UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER: 0-13368
FIRST MID-ILLINOIS BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 37-1103704
(State or other jurisdiction of (I.R.S. employer identification No.)
incorporation or organization)
1515 CHARLESTON AVENUE, MATTOON, ILLINOIS 61938
(Address and Zip Code of Principal Executive Offices)
(217) 234-7454
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
As of November 10, 1998, 2,008,887 common shares, $4.00 par value, were
outstanding.
PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS September 30, December 31,
(In thousands, except share data) 1998 1997
ASSETS
Cash and due from banks:
Non-interest bearing $ 17,409 $ 20,486
Interest bearing 496 250
Federal funds sold 10,950 5,925
Cash and cash equivalents 28,855 26,661
Investment securities:
Available-for-sale, at fair value 130,760 116,782
Held-to-maturity, at amortized cost (estimated fair
value of $3,605 and $3,057 at September 30, 1998
and December 31, 1997, respectively) 3,544 3,020
Loans 346,873 358,223
Less allowance for loan losses 2,837 2,636
Net loans 344,036 355,587
Premises and equipment, net 13,087 12,356
Intangible assets, net 7,978 8,550
Other assets 8,982 10,022
TOTAL ASSETS $537,242 $532,978
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing deposits $ 61,713 $ 53,599
Interest bearing deposits 382,985 403,999
Total deposits 444,698 457,598
Securities sold under agreements to repurchase 14,075 10,780
Federal Home Loan Bank advances 19,500 7,000
Long-term debt 5,075 6,200
Other liabilities 3,697 5,824
TOTAL LIABILITIES 487,045 487,402
Stockholders' Equity
Series A convertible preferred stock; no par value;
authorized 1,000,000 shares; issued 614 shares in
1998 and 620 shares in 1997 with stated value of
$5,000 per share 3,070 3,100
Common stock, $4 par value; authorized 6,000,000
shares in 1998 and 1997; issued 2,017,964 shares
in 1998 and 1,972,709 shares in 1997 8,072 7,891
Additional paid-in-capital 8,388 7,038
Retained earnings 30,390 27,271
Deferred compensation 915 -
Accumulated other comprehensive income 704 300
Less treasury stock at cost, 12,477 shares in
1998 and 2,000 shares in 1997 (1,342) (24)
TOTAL STOCKHOLDERS' EQUITY 50,197 45,576
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $537,242 $532,978
See accompanying notes to consolidated financial statements (unaudited).
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
1998 1997 1998 1997
INTEREST INCOME:
Loans $ 7,277 $ 7,662 $21,887 $22,363
Investment securities 1,930 1,851 5,855 5,631
Federal funds sold 122 44 283 122
Deposits with financial institutions 8 50 28 73
Total interest income 9,337 9,607 28,053 28,189
INTEREST EXPENSE:
Deposits 4,160 4,489 12,625 12,629
Securities sold under agreements
to repurchase 137 111 250 394
Federal Home Loan Bank advances 273 182 745 881
Federal funds purchased 1 10 17 25
Long-term debt 95 117 299 341
Total interest expense 4,666 4,909 13,936 14,270
Net interest income 4,671 4,698 14,117 13,919
Provision for loan losses 100 210 400 460
Net interest income after
provision for loan losses 4,571 4,488 13,717 13,459
OTHER INCOME:
Trust revenues 426 338 1,257 1,212
Brokerage revenues 85 126 239 346
Service charges 470 465 1,410 1,326
Securities gains(losses), net 52 - 64 (6)
Mortgage banking income 209 122 826 291
Other 264 245 799 736
Total other income 1,506 1,296 4,595 3,905
OTHER EXPENSE:
Salaries and employee benefits 2,153 1,950 6,384 5,868
Occupancy, furniture, equipment, net 754 741 2,192 2,099
Intangible asset amortization 191 179 573 518
Stationary and supplies 148 179 498 478
Legal and professional 258 234 680 619
Marketing and promotion 108 108 371 398
Other 628 545 1,988 1,655
Total other expense 4,240 3,936 12,686 11,635
Income before income taxes 1,837 1,848 5,626 5,729
Income taxes 574 663 1,832 2,040
Net income $ 1,263 $ 1,185 $ 3,794 $ 3,689
Per common share data:
Basic earnings per share $ .59 $ .57 $ 1.79 $ 1.81
Diluted earnings per share $ .56 $ .54 $ 1.68 $ 1.70
See accompanying notes to consolidated financial statements (unaudited).
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) NINE MONTHS ENDED
September 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,794 $ 3,689
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 400 460
Depreciation, amortization and accretion, net 1,537 1,366
(Gain)loss on sale of securities, net (64) 6
(Gain)loss on sale of fixed assets & real estate owned, net 171 (3)
Gain on sale of loans held for sale, net (634) (212)
Origination of loans held for sale (52,123) (17,437)
Proceeds from sale of loans held for sale 51,143 17,298
(Increase)decrease in other assets 925 (973)
Decrease in other liabilities (1,896) (280)
Net cash provided by operating activities 3,253 3,914
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of mortgage servicing rights (75) (62)
Purchases of premises and equipment (1,629) (1,097)
Net (increase)decrease in loans 12,765 (14,426)
Proceeds from sales of:
Securities available-for-sale 6,848 9,983
Proceeds from maturities of:
Securities available-for-sale 42,590 19,650
Securities held-to-maturity 420 155
Purchases of:
Securities available-for-sale (62,933) (26,958)
Securities held-to-maturity (799) (170)
Purchase of financial organization, net of cash - 22,416
Net cash provided by (used in) investing activities (2,813) 9,491
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase(decrease) in deposits (12,900) 14,657
Increase(decrease) in securities sold under
agreements to repurchase 3,295 (9,170)
Increase(decrease) in FHLB advances 12,500 (22,426)
Repayment of long-term debt (1,125) (750)
Proceeds from issuance of long-term debt - 1,000
Purchase of treasury stock (403) -
Proceeds from issuance of common stock 878 838
Dividends paid on preferred stock (16) (16)
Dividends paid on common stock (475) (425)
Net cash provided by (used in) financing activities 1,754 (16,292)
Increase(decrease) in cash & cash equivalents 2,194 (2,887)
Cash & cash equivalents at beginning of period 26,661 27,111
Cash and cash equivalents at end of period $28,855 $24,224
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $13,651 $14,623
Income taxes $ 2,088 $ 2,285
Loans transferred to real estate owned $ 537 $ 579
Dividends reinvested in common shares $ 623 $ 529
See accompanying notes to consolidated financial statements (unaudited).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting and Consolidation
The unaudited consolidated financial statements include the accounts of First
Mid-Illinois Bancshares, Inc. ("Registrant") and its wholly-owned subsidiaries:
Mid-Illinois Data Services, Inc. ("MIDS") and First Mid-Illinois Bank & Trust,
N.A. ("First Mid Bank") and its wholly-owned subsidiary First Mid-Illinois
Insurance Services, Inc. ("First Mid Insurance"). First Mid Insurance began
operations during the second quarter of 1998. 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 to present a fair statement of the results of the interim periods
ended September 30, 1998 and 1997, and all such adjustments are of a normal
recurring nature. The results of the interim periods ended September 30, 1998,
are not necessarily indicative of the results expected for the year ending
December 31, 1998.
The unaudited consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information required by generally accepted accounting principles for complete
financial statements and related footnote disclosures. These financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Registrant's 1997 Form 10-K.
STOCK SPLIT
On May 22, 1997, the Registrant declared a two-for-one stock split in the form
of a 100% stock dividend. Par value remained at $4 per share. All references
in the consolidated financial statements and notes thereto as to the number of
common shares, per common share amounts and market prices of the Registrant's
common stock have been restated giving retroactive recognition to the stock
split.
