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 June 30, 2001
Commission file number: 0-13368
FIRST MID-ILLINOIS BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State of incorporation)
37-1103704
(I.R.S. employer identification no.)
1515 CHARLESTON AVENUE, MATTOON, ILLINOIS 61938
(Address and zip code of principal executive offices)
(217) 234-7454
(Registrant's telephone number, including area code)
Indicate by check mark whether the Company (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Company was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
As of August 8, 2001, 2,257,682 common stock, $4.00 par value,
were outstanding.
PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (unaudited) June 30, December 31,
(In thousands, except share data) 2001 2000
------------ ------------
<s> <c> <c>
ASSETS
Cash and due from banks:
Non-interest bearing $ 17,624 $ 22,035
Interest bearing 36 80
Federal funds sold 13,125 2,725
-------- --------
Cash and cash equivalents 30,785 24,840
Investment securities:
Available-for-sale, at fair value 139,527 150,034
Held-to-maturity, at amortized cost (estimated fair
value of $2,789 and $2,800 at June 30, 2001
and December 31, 2000, respectively) 2,727 2,757
Loans 462,582 429,288
Less allowance for loan losses 3,693 3,262
-------- --------
Net loans 458,889 426,026
Premises and equipment, net 16,879 15,375
Goodwill intangible assets, net 11,562 10,913
Other intangible assets, net 1,455 1,237
Other assets 10,459 11,817
-------- --------
TOTAL ASSETS $672,283 $642,999
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 69,873 $ 66,646
Interest bearing 471,044 437,339
-------- --------
Total deposits 540,917 503,985
Securities sold under agreements to repurchase 31,263 31,096
Federal Home Loan Bank advances-short term 5,000 20,000
Federal Home Loan Bank advances-long term 23,300 20,300
Long-term debt 4,325 4,325
Other liabilities 5,496 5,566
-------- --------
TOTAL LIABILITIES 610,301 585,272
-------- --------
-2-
Stockholders' Equity:
Common stock, $4 par value; authorized 6,000,000
shares; issued 2,357,928 shares in 2001 and
2,325,469 shares in 2000 9,432 9,302
Additional paid-in-capital 13,114 12,293
Retained earnings 41,598 39,169
Deferred compensation 1,306 1,218
Accumulated other comprehensive income (loss) 1,029 (288)
Less treasury stock at cost, 99,385 shares
in 2001 and 85,404 shares in 2000 (4,497) (3,967)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 61,982 57,727
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $672,283 $642,999
======== ========
See accompanying notes to unaudited consolidated financial statements.
-3-
CONSOLIDATED STATEMENTS OF INCOME (unaudited) Three months ended Six months ended
(In thousands, except per share data) June 30, June 30,
------------------ ----------------
2001 2000 2001 2000
---- ---- ---- ----
<s> <c> <c> <c> <c>
INTEREST INCOME:
Interest and fees on loans $ 9,347 $ 8,493 $18,362 $16,658
Interest on investment securities 2,162 2,282 4,383 4,570
Interest on federal funds sold 53 26 87 63
Interest on deposits with
other financial institutions 1 3 2 4
------- ------- ------- -------
Total interest income 11,563 10,804 22,834 21,295
INTEREST EXPENSE:
Interest on deposits 4,972 4,377 10,024 8,610
Interest on securities sold under agreements
to repurchase 251 311 543 600
Interest on Federal Home Loan Bank advances 419 636 823 995
Interest on Federal funds purchased 6 11 12 47
Interest on long-term debt 62 83 136 158
------- ------- ------- -------
Total interest expense 5,710 5,418 11,538 10,410
------- ------- ------- -------
Net interest income 5,853 5,386 11,296 10,885
Provision for loan losses 150 150 300 300
------- ------- ------- -------
Net interest income after provision 5,703 5,236 10,996 10,585
OTHER INCOME:
Trust revenues 471 448 971 961
Brokerage revenues 94 138 191 275
Service charges 799 616 1,516 1,208
Securities gains 82 -- 140 --
Mortgage banking income 296 107 474 169
Other 478 307 924 613
------ ------ ------ ------
Total other income 2,220 1,616 4,216 3,226
OTHER EXPENSE:
Salaries and employee benefits 2,750 2,516 5,302 5,026
Net occupancy and equipment expense 958 905 1,909 1,783
Amortization of goodwill intangible assets 226 210 436 420
Amortization of other intangible assets 85 90 167 182
Stationery and supplies 181 124 337 272
Legal and professional 253 205 488 375
Marketing and promotion 231 249 389 406
-4-
Other 930 753 1,749 1,484
------- ------- ------- -------
Total other expense 5,612 5,052 10,777 9,948
------- ------- ------- -------
Income before income taxes 2,311 1,800 4,435 3,863
Income taxes 696 305 1,355 938
------- ------- ------- -------
Net income $ 1,615 $ 1,495 $ 3,080 $ 2,925
======= ======= ======= =======
Per share data:
Basic earnings per share $ .72 $ .66 $ 1.37 $ 1.29
Diluted earnings per share $ .72 $ .66 $ 1.37 $ 1.29
====== ====== ====== ======
See accompanying notes to unaudited consolidated financial statements.
-5-
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For the six months ended
(In thousands) June 30,
------------------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<s> <c> <c>
Net income $ 3,080 $ 2,925
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 300 300
Depreciation, amortization and accretion, net 1,472 1,485
Gain on sale of securities, net (140) --
Loss on sale of other real property owned, net 2 59
Gain on sale of mortgage loans held for sale, net (381) (129)
Origination of mortgage loans held for sale (31,156) (7,494)
Proceeds from sale of mortgage loans held for sale 26,600 7,113
Decrease in other assets 1,598 396
Decrease in other liabilities (529) (407)
------- ------
Net cash provided by operating activities 847 4,248
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of mortgage servicing rights (40) (96)
Purchases of premises and equipment (788) (523)
Net increase in loans (3,607) (21,443)
Proceeds from sales of securities available-for-sale 6,850 --
Proceeds from maturities of securities available-for-sale 51,084 4,378
Purchases of securities available-for-sale (42,367) --
Purchases of securities held-to-maturity (299) (1,516)
Net cash provided by acquisition 606 --
------- -------
Net cash provided by (used in) investing activities 11,440 (19,200)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 6,351 4,680
Increase (decrease) in repurchase agreements 167 (6,187)
Decrease in federal funds purchased -- (1,175)
Increase (decrease) in FHLB advances short-term (15,000) 25,049
Increase (decrease) in FHLB advances long-term 3,000 (8,200)
Proceeds from issuance of common stock 173 12
Purchase of treasury stock (443) (1,411)
Dividends paid on common stock (590) (597)
------- -------
Net cash provided by (used in) financing activities (6,342) 12,171
------- -------
-6-
Increase (decrease) in cash and cash equivalents 5,945 (2,781)
Cash and cash equivalents at beginning of period 24,840 21,842
------- -------
Cash and cash equivalents at end of period $30,785 $19,061
======= =======
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $11,147 $10,597
Income taxes 1,525 1,430
Dividends reinvested in common stock 777 695
======= =======
See accompanying notes to unaudited consolidated financial statements.
