UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer[ ] Accelerated filer[X] Non-accelerated filer[ ]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act). [ ] Yes [X] No
As of May 8, 2006, 4,340,725 common shares, $4.00 par value, were outstanding.
PART I
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited) March 31, December 31,
(In thousands, except share data) 2006 2005
------------- -------------
Assets
Cash and due from banks:
Non-interest bearing $ 14,945 $ 19,131
Interest bearing 170 426
Federal funds sold 2,175 -
------------- -------------
Cash and cash equivalents 17,290 19,557
Investment securities:
Available-for-sale, at fair value 147,000 155,841
Held-to-maturity, at amortized cost (estimated
fair value of $1,316 and $1,442 at March 31, 2006
and December 31, 2005, respectively) 1,292 1,412
Loans held for sale 777 1,778
Loans 641,084 636,355
Less allowance for loan losses (4,729) (4,648)
------------- -------------
Net loans 636,355 631,707
Interest receivable 5,970 6,410
Premises and equipment, net 15,325 15,168
Goodwill, net 9,034 9,034
Intangible assets, net 2,640 2,778
Other assets 6,333 6,888
------------- -------------
Total assets $842,016 $850,573
============= =============
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 96,827 $ 95,305
Interest bearing 556,919 553,764
------------- -------------
Total deposits 653,746 649,069
Securities sold under agreements to repurchase 46,606 67,380
Interest payable 2,122 1,717
Other borrowings 53,000 44,500
Junior subordinated debentures 10,310 10,310
Other liabilities 3,979 5,271
------------- -------------
Total liabilities 769,763 778,247
------------- -------------
Stockholders' Equity
Common stock, $4 par value; authorized 18,000,000
shares; issued 5,662,115 shares in 2006 and
5,633,621 shares in 2005 22,648 22,534
Additional paid-in capital 20,302 19,439
Retained earnings 63,272 60,867
Deferred compensation 2,514 2,440
Accumulated other comprehensive loss (887) (739)
Less treasury stock at cost, 1,321,390 shares
in 2006 and 1,241,359 shares in 2005 (35,596) (32,215)
------------- -------------
Total stockholders' equity 72,253 72,326
------------- -------------
Total liabilities and stockholders' equity $842,016 $850,573
============= =============
See accompanying notes to consolidated financial statements.
Consolidated Statements of Income (unaudited)
(In thousands, except per share data)
Three months ended March 31,
2006 2005
------------- -------------
Interest income:
Interest and fees on loans $10,286 $ 8,782
Interest on investment securities 1,553 1,563
Interest on federal funds sold 17 69
Interest on deposits with other financial institutions 3 10
------------- -------------
Total interest income 11,859 10,424
Interest expense:
Interest on deposits 3,449 2,515
Interest on securities sold under agreements
to repurchase 481 283
Interest on other borrowings 599 411
Interest on subordinated debentures 190 140
------------- -------------
Total interest expense 4,719 3,349
------------- -------------
Net interest income 7,140 7,075
Provision for loan losses 193 187
------------- -------------
Net interest income after provision for loan losses 6,947 6,888
Other income:
Trust revenues 609 636
Brokerage commissions 92 97
Insurance commissions 576 511
Service charges 1,150 1,034
Securities gains (losses), net (1) 173
Mortgage banking revenue, net 67 153
Other 640 572
------------- -------------
Total other income 3,133 3,176
Other expense:
Salaries and employee benefits 3,563 3,474
Net occupancy and equipment expense 1,136 1,036
Amortization of intangible assets 138 142
Stationery and supplies 135 139
Legal and professional 287 386
Marketing and promotion 176 123
Other 1,094 1,006
------------- -------------
Total other expense 6,529 6,306
------------- -------------
Income before income taxes 3,551 3,758
Income taxes 1,147 1,323
------------- -------------
Net income $ 2,404 $ 2,435
============= =============
Per share data:
Basic earnings per share $ 0.55 $ 0.55
Diluted earnings per share $ 0.54 $ 0.54
See accompanying notes to unaudited consolidated financial statements.
Consolidated Statements of Cash Flows (unaudited) Three months ended
(In thousands) March 31,
2006 2005
------------ ----------
Cash flows from operating activities:
Net income $ 2,404 $ 2,435
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 193 187
Depreciation, amortization and accretion, net 426 384
Stock-based compensation expense 49 -
Gain (loss) on sale of securities, net 1 (173)
Loss on sale of other real property owned, net 23 67
Gain on sale of loans held for sale, net (90) (183)
Origination of loans held for sale (5,086) (12,145)
Proceeds from sale of loans held for sale 6,177 13,767
Decrease in other assets 392 1,612
Increase (decrease) in other liabilities 254 (726)
------------ ----------
Net cash provided by operating activities 4,743 5,225
------------ ----------
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale 4,091 19,667
Proceeds from maturities of securities available-for-sale 4,586 18,067
Proceeds from maturities of securities held-to-maturity 120 120
Purchases of securities available-for-sale - (37,258)
Purchases of securities held-to-maturity - (73)
Net decrease (increase) in loans (4,841) 3,042
Purchases of premises and equipment (524) (254)
Proceeds from sales of other real property owned 822 289
------------ ----------
Net cash provided by investing activities 4,254 3,600
------------ ----------
Cash flows from financing activities:
Net increase (decrease) in deposits 4,677 (12,605)
Decrease in federal funds purchased (2,000) -
(Decrease) increase in repurchase agreements (20,774) 5,880
Increase (decrease) in short-term FHLB advances 4,500 (2,000)
Increase in long-term FHLB advances 10,000 5,000
Repayment of short-term debt (4,500) (200)
Proceeds from short-term debt 500 2,000
Proceeds from issuance of common stock 405 353
Purchase of treasury stock (3,307) (1,566)
Dividends paid on common stock (765) (715)
------------ ----------
Net cash used in financing activities (11,264) (3,853)
------------ ----------
(Decrease) increase in cash and cash equivalents (2,267) 4,972
Cash and cash equivalents at beginning of period 19,557 23,554
------------ ----------
Cash and cash equivalents at end of period $17,290 $28,526
============ ==========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $4,314 $ 3,392
Income taxes 1,355 232
Supplemental disclosures of noncash
investing and financing activities
Loans transferred to real estate owned 25 -
Dividends reinvested in common stock 377 355
Net tax benefit related to option and
deferred compensation plans 147 87
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 March 31, 2006 and 2005, 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 March 31, 2006
presentation and there was no impact on net income or stockholders' equity. The
results of the interim period ended March 31, 2006 are not necessarily
indicative of the results expected for the year ending December 31, 2006. The
Company operates as a one-segment entity for financial reporting purposes.
The 2005 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 2005 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.