EARNINGS PER SHARE
Effective December 31, 1997, the Registrant adopted Financial Accounting
Standards Board's Statement No. 128, "EARNINGS PER SHARE" ("SFAS 128"). Income
for Basic Earnings per Share ("EPS") is adjusted for dividends attributable to
preferred stock and is based on the weighted average number of common shares
outstanding. Diluted EPS is computed by using the weighted average number of
common shares outstanding, increased by the assumed conversion of the
convertible preferred stock and the assumed conversion of the stock options.
The components of basic and diluted earnings per common share are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, 1998 1997 1998 1997
BASIC EARNINGS PER SHARE:
Net income $1,263,000 $1,185,000 $3,794,000 $3,689,000
Less preferred stock dividends (71,000) (72,000) (214,000) (215,000)
Net income available to
common stockholders $1,192,000 $1,113,000 $3,580,000 $3,474,000
Weighted average common shares
outstanding 2,008,549 1,945,720 1,996,937 1,919,264
Basic Earnings per Common Share $ .59 $ .57 $ 1.79 $ 1.81
DILUTED EARNINGS PER SHARE:
Net income available to
common stockholders $1,192,000 $1,113,000 $3,580,000 $3,474,000
Conversion of preferred stock 71,000 72,000 214,000 215,000
Net income available to common
stockholders after conversion $1,263,000 $1,185,000 $3,794,000 $3,689,000
Weighted average common shares
outstanding 2,008,549 1,945,720 1,996,937 1,919,264
Conversion of stock options 9,180 - 8,551 -
Conversion of preferred stock 248,179 250,604 249,440 250,604
Diluted weighted average common
shares outstanding 2,265,908 2,196,324 2,254,928 2,169,868
Diluted Earnings per Common Share $ .56 $ .54 $ 1.68 $ 1.70
COMPREHENSIVE INCOME
The Financial Accounting Standards Board has issued Statement No. 130,
"REPORTING COMPREHENSIVE INCOME" ("SFAS 130"), which is effective for fiscal
years beginning after December 31, 1997. This statement establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Registrant adopted SFAS 130 on January 1,
1998. The Registrant's comprehensive income is shown as follows:
(in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
September 30, 1998 1997 1998 1997
Net income $1,263 $1,185 $ 3,794 $ 3,689
Other comprehensive income, net of tax:
Unrealized gains during the period 388 281 446 205
Reclassification adjustment for net
(gains)losses realized in net income (34) - (42) 4
Comprehensive income $1,617 $1,466 $4,198 $3,898
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 Registrant and its subsidiaries for the three months ended and nine
months ended September 30, 1998 and 1997. 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
Registrant's pricing and fee trends, credit quality and outlook, new business
results, expansion plans, anticipated expenses and planned schedules for Year
2000 work. The Registrant 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 Registrant, 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 Registrant's market area and accounting principles,
policies and guidelines. With respect to the Registrant's Year 2000 work, such
uncertainties also include the Registrant's ability to continue to fund its
Year 2000 renovation and to retain capable staff through the completion of its
Year 2000 renovation and the ability of its vendors, clients, counter parties
and customers to complete Year 2000 renovation efforts on a timely basis and in
a manner that allows them to continue normal business operations or furnish
products, services or data to the Registrant without disruption, as well as the
Registrant's ability to accurately evaluate their readiness in this regard and,
where necessary, develop and implement effective contingency plans. These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Registrant and its business, including additional
factors that could materially affect the Registrant's financial results, is
included in the Registrant's filings with the Securities and Exchange
Commission.
OVERVIEW
Net income for the three months ended September 30, 1998, increased to
$1,263,000, up 6.6% from $1,185,000 for the same period of 1997. Diluted
earnings per share for the quarter increased $.02 per share to $.56 as compared
to $.54 per share earned in the same quarter of 1997.
Net income for the nine months ended September 30, 1998, increased to
$3,794,000, up 2.9% from $3,689,000 for the same period of 1997. Diluted
earnings per share for the period decreased 2 cents per share to $1.68 as
compared to $1.70 per share earned in the same period of 1997.A summary of
the factors which contributed to the changes in net income for the
three months and nine months ended September 30, 1998 is shown in Table 1.
TABLE 1 EFFECT ON EARNINGS
1998 VS 1997
(in thousands) THREE MONTHS NINE MONTHS
Net interest income $ (27) $ 198
Provision for loan losses 110 60
Other income, including
securities transactions 210 690
Other expenses (304) (1,051)
Income taxes 89 208
Increase in net income $ 78 $ 105
The following table shows the Registrant's annualized performance ratios for
the nine months ended September 30, 1998 compared to the performance ratios for
the year ended December 31, 1997:
SEPTEMBER 30, December 31,
1998 1997
Return on average assets .96% .90%
Return on average equity 10.50% 11.08%
Return on average common equity 10.59% 11.23%
Average equity to average assets 9.14% 8.11%
On March 7, 1997, the Registrant acquired the Charleston, Illinois branch
location and the deposit base of First of America Bank. This cash acquisition
added approximately $28 million to total deposits, $500,000 to loans,
$1.3 million to premises and equipment and $3.8 million to intangible assets.
The acquisition of the branch was accounted for using the purchase method of
accounting whereby the acquired assets and deposits of the branch were
recorded at their fair values as of the acquisition date. The operating
results have been combined with those of the Registrant since March 7, 1997.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The largest source of operating revenue for the Registrant 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 deposits.
For purposes of the following discussion and analysis, the interest earned on
tax-exempt securities is adjusted to an amount comparable to interest subject to
normal income taxes. The adjustment is referred to as the tax-equivalent ("TE")
adjustment. The Registrant's average daily 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):
TABLE 2 DISTRIBUTION OF CONSOLIDATED ASSETS, LIABILITIES AND STOCKHOLDERS'
EQUITY - INTEREST, RATES AND NET YIELDS
NINE MONTH ENDED YEAR ENDED
SEPTEMBER 30, 1998 <F4> DECEMBER 31, 1997
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
ASSETS:
Interest-bearing deposits $ 713 $ 37 5.24% $ 1,497 $ 75 5.01%
Federal funds sold 7,055 378 5.36% 4,254 230 5.41%
Investment securities
Taxable 112,941 7,048 6.24% 107,124 6,759 6.31%
Tax-exempt<F1> 15,248 1,150 7.54% 13,046 1,062 8.14%
Loans <F2><F3> 348,850 29,182 8.37% 355,167 30,040 8.46%
Total earning assets 484,807 37,795 7.80% 481,088 38,166 7.93%
Cash and due from banks 16,057 18,363
Premises and equipment 12,613 11,916
Other assets 16,206 17,056
Allowance for loan losses (2,803) (2,672)
Total assets $526,880 $525,751
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing deposits
Demand deposits $126,153 3,810 3.02% $125,666 $ 3,684 2.93%
Savings deposits 38,278 870 2.27% 38,642 999 2.59%
Time deposits 220,386 12,153 5.51% 226,431 12,464 5.50%
Securities sold under
agreements to repurchase 7,107 333 4.69% 10,806 488 4.52%
FHLB advances 18,434 994 5.39% 17,221 1,018 5.91%
Federal funds purchased 431 22 5.20% 502 26 5.18%
Long-term debt 5,817 398 6.85% 6,584 452 6.87%
Total interest-bearing
liabilities 416,606 18,580 4.46% 425,852 19,131 4.49%
Demand deposits 58,518 52,660
Other liabilities 3,600 4,601
Stockholders' equity 48,156 42,638
Total liabilities & equity $526,880 $525,751
Net interest income (TE) $ 19,215 $ 19,035
Net interest spread 3.34% 3.44%
Impact of non-interest bearing funds .63% .52%
Net yield on interest-earning assets 3.97% 3.96%
<FN>
<F1> Interest income and rates are presented on a tax-equivalent basis
("TE") assuming a federal income tax rate of 34%.
