UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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 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 Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act) YES [X] NO [ ]
As of May 13, 2003, 3,158,169 common shares, $4.00 par value, were
outstanding.
PART I
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited) March 31, December 31,
(In thousands, except share data) 2003 2002
------------- -------------
Assets
Cash and due from banks:
Non-interest bearing $ 21,864 $ 22,437
Interest bearing 18,636 19,995
Federal funds sold 29,000 27,225
------------- -------------
Cash and cash equivalents 69,500 69,657
Investment securities:
Available-for-sale, at fair value 153,174 166,415
Held-to-maturity, at amortized cost (estimated fair
value of $1,824 and $1,927 at March 31, 2003
and December 31, 2002, respectively) 1,797 1,902
Loans 506,756 499,864
Less allowance for loan losses (3,841) (3,723)
------------- -------------
Net loans 502,915 496,141
Premises and equipment, net 17,005 16,916
Accrued interest receivable 4,919 6,362
Goodwill, net 9,034 9,034
Intangible assets, net 4,559 4,743
Other assets 4,886 5,070
------------- -------------
Total assets $767,789 $ 776,240
============= =============
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 84,694 $ 84,025
Interest bearing 530,951 529,427
------------- -------------
Total deposits 615,645 613,452
Accrued interest payable 1,481 1,793
Securities sold under agreements to repurchase 38,119 44,184
Other borrowings 39,425 44,625
Other liabilities 5,202 5,379
------------- -------------
Total liabilities 699,872 709,433
------------- -------------
Stockholders' equity:
Common stock, $4 par value; authorized 6,000,000
shares; issued 3,634,507 shares in 2003 and
3,603,737 shares in 2002 14,538 14,415
Additional paid-in capital 15,153 14,450
Retained earnings 48,257 45,896
Deferred compensation 1,746 1,589
Accumulated other comprehensive income 1,985 2,373
Less treasury stock at cost, 472,123 shares
in 2003 and 414,562 shares in 2002 (13,762) (11,916)
------------- -------------
Total stockholders' equity 67,917 66,807
------------- -------------
Total liabilities and stockholders' equity $767,789 $776,240
============= =============
See accompanying notes to unaudited consolidated financial statements.
Consolidated Statements of Income (unaudited) Three months ended
(In thousands, except per share data) March 31,
2003 2002
------------- -------------
Interest income:
Interest and fees on loans $ 8,008 $ 8,419
Interest on investment securities 1,602 1,906
Interest on federal funds sold 54 30
Interest on deposits with
other financial institutions 56 10
------------- -------------
Total interest income 9,720 10,365
Interest expense:
Interest on deposits 2,698 3,381
Interest on securities sold under agreements
to repurchase 64 86
Interest on Federal Home Loan Bank advances 418 450
Interest on federal funds purchased - 1
Interest on debt 60 33
------------- -------------
Total interest expense 3,240 3,951
------------- -------------
Net interest income 6,480 6,414
Provision for loan losses 250 125
------------- -------------
Net interest income after provision for loan losses 6,230 6,289
Other income:
Trust revenues 456 478
Brokerage commissions 57 58
Insurance commissions 411 191
Service charges 1,038 737
Securities gains, net 370 43
Mortgage banking revenue 549 326
Other 549 490
------------- -------------
Total other income 3,430 2,323
Other expense:
Salaries and employee benefits 3,314 3,006
Net occupancy and equipment expense 1,063 971
Amortization of other intangible assets 184 179
Stationery and supplies 144 155
Legal and professional 231 238
Marketing and promotion 132 159
Other 998 923
------------- -------------
Total other expense 6,066 5,631
------------- -------------
Income before income taxes 3,594 2,981
Income taxes 1,232 972
------------- -------------
Net income $ 2,362 $ 2,009
============= =============
Per share data:
Basic earnings per share $.74 $.59
Diluted earnings per share $.73 $.59
============= =============
Consolidated Statements of Cash Flows (unaudited) Three months ended
March 31,
(In thousands) 2003 2002