Comprehensive Income
The Company's comprehensive income for the three-month periods ended March 31,
2006 and 2005 was as follows (in thousands):
Three months ended
March 31,
-------------------------
2006 2005
------------ ------------
Net income $2,404 $2,435
Other comprehensive income:
Unrealized loss during the period (243) (1,441)
Less realized gain (loss) during the period 1 (173)
Tax effect 94 629
------------ ------------
Total other comprehensive loss (148) (985)
------------ ------------
Comprehensive income $2,256 $1,450
============ ============
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-month
periods ended March 31, 2006 and 2005 were as follows:
Three months ended
March 31,
-------------------------
2006 2005
------------ ------------
Basic Earnings per Share:
Net income $2,404,000 $2,435,000
Weighted average common shares outstanding 4,383,765 4,450,359
============ ============
Basic earnings per common share $ .55 $ .55
============ ============
Diluted Earnings per Share:
Weighted average common shares outstanding 4,383,765 4,450,359
Assumed conversion of stock options 97,270 93,116
------------ ------------
Diluted weighted average common shares outstanding 4,481,035 4,543,475
============ ============
Diluted earnings per common share $ .54 $ .54
============ ============
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 March 31, 2006 and December 31, 2005 (in
thousands):
March 31, 2006 December 31, 2005
------------------------------ -----------------------------
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 1,810 3,015 1,760
Core deposit intangibles 2,805 2,481 2,805 2,440
Mortgage servicing rights 608 608 608 608
Customer list intangibles 1,904 793 1,904 746
------------- ---------------- -------------- --------------
$21,126 $9,452 $21,126 $9,314
============= ================ ============== ==============
Total amortization expense for the three months ended March 31, 2006 and 2005
was as follows (in thousands):
March 31,
2006 2005
-------------- -------------
Intangibles from branch acquisition $50 $50
Core deposit intangibles 40 40
Mortgage servicing rights - 4
Customer list intangibles 48 48
-------------- -------------
$138 $142
============== =============
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 3/31/06 $138
Estimated amortization expense:
For period 04/01/06-12/31/06 $415
For year ended 12/31/07 $499
For year ended 12/31/08 $452
For year ended 12/31/09 $417
For year ended 12/31/10 $391
For year ended 12/31/11 $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
Prior to January 1, 2006, the Company accounted for its Stock Incentive Plan
("Plan") under the recognition and measurement provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), and related
Interpretations, as permitted by Financial Accounting Standards Board ("FASB")
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
No stock option compensation cost was recognized in the Statement of Income as
all options granted had an exercise price equal to the market value of the
underlying common stock on the grant date.
In December 2004, the FASB issued Statement No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"), which requires the cost resulting from stock options
be measured at fair value and recognized in earnings. This Statement replaces
SFAS No. 123 and supercedes APB No. 25 which permitted the recognition of
compensation expense using the intrinsic value method.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS 123R using the modified prospective application method. Under
this method, the Statement applies to new awards and to awards modified,
repurchased or cancelled after the effective date. Additionally, compensation
cost for a portion of awards for which requisite services have not been rendered
that are outstanding as of the effective date shall be recognized as the
requisite service is rendered or after the effective date. As a result of this
adoption, the Company's income before income taxes and net income for the three
months ended March 31, 2006 have included stock option compensation cost of
$49,000 and $47,000, respectively, which represents $.01 impact on basic and
diluted earnings per share for the period. The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of SFAS No. 123 on stock-based employee
compensation for the three months ended March 31, 2005.
Three months ended
March 31, 2005
-------------------
Net income, as reported $2,435
Stock based compensation expense determined under
fair value based method, net of related tax effect (93)
-------------------
Pro forma net income $2,342
===================
Basic Earnings Per Share:
As reported $.55
Pro forma .53
Diluted Earnings Per Share:
As reported $.54
Pro forma .52
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis is intended to provide a better
understanding of the consolidated financial condition and results of operations
of the Company and its subsidiaries as of, and for the periods ended, March 31,
2006 and 2005. 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 2005 Annual Report on Form 10-K under the headings
"Item 1. Business," and "Item 1A. Risk Factors."
New Accounting Standards Adopted During First Quarter of 2006
Prior to January 1, 2006, the Company accounted for its Stock Incentive Plan
("Plan") under the recognition and measurement provisions of APB No. 25, and
related Interpretations, as permitted by SFAS No. 123. No stock option
compensation cost was recognized in the Statement of Income as all options
granted had an exercise price equal to the market value of the underlying common
stock on the grant date.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS 123R using the modified prospective application method. Under
this method, the Statement applies to new awards and to awards modified,
repurchased or cancelled after the effective date. Additionally, compensation
cost for a portion of awards for which requisite services have not been rendered
that are outstanding as of the effective date shall be recognized as the
requisite service is rendered or after the effective date. As a result of this
adoption, the Company's income before income taxes and net income for the three
months ended March 31, 2006 have included stock option compensation cost of
$49,000 and $47,000, respectively, which represents $.01 impact on basic and
diluted earnings per share for the period. As of March 31, 2006, there was
approximately $237,470 of total unrecognized compensation cost related to
nonvested options under the Plan. The Company expects to recognize that cost
over a weighted average period of less than four years.
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 $2,404,000 and $2,435,000 and diluted earnings per share was $.54
for the three months ended March 31, 2006 and 2005. The following table shows
the Company's annualized performance ratios for the three months ended March 31,
2006 and 2005, compared to the performance ratios for the year ended December
31, 2005:
Three months ended Year ended
March 31, March 31, December 31,
2006 2005 2005
------------- ------------- ---------------
Return on average assets 1.15% 1.18% 1.18%
Return on average equity 13.11% 13.93% 13.64%
Average equity to average assets 8.75% 8.47% 8.64%
Total assets at March 31, 2006 and December 31, 2005 were $842.0 million and
$850.6 million, respectively. The decrease in net assets was primarily the
result of a decrease in available-for-sale securities that matured during the
first quarter of 2006 and were not replaced and seasonal declines in cash and
cash equivalents. Net loan balances were $636.4 million at March 31, 2006, an
increase of $4.6 million, or .7%, from $631.7 million at December 31, 2005,
primarily due to an increase in commercial real estate loans. Total deposit
balances increased to $653.7 million at March 31, 2006 from $649.1 million at
December 31, 2005.
Net interest margin, defined as net interest income divided by average
interest-earning assets, was 3.66% for the three months ended March 31, 2006,
down from 3.71% for the same period in 2005. 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 $7.14 million with growth in average
earning assets of $14.7 million for the three months ended March 31, 2006
compared to net interest income of $7.08 million for the same period in 2005.