<F2> Loans fees are included in interest income and are not material.
<F3> Nonaccrual loans have been included in the average balances.
<F4> 1998 interest income and expense amounts have been annualized based on
results through September 30, 1998. The annualized amounts are not
necessarily indicative of the actual amounts that are expected or that
will occur for the year ending December 31, 1998.
</FN>
Changes in net interest income may also be analyzed by segregating the volume
and rate components of interest income and interest expense. The following
table summarizes the approximate relative contribution of changes in average
volume and interest rates to changes in net interest income (TE), on an
annualized basis, for the nine months ended September 30, 1998 and 1997
(in thousands):
TABLE 3 ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
1998 COMPARED TO 1997
INCREASE - (DECREASE)<F5>
TOTAL RATE/
CHANGE VOLUME RATE VOLUME<F4>
EARNING ASSETS:
Interest-bearing deposits $ (38) $ (39) $ 4 $ (3)
Federal funds sold 148 151 (2) (1)
Investment securities:
Taxable 289 367 (74) (4)
Tax-exempt <F1> 88 179 (78) (13)
Loans <F2><F3> (858) (534) (330) 6
Total interest income (371) 124 (480) (15)
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits
Demand deposits 126 14 111 1
Savings deposits (129) (9) (121) 1
Time deposits (311) (333) 23 (1)
Securities sold under
agreements to repurchase (155) (167) 19 (7)
FHLB advances (24) 72 (90) (6)
Federal funds purchased (4) (4) - -
Long-term debt (54) (53) (1) -
Total interest expense (551) (480) (59) (12)
Net interest income $ 180 $ 604 $(421) $ (3)
<FN>
<F1> Interest income and rates are presented on a tax equivalent basis,
assuming a federal income tax rate of 34%.
<F2> Loan fees are included in interest income and are not material.
<F3> Nonaccrual loans are not material and have been included in the average
balances.
<F4> The changes in rate/volume are computed on a consistent basis by
multiplying the change in rates by the change in volume.
<F5> 1998 interest income and expense amounts have been annualized based on
results through September 30, 1998. The annualized amounts are not
necessarily indicative of the actual amounts that are expected or that
will occur for the year ending December 31, 1998.
</FN>
On an annualized tax equivalent basis, net interest income increased $180,000,
or .9% in 1998, compared to an annualized increase of $718,000, or 4.0% in 1997.
As set forth in Table 3, the slight improvement in net interest income in 1998
was due primarily to the increases in the volume of earning assets and decreases
in the volume of interest-bearing liabilities, partially offset by the effect of
changes in interest rates. In 1997, the increase in net interest income was due
to the increase in the volume of earning assets and interest-bearing
liabilities.
For the first nine months of 1998, average earning assets increased by
$3,719,000, or .8%, and average interest-bearing liabilities decreased
$9,246,000, or 2.2%, compared with 1997, as shown in Table 2. The higher volume
of earning assets was primarily the result of investment growth in 1998. As a
percentage of average earning assets, average loans decreased from 73.8% in 1997
to 72.0% for the first nine months of 1998, while average securities increased
from 25.0% in 1997 to 26.4% for the first nine months of 1998.
The interest margin increased slightly from 3.96% in 1997 to 3.97% during the
first nine months of 1998.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the first nine months of 1998 was $400,000, a
decrease of $60,000 from $460,000 for the same period in 1997. For additional
information on loan loss experience and nonperforming loans, see the
"Nonperforming Loans" and "Loan Quality and Allowance for Loan Losses" sections
later in this document.
OTHER INCOME
An important source of the Registrant's revenue is derived from other income.
The following table sets forth the major components of other income for the
three months and nine months ended September 30, 1998 and 1997 (in thousands):
TABLE 4 OTHER INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
1998 1997 $ CHANGE 1998 1997 $ CHANGE
Trust $ 426 $ 338 $ 88 $ 1,257 $ 1,212 $ 45
Brokerage 85 126 (41) 239 346 (107)
Securities gains(losses) 52 - 52 64 (6) 70
Service charges 470 465 5 1,410 1,326 84
Mortgage banking 209 122 87 826 291 535
Other 264 245 19 799 736 63
Total other income $1,506 $1,296 $ 210 $4,595 $3,905 $ 690
The Registrant's other income increased to $4,595,000 in the first nine months
of 1998 as compared to $3,905,000 in the same period of 1997.
Trust revenues increased to $1,257,000 in the first nine months of 1998 from
$1,212,000 for the same period in 1997. This increase of $45,000 is the net
effect of increases in the fee structure for trust accounts and growth in
employee benefit accounts managed by the Trust Department which were partially
offset by lower farm management fees. Lower farm management fees are the result
of both lower commodity prices and the timing of grain sales. Trust assets
decreased 2.8% to $317,623,000 at September 30, 1998 from $326,935,000 at
December 31, 1997 and increased from $302,589,000 at September 30, 1997. The
increase from September, 1997 to September, 1998 in trust assets was due
primarily to growth of the trust accounts under management.
Revenues from brokerage operations decreased by 30.9% in the first nine months
of 1998, as compared to the same period in 1997, primarily as a result of
intense competition from local brokerage firms. This competition is not
expected to diminish and management does not anticipate brokerage revenues
returning to their 1997 levels.
Net securities gains for the first nine months of 1998 were $64,000, as compared
to net securities losses of $6,000 for the same period of 1997.
Service charges amounted to $1,410,000 in the first nine months of 1998, as
compared to $1,326,000 for the same period of 1997. This increase of $84,000 or
6.3% in service charges was primarily due to an increase in the number of
savings and transaction accounts, an increase in the service charges on ATM's,
an increase in the volume associated with these accounts, and an increase in
overdraft fees.
First Mid Bank originates residential real estate loans for its own portfolio
and for sale to others. Mortgage banking income from such fixed rate loans
originated and subsequently sold into the secondary market amounted to $826,000
in the first nine months of 1998 as compared to $291,000 for the same period of
1997. This $535,000 increase in 1998 was attributed to a substantial increase
in the volume of loans sold by First Mid Bank to $50.5 million (representing 616
loans) from $17.0 million in 1997 (representing 260 loans) and to re-financings
by customers as a result of a low interest rate environment. The increase in
the volume of fixed rate loan originations is to a large degree the result of a
flat yield curve that enables borrowers to lock in low long-term rates. If the
yield curve were to return to its historical norm, management anticipates that
the volume of loan originations (and therefore the amount of revenue recognized
from the sale of loans) would diminish.
OTHER EXPENSE
The major categories of other expense include salaries and employee benefits,
occupancy and equipment expenses and other operating expenses associated with
day-to-day operations. The following table sets forth the major components of
other expense for the nine months and three months ended September 30, 1998 and
1997 (in thousands):
TABLE 5 OTHER EXPENSE
THREE MONTHS ENDED NINE MONTHS ENDED
1998 1997 CHANGE 1998 1997 CHANGE
Salaries and benefits $2,153 $1,950 $ 203 $6,384 $5,868 $ 516
Occupancy and equipment 754 741 13 2,192 2,099 93
FDIC premiums 26 27 (1) 82 12 70
Amortization of intangibles 191 179 12 573 518 55
Stationery and supplies 148 179 (31) 498 478 20
Legal and professional fees 258 234 24 680 619 61
Marketing and promotion 108 108 - 371 398 (27)
Other operating expenses 602 518 84 1,906 1,643 263
Total other expense $4,240 $3,936 $ 304 $12,686 $11,635 $1,051
The Registrant's non-interest expense amounted to $12,686,000 for the first nine
months of 1998 as compared to $11,635,000 for the same period in 1997, an
increase of $1,051,000 or 9.0%.
