 as of December 31, 2004.
During the first nine months of 2005, net income contributed $7,242,000 to
equity before the payment of dividends to common stockholders. The change in
market value of available-for-sale investment securities decreased stockholders'
equity by $745,000, net of tax. Additional purchases of treasury stock (106,360
shares at an average cost of $40.46 per share) decreased stockholders' equity by
$4,304,000.
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 Board of Governors of the Federal
Reserve System ("Federal Reserve System"), and First Mid Bank follows similar
minimum regulatory requirements established for national banks by the Office of
the Comptroller of the Currency ("OCC"). 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, 2005 and December 31, 2004, the Company and First Mid
Bank met all capital adequacy requirements.
The trust preferred securities issued by First Mid-Illinois Statutory Trust I
are included as Tier 1 capital of the Company for regulatory capital purposes.
On March 1, 2005, the Federal Reserve Board adopted a final rule that allows the
continued limited inclusion of trust preferred securities in the calculation of
Tier 1 capital for regulatory purposes. The final rule provides a five-year
transition period, ending March 31, 2009, for application of the quantitative
limits. The Company does not expect the application of the quantitative limits
to have an impact on its calculation of Tier 1 capital for regulatory purposes
or its classification as well-capitalized.
As of September 30, 2005, the most recent notification from the OCC 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 following table (dollars in thousands). There are no conditions
or events since that notification that management believes have changed this
categorization.
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ------------ ------------ ------------ ------------ ------------
September 30, 2005
Total Capital (to risk-weighted assets)
Company $74,821 11.81% $50,671 > 8.00% N/A N/A
-
First Mid Bank 73,716 11.74% 50,248 > 8.00% $62,810 >10.00%
- -
Tier 1 Capital (to risk-weighted assets)
Company 70,147 11.07% 25,336 > 4.00% N/A N/A
-
First Mid Bank 69,042 10.99% 25,124 > 4.00% 37,686 > 6.00%
- -
Tier 1 Capital (to average assets)
Company 70,147 8.48% 33,093 > 4.00% N/A N/A
-
First Mid Bank 69,042 8.39% 32,921 > 4.00% 41,151 > 5.00%
- -
December 31, 2004
Total Capital (to risk-weighted assets)
Company $70,787 11.71% $48,371 > 8.00% N/A N/A
-
First Mid Bank 71,233 11.88% 47,988 > 8.00% $59,986 >10.00%
- -
Tier 1 Capital (to risk-weighted assets)
Company 66,166 10.94% 24,185 > 4.00% N/A N/A
-
First Mid Bank 66,612 11.10% 23,994 > 4.00% 35,991 > 6.00%
- -
Tier 1 Capital (to average assets)
Company 66,166 7.99% 33,132 > 4.00% N/A N/A
-
First Mid Bank 66,612 8.08% 32,961 > 4.00% 41,201 > 5.00%
- -
Banks and financial 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 2004 Annual Report on Form
10-K.
On August 5, 1998, the Company announced a stock repurchase program for 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
approved the repurchase of $3 million of additional shares of the Company's
common stock and in August 2002, the Board approved the repurchase of $5 million
of additional shares of the Company's common stock. In September 2003, the Board
approved the repurchase of $10 million of additional shares of the Company's
common stock. On April 27, 2004, the Board approved the repurchase of an
additional $5 million shares of the Company's common stock. On August 23, 2005
the Board approved the repurchase of an additional $5 million shares of the
Company's common stock, bringing the aggregate total on September 30, 2005 to 8%
of the Company's common stock plus $28 million of additional shares.
During the nine-month period ending September 30, 2005, the Company repurchased
106,360 shares at a total cost of $4,304,000. Since 1998, the Company has
repurchased a total of 1,223,406 shares at a total price of $29,204,000. As of
September 30, 2005, the Company was authorized per all repurchase programs to
purchase $5,003,000 in additional shares.
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 of 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 of Chicago, and the Company's operating line
of credit with The Northern Trust Company. Details for the sources include:
> First Mid Bank has $22.5 million available in overnight federal fund
lines, including $10 million from Harris Trust and Savings Bank of
Chicago and $12.5 million from The Northern Trust Company.