Noninterest income decreased $43,000, or 1.4%, to $3.13 million for the three
months ended March 31, 2006 compared to $3.18 million for the three months ended
March 31, 2005. The primary reason for this decrease was $173,000 in gains on
the sale of securities during the first three months of 2005 as market
conditions and investment portfolio liquidity were conducive to the sale
compared to $1,000 in losses during the first quarter of 2006 offset by an
increase in ATM and bankcard service fees during the first three months of 2006
compared to the same period in 2005.
Noninterest expense increased 3.5% or $223,000, to $6.53 million for the three
months ended March 31, 2006 compared to $6.31 million during the same period in
2005. The primary factor in the expense increase was increased salaries and
benefits expense that resulted from merit increases for continuing employees,
additional compensation expense recorded in accordance with the provisions of
SFAS 123R, and an increase in occupancy expense for a new Highland branch
location added in March 2005 and a new office location for Checkley.
Following is a summary of the factors that contributed to the changes in net
income (in thousands):
2006 versus 2005
Three months ended
March 31
-------------------
Net interest income $ 65
Provision for loan losses (6)
Other income, including securities transactions (43)
Other expenses (223)
Income taxes 176
Increase (decrease) in net income $(31)
===================
Credit quality is an area of importance to the Company. Total nonperforming
loans were $3.1 million at March 31, 2006, compared to $3.7 million at March 31,
2005 and $3.5 million at December 31, 2005. The Company's provision for loan
loss for the three months ended March 31, 2006 and 2005 was $193,000 and
$187,000, respectively. At March 31, 2006, the composition of the loan portfolio
remained similar to the same period last year. During the three months ended
March 31, 2006, net charge-offs were 0.07% of average loans compared to .05% for
the same period in 2005. Loans secured by both commercial and residential real
estate comprised 71% of the loan portfolio as of March 31, 2006 and 2005.
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 March 31, 2006 and 2005 was 11.13%
and 11.35%, respectively. The Company's total capital to risk weighted assets
ratio calculated under the regulatory risk-based capital requirements at March
31, 2006 and 2005 was 11.86% and 12.15%, 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 March 31, 2006 and 2005 were $116.9 million and $119.9 million,
respectively. This decrease is primarily attributable to a decrease in unused
lines of credit to agricultural 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 2005 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.
Mergers and Acquisitions
On February 14, 2006, the Company announced it had entered into an agreement and
plan of merger to acquire Mansfield Bancorp, Inc. ("Mansfield"), and its wholly
owned subsidiary, Peoples State Bank of Mansfield ("Peoples") in Mansfield,
Mahomet and Weldon, Illinois for a total cost of approximately $24 million in
cash with no Company stock to be issued. On May 1, 2006, the Company completed
the acquisition of Mansfield and Peoples. As of April 30, 2006, Mansfield had
consolidated assets of $127 million, consolidated total deposits of $111 million
and consolidated stockholders' equity of $15 million. The Company financed the
purchase price through a dividend of $5 million from First Mid Bank, issuance of
$10 million of trust preferred securities and a loan of the balance from The
Northern Trust Company. See discussion under the heading "Repurchase Agreements
and Other Borrowings" for details regarding this financing. The Company expects
the acquisition to be accretive to earnings in 2006, and that it will be able to
reduce the annual expenses of the acquired operations by approximately 20-25%
after conversion of Peoples into First Mid Bank which is expected to occur in
the third quarter of 2006.
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):
Three months ended Three months ended
March 31, 2006 March 31, 2005
------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------
ASSETS
Interest-bearing deposits $ 271 $ 3 4.49% $ 1,644 $ 10 2.47%
Federal funds sold 1,550 17 4.45% 12,391 69 2.26%
Investment securities
Taxable 136,487 1,390 4.07% 147,942 1,380 3.73%
Tax-exempt (1) 14,708 163 4.43% 22,200 183 3.30%
Loans (2)(3) 635,351 10,286 6.57% 589,492 8,782 6.04%
------------------------------------------------------------------------
Total earning assets 788,367 11,859 6.10% 773,669 10,424 5.46%
Cash and due from banks 16,383 18,701
Premises and equipment 15,201 15,150
Other assets 23,479 22,688
Allowance for loan losses (4,746) (4,697)
------------ ---------------
Total assets $838,684 $825,511
============ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
Demand deposits $224,589 $ 1,011 1.83% $231,657 $ 554 .97%
Savings deposits 56,722 62 .44% 60,359 58 .39%
Time deposits 270,963 2,376 3.56% 268,847 1,903 2.87%
Securities sold under agreements to repurchase 51,405 481 3.79% 61,665 283 1.86%
FHLB advances 46,078 512 4.51% 25,667 355 5.61%
Federal funds purchased 3,311 38 4.65% - - -
Junior subordinated debt 10,310 190 7.47% 10,310 140 5.51%
Other debt 3,417 49 5.82% 5,867 56 3.87%
------------------------------------------------------------------------
Total interest-bearing liabilities 666,795 4,719 2.87% 664,372 3,349 2.04%
Non interest-bearing demand deposits 93,486 86,390
Other liabilities 5,040 4,835
Stockholders' equity 73,363 69,914
------------ ---------------
Total liabilities & equity $838,684 $825,511
============ ===============
Net interest income $ 7,140 $ 7,075
============ ===========
Net interest spread 3.23% 3.42%
Impact of non-interest bearing funds .43% .29%
----------- -------------
Net yield on interest- earning assets 3.66% 3.71%
=========== ============
(1) The tax-exempt income is not recorded on a tax equivalent basis.
(2) Nonaccrual loans have been included in the average balances.
(3) Includes loans held for sale.
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 three months ended
March 31, 2006, compared to the same period in 2005 (in thousands):
For the three months ended March 31,
2006 compared to 2005
Increase / (Decrease)
Total
Change Volume (1) Rate (1)
-------------------------------------------
Earning Assets:
Interest-bearing deposits $ (7) $ (37) $ 30
Federal funds sold (52) (282) 230
Investment securities:
Taxable 10 (457) 467
Tax-exempt (2) (20) (72) 52
Loans (3) 1,504 722 782
------------------------------------------
Total interest income 1,435 (182) 1,617
-------------------------------------------
Interest-Bearing Liabilities:
Interest-bearing deposits
Demand deposits 457 (118) 575
Savings deposits 4 (18) 22
Time deposits 473 15 458
Securities sold under
agreements to repurchase 198 (303) 501
FHLB advances 157 582 (425)
Federal funds purchased 38 38 -
Junior subordinated debt 50 - 50
Other debt (7) (107) 100
------------------------------------------
Total interest expense 1,370 89 1,281
------------------------------------------
Net interest income $ 65 $(271) $ 336
==========================================
(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) The tax-exempt income is not recorded on a tax-equivalent basis.
(3) Nonaccrual loans have been included in the average balances.