Salaries and employee benefits, the largest component of other expense,
increased to $6,384,000 for the first nine months of 1998 as compared to
$5,868,000 for the same period in 1997. This 8.8% increase was partly due to
normal annual salary adjustments to employees, higher benefit costs, and an
increase of approximately $93,000 for incentive compensation.
Occupancy, furniture and equipment expense increased to $2,192,000 for the first
nine months of 1998 as compared to $2,099,000 for the same period in 1997. This
$93,000, or 4.4%, increase included depreciation expense recorded on technology
equipment placed in service as well as items for document imaging, report
imaging, home banking and wide-area network projects.
The cost of insurance premiums assessed by the Federal Deposit Insurance
Corporation ("FDIC") for the first nine months of 1998 was $82,000, remaining
fairly constant as compared to $81,000 for the same period in 1997. However,
during the first quarter of 1997, the Registrant received a refund of $69,000 on
the 1996 assessments of the Savings Association Insurance Fund ("SAIF").
Amortization of intangible assets increased 10.6% when comparing the first nine
months of 1998 to the same period in 1997. This increase was due to the
goodwill and core deposit intangibles associated with the purchase of the
Charleston branch in March, 1997.
During the first nine months of 1998, all other operating expenses increased
$317,000 or 10.1% to $3,455,000 from $3,138,000 for the same period in 1997.
This increase was primarily due to net losses of $171,000 on the sale of other
real estate owned, start up cost associated with the implementation of the
merchant debit card program, start up costs associated with the wide area
network, and costs associated with the Year 2000 issue.
INCOME TAXES
Total income tax expense amounted to $1,832,000 for the first nine months of
1998 as compared to $2,040,000 for the same period in 1997. Effective tax rates
were 32.6% and 35.5% for the first nine months of 1998 and 1997, respectively.
THE YEAR 2000 ISSUE
Like other businesses dependent upon computerized information processing, the
Registrant must deal with "Year 2000" issues, which stem from using two digits
to reflect the year in many computer programs and data. Computer programmers
and other designers of equipment that use microprocessors have abbreviated
dates by eliminating the first two digits of the year. As the year 2000
approaches, many systems may be unable to distinguish years beginning with 20
from years beginning with 19, and so may not accurately process certain date-
based information, which could cause a variety of operational problems for
businesses.
The Registrant's data processing software and hardware provide essential support
to virtually all of its businesses, so successfully addressing Year 2000 issues
is of the highest importance. Failure to complete renovation of the critical
systems used by the Registrant on a timely basis could have a materially adverse
affect on its operations and financial performance, as could Year 2000 problems
experienced by others with whom the Registrant does business. Because of the
range of possible issues and the large number of variables involved, it is
impossible to quantify the potential cost of problems should the Registrant's
remediation efforts or the efforts of those with whom it does business not be
successful.
The Registrant has a dedicated Year 2000 project team whose members have
significant experience on the Registrant's applications which run on both main
frame and desk top applications. Virtually all applications used by the
Registrant were developed by third party vendors who have represented that their
systems were developed using four digit years.
The Registrant completed the information technology portion of the assessment
and inventory phases of its Year 2000 project in early 1998. Full time
renovation began in the first quarter of 1998. Testing and implementation
activities have been underway on mission critical applications since late 1997.
The Registrant has a highly centralized data processing environment, with the
vast majority of its data processing needs serviced out of a consolidated data
center in Mattoon. As of September 30, 1998, the Registrant had completed
approximately 75% of its renovation, 60% of its testing and 65% of its
implementation for its mission critical applications (including vended and out-
sourced applications). All implementation includes testing with dates into the
Year 2000 and internal user acceptance. The balance of these applications are
planned to be renovated, tested and implemented by December 31, 1998. With
respect to non-mission critical applications, the Registrant's target for
completion of Year 2000 work is mid-1999.
The Year 2000 project team is also responsible for addressing issues that are
not directly related to data processing systems. The Task Force is coordinating
a review of various infrastructure issues, such as checking elevators and
heating, ventilation and air-conditioning equipment, some of which include
embedded systems, to verify that they will function in the Year 2000. The Task
Force is also coordinating a review of the Year 2000 status of power and
telecommunications providers at each important location, as these services are
critical to its business. Contingency plans are being developed for the
Registrant's important locations. The actions taken pursuant to these plans
will depend in part on the Registrant's assessment of the readiness of specific
providers in the power and telecommunications industries.
The Task Force is also monitoring programs to contact vendors and suppliers to
determine their Year 2000 readiness. Although the Registrant is attempting to
monitor and validate the efforts of other parties, it cannot control the success
of these efforts. Contingency plans are being developed where practical to
provide the Registrant with alternatives in situations where an entity
furnishing a critical product or service experiences significant Year 2000
difficulties that will affect the Registrant.
As part of its credit analysis process, the Registrant is assessing the Year
2000 readiness of its significant credit customers and is using this information
in the methodology of assessing the adequacy of the allowance for possible loan
losses. In addition, as part of its fiduciary activities, the Registrant has
developed and is implementing a plan for taking the Year 2000 issue into
consideration, and to evaluate and deal with Year 2000 issues associated with
property held in trust. The Registrant's personnel have also conducted several
workshops for its customers, as well as for the community as a whole, to explain
the Year 2000 issues and the Registrant's Year 2000 program.
The Registrant conducts an ongoing review of its estimated Year 2000 external
expenditures which are currently estimated to be approximately $100,000. This
estimate includes the cost of purchasing licenses for software programming tools
but does not reflect the cost of the time of internal staff. All Year 2000
costs are expensed as incurred. As of September 30, 1998, approximately 50% of
project costs have been incurred. The remaining costs are expected to be
incurred roughly evenly over the next 18 months.
The cost of the time of internal staff devoted to the Year 2000 project is
significant. This expense is not included in the above statement. Because of
the priority given to the Year 2000 work by the Registrant, some other
technology-related projects have been delayed. However, such delays are not
expected to have a material effect on the ongoing business operations of the
Registrant.
ANALYSIS OF BALANCE SHEETS
SECURITIES
The Registrant's overall investment goal is to maximize earnings while
maintaining liquidity in securities having minimal credit risk. The types and
maturities of securities purchased are primarily based on the Registrant's
current and projected liquidity and interest rate sensitivity positions. The
following table sets forth the amortized cost of the securities for September
30, 1998 and December 31, 1997 (in thousands):
TABLE 6 INVESTMENT PORTFOLIO
SEPTEMBER 30, DECEMBER 31,
1998 1997
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 77,528 58% $ 80,509 67%
Obligations of states and
political subdivisions 20,476 15% 12,820 11%
Mortgage-backed securities 32,642 25% 23,272 20%
Other securities 2,591 2% 2,747 2%
Total securities $133,237 100% $119,348 100%
At September 30, 1998, the Registrant's investment portfolio showed a slight
decrease in the composition of U.S. Government agency securities as well as an
increase in mortgage-backed securities and obligations of states and political
subdivisions. This change in the portfolio mix improved the repricing
characteristics of the portfolio and helped reduce the Registrant's exposure to
interest rate risk in a rising interest rate environment.