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING AND CONSOLIDATION
The unaudited consolidated financial statements include the
accounts of First Mid-Illinois Bancshares, Inc. ("Company") and its
wholly-owned subsidiaries: Mid-Illinois Data Services, Inc. ("MIDS")
and First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank") and its
wholly-owned subsidiary First Mid-Illinois Insurance Services, Inc.
("First Mid Insurance"). All significant inter-company balances and
transactions have been eliminated in consolidation. The financial
information reflects all adjustments which, in the opinion of
management, are necessary to present a fair statement of the results
of the interim periods ended June 30, 2001 and 2000, and all such
adjustments are of a normal recurring nature. The results of the
interim period ended June 30, 2001, are not necessarily indicative of
the results expected for the year ending December 31, 2001.
The unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Article
10 of Regulation S-X and do not include all of the information
required by accounting principles generally accepted in the United
States of America for complete financial statements and related
footnote disclosures. These financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in the Company's 2000 Form 10-K.
ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS
133"). 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 balance sheet at fair value. The
accounting for the changes in fair value 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. The
gain or loss due to changes in fair value is recognized in earnings or
as other comprehensive income in the statement of stockholders'
equity, depending on the type of instrument and whether or not it is
considered a hedge. In June 1999, the FASB issued SFAS 137,
"ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -
DEFERRAL OF THE EFFECTIVE DATE OF STATEMENT NO. 133." This statement
defers the adoption of SFAS 133 to fiscal quarters of fiscal years
beginning after June 15, 2000. The FASB issued SFAS No. 138,
"ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING
ACTIVITIES -- AN AMENDMENT OF FASB STATEMENT NO. 133" in June 2000,
which addresses various implementation issues relating to SFAS 133.
-8-
Adoption of the above Statements on January 1, 2001, did not have a
material impact on the Company's financial position, results of
operation or liquidity.
SFAS No. 140 "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL
ASSETS AND EXTINGUISHMENT OF LIABILITIES" ("SFAS 140"), was issued by
the Financial Accounting Standards Board in September of 2000. SFAS
140 supersedes and replaces FASB SFAS 125, "ACCOUNTING FOR TRANSFERS
AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES".
Accordingly, SFAS 140 is now the authoritative accounting literature
for transfers and servicing of financial assets and extinguishment of
liabilities. SFAS 140 also includes several additional disclosure
requirements in the area of securitized financial assets and
collateral arrangements. The provisions of SFAS 140 related to
transfers of financial assets applicable to all transfers of financial
assets occurring after March 31, 2001. The collateral recognition and
disclosure provisions in SFAS 140 were effective for fiscal years
ending after December 15, 2000. The Company's adoption of SFAS 140 did
not have a material impact on the Company's results of operations.
On July 20, 2001, the FASB issued SFAS No. 141, "BUSINESS
COMBINATIONS" ("SFAS 141") and SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS" ("SFAS 142"). SFAS 141 requires all business
combinations initiated after June 30, 2001, to be accounted for using
the purchase method. Poolings initiated prior to June 30, 2001, are
grandfathered. SFAS 142 replaces the requirement to amortize
intangible assets with indefinite lives and goodwill with a
requirement for an impairment test. SFAS 142 also requires an
evaluation of intangible assets and their useful lives and a
transitional impairment test for goodwill and certain intangible
assets. After transition, the impairment tests will be performed
annually. Any transitional impairment losses (goodwill and intangible
assets with indefinite lives) or write-offs of negative goodwill must
be accounted for as the cumulative effect of a change in accounting
principle. SFAS 142 must be adopted in fiscal years beginning after
December 15, 2001, as of the beginning of the year. Management is in
the process of evaluating the effect this will have on the Company's
financial statements.
COMPREHENSIVE INCOME
The Company's comprehensive income for the three month and six
month periods ended June 30, 2001 and 2000 is as follows:
-9-
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
(In thousands) 2001 2000 2001 2000
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net income $1,615 $1,495 $3,080 $2,925
Other comprehensive income:
Unrealized gain during the period 381 135 2,290 51
Less: realized gain during the period (82) -- (140) --
Tax effect (116) (52) (833) (20)
------ ------ ------ ------
Comprehensive income $1,798 $1,578 $4,397 $2,956
====== ====== ====== ======
EARNINGS PER SHARE
Income for basic earnings per share ("EPS") is based on the
weighted average number of common shares outstanding. Diluted EPS is
computed using the weighted average number of common shares
outstanding increased by the assumed conversion of the Company's stock
options, unless anti-dilutive. The components of basic and diluted
earnings per common share for the three month and six month periods
ended June 30, 2001 and 2000 are as follows:
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2001 2000 2001 2000
---- ---- ---- ----
BASIC EARNINGS PER SHARE:
<s> <c> <c> <c> <c>
Net income $1,615,000 $1,495,000 $3,080,000 $2,925,000
Weighted average common shares outstanding 2,248,864 2,257,694 2,250,213 2,267,716
========== ========== ========== ==========
Basic earnings per common share $ .72 $ .66 $ 1.37 $ 1.29
===== ===== ====== ======
DILUTED EARNINGS PER SHARE:
Weighted average common shares outstanding 2,248,864 2,257,694 2,250,213 2,267,716
Assumed conversion of stock options 6,087 4,264 6,116 4,747
---------- ---------- ---------- ----------
Diluted weighted average common
shares outstanding 2,254,951 2,261,958 2,256,328 2,272,473
========== ========== ========== ==========
Diluted earnings per common share $ .72 $ .66 $ 1.37 $ 1.29
===== ===== ====== ======
MERGER AND ACQUISITION
On April 20, 2001, First Mid Bank acquired all the outstanding
stock of American Bank of Illinois located in Highland, Illinois, for
$3.7 million in cash. This acquisition added approximately $30.8
million to total deposits, $24.9 million to loans, $2 million to
securities, $1.7 million to premises and equipment and $1.4 million to
-10-
intangible assets. The acquisition was accounted for using the
purchase method of accounting whereby the acquired assets and
liabilities were recorded at fair value as of the acquisition date and
the excess cost over fair value of net assets was recorded as
goodwill. The consolidated financial statements include the results
of operations of American Bank of Illinois since the acquisition date.
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, June 30, 2001 and 2000. This discussion and
analysis should be read in conjunction with the consolidated financial
statements, related notes and selected financial data appearing
elsewhere in this report.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended,
such as, discussions of the Company's pricing and fee trends, credit
quality and outlook, liquidity, new business results, expansion plans,
anticipated expenses and planned schedules. The Company intends such
forward-looking statements to be covered by the safe harbor provisions
for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and is including this statement for
purposes of these safe harbor provisions. Forward-looking statements,
which are based on certain assumptions and describe future plans,
strategies and expectations of the Company, are identified by use of
the words "believe," "expect," "intend," "anticipate," "estimate,"
"project," or similar expressions. Actual results could differ
materially from the results indicated by these statements because the
realization of those results is subject to many uncertainties
including: changes in interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality or composition of the loan or
investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market
area and accounting principles, policies and guidelines. These risks
and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Further information concerning the Company and its business, including
additional factors that could materially affect the Company's
financial results, is included in the Company's filings with the
Securities and Exchange Commission.