------------- -------------
Cash flows from operating activities:
Net income $ 2,362 $ 2,009
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 250 125
Depreciation, amortization and accretion, net 771 832
Gain on sale of securities, net (370) (43)
Loss on sale of other real property owned, net 16 6
Gain on sale of mortgage loans held for sale, net (514) (291)
Origination of mortgage loans held for sale (35,912) (19,593)
Proceeds from sale of mortgage loans held for sale 39,375 22,688
(Increase) decrease in other assets 1,611 (879)
Increase in other liabilities 618 1,330
------------- -------------
Net cash provided by operating activities 8,207 6,184
------------- -------------
Cash flows from investing activities:
Capitalization of mortgage servicing rights (1) (1)
Purchases of premises and equipment (569) (335)
Net increase in loans (9,973) (1,359)
Proceeds from sales of securities available-for-sale 13,815 4,039
Proceeds from maturities of:
Securities available-for-sale 29,900 7,600
Securities held-to-maturity 15,105 246
Purchases of securities available-for-sale (45,755) (12,728)
Purchases of securities held-to-maturity (90) (45)
Net cash provided by acquisition - 15
------------- -------------
Net cash provided by (used in) investing activities 2,432 (2,568)
------------- -------------
Cash flows from financing activities:
Net increase (decrease) in deposits 2,193 (7,687)
Decrease in repurchase agreements (6,065) (9,309)
Decrease in short-term FHLB advances (5,000) -
Increase in long-term FHLB advances - 5,000
Increase in other borrowings - 239
Repayment of short-term debt (200) -
Proceeds from issuance of common stock 392 259
Purchase of treasury stock (1,689) (524)
Dividends paid on common stock (427) (330)
------------- -------------
Net cash used in financing activities (10,796) (12,352)
------------- -------------
Decrease in cash and cash equivalents (157) (8,736)
Cash and cash equivalents at beginning of period 69,657 33,096
------------- -------------
Cash and cash equivalents at end of period $69,500 $24,360
============= =============
Additional disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,552 $ 4,389
Income taxes 254 218
Loans transferred to real estate owned 422 479
Dividends reinvested in common stock 108 116
============= =============
Notes to Consolidated Financial Statements
(Unaudited)
Website
The Company maintains a website at www.firstmid.com. All periodic and
current reports of the Company and amendments to these reports filed with the
Securities and Exchange Commission ("SEC") can be accessed, free of charge,
through this website as soon as reasonably practicable after these materials are
filed with the SEC.
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"), The Checkley Agency,
Inc. ("Checkley") 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 for a fair
presentation of the results of the interim periods ended March 31, 2003, and
2002, and all such adjustments are of a normal recurring nature. The results of
the interim period ended March 31, 2003, are not necessarily indicative of the
results expected for the year ending December 31, 2003.
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 2002 Annual Report on Form 10-K.
Recent Accounting Pronouncements
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets," ("SFAS 142")
as of January 1, 2002,and the provisions of SFAS No. 147, "Acquisitions of
Certain Financial Institutions," ("SFAS 147") as of October 1, 2002, retroactive
to January 1, 2002. As of January 1, 2002, the Company had unamortized goodwill
of $9 million, which was subject to the transition provisions of SFAS 142 and
SFAS 147, and is no longer being amortized. The Company also had $2.1 million of
intangible assets for an acquisition of a branch whereby the liabilities assumed
were greater than the assets obtained and was not considered an acquisition of a
business, $1.3 million of core deposit intangibles, and $217,000 of intangible
assets arising from the rights to service mortgage loans for others, all which
continue to be amortized. In January 2002, the Company added an additional $1.9
million of amortizable intangibles as a result of the acquisition of Checkley.