The amortized cost, gross unrealized gains and losses and estimated fair values
for available-for-sale and held-to-maturity securities by major security type at
September 30, 1998 and December 31, 1997 were as follows (in thousands):
TABLE 7 INVESTMENTS AT AMORTIZED COST / ESTIMATED FAIR VALUE
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
September 30, 1998 COST GAINS LOSSES VALUE
Available-for-sale:
U.S. Treasury securities
and obligations of
U.S. Government Agencies
and corporations $ 77,528 $ 593 $ (85) $ 78,036
Obligations of states and
political subdivisions 16,932 431 (13) 17,350
Mortgage-backed securities 32,642 180 (39) 32,783
Federal Home Loan Bank stock 1,925 - - 1,925
Other securities 666 - - 666
Total available-for-sale $129,693 $1,204 $ (137) $130,760
Held-to-maturity:
Obligations of states and
political subdivisions $ 3,544 $ 61 $ - $ 3,605
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
December 31, 1997 COST GAINS LOSSES VALUE
Available-for-sale:
U.S. Treasury securities
and obligations of
U.S. Government Agencies
and corporations $ 80,509 $ 198 $ (256) $ 80,451
Obligations of states and
political subdivisions 9,800 373 - 10,173
Mortgage-backed securities 23,272 195 (56) 23,411
Federal Home Loan Bank stock 2,115 - - 2,115
Other securities 632 - - 632
Total available-for-sale $116,328 $ 766 $ (312) $116,782
Held-to-maturity:
Obligations of states and
political subdivisions $ 3,020 $ 41 $ (4) $ 3,057
The following table indicates the expected maturities of investment securities
classified as available-for-sale and held-to-maturity, presented at amortized
cost, at September 30, 1998 (dollars in thousands) and the weighted average
yield for each range of maturities. Mortgage-backed securities are aged
according to their weighted average life. All other securities are shown at
their contractual maturity.
TABLE 8 INVESTMENT MATURITY SCHEDULE
ONE AFTER 1 AFTER 5 AFTER
YEAR THROUGH THROUGH TEN
OR LESS 5 YEARS 10 YEARS YEARS TOTAL
Available-for-sale:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 4,666 $40,534 $32,328 $ - $ 77,528
Obligations of state and
political subdivisions 1,888 4,074 3,469 7,501 16,932
Mortgage-backed securities 4,500 10,548 7,917 9,677 32,642
Other securities - - - 2,591 2,591
Total available-for-sale $11,054 $55,156 $43,714 $19,769 $129,693
Weighted average yield 5.73% 6.08% 6.02% 4.75% 5.96%
Full tax-equivalent yield 6.18% 6.28% 6.21% 5.69% 6.29%
Held-to-maturity:
Obligations of state and
political subdivisions $ 361 $ 1,795 $ 943 $ 445 $ 3,544
Weighted average yield 5.00% 5.18% 4.57% 5.74% 5.05%
Full tax-equivalent yield 7.57% 7.86% 6.93% 8.70% 7.66%
The weighted average yields are calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each security. Full
tax-equivalent yields have been calculated using a 34% tax rate.
The maturities of, and yields on, mortgage-backed securities have been
calculated using actual repayment history. However, where securities have call
features, and have a market value in excess of par value, the call date has been
used to determine the expected maturity.
With the exception of obligations of the U.S. Treasury and other U.S. Government
agencies and corporations, there were no investment securities of any single
issuer the book value of which exceeded 10% of stockholders' equity at
September 30, 1998.
Proceeds from sales of investment securities and realized gains and losses were
as follows for the periods ended September 30, 1998 and December 31, 1997:
September 30, December 31,
(in thousands) 1998 1997
Proceeds from sales $ 6,848 $ 9,983
Gains 67 20
Losses 3 26
In total, the investment portfolio increased $14 million as a result of
increased cash from mortgage re-financings in the loan portfolio. Due to the
relatively flat yield curve throughout the year, the Registrant experienced an
increase in demand by customers for fixed-rate mortgage loans which were
originated and subsequently sold in the secondary market.
LOANS
The loan portfolio is the largest category of the Registrant's earning assets.
The following table summarizes the composition of the loan portfolio for the
periods ended September 30, 1998 and December 31, 1997:
TABLE 9 COMPOSITION OF LOANS
September 30, DECEMBER 31,
(in thousands) 1998 1997
Commercial, financial
and agricultural $ 74,089 $ 73,854
Real estate - mortgage 245,174 252,312
Installment 26,727 29,266
Other 883 2,791
Total loans $346,873 $358,223
The Registrant had loan concentrations in agricultural industries of 14.5% at
September 30, 1998 and 13.8% at December 31, 1997. The Registrant had no
further industry loan concentrations in excess of 10% of outstanding loans.
The 2.8% decrease in the real estate mortgage loan category was primarily due to
the $38.8 million (representing 404 loans) of long-term fixed rate loans sold in
the secondary market with servicing released. Many of these loans were
re-finances of existing loans.
TABLE 10 LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY
The following table presents the balance of loans outstanding as of September
30, 1998, by maturities (dollars in thousands):
MATURITY <F1>
OVER 1
ONE YEAR THROUGH OVER
OR LESS<F2> 5 YEARS 5 YEARS TOTAL
Commercial, financial
and agricultural $ 50,205 $ 21,278 $ 2,606 $ 74,089
Real estate - mortgage 57,802 141,979 45,393 245,174
Installment 6,648 19,416 663 26,727
Other 330 192 361 883
Total loans $114,985 $182,865 $ 49,023 $346,873
<FN>
<F1> Based on scheduled principal repayments.
<F2> Includes demand loans, past due loans and overdrafts.
</FN>
As of September 30, 1998, loans with maturities over one year consisted of
$198,688,000 in fixed rate loans and $33,200,000 in variable rate loans. The
loan maturities noted above are based on the contractual provisions of the
individual loans. The Registrant has no general policy regarding rollovers and
borrower requests, which are handled on a case-by-case basis.
NONPERFORMING LOANS
Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b)
accruing loans contractually past due ninety days or more as to interest or
principal payments; and loans not included in (a) and (b) above which are
defined as "troubled debt restructurings".
The following table presents information concerning the aggregate amount of
nonperforming loans (in thousands):
TABLE 11 NONPERFORMING LOANS
September 30, December 31,
1998 1997
Nonaccrual loans $2,907 $1,194
Loans past due ninety days
or more and still accruing 441 145
Restructured loans which are
performing in accordance
with revised terms 93 346
Total Nonperforming Loans $3,441 $1,685
The $1.7 million increase in nonperforming loans was the net result of a $.9
million commercial loan becoming nonaccrual during the second quarter of 1998, a
$1.2 million commercial loan becoming nonaccrual during the third quarter of
1998 and a $.4 million loan being removed from the nonaccrual list and
transferring the balance to other real estate owned. This property was sold on
October 1, 1998 at its carrying value of $.4 million.
At September 30, 1998, management has identified approximately $250,000 exposure
associated with the $2.9 million nonaccrual loans. This exposure was considered
in determining the adequacy of the allowance for possible loan losses as of
September 30, 1998.
Interest income that would have been reported if nonaccrual and restructured
loans had been performing totaled $251,000 for the first nine months of 1998.
Interest income that was included in income totaled $6,000 for this same period.
The Registrant's policy generally is to discontinue the accrual of interest
income on any loan for which principal or interest is ninety days past due and
when, in the opinion of management, there is reasonable doubt as to the timely
collection of interest or principal. Nonaccrual loans are returned to accrual
status when, in the opinion of management, the financial position of the
borrower indicates there is no longer any reasonable doubt as to the timely
collection of interest or principal.