-11-
OVERVIEW
Net income for the three months ended June 30, 2001 was
$1,615,000 ($.72 diluted EPS), an increase of $120,000 from $1,495,000
($.66 diluted EPS) for the same period in 2000. Net income for the
six months ended June 30, 2001 was $3,080,000 ($1.37 diluted EPS), an
increase of $155,000 from $2,925,000 ($1.29 diluted EPS) for the same
period in 2000. A summary of the factors which contributed to the
changes in net income is shown in the table below.
2001 vs 2000
Three months Six months
(In thousands) ------------ ----------
Net interest income $ 467 $ 411
Other income, including
securities transactions 604 990
Other expenses (560) (829)
Income taxes (391) (417)
----- -----
Increase in net income $ 120 $ 155
===== =====
The following table shows the Company's annualized performance
ratios for the six months ended June 30, 2001 and 2000, as compared to
the performance ratios for the year ended December 31, 2000:
June 30, June 30, December 31,
2001 2000 2000
-------- -------- ------------
<s> <c> <c> <c>
Return on average assets .95% .97% .92%
Return on average equity 10.28% 11.24% 10.55%
Return on average common equity 10.28% 11.24% 10.55%
Average equity to average assets 9.26% 8.63% 8.70%
RESULTS OF OPERATIONS
Net Interest Income
-------------------
The largest source of operating revenue for the Company is net
interest income. Net interest income represents the difference
between total interest income earned on earning assets and total
interest expense paid on interest-bearing liabilities. The amount of
interest income is dependent upon many factors, including the volume
and mix of earning assets, the general level of interest rates and the
dynamics of changes in interest rates. The cost of funds necessary to
support earning assets varies with the volume and mix of interest-
bearing liabilities and the rates paid to attract and retain such
funds.
For purposes of the following discussion and analysis, the
interest earned on tax-exempt securities is adjusted to an amount
comparable to interest subject to income taxes at 34%. The adjustment
is referred to as the tax-equivalent ("TE") adjustment. The Company's
average balances, interest income and expense and rates earned or paid
-12-
for major balance sheet categories are set forth in the following
table (dollars in thousands):
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
---------------- ----------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
<s> <c> <c> <c> <c> <c> <c>
ASSETS
Interest-bearing deposits $ 56 $ 2 5.60% $ 132 $ 4 6.09%
Federal funds sold 3,647 87 4.79% 2,166 63 5.81%
Investment securities
Taxable 121,576 3,682 6.06% 121,150 3,850 6.36%
Tax-exempt (1) 30,574 1,061 6.94% 29,768 1,092 7.33%
Loans (2)(3) 440,350 18,362 8.34% 396,614 16,658 8.40%
-------- ------- ------ -------- ------- ------
Total earning assets 596,203 23,194 7.78% 549,830 21,667 7.88%
-------- -------- ------ -------- -------- -----
Cash and due from banks 16,253 16,388
Premises and equipment 15,937 16,020
Other assets 22,340 23,924
Allowance for loan losses (3,513) (3,070)
-------- --------
Total assets $647,220 $603,092
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
Demand deposits $167,016 $ 2,364 2.83% $160,459 $ 2,366 2.95%
Savings deposits 39,379 452 2.30% 40,490 473 2.33%
Time deposits 252,006 7,208 5.72% 222,528 5,771 5.19%
Securities sold under
agreements to repurchase 25,673 543 4.23% 23,295 600 5.15%
FHLB advances 28,364 823 5.81% 31,966 995 6.22%
Federal funds purchased 454 12 5.17% 1,547 47 6.12%
Long-term debt 4,325 136 6.28% 4,325 158 7.32%
-------- ------- ------ ------- ------- ------
Total interest-bearing
liabilities 517,217 11,538 4.46% 484,610 10,410 4.30%
-------- ------- ------ -------- ------- ------
Demand deposits 64,469 61,807
Other liabilities 5,632 4,638
Stockholders' equity 59,902 52,037
-------- --------
Total liabilities & equity $647,220 $603,092
======== ========
Net interest income (TE) $11,656 $11,257
======= =======
Net interest spread 3.32% 3.58%
Impact of non-interest
bearing funds .59% .51%
------ ------
Net yield on interest-
earning assets (TE) 3.91% 4.09%
====== ======
-13-
(1) Interest income and rates are presented on a tax-equivalent basis ("TE")
assuming a federal income tax rate of 34%.
(2) Loan fees are included in interest income and are not material.
(3) Nonaccrual loans have been included in the average balances.
Changes in net interest income may also be analyzed by
segregating the volume and rate components of interest income and
interest expense. The following table summarizes the approximate
relative contribution of changes in average volume and interest rates
to changes in net interest income (TE) for the six months ended June
30, 2001, as compared to the same period in 2000 (in thousands):
For the six months ended June 30,
2001 compared to 2000
Increase / (Decrease)
-----------------------------------------------------------------
Total Rate/
Change Volume Rate Volume (4)
------ ------ ---- ----------
<s> <c> <c> <c> <c>
EARNING ASSETS:
Interest-bearing deposits $ (2) $ (2) $ -- $ --
Federal funds sold 24 43 (11) (8)
Investment securities:
Taxable (168) 15 (183) --
Tax-exempt (1) (31) 30 (59) (2)
Loans (2)(3) 1,704 1,837 (120) (13)
------ ------ ------ -----
Total interest income 1,527 1,923 (373) (23)
------ ------ ------ -----
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits
Demand deposits (2) 97 (96) (3)
Savings deposits (21) (14) (7) --
Time deposits 1,437 769 590 78
Securities sold under
agreements to repurchase (57) 61 (107) (11)
FHLB advances (172) (113) (66) 7
Federal funds purchased (35) (33) (7) 5
Long-term debt (22) -- (22) --
------ ------- ------ -----
Total interest expense 1,128 767 285 76
------ ------- ------ -----
Net interset income $ 399 $ 1,156 $ (658) $ (99)
====== ======= ====== =====
(1) Interest income and rates are presented on a tax-equivalent basis, assuming a federal income tax rate of 34%.
(2) Loan fees are included in interest income and are not material.
(3) Nonaccrual loans are not material and have been included in the average balances.
(4) The changes in rate/volume are computed on a consistent basis by multiplying the change in rates with the change
in volume.
-14-
On an tax equivalent basis, net interest income increased
$399,000, or 3.5% to $11,656,000 for the six months ended June 30,
2001, from $11,257,000 for the same period in 2000. The increase in
net interest income was primarily due to a growth in interest earning
assets including the acquisition of American Bank of Illinois.
For the six months ended June 30, 2001, average earning assets
increased by $46,373,000, or 8.4%, and average interest-bearing
liabilities increased $32,607,000, or 6.7%, compared with average
balances for the same period in 2000.