Net interest income increased $65,000, or .9% to $7.14 million for the three
months ended March 31, 2006, from $7.08 million for the same period in 2005. The
increase in net interest income was due to an increase in rates and growth in
earning assets, primarily composed of loan growth, which was largely offset by
an increase in the cost of interest-bearing liabilities.
For the three months ended March 31, 2006, average earning assets increased by
$14.7 million, or 1.9%, and average interest-bearing liabilities increased $2.4
million, or .4%, compared with average balances for the same period in 2005. The
changes in average balances for these periods are shown below:
> Average loans increased by $45.9 million or 7.8%.
> Average securities decreased by $18.9 million or 11.1%.
> Average interest-bearing deposits decreased by $8.6 million or 1.5%.
> Average securities sold under agreements to repurchase decreased by $10.3
million or 16.7%.
> Average borrowings and other debt increased by $21.3 million or 50.9%.
> Net interest margin decreased to 3.66% for the first three months of 2006
from 3.71% for the first three months of 2005.
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 3.70% for the first three months of 2006 and
3.76% for the first three months of 2005. The TE adjustments to net interest
income for March 31, 2006 and 2005 were $84,000 and $94,000, respectively.
Provision for Loan Losses
The provision for loan losses for the three months ended March 31, 2006 and 2005
was $193,000 and $187,000, respectively. Nonperforming loans decreased from $3.7
million as of March 31, 2005 to $3.1 million as of March 31, 2006. Net
charge-offs were $112,000 for the three months ended March 31, 2006 compared to
$71,000 during the same period in 2005. 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 three
months ended March 31, 2006 and 2005 (in thousands):
Three months ended March 31
2006 2005 $ Change
------------- ------------- -------------
Trust $609 $636 $ (27)
Brokerage 92 97 (5)
Insurance commissions 576 511 65
Service charges 1,150 1,034 116
Security gains (1) 173 (174)
Mortgage banking 67 153 (86)
Other 640 572 68
------------- ------------- -------------
Total other income $3,133 $3,176 $ (43)
============= ============= =============
Following are explanations for the three months ended March 31, 2006 compared to
the same period in 2005:
> Trust revenues decreased $27,000 or 4.2% to $609,000 from $636,000. Trust
assets, at market value, were $411 million at March 31, 2006 compared to
$384 million at March 31, 2005. The decrease in trust revenues was due to
non-recurring executor and sales fees received in the first quarter of 2005
that were not received in 2006.
> Revenues from brokerage decreased $5,000 or 5.2% to $92,000 from $97,000
due to a reduction in the number of transactions.
> Insurance commissions increased $65,000 or 12.7% to $576,000 from $511,000
due to an increase in commissions received on sales of business property
and casualty insurance.
> Fees from service charges increased $116,000 or 11.2% to $1,150,000 from
$1,034,000. This was primarily the result of an increase in the number of
overdrafts and an increase in the per overdraft fee to $25 from $22.50.
> The sale of securities during the three months ended March 31, 2006
resulted in net securities losses of $1,000 compared to the three months
ended March 31, 2005 which resulted in securities gains of $173,000.
> Mortgage banking income decreased $86,000 or 56.2% to $67,000 from
$153,000. This decrease was due to the decreased volume of fixed rate loans
originated and sold by First Mid Bank. Loans sold balances were as follows:
> $6.1 million (representing 62 loans) for the first quarter of 2006.
> $13.6 million (representing 129 loans) for the first quarter of 2005.
First Mid Bank generally releases the servicing rights on loans sold into
the secondary market.
> Other income increased $68,000 or 11.9% to $640,000 from $572,000.
This increase was primarily due to increased ATM service fees.
Other Expense
The major categories of other expense include salaries and employee benefits,
occupancy and equipment expenses and other operating expenses associated with
day-to-day operations. The following table sets forth the major components of
other expense for the three months ended March 31, 2006 and 2005 (in thousands):
Three months ended March 31,
2006 2005 $ Change
------------ ------------- -------------
Salaries and benefits $ 3,563 $ 3,474 $ 89
Occupancy and equipment 1,136 1,036 100
Amortization of intangibles 138 142 (4)
Stationery and supplies 135 139 (4)
Legal and professional fees 287 386 (99)
Marketing and promotion 176 123 53
Other operating expenses 1,094 1,006 88
------------ ------------- -------------
Total other expense $ 6,529 $ 6,306 $ 223
============ ============= =============
Following are explanations for the three months ended March 31, 2006 compared to
the same period in 2005:
> Salaries and employee benefits, the largest component of other expense,
increased $89,000 or 2.6% to $3,563,000 from $3,474,000. This increase is
due to merit increases for continuing employees and $49,000 of additional
compensation expense recorded in accordance with the provisions of SFAS
123R. There were 315 full-time equivalent employees at March 31, 2006
compared to 318 at March 31, 2005.
> Occupancy and equipment expense increased $100,000 or 9.7% to $1,136,000
from $1,036,000 due to an increase in occupancy expenses for the new office
location of Checkley and the Highland branch facility that were opened in
2005.
> Expense for amortization of intangible assets decreased $4,000 or 2.8% to
$138,000 from $142,000.
> Other operating expenses increased $88,000 or 8.7% to $1,094,000 in 2006
from $1,006,000 in 2005 due to increases in various expenses including ATM
and bankcard expenses which were $25,000 greater in 2006 than 2005.
> All other categories of operating expenses decreased a net of $50,000 or
7.7% to $598,000 from $648,000. The decrease was primarily due to decreases
in various professional fees partially offset by increases in marketing and
promotion expenses.
Income Taxes
Total income tax expense amounted to $1,147,000 (32.3% effective tax rate) for
the three months ended March 31, 2006, compared to $1,323,000 (35.2% effective
tax rate) for the same period in 2005. The change in the effective tax rate in
2006 is due to a $142,000 reduction in the state tax expense accrual as a result
of amending the 2004 state income tax return for a greater deduction in
enterprise zone interest filed during the first quarter of 2006. This resulted
in a $92,000 net reduction in tax expense.
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, including loans held for sale, as of March 31, 2006 and December
31, 2005 (in thousands):
March 31, December 31,
2006 2005
-----------------------------------
Real estate - residential $119,655 $117,204
Real estate - agricultural 51,037 50,730
Real estate - commercial 287,965 282,501
------------------------------------
Total real estate - mortgage 458,657 450,435
Commercial and agricultural 146,507 150,598
Installment 34,243 34,385
Other 2,454 2,715
------------------------------------
Total loans $641,861 $638,133
===================================
Overall loans increased $3.7 million, or .6% primarily as a result of an
increase in residential and commercial real estate loans offset by a decrease in
commercial and agricultural operating loans. Total real estate mortgage loans
have averaged approximately 71% 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 $777,000 and $1,778,000
as of March 31, 2006 and December 31, 2005, respectively.