The following table presents gross carrying amount and accumulated amortization
by major intangible asset class as of March 31, 2003 and December 31, 2002 (in
thousands):
March 31, 2003 December 31, 2002
------------------------ ------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
---------- ------------- ---------- -------------
Goodwill not subject to amortization $12,794 $3,760 $12,794 $3,760
Intangibles from branch acquisition 3,015 1,207 3,015 1,157
Core deposit intangibles 2,805 1,880 2,805 1,807
Mortgage servicing rights 608 464 608 451
Customer list intangibles 1,904 222 1,904 174
---------- ------------- ---------- -------------
$21,126 $7,533 $21,126 $7,349
========== ============= ========== =============
Total amortization expense for the periods ended March 31, 2003 and
2002 was as follows (in thousands):
2003 2002
------------ ------------
Intangibles from branch acquisitions $ 50 $ 50
Core deposit intangibles 73 78
Mortgage servicing rights 13 19
Customer list intangibles 48 32
------------ ------------
$184 $179
============ ============
Aggregate amortization expense for the current year and estimated
amortization expense for each of the five succeeding years is shown in the table
below (in thousands):
Aggregate amortization expense:
For period ended 3/31/03 $184
Estimated amortization expense:
For period 4/1/03-12/31/03 $535
For period ended 12/31/04 $614
For period ended 12/31/05 $578
For period ended 12/31/06 $579
For period ended 12/31/07 $515
For period ended 12/31/08 $454
In July 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). The standard requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. The Company adopted the provisions of
SFAS 146 for exit or disposal activities initiated after December 31, 2002 on
January 1, 2003, as required. The adoption did not have a material effect on the
Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS 123"
("SFAS 148"). SFAS 148 permits two additional transition methods for entities
that adopt the fair value based method of accounting for stock-based employee
compensation. The Statement also requires new disclosures about the ramp-up
effect of stock-based employee compensation on reported results, and requires
that those effects be disclosed more prominently by specifying the form, content
and location of those disclosures. The transition guidance and annual disclosure
provisions of SFAS 148 are effective for fiscal years ending after December 15,
2002, with earlier application permitted in certain circumstances. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. The Company
applies APB Opinion No. 25 in accounting for the Stock Investment 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. The
Company has presented pro forma compensation cost based on the fair value at
grant date for its stock options under SFAS No. 123, "Accounting for Stock-Based
Compensation" in the table below (in thousands, except per share data). The
Company has not decided yet if it will adopt a change to the fair value based
method of accounting.
March 31,
2003 2002
------------ ------------
Net income:
As reported $2,362 $2,009
Pro forma 2,310 1,969
Basic Earnings Per Share:
As reported $.74 $.59
Pro forma .72 .58
Diluted Earnings Per Share:
As reported $.73 $.59
Pro forma .72 .58
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). This Interpretation provides
guidance on disclosures to be made by a guarantor about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The disclosure
requirements were effective for financial statement periods after December 15,
2002. The Company adopted the initial measurement and recognition provisions
applicable to guarantees issued or modified after December 31, 2002 on January
1, 2003, as required. The adoption did not have a material impact on the
Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidated Variable Interest Entities." The objective of this Interpretation
is to provide guidance on how to identify a variable interest entity and
determine when the assets, liabilities, non-controlling interests, and results
of operations of a variable interest in an entity need to be included in a
company's consolidated financial statements. A company that holds variable
interests in an entity will need to consolidate the entity if the company's
interest in the variable interest entity is such that the company will absorb a
majority of the variable interest entity's losses and/or receive a majority of
the entity's expected residual returns, if they occur. FIN 46 also requires
additional disclosures by primary beneficiaries and other significant variable
interest holders. The provisions of this Interpretation are effective upon
issuance. The Company does not expect the provisions of FIN 46 to have a
material impact on its financial position or results of operations.
Comprehensive Income
The Company's comprehensive income for the three-month periods ended
March 31, 2003 and 2002 was as follows (in thousands):
March 31,
2003 2002
------------ ------------
Net income $2,362 $2,009
Other comprehensive income:
Unrealized loss during the period (265) (42)
Less realized gain during the period (370) (43)
Tax effect 246 33
------------ ------------
Comprehensive income $1,973 $1,957
============ ============
Earnings Per Share
Basic earnings per share ("EPS") is calculated as net income divided by
the weighted average number of common shares outstanding. Diluted EPS is
computed using the weighted average number of common shares outstanding,
increased by the assumed conversion of the Company's stock options, unless
anti-dilutive. The components of basic and diluted earnings per common share for
the three-month periods ended March 31, 2003 and 2002 were as follows:
Three months ended
March 31,
2003 2002
------------ ------------
Basic Earnings per Share:
Net income $2,362,000 $2,009,000
Weighted average common shares outstanding 3,186,961 3,384,619
============ ============
Basic earnings per common share $ .74 $ .59
============ ============
Diluted Earnings per Share:
Weighted average common shares outstanding 3,186,961 3,384,619
Assumed conversion of stock options 35,189 18,574
------------ ------------
Diluted weighted average common
shares outstanding 3,222,150 3,403,193
============ ============
Diluted earnings per common share $ .73 $ .59
============ ============
Mergers and Acquisitions
On January 29, 2002, the Company acquired all of the issued and
outstanding stock of Checkley, an insurance agency headquartered in Mattoon,
Illinois. Checkley was purchased for cash with a portion ($750,000) paid at
closing and the remainder ($1,000,000) to be paid, pursuant to a promissory
note, over a five-year period ending January 2007. Checkley operates as a
separate subsidiary of the Company and provides customers with commercial
property, casualty, life, auto and home insurance. In order to facilitate this
acquisition, the Company became a financial holding company under the
Gramm-Leach-Bliley Act on December 14, 2001. The results of Checkley's
operations are included in the consolidated financial statements since 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, March 31,
2003 and 2002. This discussion and analysis should be read in conjunction with
the consolidated financial statements, related notes and selected financial data
appearing elsewhere in this report.