Changes in average balances, as a percent of average earnings assets,
are shown below:
* average loans (as a percent of average earnings assets)
increased 1.8% to 73.9% for the six months ended June 30,
2001, from 72.1% for the same period in 2000.
* average securities (as a percent of average earnings assets)
decreased 1.9% to 25.5% for the six months ended June 30,
2001, from 27.4% for the same period in 2000.
Provision for Loan Losses
-------------------------
The provision for loan losses for the six months ended June 30,
2001 and 2000 was $300,000. For information on loan loss experience
and nonperforming loans, see the "NONPERFORMING LOANS" and "LOAN
QUALITY AND ALLOWANCE FOR LOAN LOSSES" sections later in this
document.
Other Income
------------
An important source of the Company's revenue is derived from
other income. The following table sets forth the major components of
other income for the three months ended June 30, 2001 and 2000 (in
thousands):
Three months ended Six months ended
------------------------------ ------------------------------
2001 2000 $ change 2001 2000 $ change
---- ---- -------- ---- ---- --------
<s> <c> <c> <c> <c> <c> <c>
Trust $ 471 $ 448 $ 23 $ 971 $ 961 $ 10
Brokerage 94 138 (44) 191 275 (84)
Service charges 799 616 183 1,516 1,208 308
Security gains 82 -- 82 140 -- 140
Mortgage banking 296 107 189 474 169 305
Other 478 307 171 924 613 311
------ ------ ----- ------ ------ -----
Total other income $2,220 $1,616 $ 604 $4,216 $3,226 $ 990
====== ====== ===== ====== ====== =====
Explanations for the three months ended June 30, 2001 as compared to
the same period in 2000:
-15-
* Trust revenues increased $23,000 or 5.1% to $471,000 from
$448,000. Trust assets, reported at market value, were $298
million at June 30, 2001 compared to $318 million at June 30,
2000.
* Revenues from brokerage and annuity sales decreased $44,000 or
31.9% to $94,000 from $138,000. This was primarily due to an
overall downturn in the stock market.
* Fees from service charges increased $183,000 or 29.7% to $799,000
from $616,000. This increase was primarily due to an increase in
the number of transaction accounts with the acquisition of
American Bank of Illinois, as well as a fee increase in 4th
quarter 2000.
* Sales of investment securities resulted in a net gain of $82,000
or 100% change. This resulted from the sale of four available-
for-sale corporate bonds to take advantage of the narrowing
change in the spread due to the downturn in the market.
* Mortgage banking income increased $189,000 or 176.6% to $296,000
from $107,000. This increase was due to a higher number of fixed
rate loans originated and sold by First Mid Bank as a result of
falling interest rates. Loans sold balances are as follows:
* $17.9 million (representing 206 loans) for the 2nd quarter
2001.
* $4.0 million (representing 52 loans) for the 2nd quarter
2000.
* Other income increased $171,000 or 55.7% to $478,000 from
$307,000. This increase is partially due to an increase in late
charge fees, and an increase in ATM service charges due to the
number of ATM's increasing.
Explanations for the six months ended June 30, 2001 as compared to the
same period in 2000:
* Trust revenues increased $10,000 or 1.0% to $971,000 from
$961,000. Trust assets, reported at market value, were $298
million at June 30, 2001, $303 million at December 31, 2000, and
$318 million at June 30, 2000.
* Revenues from brokerage and annuity sales decreased $84,000 or
30.5% to $191,000 from $275,000. This was primarily due to an
overall downturn in the stock market.
* Fees from service charges increased $308,000 or 25.5% to
$1,516,000 from $1,208,000. This increase was primarily due to
an increase in the number of transaction accounts with the
acquisition of American Bank of Illinois, as well as a fee
increase in 4th quarter 2000.
-16-
* Sales of investment securities resulted in a net gain of
$140,000. This resulted from the sale of several securities in
the available-for-sale portfolio to improve the overall portfolio
mix and the margin, including the sale of four corporate bonds
with a narrow change in spread due to the downturn in the market.
* Mortgage banking income increased $305,000 or 180.5% to $474,000
from $169,000. This increase was due to a higher number of fixed
rate loans originated and sold by First Mid Bank as a result of
falling interest rates. Loans sold balances are as follows:
* $26.2 million (representing 303 loans) for the period to
date in 2001.
* $7.0 million (representing 93 loans) for the period to date
in 2000.
* Other income increased $311,000 or 50.7% to $924,000 from
$613,000. This increase is partially due to additional income on
credit life insurance sales, and an increase in ATM service
charges due to the number of ATM's increasing.
Other Expense
-------------
The major categories of other expense include salaries and
employee benefits, occupancy and equipment expenses and other
operating expenses associated with day-to-day operations. The
following table sets forth the major components of other expense for
the three months and six months ended June 30, 2001 and 2000 (in
thousands):
Three months ended Six months ended
--------------------------------- ---------------------------------
2001 2000 $ change 2001 2000 $ change
---- ---- -------- ---- ---- --------
<s> <c> <c> <c> <c> <c> <c>
Salaries and benefits $ 2,750 $ 2,516 $ 234 $ 5,302 $ 5,026 $ 276
Occupancy and equipment 958 905 53 1,909 1,783 126
Amortization of intangibles 309 300 9 603 602 1
Stationery and supplies 181 124 57 337 272 65
Legal and professional fees 253 205 48 488 375 113
Marketing and promotion 231 249 (18) 389 406 (17)
Other operating expenses 930 753 177 1,749 1,484 265
------- ------- ----- ------- ------- -----
Total other expense $ 5,612 $ 5,052 $ 560 $10,777 $ 9,948 $ 829
======= ======= ===== ======= ======= =====
Explanations for the three months ended June 30, 2001 as compared to
the same period in 2000:
* Salaries and employee benefits, the largest component of other
expense, increased $234,000 or 9.3% to $2,750,000 from
$2,516,000. This increase can be explained by merit increases
for continuing employees, an increase of approximately $104,000
due to the acquisition of American Bank of Illinois in April,
-17-
2001, and an increase of approximately $9,000 due to a new branch
being opened at Eastern Illinois University during 3rd quarter
2000. There were 293 FTE employees at June 30, 2001 compared to
275 at June 30, 2000.
* Occupancy and equipment expense increased $53,000 or 5.9% to
$958,000 from $905,000. This increase included building
maintenance, utilities and depreciation expense recorded on
assets acquired in the American Bank of Illinois acquisition.
* All other categories of operating expenses increased a net of
$264,000 or 19.8% to $1,595,000 from $1,331,000. This increase
is primarily due to higher expense for customer supplies and
printing forms associated with the purchase of American Bank of
Illinois.
Explanations for the six months ended June 30, 2001 as compared to the
same period in 2000:
* Salaries and employee benefits, the largest component of other
expense, increased $276,000 or 5.5% to $5,302,000 from
$5,026,000. This increase can be explained by merit increases
for continuing employees, an increase of approximately $104,000
due to the acquisition of American Bank of Illinois in April,
2001, and an increase of approximately $17,000 due to a new
branch being opened at Eastern Illinois University during 3rd
quarter 2000. There were 293 FTE employees at June 30, 2001
compared to 275 at June 30, 2000.