At March 31, 2006, the Company had loan concentrations in agricultural
industries of $89.7 million, or 14%, of outstanding loans and $92.3 million, or
14.5%, at December 31, 2005. In addition, the Company had loan concentrations in
the following industries as of March 31, 2006 compared to December 31, 2005
(dollars in thousands):
March 31, 2006 December 31, 2005
Principal % Outstanding Principal % Outstanding
balance loans Balance loans
---------------- --------------- ----------------- ---------------
Operators of non-residential
buildings $22,886 3.57% $22,446 3.52%
Apartment building owners 40,822 6.36% 40,843 6.40%
Motels, hotels & tourist courts 29,191 4.55% 28,054 4.40%
Subdividers & developers 27,550 4.29% 26,397 4.14%
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 March 31,
2006, by maturities (in thousands):
Maturity (1)
Over 1
One year through Over
or less (2) 5 years 5 years Total
----------------------------------------------------------------
Real estate - residential $ 54,123 $ 55,020 $ 10,512 $119,655
Real estate - agricultural 10,006 33,215 7,816 51,037
Real estate - commercial 63,016 201,025 23,924 287,965
----------------------------------------------------------------
Total real estate - mortgage 127,145 289,260 42,252 458,657
Commercial and agricultural 94,752 48,182 3,573 146,507
Installment 16,484 17,469 290 34,243
Other 687 1,435 332 2,454
----------------------------------------------------------------
Total loans $239,068 $356,346 $ 46,447 $641,861
================================================================
(1) Based on scheduled principal repayments.
(2) Includes demand loans, past due loans and overdrafts.
As of March 31, 2006, loans with maturities over one year consisted of
approximately $322.0 million fixed rate loans and $80.8 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 March 31, 2006 and December 31, 2005 (in thousands):
March 31, December 31,
2006 2005
------------------------------
Nonaccrual loans $3,062 $3,458
Renegotiated loans which are performing
in accordance with revised terms - -
------------------------------
Total nonperforming loans $3,062 $3,458
==============================
The $396,000 decrease in nonaccrual loans during the three months ended March
31, 2006 resulted from the net of $292,000 of loans put on nonaccrual status,
$531,000 of loans brought current or paid-off, $25,000 of loans transferred to
other real estate owned and $132,000 of loans charged-off.
Interest income that would have been reported if nonaccrual and renegotiated
loans had been performing totaled $35,000 and $34,000 for the quarters ended
March 31, 2006 and 2005, respectively.
Loan Quality and Allowance for Loan Losses
The allowance for loan losses represents management's estimate of the reserve
necessary to adequately account for probable losses that could ultimately be
realized from current loan exposures. The provision for loan losses is the
charge against current earnings that is determined by management as the amount
needed to maintain an adequate allowance for loan losses. In determining the
adequacy of the allowance for loan losses, and therefore the provision to be
charged to current earnings, management relies predominantly on a disciplined
credit review and approval process that extends to the full range of the
Company's credit exposure. The review process is directed by overall lending
policy and is intended to identify, at the earliest possible stage, borrowers
who might be facing financial difficulty. Once identified, the magnitude of
exposure to individual borrowers is quantified in the form of specific
allocations of the allowance for loan losses. Management considers collateral
values and guarantees in the determination of such specific allocations.
Additional factors considered by management in evaluating the overall adequacy
of the allowance include historical net loan losses, the level and composition
of nonaccrual, past due and renegotiated loans, trends in volumes and terms of
loans, effects of changes in risk selection and underwriting standards or
lending practices, lending staff changes, concentrations of credit, industry
conditions and the current economic conditions in the region where the Company
operates. Management considers the allowance for loan losses a critical
accounting policy.
Management recognizes 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 March 31, 2006, the Company's loan portfolio included
$89.7 million of loans to borrowers whose businesses are directly related to
agriculture. The balance decreased $2.6 million from $92.3 million at December
31, 2005. 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.
In addition, the Company has $29.2 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
non-performing loans to this business segment and potentially in loan losses.
The Company also has $22.9 million of loans to operators of non-residential
buildings, $40.8 million of loans to apartment building owners and $27.6 million
of loans to subdividers and developers. A significant widespread decline in real
estate values could result in an increase in non-performing loans to this
segment and potentially in loan losses.
Analysis of the allowance for loan losses as of March 31, 2006 and 2005, and of
changes in the allowance for the three-month periods ended March 31, 2006 and
2005, is as follows (dollars in thousands):
Three months ended March 31,
2006 2005
-----------------------------
Average loans outstanding, net of unearned income $635,351 $589,492
Allowance-beginning of period $ 4,648 $ 4,621
Charge-offs:
Real estate-mortgage 24 -
Commercial, financial & agricultural 123 97
Installment 4 50
Other 30 -
-----------------------------
Total charge-offs 181 147
Recoveries:
Real estate-mortgage 2 -
Commercial, financial & agricultural 21 61
Installment 10 15
Other 36 -
-----------------------------
Total recoveries 69 76
-----------------------------
Net charge-offs (recoveries) 112 71
Provision for loan losses 193 187
-----------------------------
Allowance-end of period $ 4,729 $ 4,737
=============================
Ratio of annualized net charge-offs to
average loans .07% .05%
=============================
Ratio of allowance for loan losses to loans
outstanding (less unearned interest
at end of period) .74% .80%
=============================
Ratio of allowance for loan losses to
nonperforming loans 154.4% 127.1%
=============================
During the first three months of 2006, the Company had charge-offs of $100,000
on three commercial loans of a single borrower. During the first three months of
2005, the Company had charge-offs of $53,000 on two agricultural loans of a
single borrower and a charge-off of $44,000 on a commercial loan of a single
borrower.