LOAN QUALITY AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's best estimate of the
reserve necessary to adequately cover losses that could ultimately be realized
from current loan exposures. The provision for loan losses is the charge against
current earnings that is determined by management as the amount needed to
maintain an adequate allowance for loan losses. In determining the adequacy of
the allowance for loan losses, and therefore the provision to be charged to
current earnings, management relies predominantly on a disciplined credit review
and approval process which extends to the full range of the Registrant'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 a locations of the
allowance for loan losses. Collateral values are considered by management in
the determination of such specific allocations. Additional factors considered
by management in evaluating the overall adequacy of the allowance include
historical net loan losses, the level and composition of nonaccrual, past due
and renegotiated loans and the current and anticipated economic conditions in
the region where the Registrant operates.
Management recognizes that there are risk factors which are inherent in the
Registrant's loan portfolio. All financial institutions face risk factors in
their loan portfolios because risk exposure is a function of the business. The
Registrant'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 Registrant's success. At September 30, 1998, the
Registrant's loan portfolio included $50.1 million of loans to borrowers whose
businesses are directly related to agriculture. The balance increased $.8
million from $49.3 million at December 31, 1997. In addition to agricultural
lending, the Registrant has historically had substantial residential mortgage
lending activity in and around east central Illinois. At September 30, 1998,
these loans amounted to $167.5 million or 48.3% of total loans. Such
residential mortgage loans amounted to $181.3 million or 50.6% of total loans at
December 31, 1997.
Loan loss experience for the nine months ended September 30, 1998 and for the
year ended December 31, 1997 are as follows (dollars in thousands):
TABLE 12 ALLOWANCE FOR LOAN LOSSES
September 30, December 31,
1998 1997
Average loans outstanding,
net of unearned income $348,850 $355,167
Allowance-beginning of year 2,636 2,684
Charge-offs:
Commercial, financial
and agricultural 158 588
Real estate-mortgage 21 69
Installment 98 145
Total charge-offs 277 802
Recoveries:
Commercial, financial
and agricultural 25 28
Real estate-mortgage 30 1
Installment 23 25
Total recoveries 78 54
Net charge-offs 199 748
Provision for loan losses 400 700
Allowance-end of period $ 2,837 $ 2,636
Ratio of net charge-offs to
average loans .08% .21%
Ratio of allowance for loan
losses to loans outstanding
(less unearned interest
at end of period) .82% .74%
Ratio of allowance for loan
losses to nonperforming
loans 82.4% 156.4%
The Registrant minimizes credit risk by adhering to sound underwriting and
credit review policies. These policies are reviewed at least annually, and
changes are approved by the board of directors. Senior management is actively
involved in business development efforts and the maintenance and monitoring of
credit underwriting and approval. The loan review system and controls are
designed to identify, monitor and address asset quality problems in an accurate
and timely manner. On a monthly basis, the board of directors review the status
of problem loans. In addition to internal policies and controls, regulatory
authorities and external auditors periodically review asset quality and the
overall adequacy of the allowance for loan losses.
During the first nine months of 1998, the Registrant had net charge-offs of
$199,000 as compared to $748,000 for the year ended December 31, 1997.
Management provided $400,000 for loan losses during the first nine months of
1998 as compared to $460,000 for the same period in 1997.
On September 30, 1998, the allowance for loan losses amounted to $2,837,000, or
.82% of total loans, and 82.4% of nonperforming loans. At December 31, 1997,
the allowance was $2,636,000, or .74% of total loans and 156.4% of nonperforming
loans. The ratio of the allowance for loan loss to total nonperforming loans
decreased substantially from 156.4% at December 31, 1997 to 82.4% at September
30, 1998 due to the aforementioned increases in nonperforming loans. The
allowance for loan losses, in management's judgment, would be allocated as
follows to cover potential loan losses (in thousands):
TABLE 13 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
September 30, December 31,
1998 1997
ALLOWANCE % OF ALLOWANCE % OF
FOR LOANS FOR LOANS
LOAN TO TOTAL LOAN TO TOTAL
LOSSES LOANS LOSSES LOANS
Commercial, financial
and agricultural $ 1,843 21.3% $ 1,699 20.6%
Real estate-mortgage 264 70.7% 245 70.4%
Installment 221 7.7% 192 8.2%
Other - .3% - .8%
Total allocated 2,328 2,136
Unallocated 509 N/A 500 N/A
Allowance at end of
reported period $ 2,837 100.0% $ 2,636 100.0%
The allowance is allocated to the individual loan categories by a specific
allocation for all classified loans plus a percentage of loans not classified
based on historical losses.
DEPOSITS
Funding the Registrant's earning assets is substantially provided by a
combination of consumer, commercial and public fund deposits. The Registrant
continues to focus its strategies and emphasis on retail core deposits, the
major component of funding sources. The following table sets forth the average
deposits and weighted average rates at September 30, 1998 and December 31, 1997
(dollars in thousands):
TABLE 14 COMPOSITION OF DEPOSITS
SEPTEMBER 30, DECEMBER 31,
1998 1997
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
Demand deposits:
Non-interest bearing $58,518 - $ 52,660 -
Interest bearing 126,153 3.02% 125,666 2.93%
Savings 38,278 2.27% 38,642 2.59%
Time deposits 220,386 5.51% 226,431 5.50%
Total average deposits $443,335 3.80% $443,399 3.87%
Although total average deposits remained constant from December 31, 1997 to
September 30, 1998, the ending balance of total deposits decreased by $13
million. This decrease can be attributed to the decrease in public funds in
time deposits over $100,000, as well as being attributed to the movement, in
early 1998, of approximately $9 million from money market accounts into a new
product, Repurchase Agreements, reported as "Other Borrowings".
The following table sets forth the maturity of time deposits of $100,000 or more
as of September 30,1998 and December 31, 1997 (in thousands):
TABLE 15 MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
September 30, December 31,
1998 1997
3 months or less $ 21,919 $ 21,715
Over 3 through 6 months 13,529 12,287
Over 6 through 12 4,099 6,438
Over 12 months 9,336 10,293
Total $ 48,883 $ 50,733
OTHER BORROWINGS
Other borrowings consist of securities sold under agreements to repurchase and
Federal Home Loan Bank ("FHLB") advances. Information relating to other
borrowings for the nine months ended September 30, 1998 and the year ended
December 31, 1997 is presented below (in thousands):
TABLE 16 SCHEDULE OF OTHER BORROWINGS
September 30, December 31,
1998 1997
End of period:
Securities sold under agreements to repurchase $14,075 $10,780
Federal Home Loan Bank advances:
Overnight - -
Fixed term - due in one year or less - -
Fixed term - due after one year 19,500 7,000
Federal funds purchased - -
Total $33,575 $17,780
Average interest rate at end of period 4.99% 5.01%
Maximum Outstanding at Any Month-end
Securities sold under agreements to repurchase $14,075 $17,710
Federal Home Loan Bank advances:
Overnight 5,500 23,733
Fixed term - due in one year or less - 16,000
Fixed term - due after one year 20,500 9,000
Federal funds purchased 5,750 -
Total $45,825 $66,443
Averages for the Period
Securities sold under agreements to repurchase $ 7,107 $10,806
Federal Home Loan Bank advances:
Overnight 266 6,933
Fixed term - due in one year or less - 3,455
Fixed term - due after one year 18,168 6,833
Federal funds purchased 431 502
Total $25,972 $28,529
Average interest rate during the period 5.20% 5.02%
Securities sold under agreements to repurchase are short-term debt obligations
of First Mid Bank. First Mid Bank pledges as collateral, securing any obligation
to pay the amount due, certain government securities which are direct
obligations of the United States or one of its agencies. First Mid Bank offers
these retail repurchase agreements as a cash management service to its corporate
customers.