* Occupancy and equipment expense increased $126,000 or 7.1% to
$1,909,000 from $1,783,000. This increase included building
maintenance, utilities and depreciation expense recorded on
assets acquired in the American Bank of Illinois acquisition as
well as higher utilities expense for all buildings.
* All other categories of operating expenses increased a net of
$398,000 or 15.7% to $2,923,000 from $2,537,000. This increase
is primarily due to higher expense for printing forms associated
with the purchase of American Bank of Illinois, and an increase
in mortgage servicing expense.
Income Taxes
------------
Total income tax expense amounted to $1,355,000 (30.6% effective
tax rate) for the six months ended June 30, 2001, compared to $938,000
(24.3% effective tax rate) for the same period in 2000. During the
six months ended June 30, 2000, the Company donated property with a
market value in excess of the remaining book value to the local school
district which led to a lower effective tax rate.
-18-
ANALYSIS OF BALANCE SHEETS
Loans
-----
The loan portfolio is the largest category of the Company's
earning assets. The following table summarizes the composition of the
loan portfolio as of June 30, 2001 and December 31, 2000 (in
thousands):
June 30, December 31,
2001 2000
-------- ------------
Real estate - residential $145,621 $140,842
Real estate - agriculture 40,228 33,689
Real estate - commercial 135,649 124,721
-------- --------
Total real estate - mortgage $321,498 $299,252
Commercial and agricultural 106,263 100,201
Installment 33,413 28,674
Other 1,408 1,161
-------- --------
Total loans $462,582 $429,288
======== ========
At June 30, 2001, the Company had loan concentrations in
agricultural industries of $79.7 million, or 17.2%, of outstanding
loans and $67.9 million, or 15.8%, at December 31, 2000. The Company
had no further industry loan concentrations in excess of 10% of
outstanding loans.
Real estate mortgage loans have averaged approximately 70% of the
Company's total loan portfolio for the past several years. This is
the result of a strong local housing market and the Company's
historical focus on residential real estate lending. The balance of
real estate loans held for sale amounted to $5,524,000 and $587,000 as
of June 30, 2001 and December 31, 2000, respectively.
The following table presents the balance of loans outstanding as
of June 30, 2001, by maturities (dollars in thousands):
-19-
Maturity (1)
------------------------------------------------------------
Over 1
One year through Over
or less (2) 5 years 5 years Total
----------- ------- ------- -----
<s> <c> <c> <c> <c>
Real estate - residential $ 39,230 $ 84,359 $ 22,032 $145,621
Real estate - agriculture 6,983 26,478 6,766 40,228
Real estate - commercial 36,443 90,519 8,687 135,649
-------- -------- -------- --------
Total real estate - mortgage $ 82,656 $201,357 $ 37,485 $321,498
Commercial and agricultural 65,788 38,176 2,298 106,263
Installment 6,505 24,426 2,482 33,413
Other 444 225 739 1,408
-------- -------- -------- --------
Total loans $155,394 $264,184 $ 43,004 $462,582
======== ======== ======== ========
(1) Based on scheduled principal repayments.
(2) Includes demand loans, past due loans and overdrafts.
As of June 30, 2001, loans with maturities over one year
consisted of approximately $272,317,000 in fixed rate loans and
$34,871,000 in variable rate loans. The loan maturities noted above
are based on the contractual provisions of the individual loans.
Rollovers and borrower requests are handled on a case-by-case basis.
Nonperforming Loans
-------------------
Nonperforming loans include: (a) loans accounted for on a
nonaccrual basis; (b) accruing loans contractually past due ninety
days or more as to interest or principal payments; and loans not
included in (a) and (b) above which are defined as "renegotiated
loans".
The following table presents information concerning the aggregate
amount of nonperforming loans at June 30, 2001 and December 31, 2000
(in thousands):
June 30, December 31,
2001 2000
-------- ------------
<s> <c> <c>
Nonaccrual loans $4,354 $2,982
Loans past due ninety days
or more and still accruing -- 245
Renegotiated loans which are
performing in accordance
with revised terms 199 232
------ ------
Total Nonperforming Loans $4,553 $3,459
====== ======
-20-
At June 30, 2001, approximately $1,107,000 of the nonperforming
loans resulted from collateral dependent loans to three borrowers.
Management has identified $45,000 possible loss exposure associated
with the total nonperforming loans. The Company's policy generally is
to discontinue the accrual of interest income on any loan for which
principal or interest is ninety days past due. Nonaccrual loans are
returned to accrual status when, in the opinion of management, the
financial position of the borrower indicates there is no longer any
reasonable doubt as to the timely collection of interest or principal.
Interest income that would have been reported if nonaccrual and
renegotiated loans had been performing totaled $135,000 for the six
months ended June 30, 2001 and $154,000 for the year ended December
31, 2000. Interest income that was included in income totaled $8,000
and $20,000 for the same periods.
Loan Quality and Allowance for Loan Losses
------------------------------------------
The allowance for loan losses represents management's best
estimate of the reserve necessary to adequately cover probable losses
in the loan portfolio. The provision for loan losses is the charge
against current earnings that is determined by management as the
amount needed to maintain an adequate allowance for loan losses. In
determining the adequacy of the allowance for loan losses, and
therefore the provision to be charged to current earnings, management
relies predominantly on a disciplined credit review and approval
process which extends to the full range of the Company's credit
exposure. The review process is directed by overall lending policy
and is intended to identify, at the earliest possible stage, borrowers
who might be facing financial difficulty. Once identified, the
magnitude of exposure to individual borrowers is quantified in the
form of specific allocations of the allowance for loan losses.
Collateral values are considered by management in the determination of
such specific allocations. Additional factors considered by
management in evaluating the overall adequacy of the allowance include
historical net loan losses, the level and composition of nonaccrual,
past due and renegotiated loans and the current economic conditions in
the region where the Company operates.
Management recognizes that there are risk factors which are
inherent in the Company's loan portfolio. All financial institutions
face risk factors in their loan portfolios because risk exposure is a
function of the business. The Company's operations (and therefore its
loans) are concentrated in east central Illinois, an area where
agriculture is the dominant industry. Accordingly, lending and other
business relationships with agriculture-based businesses are critical
to the Company's success. At June 30, 2001 the Company's loan
portfolio included $79.7 million of loans to borrowers whose
businesses are directly related to agriculture. The balance increased
by $11.8 million from $67.9 million at December 31, 2000. While the
Company adheres to sound underwriting practices including
collateralization of loans, an extended period of low commodity prices
and/or significantly reduced yields on crops could nevertheless result
in an increase in the level of problem agriculture loans.