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 March
31, 2006 and December 31, 2005 (dollars in thousands):
March 31, 2006 December 31, 2005
----------------------------- ---------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Yield
-------------- -------------- ------------- -------------
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $103,406 3.73% $108,506 3.74%
Obligations of states and political 14,397 4.49% 16,829 4.54%
subdivisions
Mortgage-backed securities 18,875 4.39% 20,046 4.34%
Other securities 13,068 5.99% 13,083 6.21%
-------------- -------------- ------------- -------------
Total securities $149,746 4.08% $158,464 4.10%
============== ============== ============= =============
At March 31, 2006, the Company's investment portfolio showed a decrease of $8.7
million from 2005 as various securities matured during the first quarter of 2006
and were not immediately replaced. The amortized cost, gross unrealized gains
and losses and estimated fair values for available-for-sale and held-to-maturity
securities by major security type at March 31, 2006 and December 31, 2005 were
as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------- --------------- ---------------- --------------
March 31, 2006
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. government corporations & agencies $103,406 $ - $(1,609) $101,797
Obligations of states and political subdivisions 13,105 197 (43) 13,259
Mortgage-backed securities 18,875 24 (512) 18,387
Federal Home Loan Bank stock 5,557 - - 5,557
Other securities 7,511 489 - 8,000
--------------- --------------- ---------------- --------------
Total available-for-sale $148,454 $ 710 $(2,164) $147,000
=============== =============== ================ ==============
Held-to-maturity:
Obligations of states and political subdivisions $ 1,292 $ 24 $ - $1,316
=============== =============== ================ ==============
December 31, 2005
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. government corporations & agencies $ 108,506 $ 31 $(1,500) $ 107,037
Obligations of states and political subdivisions 15,417 239 (50) 15,606
Mortgage-backed securities 20,046 25 (442) 19,629
Federal Home Loan Bank stock 5,557 - - 5,557
Other securities 7,526 486 - 8,012
--------------- --------------- ---------------- --------------
Total available-for-sale
$157,052 $ 781 $(1,992) $155,841
=============== =============== ================ ==============
Held-to-maturity:
Obligations of states and political subdivisions $ 1,412 $ 30 $ - $ 1,442
=============== =============== ================ ==============
At March 31, 2006, there were five mortgage-backed securities with a fair value
of $16,238,000 and an unrealized loss of $509,000, and twelve obligations of
U.S. government agencies with a fair value of $63,650,230 and an unrealized loss
of $1,262,000, in a continuous unrealized loss position for twelve months or
more. At March 31, 2005, there was one mortgage-backed security with a fair
value of $3,375,000 and an unrealized loss of $46,000 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 March 31, 2006 or December 31,
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 March 31, 2006 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 $30,224 $ 54,769 $13,415 $ 4,998 $103,406
Obligations of state and
political subdivisions 1,478 4,574 5,046 2,007 13,105
Mortgage-backed securities 1,292 17,583 - - 18,875
Federal Home Loan Bank stock - - - 5,557 5,557
Other securities - - 2,500 5,011 7,511
--------------------------------------------------------------------------------
Total investments $32,994 $76,926 $20,961 $17,573 $148,454
================================================================================
Weighted average yield 3.04% 4.10% 4.85% 4.96% 4.07%
Full tax-equivalent yield 3.14% 4.22% 5.36% 5.18% 4.25%
================================================================================
Held-to-maturity:
Obligations of state and
political subdivisions $ 145 $ 505 $ 140 $ 502 $ 1,292
================================================================================
Weighted average yield 5.36% 5.54% 5.75% 5.35% 5.47%
Full tax-equivalent yield 7.92% 8.19% 8.51% 7.91% 8.09%
================================================================================
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 March 31, 2006.
Investment securities carried at approximately $123,138,000 and $136,787,000 at
March 31, 2006 and December 31, 2005, respectively, were pledged to secure
public deposits and repurchase agreements and for other purposes as permitted or
required by law.
Deposits
Funding of the Company's earning assets is substantially provided by a
combination of consumer, commercial and public fund deposits. The Company
continues to focus its strategies and emphasis on retail core deposits, the
major component of funding sources. The following table sets forth the average
deposits and weighted average rates for the three months ended March 31, 2006
and for the year ended December 31, 2005 (dollars in thousands):
March 31, 2006 December 31, 2005
-----------------------------------------------
Weighted Weighted
Average Average Average Average
Balance Rate Balance Rate
-----------------------------------------------
Demand deposits:
Non-interest-bearing $ 93,486 - $ 89,593 -
Interest-bearing 224,589 1.83% 229,532 1.30%
Savings 56,722 .44% 59,830 .41%
Time deposits 270,963 3.56% 271,161 3.13%
-----------------------------------------------
Total average deposits $645,760 2.17% $650,116 1.80%
===============================================
March 31, December 31,
(dollars in thousands) 2006 2005
-------------------------------------------------------------------------
High month-end balances of total deposits $654,060 $677,872
Low month-end balances of total deposits 651,392 627,107
The following table sets forth the maturity of time deposits of $100,000 or more
at March 31, 2006 and December 31, 2005 (in thousands):
March 31, December 31,
2006 2005
--------------------------------------
3 months or less $28,434 $ 15,947
Over 3 through 6 months 26,613 23,593
Over 6 through 12 months 25,447 34,944
Over 12 months 28,178 28,950
--------------------------------------
Total $108,672 $103,434
======================================
During the first three months of 2006, the balance of time deposits of $100,000
or more increased by $5.2 million. The increase in balances was primarily
attributable to an increase in brokered CD balances and to a promotion run in
the first quarter of 2006.
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 $40.8 million and $38.4 million as of March 31, 2006
and December 31, 2005, respectively. The Company also maintained time deposits
for the State of Illinois with balances of $3.2 million and $3.4 million as of
March 31, 2006 and December 31, 2005, 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 March 31, 2006 and December 31, 2005 is presented below
(dollars in thousands):
March 31, December 31,
2006 2005
-----------------------------
Federal funds purchased $ 2,000 $ 4,000
Securities sold under agreements to repurchase 46,606 67,380
Federal Home Loan Bank advances:
Overnight 19,500 12,000
Fixed term - due in one year or less - 3,000
Fixed term - due after one year 30,000 20,000
Debt:
Loans due in one year or less 1,500 5,500
Loans due after one year - -
------------- --------------
Junior subordinated debentures 10,310 10,310
------------- --------------
Total $109,916 $122,190
============= ==============
Average interest rate at end of period 4.61% 4.27%
Maximum outstanding at any month-end
Federal funds purchased $ 2,000 $ 4,000
Securities sold under agreements to repurchase 50,072 67,380
Federal Home Loan Bank advances:
Overnight 19,500 12,014
Fixed term - due in one year or less 3,000 20,000
Fixed term - due after one year 30,000 20,000
Debt:
Loans due in one year or less 4,500 6,200
Loans due after one year - 200
Junior subordinated debentures 10,310 10,310
Averages for the period (YTD)
Federal funds purchased $ 3,311 $ 874
Securities sold under agreements to repurchase 51,405 57,799
Federal Home Loan Bank advances:
Overnight 14,722 2,447
Fixed term - due in one year or less 2,633 13,575
Fixed term - due after one year 28,723 15,523
Debt:
Loans due in one year or less 3,417 5,607
Loans due after one year - 104
Junior subordinated debentures 10,310 10,310
------------- --------------
Total $ 114,521 $106,239
============= ==============
Average interest rate during the period 4.43% 3.74%
FHLB advances represent borrowings by First Mid Bank to economically fund loan
demand. The fixed term advances consist of $30 million as follows:
> $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
> $5 million advance at 4.00% with a 5-year maturity, due January 5,
2011
> $5 million advance at 4.03% with a 5-year maturity, due January 20,
2011
> $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 March 31, 2006, outstanding debt balances include $1,500,000 on a revolving
credit agreement with The Northern Trust Company with a floating interest rate
of 1.25% over the federal funds rate (5.95% as of March 31, 2006) that was set
to mature on October 21, 2006. This loan was renegotiated on October 22, 2005
and had a maximum available balance of $15 million. The loan was secured by all
of the common stock of First Mid Bank. The borrowing agreement contained
requirements for the Company and First Mid Bank to maintain various operating
and capital ratios and also contained requirements for prior lender approval for
certain sales of assets, merger activity, the acquisition or issuance of debt
and the acquisition of treasury stock. The Company and First Mid Bank were in
compliance with the existing covenants at March 31, 2006 and 2005 and December
31, 2005.