Federal Home Loan Bank advances represent borrowings by First Mid Bank to
economically fund agricultural loan demand. This loan demand was previously
funded primarily through deposits by the State of Illinois.
INTEREST RATE SENSITIVITY
The Registrant seeks to maximize its net interest margin within an acceptable
level of interest rate risk. Interest rate risk can be defined as the amount of
forecasted net interest income that may be gained or lost due to favorable or
unfavorable movements in interest rates. Interest rate risk, or sensitivity,
arises when the maturity or repricing characteristics of assets differ
significantly from the maturity or repricing characteristics of liabilities.
The Registrant 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
Registrant's asset/liability management committee oversees the interest rate
sensitivity position and directs the overall allocation of funds in an effort to
maintain a cumulative one-year gap to earning assets ratio of less than 30% of
total earning assets.
In the banking industry, a traditional measurement of interest rate sensitivity
is known as "GAP" analysis, which measures the cumulative differences between
the amounts of assets and liabilities maturing or repricing at various
intervals. The following table sets forth the Registrant's interest rate
repricing gaps for selected maturity periods at September 30, 1998 (in
thousands):
TABLE 17 GAP TABLE
NUMBER OF MONTHS UNTIL NEXT REPRICING OPPORTUNITY
INTEREST EARNING ASSETS: 0-1 1-3 3-6 6-12 12+
Deposits with other financial
institutions $ 496 $ - $ - $ - $ -
Federal funds sold 10,950 - - - -
Taxable investment securities 23,073 17,778 19,265 11,021 38,679
Nontaxable investment securities - 1,779 661 238 19,257
Loans 44,948 19,454 32,203 40,987 209,281
Total $ 79,467 $ 39,011 $ 52,129 $ 52,246 $ 267,217
INTEREST BEARING LIABILITIES:
Savings and N.O.W. accounts 113,650 - - - -
Money market accounts 39,220 - - - -
Other time deposits 25,280 35,633 59,344 37,533 72,326
Other borrowings 14,075 - 4,000 - 15,500
Long-term debt 5,075 - - - -
Total $ 197,300 $ 35,633 $ 63,344 $ 37,533 $ 87,826
Periodic GAP $(117,833) $ 3,378 $ (11,215) $ 14,713 $179,391
Cumulative GAP $(117,833) $(114,455) $(125,670) $(110,957) $ 68,434
GAP as a % of interest earning assets:
Periodic (24.0%) .7% (2.3%) 3.0% 36.6%
Cumulative (24.0%) (23.4%) (25.6%) (22.6%) 14.0%
At September 30, 1998, the Registrant was liability sensitive on a cumulative
basis through the twelve-month time horizon. Accordingly, future increases in
interest rates, if any, could have an unfavorable effect on the net interest
margin.
Interest rate sensitivity using a static GAP analysis basis is only one of
several measurements of the impact of interest rate changes on net interest
income used by the Registrant. Its actual usefulness in assessing the effect of
changes in interest rates varies with the constant changes which occur in the
composition of the Registrant's earning assets and interest-bearing liabilities.
For this reason, the Registrant uses financial models to project interest income
under various rate scenarios and assumptions relative to the prepayments,
reinvestment and roll overs of assets and liabilities, of which First Mid Bank
represents substantially all of the Registrant's rate sensitive assets and
liabilities.
CAPITAL RESOURCES
At September 30, 1998, the Registrant's stockholders' equity amounted to
$50,197,000, a $4,621,000 or 10.1% increase from the $45,576,000 balance as of
December 31, 1997. During the nine month period ended September 30, 1998, net
income contributed $3,794,000 to equity before the declaration of dividends to
preferred stockholders amounting to $285,000. The change in net unrealized gain
on available-for-sale investment securities increased stockholders' equity by
$404,000, net of tax.
The Registrant issues common stock as part of a deferred compensation plan for
its directors and certain senior officers and as an investment option under the
Registrant's 401-K (First Retirement and Savings Plan) for its employees. For
the nine month period ended September 30, 1998, the following shares were
issued:
* 3,559 shares pursuant to the Deferred Compensation Plan
* 20,834 shares pursuant to the First Retirement and Savings Plan
For the year ended December 31, 1997, the following shares were issued:
* 11,403 shares pursuant to the Deferred Compensation Plan
* 44,893 shares pursuant to the First Retirement and Savings Plan
Effective September 30, 1998, the Registrant adopted the provisions of the
Emerging Issues Task Force Issue No. 97-14, "ACCOUNTING FOR DEFERRED
COMPENSATION ARRANGEMENTS WHERE AMOUNTS EARNED ARE HELD IN A RABBI TRUST AND
INVESTED" ("EITF 97-14") for purposes of the Fist Mid-Illinois Bancshares, Inc.
Deferred Compensation Plan (the "Plan"). Upon adoption of EITF 97-14, the
Registrant has reclassified the cost basis of its common stock issued and held
in trust in connection with the Plan of approximately $915,000 to treasury
stock. The Registrant also reclassified the cost basis of its related deferred
compensation obligation of approximately $915,000 from other liabilities to an
equity instrument (deferred compensation).
The Registrant has a Dividend Reinvestment Plan whereby common and preferred
shareholders can elect to have their cash dividends automatically reinvested
into newly-issued common shares of the Registrant. Of the $1,113,000 in common
and preferred stock dividends paid during the first nine months of 1998,
$622,000 or 56% was reinvested into shares of common stock of the Registrant
through the Dividend Reinvestment Plan. Three events occurred during the nine
month period ended September 30, 1998 that resulted in common stock shares being
reinvested in the Dividend Reinvestment Plan:
* 1,000 shares of common stock were issued from stock options that
were issued during the fourth quarter of 1997 and exercised in
August, 1998
* 2,425 shares on common stock were converted from 6 shares of
preferred stock
* 17,437 shares of common stock were issued from the common stock
and preferred stock dividends
As of the year ended December 31, 1997, 32,781 shares of common stock were
issued pursuant to the Dividend Reinvestment Plan.
In 1997, the Registrant established a Stock Incentive Plan ("SI Plan") intended
to provide a means whereby directors and certain officers can acquire shares of
the Registrant's common stock. A maximum of 100,000 shares have been authorized
under the SI Plan. Options to acquire shares will be awarded at an exercise
price equal to the fair market value of the shares on the date of grant.
Options to acquire shares have a 10-year term. Options granted to employees
vest over a four year period and those options granted to directors vest at the
time they are issued.
In October, 1997, the Registrant granted 19,500 options at an option price of
$23.51. Of these stock options, 500 were exercised in August, 1998. In
December, 1997, the Registrant granted 11,500 options at an option price of
$33.73. Of these stock options, 500 were exercised in August, 1998. The
Registrant applied APB Opinion No. 25 in accounting for the SI Plan and,
accordingly, compensation cost based on fair value at grant date has not been
recognized for its stock options in the consolidated financial statements for
the periods ended September 30, 1998 and December 31, 1997.
On August 5, 1998, the Registrant announced a stock repurchase program of up to
3% of its common stock. The shares will be repurchased at the most recent
market price of the stock. As of September 30, 1998, 10,477 shares (.5%) at a
total price of $403,000 were repurchased by the Registrant. Treasury Stock is
further affected by activity in the Deferred Compensation Plan as further
explained in this section.
The Registrant and First Mid Bank have capital ratios above the regulatory
capital requirements. These requirements call for 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 ratio of Tier 1 capital to total risk-weighted assets of
4% to 5% depending on their particular circumstances and risk profiles. At
September 30, 1998, the Registrant's leverage ratio was 8.01%.