-21-
Analysis of the allowance for loan losses as of June 30, 2001 and
2000, and of changes in the allowance for the six months ended June
30, 2001 and 2000, is as follows (dollars in thousands):
June 30,
2001 2000
---- ----
<s> <c> <c>
Average loans outstanding, net of unearned income $440,350 $396,614
Allowance-beginning of period $ 3,262 $ 2,939
Balance of acquired branches 275 --
Charge-offs:
Real estate-mortgage 10 18
Commercial, financial & agricultural 124 55
Installment 46 54
-------- --------
Total charge-offs 180 127
Recoveries:
Real estate-mortgage -- 1
Commercial, financial & agricultural 11 10
Installment 25 10
-------- --------
Total recoveries 36 21
-------- --------
Net charge-offs 144 106
-------- --------
Provision for loan losses 300 300
-------- --------
Allowance-end of period $ 3,693 $ 3,133
======= =======
Ratio of net charge-offs to average loans .064% .060%
==== ====
Ratio of allowance for loan losses to
loans outstanding (less unearned
interest at end of period) .80% .76%
=== ===
Ratio of allowance for loan losses
to nonperforming loans 81.1% 163.7%
==== =====
The Company minimizes credit risk by adhering to sound
underwriting and credit review policies. These policies are reviewed
at least annually, and changes are approved by the board of directors.
Senior management is actively involved in business development efforts
and the maintenance and monitoring of credit underwriting and
-22-
approval. The loan review system and controls are designed to
identify, monitor and address asset quality problems in an accurate
and timely manner. The board of directors and management review the
status of problem loans and determines the adequacy of the allowance
account. In addition to internal policies and controls, regulatory
authorities periodically review asset quality and the overall adequacy
of the allowance for loan losses. As of June 30, 2001, $1,029,000 of
the allowance account has been specifically allocated to individual
loans.
Securities
----------
The Company's overall investment goal is to maximize earnings
while maintaining liquidity in securities having minimal credit risk.
The types and maturities of securities purchased are primarily based
on the Company's current and projected liquidity and interest rate
sensitivity positions. The following table sets forth the amortized
cost of the securities as of June 30, 2001 and December 31, 2000 (in
thousands):
June 30, December 31,
2001 2000
------------------ --------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
<s> <c> <c> <c> <c>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 75,141 53% $ 89,202 58%
Obligations of states and
political subdivisions 30,182 22% 30,434 20%
Mortgage-backed securities 25,779 18% 27,750 18%
Other securities 9,472 7% 5,873 4%
-------- --- ------- ---
Total securities $140,574 100% $153,259 100%
======== === ======== ===
At June 30, 2001, the Company's investment portfolio showed an
increase in other securities and a decrease in U.S. Treasury
securities and obligations of U.S. government corporations and
agencies. All other types of securities remained consistent. The
amortized cost, gross unrealized gains and losses and estimated fair
values for available-for-sale and held-to-maturity securities by major
security type at June 30, 2001 and December 31, 2000 were as follows
(in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
JUNE 30, 2001 - AVAILABLE-FOR-SALE: Cost Gains Losses Value
--------- ---------- ---------- ---------
<s> <c> <c> <c> <c>
U.S. Treasury securities and obligations
of U.S. Government corporations & agencies $ 75,141 $ 848 $ (30) $ 75,959
Obligations of states and political
subdivisions 27,455 371 (79) 27,747
Mortgage-backed securities 25,779 341 (24) 26,096
-23-
Federal Home Loan Bank stock 3,006 - - 3,006
Other securities 6,466 253 - 6,719
------- ----- ----- -------
Total available-for-sale $137,847 $ 1,813 $ (133) $139,527
======== ======= ====== ========
JUNE 30, 2001 - HELD-TO-MATURITY:
Obligations of states and political
subdivisions $ 2,727 $ 62 $ - $ 2,789
======== ======= ======= =======
DECEMBER 31, 2000 - AVAILABLE-FOR-SALE:
U.S. Treasury securities and obligations
of U.S. Government corporations & agencies $ 89,202 $ 185 $(707) $ 88,680
Obligations of states and political
subdivisions 27,677 248 (283) 27,642
Mortgage-backed securities 27,750 102 (144) 27,708
Federal Home Loan Bank stock 2,708 - - 2,708
Other securities 3,165 131 - 3,296
-------- ------- ------- --------
Total available-for-sale $150,502 $ 666 $(1,134) $150,034
======== ======= ========
DECEMBER 31, 2000 - HELD-TO-MATURITY:
Obligations of states and political
subdivisions $ 2,757 $ 43 $ - $ 2,800
======== ======= ======= ========
The following table indicates the expected maturities of
investment securities classified as available-for-sale and held-to-
maturity, presented at amortized cost, at June 30, 2001 and the
weighted average yield for each range of maturities. Mortgage-backed
securities are aged according to their weighted average life. All
other securities are shown at their contractual maturity.
One After 1 After 5 After
year through through ten
or less 5 years 10 years years Total
(dollars in thousands) ------- ------- -------- ----- -----
<s> <c> <c> <c> <c> <c>
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 2,999 $58,266 $ 5,496 $ 8,380 $ 75,141
Obligations of state and
political subdivisions 236 4,522 11,880 10,817 27,455
Mortgage-backed securities - 18,033 5,280 2,466 25,779
Other securities - - - 9,472 9,472
------- ------- ------- ------- -------
Total Investments $ 3,235 $80,821 $22,656 $31,135 $137,847
======= ======= ======= ======= ========
Weighted average yield 5.57% 5.59% 5.17% 6.59% 5.75%
Full tax-equivalent yield 5.80% 5.71% 6.38% 7.45% 6.22%
======= ======= ======= ======= ========
-24-
Held-to-maturity:
Obligations of state and
political subdivisions $ 711 $ 700 $ 675 $ 641 $ 2,727
======= ======= ======= ======= ========
Weighted average yield 4.86% 5.28% 5.49% 5.44% 5.26%
Full tax-equivalent yield 7.37% 8.00% 8.32% 8.25% 7.97%
======= ======= ======= ======= ========
The weighted average yields are calculated on the basis of the
amortized cost and effective yields weighted for the scheduled
maturity of each security. Full tax-equivalent yields have been
calculated using a 34% tax rate. With the exception of obligations of
the U.S. Treasury and other U.S. Government agencies and corporations,
there were no investment securities of any single issuer the book
value of which exceeded 10% of stockholders' equity at June 30, 2001.