Subsequently, the Company renegotiated and amended and restated the existing
revolving credit agreement on April 24, 2006 in conjunction with obtaining
financing for the acquisition of Mansfield Bancorp, Inc. The new revolving
credit agreement has a maximum available balance of $22.5 million with a term of
3 years from the date of closing. The interest rate is floating at 1.25% over
the federal funds rate when the ratio of senior debt to Tier 1 capital is equal
to or below 35% as of the end of the previous quarter. The interest rate is
floating at 1.50% over the federal funds rate when the ratio of senior debt to
Tier 1 capital is above 35%. The loan is secured by the common stock of First
Mid Bank and subject to a borrowing agreement containing requirements for the
Company and First Mid Bank similar to those of the prior agreement including
requirements for operating and capital ratios.
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 ("Trust I"), a statutory business trust and wholly-owned unconsolidated
subsidiary of the Company, as part of a pooled offering. The Company established
Trust I for the purpose of issuing the trust preferred securities. The $10
million in proceeds from the trust preferred issuance and an additional $310,000
for the Company's investment in common equity of Trust I, 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 Trust I
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 (7.40% and 6.95% at
March 31, 2006 and December 31, 2005, respectively).The Company used the
proceeds of the offering for general corporate purposes.
The trust preferred securities issued by 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.
Subsequently, on April 26, 2006, the Company completed the issuance and sale of
$10 million of fixed/floating rate trust preferred securities through First
Mid-Illinois Statutory Trust II ("Trust II"), a statutory business trust and
wholly-owned unconsolidated subsidiary of the Company, as part of a pooled
offering. The Company established Trust II for the purpose of issuing the trust
preferred securities. The $10 million in proceeds from the trust preferred
issuance and an additional $310,000 for the Company's investment in common
equity of Trust II, 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 2036, bear interest at fixed rate of 6.98%
(three-month LIBOR plus 160 basis points) paid quarterly and converts to
floating rate (LIBOR plus 160 basis points) after June 15, 2011. The net
proceeds to the Company were used for general corporate purposes, including the
Company's acquisition of Mansfield Bancorp, Inc. The trust preferred securities
issued by Trust II will count as Tier 1 capital up to the regulatory limit of
25% of core capital with the remainder to count as Tier 2 capital.
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 March 31, 2006 (dollars in thousands):
Rate Sensitive Within Fair
-------------------------------------------------------------------------------------
1 year 1-2 years 2-3 years 3-4 years 4-5 years Thereafter Total Value
----------- ------------ ------------ ----------- ----------- ------------ ---------- -----------
Interest-earning assets:
Federal funds sold and other
interest-bearing deposits $ 2,345 $ - $ - $ - $ - $ - $ 2,345 $ 2,345
Taxable investment securities 36,284 14,625 9,494 14,675 14,817 43,847 133,742 133,742
Nontaxable investment securities 1,633 968 1,043 1,495 1,631 7,780 14,550 14,574
Loans 288,259 92,862 125,933 69,157 48,674 16,976 641,861 623,859
----------- ------------ ------------ ----------- ----------- ------------ ---------- -----------
Total $328,521 $108,455 $136,470 $85,327 $65,122 $68,603 $792,498 $774,520
=========== ============ ============ =========== =========== ============ ========== ===========
Interest-bearing liabilities:
Savings and N.O.W. accounts $ 38,770 $ 10,511 $ 10,977 $ 16,103 $ 16,656 $ 99,981 $192,998 $199,861
Money market accounts 65,355 1,808 1,858 2,411 2,461 13,008 86,901 88,156
Other time deposits 184,534 73,438 6,077 5,240 7,692 39 277,020 273,086
Short-term borrowings/debt 69,606 - - - - - 69,606 69,607
Long-term borrowings/debt - 7,000 - 5,000 23,310 5,000 40,310 40,285
----------- ------------ ------------ ----------- ----------- ------------ ---------- -----------
Total $358,265 $ 92,757 $18,912 $28,754 $ 50,119 $ 118,028 $666,835 $670,995
=========== ============ ============ =========== =========== ============ ========== ===========
Rate sensitive assets -
rate sensitive liabilities $(29,744) $ 15,698 $117,558 $56,573 $15,003 $(49,425) $125,663
Cumulative GAP $(29,744) $(14,046) $103,512 $160,085 $175,088 $125,663
Cumulative amounts as % of
total rate sensitive assets -3.8% 2.0% 14.8% 7.1% 1.9% -6.2%
Cumulative Ratio -3.8% -1.8% 13.1% 20.2% 22.1% 15.9%
The static GAP analysis shows that at March 31, 2006, the Company was liability
sensitive, on a cumulative basis, through the twelve-month time horizon. This
indicates that future increases in interest rates, if any, could have a adverse
effect on net interest income. Conversely, future decreases in interest rates
could have an positive 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 March 31, 2006, the Company's stockholders' equity had decreased $73,000 or
..1% to $72,253,000 from $72,326,000 as of December 31, 2005. During the first
three months of 2006, net income contributed $2,404,000 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
$148,000, net of tax. Additional purchases of treasury stock (80,031 shares at
an average cost of $41.32 per share) decreased stockholders' equity by
approximately $3,307,000.
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 March 31, 2006 and December 31, 2005, 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 March 31, 2006, First Mid Bank had capital ratios that qualified it for
treatment 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).
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ------------ ------------ ------------ ------------ ------------
March 31,2005
Total Capital (to risk-weighted assets)
Company $76,194 11.86% $51,376 > 8.00% N/A N/A
-
First Mid Bank 71,614 11.25% 50,948 > 8.00% $63,685 >10.00%
- -
Tier 1 Capital (to risk-weighted assets)
Company 71,466 11.13% 25,688 > 4.00% N/A N/A
-
First Mid Bank 66,886 10.50% 25,474 > 4.00% 38,211 > 6.00%
- -
Tier 1 Capital (to average assets)
Company 71,466 8.64% 33,080 > 4.00% N/A N/A
-
First Mid Bank 66,886 8.13% 32,896 > 4.00% 41,120 > 5.00%
- -
December 31, 2005
Total Capital (to risk-weighted assets)
Company $75,901 11.87% $ 51,163 > 8.00% N/A N/A
-
First Mid Bank 73,913 11.66 50,726 > 8.00% $63,407 >10.00%
- -
Tier 1 Capital (to risk-weighted assets)
Company 71,253 11.14 25,581 > 4.00% N/A N/A
-
First Mid Bank 69,265 10.92 25,363 > 4.00% 38,044 > 6.00%
- -
Tier 1 Capital (to average assets)
Company 71,253 8.55 33,330 > 4.00% N/A N/A
-
First Mid Bank 69,265 8.36 33,152 > 4.00% 41,440 > 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. The Company
expects to continue to have capital ratios meeting regulatory requirements for
treatment as well-capitalized following the acquisition of Mansfield Bancorp,
Inc.