Availability of the funds is subject to First Mid Bank meeting minimum
regulatory capital requirements for total capital to risk-weighted
assets and Tier 1 capital to total average assets. As of September 30,
2005, First Mid Bank's ratios of total capital to risk-weighted assets
of 11.74% and Tier 1 capital to total average assets of 8.39% 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. At September 30, 2005, the excess collateral at
the Federal Home Loan Bank will support approximately $58.4 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 $15 million with The Northern Trust Company. The Company has
an outstanding balance of $5,000,000 as of September 30, 2005, and
$10,000,000 in available funds. On October 22, 2005, the Company
entered into an agreement with The Northern Trust Company to renew
this loan for one year with a maturity date of October 21, 2006, under
the same terms and conditions. The agreement contains requirements for
the Company and First Mid Bank to maintain various operating and
capital ratios and 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 September 30, 2005.
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; and
> operating activities, including scheduled debt repayments and
dividends to stockholders.
The following table summarizes significant contractual obligations and other
commitments at September 30, 2005 (in thousands):
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
-------------- --------------- --------------- --------------- --------------
Time deposits $299,284 $185,581 $100,474 $13,156 $ 73
Debt 15,310 5,000 - - 10,310
Other borrowings 80,164 60,164 7,000 5,000 8,000
Operating leases 4,243 434 880 878 2,051
Supplemental retirement 761 50 100 100 511
-------------- --------------- --------------- --------------- --------------
$399,762 $251,229 $108,454 $19,134 $20,945
============== =============== =============== =============== ==============
For the nine-month period ended September 30, 2005, net cash of $8.3 million and
$8.0 million was provided from operating activities and financing activities,
respectively, while investing activities used net cash of $17.8 million. In
total, cash and cash equivalents decreased by $1.5 million since year-end 2004.
On February 27, 2004, the Company completed the issuance and sale of $10 million
of floating rate trust preferred securities through First Mid-Illinois Statutory
Trust I (the "Trust"), a statutory business trust and wholly-owned subsidiary of
the Company, as part of a pooled offering. The Company established the Trust for
the purpose of issuing the trust preferred securities. Upon adoption of FIN 46R,
the Company was required to de-consolidate its investment in the Trust. The $10
million in proceeds from the trust preferred issuance and an additional $310,000
for the Company's investment in common equity of the Trust, a total of $10,310
000, was invested in junior subordinated debentures of the Company. The
underlying junior subordinated debentures issued by the Company to the Trust
mature in 2034, bear interest at three-month London Interbank Offered Rate
("LIBOR") plus 280 basis points, reset quarterly, and are callable, at the
option of the Company, at par on or after April 7, 2009. The Company has used
the proceeds of the offering for general corporate purposes. The trust preferred
securities issued by the Trust are included as Tier 1 capital of the Company for
regulatory capital purposes. Management believes it has adequate sources of
liquidity.
First Mid Bank enters into financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include lines of credit, letters of credit and other
commitments to extend credit. Each of these instruments involves, to varying
degrees, elements of credit, interest rate and liquidity risk in excess of the
amounts recognized in the consolidated balance sheets. The Company uses the same
credit policies and requires similar collateral in approving lines of credit and
commitments and issuing letters of credit as it does in making loans. The
exposure to credit losses on financial instruments is represented by the
contractual amount of these instruments. However, the Company does not
anticipate any losses from these instruments.