Investment securities carried at approximately $117,373,000 and
$131,654,000 at June 30, 2001 and December 31, 2000, 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 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 six
months ended June 30, 2001 and for the year ended December 31, 2000
(dollars in thousands):
June 30, December 31,
2001 2000
---------------------------- ----------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ -------- ------ --------
<s> <c> <c> <c> <c>
Demand deposits:
Non-interest bearing $ 64,469 - $ 62,579 -
Interest bearing 167,016 2.83% 163,531 3.13%
Savings 39,379 2.30% 39,215 2.43%
Time deposits 252,006 5.72% 226,259 5.42%
------- ---- ------- ----
Total average deposits $522,870 3.83% $491,584 3.73%
======== ==== ======== ====
-25-
The following table sets forth the maturity of time deposits of
of $100,000 or more at June 30, 2001 and December 31, 2000 (in thousands):
June 30, December 31,
2001 2000
-------- ------------
3 months or less $ 23,362 $ 15,413
Over 3 through 6 months 10,942 20,283
Over 6 through 12 months 23,839 18,663
5,242 8,558
Over 12 months -------- --------
$ 63,385 $ 62,922
Total ======== ========
Other Borrowings
----------------
Other borrowings consist of securities sold under agreements to
repurchase, Federal Home Loan Bank advances, and federal funds
purchased. Information relating to other borrowings as of June 30,
2001 and December 31, 2000 is presented below (in thousands):
June 30, December 31,
2001 2000
-------- -----------
<s> <c> <c>
Securities sold under agreements to repurchase $31,263 $31,096
Federal Home Loan Bank advances:
Overnight -- 20,000
Fixed term - due before one year 5,000 --
Fixed term - due after one year 23,300 20,300
------- -------
Total $59,563 $71,396
======= =======
Average interest rate at end of period 4.53% 6.06%
Maximum Outstanding at any Month-end
Securities sold under agreements to repurchase $32,634 $34,546
Federal Home Loan Bank advances:
Overnight 12,800 44,000
Fixed term - due before one year 5,000 --
Fixed term - due after one year 23,300 20,300
Federal funds purchased 2,850 1,000
------- -------
Total $76,584 $99,846
======= =======
Averages for the Period Ended
Securities sold under agreements to repurchase $25,673 $23,349
Federal Home Loan Bank advances:
Overnight 4,357 25,214
Fixed term - due before one year 1,671 --
Fixed term - due after one year 22,336 10,345
Federal funds purchased 454 1,223
------- -------
-26-
Total $54,491 $60,131
======= =======
Average interest rate during the period 5.06% 6.12%
Securities sold under agreements to repurchase are short-term
obligations of First Mid Bank. First Mid Bank collateralizes these
obligations with 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 loan demand. This loan demand was
previously funded primarily through deposits by the State of Illinois.
The fixed term advances consists of $28.3 million which First Mid is
using to fund agricultural loans:
* $5 million advance at 6.16% with a 5-year maturity, due 03/20/05
* $2.3 million advance at 6.10% with a 5-year maturity, due 04/07/05
* $5 million advance at 6.12% with a 5-year maturity, due 09/06/05
* $3 million advance at 6.58% with a 2-year maturity, due 10/10/02
* $5 million advance at 6.00% with a 5-year maturity, due 12/14/05
* $3 million advance at 5.98% with a 10-year maturity, due 03/01/11
* $5 million advance at 4.35% with a 9-month maturity, due 02/01/02
INTEREST RATE SENSITIVITY
The Company seeks to maximize its net interest margin within an
acceptable level of interest rate risk. Interest rate risk can be
defined as the amount of forecasted net interest income that may be
gained or lost due to favorable or unfavorable movements in interest
rates. Interest rate risk, or sensitivity, arises when the maturity
or repricing characteristics of assets differ significantly from the
maturity or repricing characteristics of liabilities.
The Company monitors its interest rate sensitivity position to
maintain a balance between rate sensitive assets and rate sensitive
liabilities. This balance serves to limit the adverse effects of
changes in interest rates. The Company's asset/liability management
committee oversees the interest rate sensitivity position and directs
the overall allocation of funds.
In the banking industry, a traditional measurement of interest
rate sensitivity is known as a "GAP" analysis, which measures the
cumulative differences between the amounts of assets and liabilities
maturing or repricing at various intervals. The following table sets
-27-
forth the Company's interest rate repricing gaps for selected maturity
periods at June 30, 2001 (in thousands):
Number of Months Until Next Repricing Opportunity
INTEREST EARNING ASSETS: 0-1 1-3 3-6 6-12 12+
------- ------- ------- -------- -------
<s> <c> <c> <c> <c> <c>
Federal funds sold $13,161 $ -- $ -- $ -- $ --
Taxable investment securities 9,714 10,037 8,995 8,607 74,426
Nontaxable investment securities -- 242 1,102 1,856 27,274
Loans 74,153 21,136 38,892 72,812 255,590
--------- --------- --------- --------- ---------
Total $97,028 $ 31,416 $ 48,989 $ 83,275 $ 357,289
--------- --------- --------- --------- ---------
INTEREST BEARING LIABILITIES:
Savings and N.O.W. accounts 165,699 -- -- -- --
Money market accounts 57,418 -- -- -- --
Other time deposits 29,470 37,707 50,132 84,975 45,643
Other borrowings 31,263 -- -- 5,000 23,300
Long-term debt 4,325 -- -- -- --
--------- --------- --------- --------- ---------
Total $ 288,175 $ 37,707 $ 50,132 $ 89,975 $ 68,943
--------- --------- --------- --------- ---------
Periodic GAP $(191,148) $ (6,291) $(1,143) $ (6,700) $ 288,346
--------- --------- --------- --------- ---------
Cumulative GAP $(191,148) $(197,439) $(198,582) $(205,282) $ 83,064
========= ========= ========= ========= =========
GAP as a % of interest earning assets:
Periodic (30.9%) (1.0%) (0.2%) (1.1%) 46.7%
Cumulative (30.9%) (31.9%) (32.1%) (33.2%) 13.4%
========= ========= ========= ========= =========
At June 30, 2001, the Company was liability sensitive on a
cumulative basis through the twelve-month time horizon. Accordingly,
future increases in interest rates, if any, could have an unfavorable
effect on net interest margin. The Company's ability to lag the
market in repricing deposits in a rising interest rate environment
eases the implied liability sensitivity of the Company.
Interest rate sensitivity using a static GAP analysis basis is
only one of several measurements of the impact of interest rate
changes on net interest income used by the Company. Its actual
usefulness in assessing the effect of changes in interest rates varies
with the constant changes which occur in the composition of the
Company's earning assets and interest-bearing liabilities. For this
reason, the Company uses financial models to project interest income
under various rate scenarios and assumptions relative to the
prepayments, reinvestment and rollovers of assets and liabilities, of
which First Mid Bank represents substantially all of the Company's
rate sensitive assets and liabilities.
-28-
CAPITAL RESOURCES
At June 30, 2001, the Company's stockholders' equity increased
$4,255,000 or 7.4% to $61,982,000 from $57,727,000 as of December 31,
2000. During the first six months of 2001, net income contributed
$3,080,000 to equity before the payment of dividends to common
stockholders. The change in net unrealized gain/loss on available-
for-sale investment securities increased stockholders' equity by
$1,317,00, net of tax.
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Bank holding companies
follow minimum regulatory requirements established by the Federal
Reserve Board, and First Mid Bank follows similar minimum regulatory
requirements established for national banks by the Office of the
Comptroller of the Currency. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary action by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements.
Quantitative measures established by each regulatory agency to
ensure capital adequacy require the reporting institutions to maintain
a minimum total risk-based capital ratio of 8% and a minimum leverage
ratio of 3% for the most highly-rated banks that do not expect
significant growth. All other institutions are required to maintain a
minimum leverage ratio of 4%. Management believes that, as of June
30, 2001 and December 31, 2000, all capital adequacy requirements have
been met by the Company and First Mid Bank.