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 2005 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 March 31, 2006 to 8% of
the Company's common stock plus $28 million of additional shares.
During the three-month period ending March 31, 2006, the Company repurchased
80,031 shares at a total cost of approximately $3,307,000. Since 1998, the
Company has repurchased a total of 1,316,890 shares at a total price of
approximately $33,058,000. As of March 31, 2006, the Company was authorized per
all repurchase programs to purchase $1,149,000 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 March 31, 2006, First Mid Bank's ratios of total
capital to risk-weighted assets of 11.25% and Tier 1 capital to total
average assets of 8.13% met 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 March 31, 2006, the excess collateral at the Federal Home Loan Bank will
support approximately $48.5 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, as of March 31, 2006, the Company had a revolving credit
agreement in the amount of $15 million with The Northern Trust Company with
an outstanding balance of $1,500,000 and $13,500,000 in available funds.
The Company renegotiated and amended and restated the existing revolving
credit agreement on April 24, 2006 in conjunction with obtaining financing
for the acquisition of Mansfield Bancorp, Inc. The new revolving credit
agreement has a maximum available balance of $22.5 million with a term of
three years from the date of closing. The interest rate is floating at
1.25% over the federal funds rate when the ratio of senior debt to Tier 1
capital is equal to or below 35% as of the end of the previous quarter. The
interest rate is floating at 1.50% over the federal funds rate when the
ratio of senior debt to Tier 1 capital is above 35%.
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. treasury and government agency securities; and
> operating activities, including scheduled debt repayments and dividends to
stockholders.
The following table summarizes significant contractual obligations and other
commitments at March 31, 2006 (in thousands):
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
-------------- --------------- --------------- --------------- --------------
Time deposits $277,020 $184,473 $ 79,577 $12,932 $ 38
Debt 11,810 1,500 - - 10,310
Other borrowings 96,106 66,106 7,000 5,000 18,000
Operating leases 4,058 433 920 799 1,906
Supplemental retirement 774 50 100 100 524
-------------- --------------- --------------- --------------- --------------
$389,768 $252,562 $ 87,597 $18,831 $30,778
============== =============== =============== =============== ==============
For the three-month period ended March 31, 2006, net cash of $4.7 million and
$4.3 million was provided from operating activities and investing activities,
respectively, while financing activities used net cash of $11.3 million. In
total, cash and cash equivalents decreased by $2.3 million since year-end 2005.
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 ("Trust I"), a statutory business trust and wholly-owned unconsolidated
subsidiary of the Company, as part of a pooled offering. The Company established
Trust I for the purpose of issuing the trust preferred securities. The $10
million in proceeds from the trust preferred issuance and an additional $310,000
for the Company's investment in common equity of Trust I, 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 Trust I
mature in 2034, bear interest at nine-month LIBOR plus 280 basis points, reset
quarterly, and are callable, at the option of the Company, at par on or after
April 7, 2009 (7.40% and 6.95% at March 31, 2006 and December 31, 2005,
respectively). The net proceeds to the Company were used for general corporate
purposes, including the Company's acquisition of Mansfield Bancorp, Inc.
Subsequently, on April 26, 2006, the Company completed the issuance and sale of
$10 million of fixed/floating rate trust preferred securities through First
Mid-Illinois Statutory Trust II ("Trust II"), a statutory business trust and
wholly-owned unconsolidated subsidiary of the Company, as part of a pooled
offering. The Company established Trust II for the purpose of issuing the trust
preferred securities. The $10 million in proceeds from the trust preferred
issuance and an additional $310,000 for the Company's investment in common
equity of Trust II, 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 2036, bear interest at fixed rate of 6.98%
(three-month LIBOR plus 160 basis points) paid quarterly and converts to
floating rate (LIBOR plus 160 basis points) after June 15, 2011. The Company
used the proceeds of the offering for the acquisition of Mansfield Bancorp, Inc
and general corporate purposes.
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 March 31, 2006 and December 31, 2005 were as follows (in
thousands):
March 31, December 31,
2006 2005
-------------- --------------
Unused commitments, including lines of credit:
Commercial real estate $ 27,315 $ 28,745
Commercial operating 46,890 46,012
Home equity 17,377 16,160
Other 21,746 23,178
-------------- --------------
Total $113,328 $114,095
============== ==============
Standby letters of credit $ 3,543 $ 3,694
============== ==============
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, 2005. 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, 2005.
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 1A. RISK FACTORS
Various risks and uncertainties, some of which are difficult to predict and
beyond the Company's control, could negatively impact the Company. As a
financial institution, the Company is exposed to interest rate risk, liquidity
risk, credit risk, operational risk, risks from economic or market conditions,
and general business risks among others. Adverse experience with these or other
risks could have a material impact on the Company's financial condition and
results of operations, as well as the value of its common stock. There has been
no material change to the risk factors described in the Company's Annual Report
on Form 10-K for the year ended December 31, 2005.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------
(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
Period Shares Purchased Paid per Share or Programs Programs
- ---------------------- --------------------- ----------------------- ---------------------------- -------------------------
January 1, 2006 -
January 31, 2006 - - - $4,456,000
February 1, 2006 -
February 28, 2006 36,326 $41.24 36,326 $2,958,000
March 1, 2006 -
March 31, 2006 43,705 $41.39 43,705 $1,149,000
--------------------- ----------------------- ---------------------------- -------------------------
Total 80,031 $41.32 80,031 $1,149,000
===================== ======================= ============================ =========================
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: May 8, 2006
/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
- --------------------------------------------------------------------------------
4.1 The Registrant agrees to furnish to the Commission, upon request, a
copy of each instrument with respect to issues of long-term debt
involving a total amount which does not exceed 10% of the total assets
of the Registrant and its subsidiaries on a consolidated basis
11.1 Statement re: Computation of Earnings Per Share (Filed herewith on
page 7)
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: May 8, 2006
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: May 8, 2006
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 March 31, 2006 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: May 8, 2006
/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 March 31, 2006 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: May 8, 2006
/s/ Michael L. Taylor
Michael L. Taylor
Chief Financial Officer