A tabulation of the Registrant's and First Mid Bank's capital ratios as of
September 30, 1998 and December 31, 1997 follows:
TABLE 18 CAPITAL RATIOS
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
SEPTEMBER 30, 1998
Total Capital
(to risk-weighted assets)
Registrant $ 44,353 13.90% $ 25,536 > 8.00% $ 31,920 > 10.00%
First Mid Bank 45,654 14.41 25,339 > 8.00 31,673 > 10.00
Tier 1 Capital
(to risk-weighted assets)
Registrant 41,516 13.01 12,768 > 4.00 19,152 > 6.00
First Mid Bank 42,817 13.52 12,669 > 4.00 19,004 > 6.00
Tier 1 Capital
(to average assets)
Registrant 41,516 8.01 20,734 > 4.00 25,918 > 5.00
First Mid Bank 42,817 8.29 20,657 > 4.00 25,822 > 5.00
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
DECEMBER 31, 1997
Total Capital
(to risk-weighted assets)
Registrant $ 39,416 12.20% $ 25,842 > 8.00% $ 32,303 > 10.00%
First Mid Bank 42,105 13.17 25,584 > 8.00 31,980 > 10.00
Tier 1 Capital
(to risk-weighted assets)
Registrant 36,780 11.39 12,921 > 4.00 19,382 > 6.00
First Mid Bank 39,469 12.34 12,792 > 4.00 19,188 > 6.00
Tier 1 Capital
(to average assets)
Registrant 36,780 7.05 20,879 > 4.00 26,099 > 5.00
First Mid Bank 39,469 7.59 20,807 > 4.00 26,009 > 5.00
Banks and bank holding companies are generally expected to operate at or above
the minimum capital requirements. These ratios are in excess of regulatory
minimums and will allow the Registrant to operate without capital adequacy
concerns.
LIQUIDITY
Liquidity represents the ability of the Registrant and its subsidiaries to meet
the requirements of customers for loans and deposit withdrawals. Liquidity
management focuses on the ability to obtain funds economically for these
purposes and to maintain assets which may be converted into cash at minimal
costs. Other sources for cash include deposits of the State of Illinois and
Federal Home Loan Bank advances. At September 30, 1998, the excess collateral
at the Federal Home Loan Bank will support approximately $78 million of
additional advances.
Management monitors its expected liquidity requirements carefully, focusing on
cash flows from:
* lending activities, including loan commitments, letters of credit
and mortgage prepayment assumptions
* deposit activities, including seasonal demand of private and
public funds
* investing activities, including prepayments of mortgage-backed
securities and call assumptions on U.S. Government Treasuries and
Agencies
* operating activities, including schedule debt repayments and
dividends to shareholders
EFFECTS OF INFLATION
Unlike industrial companies, virtually all of the assets and liabilities of the
Registrant are monetary in nature. As a result, interest rates have a more
significant impact on the Registrant's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or experience the same magnitude of changes as goods and services,
since such prices are affected by inflation. In the current economic
environment, liquidity and interest rate adjustments are features of the
Registrant's assets and liabilities which are important to the maintenance of
acceptable performance levels. The Registrant attempts to maintain a balance
between monetary assets and monetary liabilities, over time, to offset these
potential effects.
FUTURE ACCOUNTING CHANGES
In June, 1997, the FASB issued Statement No. 131, "DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION," ("SFAS 131"). SFAS 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. SFAS 131 is effective for financial
periods beginning after December 15, 1998, and is not expected to have a
material impact on the Registrant.
Statement of Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES," ("SFAS 133") was issued by the FASB in June
1998. SFAS 133 standardizes the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts. Under the
standard, entities are required to carry all derivative instruments in the
statement of financial position at fair value. The accounting for changes in
the fair value (i.e., gains or losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship
and, if so, on the reason for holding it. If certain conditions are met,
entities may elect to designate a derivative instrument as a hedge of exposures
to changes in fair values, cash flows, or foreign currencies. If the hedged
exposure is a fair value exposure, the gain or loss on the derivative instrument
is recognized in earnings in the period of change together with the offsetting
loss or gain on the hedged item attributable to the risk being hedged. If the
hedged exposure is a cash flow exposure, the effective portion of the gain or
loss on the derivative instrument is reported initially as a component of other
comprehensive income (outside earnings) and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts excluded
from the assessment of hedge effectiveness as well as the ineffective portion of
the gain or loss is reported in earnings immediately. Accounting for foreign
currency hedges is similar to the accounting for fair value and cash flow
hedges. If the derivative instrument is not designated as a hedge, the gain or
loss is recognized in earnings in the period of change. The Registrant has not
determined the impact that SFAS 133 will have on its financial statements and
believes that such determination will not be meaningful until closer to the date
of initial adoption.
PENDING LITIGATION
Heartland Savings Bank, a subsidiary of the Registrant that merged with First
Mid Bank during 1997, filed a complaint on December 5, 1995, against the U.S.
Government which is now pending in the U.S. Court of Federal claims in
Washington D.C. Refer to "PART II, ITEM 1, LEGAL PROCEEDINGS".
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material changes in the market risks faced by the Registrant
since December 31, 1997. For information regarding the Registrant's market risk,
reference is made to its Annual Report on Form 10-K for the year ended December
31, 1997.
PART II - OTHER INFORMATION
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 law suits (such as garnishment proceedings) involving
claims to the ownership of funds in particular accounts. Management believes
that all such litigation as well as other pending legal proceedings constitute
ordinary routine litigation incidental to the business of First Mid Bank and
that such litigation will not materially adversely affect the Registrant's
consolidated financial condition.
In addition to the normal proceedings referred to above, Heartland Savings Bank
("Heartland"), a subsidiary of the Registrant that merged with First Mid Bank
during 1997, filed a complaint on December 5, 1995, against the U.S. Government
which is now pending in the U.S. Court of Federal claims in Washington D.C. This
complaint relates to Heartland's interest as successor to Mattoon Federal
Savings and Loan Association which incurred a significant amount of supervisory
goodwill when it acquired Urbana Federal Savings and Loan in 1982. The complaint
alleges that the Government breached its contractual obligations when, in 1989,
it issued new rules which eliminated supervisory goodwill from inclusion in
regulatory capital. On August 6, 1998, First Mid Bank filed a motion with the
U.S. Court of Federal claims to grant summary judgement on liability for breach
of contract in this matter. On August 13, 1998, the U.S. Government filed a
motion to stay such proceedings. At this time, it is too early to tell if First
Mid Bank will prevail in its motion and, if so, what damages may be recovered.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits
(a) The exhibits required by Item 601 of Regulation S-K and filed herewith are
listed in the Exhibit Index which follows the Signature Page and
immediately precedes the exhibits filed.
(b) Reports on Form 8-K
The Registrant filed a Form 8-K on August 5, 1998 relating to the Registrant's
announcement, through a letter to its stockholders, that its Board of Directors
authorized the repurchase of up to three percent of the total number of shares
of the Registrant's common stock.
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)
/s/Daniel E. Marvin,Jr.
*-------------------------------------*
Daniel E. Marvin, Jr.
President and Chief Executive Officer
/s/William S. Rowland
*-------------------------------------*
William S. Rowland
Chief Financial Officer
Dated: November 12, 1998
*---------------------*
EXHIBIT INDEX TO FORM 10-K REGISTRATION STATEMENT
EXHIBIT
NUMBER DESCRIPTION AND FILING OR INCORPORATION REFERENCE
11.1 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
27.1 FINANCIAL DATA SCHEDULE