As of June 30, 2001, the most recent notification from the
primary regulator categorized First Mid Bank as well capitalized under
the regulatory framework for prompt corrective action. To be
categorized as well capitalized, minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios must be maintained as set forth
in the table. There are no conditions or events since that
notification that management believes have changed this category.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<s> <c> <c> <c> <c> <c> <c>
JUNE 30, 2001
Total Capital
(to risk-weighted assets)
Company $ 51,629 11.55% $ 35,771 > 8.00% N/A N/A
-
First Mid Bank 51,691 11.65% 35,491 > 8.00% $ 44,363 > 10.00%
- -
Tier 1 Capital
(to risk-weighted assets)
-29-
Company 47,936 10.72% 17,885 > 4.00% N/A N/A
-
First Mid Bank 47,998 10.82% 17,745 > 4.00% 26,618 > 6.00%
- -
Tier 1 Capital
(to average assets)
Company 47,936 7.38% 25,982 > 4.00% N/A N/A
-
First Mid Bank 47,998 7.28% 26,377 > 4.00% 32,971 > 5.00%
- -
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
DECEMBER 31, 2000
Total Capital
(to risk-weighted assets)
Company $ 49,111 11.74% $ 33,453 > 8.00% N/A N/A
-
First Mid Bank 50,226 12.04% 33,374 > 8.00% $ 41,718 > 10.00%
- -
Tier 1 Capital
(to risk-weighted assets)
Company 45,849 10.96% 16,727 > 4.00% N/A N/A
-
First Mid Bank 46,964 11.26% 16,687 > 4.00% 25,031 > 6.00%
- -
Tier 1 Capital
(to average assets)
Company 45,849 7.32% 25,070 > 4.00% 31,338 > 5.00%
- -
First Mid Bank 46,964 7.54% 24,931 > 4.00% 31,163 > 5.00%
- -
Banks and bank holding companies are generally expected to
operate at or above the minimum capital requirements. These ratios
are in excess of regulatory minimums and will allow the Company to
operate without capital adequacy concerns.
STOCK PLANS
The Company has four plans through which Company stock may be
purchased by participants, 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 2000 Form 10-K.
-30-
On August 5, 1998, the Company announced a stock repurchase
program of up to 3% of its common stock. During 2000, the Board of
Directors of the Company authorized the repurchase of 5%, in addition
to the original 3%, of its common stock under this stock repurchase
program. The shares will be repurchased at the most recent market
price of the stock. The Company repurchased 13,981 shares (.59%) at a
total price of $443,000 during the six months ended June 30, 2001 and
60,169 shares (2.74%) at a total price of $1,881,000 for the year
ended December 31, 2000. A total of 97,385 shares, with an average
cost of $32.45, have been repurchased from the inception of this
program to June 30, 2001, and are held in treasury.
Liquidity
---------
Liquidity represents the ability of the Company and its
subsidiaries to meet the requirements of customers for loans and
deposit withdrawals. Liquidity management focuses on the ability to
obtain funds economically for these purposes and to maintain assets
which may be converted into cash at minimal costs. Other sources for
cash include deposits of the State of Illinois, brokered deposits, and
Federal Home Loan Bank advances. At June 30, 2001, the excess
collateral at the Federal Home Loan Bank will support approximately
$60 million of additional advances.
Management monitors its expected liquidity requirements
carefully, focusing primarily on cash flows from:
* lending activities, including loan commitments, letters of
credit and mortgage prepayment assumptions.
* deposit activities, including seasonal demand of private and
public funds.
* investing activities, including prepayments of mortgage-
backed securities and call provisions on U.S. Government
Treasuries and Agency securities.
* operating activities, including scheduled debt repayments
and dividends to shareholders.
As of June 30, 2001, the Company believes it will have sufficient
funds to meet obligations such as loan commitments and anticipated
stock repurchases.
Effects of Inflation
--------------------
Unlike industrial companies, virtually all of the assets and
liabilities of the Company are monetary in nature. As a result,
interest rates have a more significant impact on the Company's
performance than the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or experience the
same magnitude of changes as goods and services, since such prices are
effected by inflation. In the current economic environment, liquidity
and interest rate adjustments are features of the Company's assets and
-31-
liabilities which are important to the maintenance of acceptable
performance levels. The Company attempts to maintain a balance
between monetary assets and monetary liabilities, over time, to offset
these potential effects.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the market risks faced by
the Company since December 31, 2000. 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, 2000.
PART II
ITEM 1. LEGAL PROCEEDINGS
Since First Mid Bank acts a depository of funds, it is named from
time to time as a defendant in lawsuits (such as garnishment
proceedings) involving claims to the ownership of funds in particular
accounts. Management believes that all such litigation as well as
other pending legal proceedings in which the Company is involved
constitute ordinary, routine litigation incidental to the business of
the Company and that such litigation will not materially adversely
affect the Company's consolidated financial condition.
In addition to the normal proceedings referred to above,
Heartland Savings Bank ("Heartland"), a subsidiary of the Company that
merged with First Mid Bank during 1997, filed a complaint on December
5, 1995, against the U.S. Government which is now pending in the U.S.
Court of Federal Claims in Washington D.C. This complaint relates to
Heartland's interest as successor to Mattoon Federal Savings and Loan
Association which incurred a significant amount of supervisory
goodwill when it acquired Urbana Federal Savings and Loan in 1982.
The complaint alleges that the U.S. Government breached its
contractual obligations when, in 1989, it issued new rules which
eliminated supervisory goodwill from inclusion in regulatory capital.
On August 6, 1998, First Mid Bank filed a motion with the U.S. Court
of Federal Claims to grant summary 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, if any, may be recovered.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
-32-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 23, 2001. At
the meeting, Charles A. Adams, Daniel E. Marvin, Jr., and Ray Anthony
Sparks were elected to serve as Class III directors with terms
expiring in 2004. Continuing Class II directors (term expiring in
2003) are Richard Anthony Lumpkin and William S. Rowland and
continuing Class I directors (term expiring in 2002) are Kenneth R.
Diepholz, Gary W. Melvin and Steven L. Grissom.
There were 2,249,231 issued and outstanding shares of Common
Stock at the time of the Annual Meeting. The voting at the meeting,
on the items listed below, was as follows:
Election of Directors For Withheld
Charles A. Adams 1,978,382 10,992
Daniel E. Marvin, Jr. 1,975,094 14,280
Ray Anthony Sparks 1,977,382 11,992
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) Exhibits: The exhibits required by Item 601 of Regulation S-K
and filed herewith are listed in the Exhibit Index which follows the
Signature Page and immediately precedes the exhibits filed.
(b) Reports on Form 8-K: None.
-33-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
FIRST MID-ILLINOIS BANCSHARES, INC.
(Company)
/s/ William S. Rowland
-------------------------------------
William S. Rowland
President and Chief Executive Officer
/s/ Michael L. Taylor
-------------------------------------
Michael L. Taylor
Chief Financial Officer
Dated: August 10, 2001
-34-
EXHIBIT INDEX TO FORM 10-Q
Exhibit
Number Description and Filing or Incorporation Reference
------- -------------------------------------------------
11.1 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(Filed herewith on page 6)
-35-