The off-balance sheet financial instruments whose contract amounts represent
credit risk at September 30, 2005 and December 31, 2004 were as follows (in
thousands):
September 30, December 31,
2005 2004
--------------------- --------------------
Unused commitments, including lines of credit:
Commercial real estate $ 27,555 $ 25,837
Commercial operating 50,817 35,986
Home equity 16,183 16,002
Other 18,925 13,577
--------------------- --------------------
Total $113,480 $ 91,402
===================== ====================
Standby letters of credit $ 3,747 $ 2,840
===================== ====================
Commitments to originate credit represent approved commercial, residential real
estate and home equity loans that generally are expected to be funded within
ninety days. Lines of credit are agreements by which the Company agrees to
provide a borrowing accommodation up to a stated amount as long as there is no
violation of any condition established in the loan agreement. Both commitments
to originate credit and lines of credit generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the
lines and some commitments are expected to expire without being drawn upon, the
total amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the financial performance of customers to third parties. Standby
letters of credit are primarily issued to facilitate trade or support borrowing
arrangements and generally expire in one year or less. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending credit facilities to customers. The maximum amount of credit that
would be extended under letters of credit is equal to the total off-balance
sheet contract amount of such instrument.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the market risk faced by the Company since
December 31, 2004. 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, 2004.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the Company's "disclosure controls and procedures" (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), as of the end of the period covered by this
report. Based on such evaluation, such officers have concluded that, as of the
end of the period covered by this report, the Company's disclosure controls and
procedures are effective in bringing to their attention on a timely basis
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic filings under
the Exchange Act. Further, there have been no changes in the Company's internal
control over financial reporting during the last fiscal quarter that have
materially affected or that are reasonably likely to affect materially the
Company's internal control over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
Since First Mid Bank acts as a depository of funds, it is named from time to
time as a defendant in lawsuits (such as garnishment proceedings) involving
claims as 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------
Period (d) Approximate Dollar
(c) Total Number of Shares Value of Shares that
Purchased as Part of May Yet Be Purchased
(a) Total Number of (b) Average Price Publicly Announced Plans Under the Plans or
Shares Purchased Paid per Share or Programs Programs
- ---------------------- --------------------- ----------------------- ---------------------------- -------------------------
July 1, 2005 -
July 30, 2005 - - - $1,003,000
August 1, 2005 -
August 31, 2005 20,108 $40.94 20,108 $5,180,000
September 1, 2005 -
September 30, 2005 4,304 $40.66 4,304 $5,003,000
--------------------- ----------------------- ---------------------------- -------------------------
Total 24,412 $40.98 24,412 $5,003,000
===================== ======================= ============================ =========================
On August 5, 1998, the Company announced a stock repurchase program for 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
approved the repurchase of $3 million of additional shares of the Company's
common stock and in August 2002, the Board approved the repurchase of $5 million
of additional shares of the Company's common stock. In September 2003, the Board
approved the repurchase of $10 million of additional shares of the Company's
common stock. On April 27, 2004, the Board approved the repurchase of an
additional $5 million shares of the Company's common stock. On August 23, 2005
the Board approved the repurchase of an additional $5 million shares of the
Company's common stock, bringing the aggregate total on September 30, 2005 to 8%
of the Company's common stock plus $28 million of additional shares.
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
The exhibits required by Item 601 of Regulation S-K and filed herewith are
listed in the Exhibit Index that follows the Signature Page and that immediately
precedes the exhibits filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST MID-ILLINOIS BANCSHARES, INC.
(Registrant)
Date: November 8, 2005
/s/ William S. Rowland
William S. Rowland
President and Chief Executive Officer
/s/ Michael L. Taylor
Michael L. Taylor
Chief Financial Officer
Exhibit Index to Quarterly Report on Form 10-Q
- --------------------------------------------------------------------------------
Exhibit
Number Description and Filing or Incorporation Reference
- --------------------------------------------------------------------------------
11.1 Statement re: Computation of Earnings Per Share
(Filed herewith on page 6)
31.1 Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
Certification pursuant to section 302
of the Sarbanes-Oxley Act of 2002
I, William S. Rowland, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First
Mid-Illinois Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 8, 2005
By: /s/ William S. Rowland
William S. Rowland, President and
Chief Executive Officer
Exhibit 31.2
Certification pursuant to section 302
of the Sarbanes-Oxley Act of 2002
I, Michael L. Taylor, certify that:
1. I have reviewed this report on Form 10-Q of First Mid-Illinois
Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 8, 2005
By: /s/ Michael L. Taylor
Michael L. Taylor, Chief Financial Officer
Exhibit 32.1
Certification pursuant to
18 U.S.C. section 1350,
as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of First Mid-Illinois Bancshares, Inc.
(the "Company") on Form 10-Q for the period ended September 30, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, William S. Rowland, President and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: November 8, 2005
/s/ William S. Rowland
William S. Rowland
President and Chief Executive Officer
Exhibit 32.2
Certification pursuant to
18 U.S.C. section 1350,
as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of First Mid-Illinois Bancshares, Inc.
(the "Company") on Form 10-Q for the period ended September 30, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Michael L. Taylor, Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: November 8, 2005
/s/ Michael L. Taylor
Michael L. Taylor
Chief Financial Officer