Forward-Looking Statements
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, such as discussions of
the Company's pricing and fee trends, credit quality and outlook, liquidity, new
business results, expansion plans, anticipated expenses and planned schedules.
The Company intends such forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and is including this statement for
purposes of these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies and
expectations of the Company, are identified by use of the words "believe",
"expect", "intend", "anticipate", "estimate", "project", or similar expressions.
Actual results could differ materially from the results indicated by these
statements because the realization of those results is subject to many
uncertainties including: changes in interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
Overview
Net income for the three months ended March 31, 2003 was $2,362,000
($.73 diluted EPS), an increase of $353,000 from $2,009,000 ($.59 diluted EPS)
for the same period in 2002.
A summary of the factors that contributed to the changes in net income
is shown in the table below.
(In thousands) 2003 vs. 2002
-----------------
Net interest income $ (59)
Other income, including securities transactions 1,107
Other expenses (435)
Income taxes (260)
-----------------
Increase in net income $ 353
=================
The following table shows the Company's annualized performance ratios
for the three months ended March 31, 2003 and 2002, as compared to the
performance ratios for the year ended December 31, 2002:
March 31, March 31, December 31,
2003 2002 2002
------------ ------------ -------------
Return on average assets 1.24% 1.15 1.11%
Return on average equity 13.92% 12.26% 11.82%
Average equity to average assets 8.89% 9.35% 9.36%
Results of Operations
Net Interest Income
The largest source of operating revenue for the Company is net interest
income. Net interest income represents the difference between total interest
income earned on earning assets and total interest expense paid on
interest-bearing liabilities. The amount of interest income is dependent upon
many factors, including the volume and mix of earning assets, the general level
of interest rates and the dynamics of changes in interest rates. The cost of
funds necessary to support earning assets varies with the volume and mix of
interest-bearing liabilities and the rates paid to attract and retain such
funds.
For purposes of the following discussion and analysis, the interest
earned on tax-exempt securities is adjusted to an amount comparable to interest
subject to normal income taxes. The adjustment is referred to as the
tax-equivalent adjustment. The Company's average balances, interest income and
expense and rates earned or paid for major balance sheet categories are set
forth in the following table (dollars in thousands):
Three months ended Three months ended
March 31, 2003 March 31, 2002
--------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
--------------------------------------------------------
ASSETS
Interest-bearing deposits $ 20,710 $ 56 1.08% $ 2,420 $ 10 1.65%
Federal funds sold 19,574 54 1.10% 7,599 30 1.58%
Investment securities
Taxable 139,997 1,284 3.67% 134,516 1,572 4.67%
Tax-exempt (1) 28,899 482 6.67% 29,361 506 6.89%
Loans (2)(3) 500,767 8,008 6.40% 468,308 8,419 7.19%
--------------------------------------------------------
Total earning assets 709,947 9,884 5.57% 642,204 10,537 6.56%
--------------------------------------------------------
Cash and due from banks 17,809 19,113
Premises and equipment 16,818 16,646
Other assets 22,578 26,131
Allowance for loan losses (3,790) (4,033)
---------- ----------
Total assets $763,362 $700,061
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
Demand deposits $211,168 $ 529 1.00% $197,349 $ 692 1.40%
Savings deposits 54,875 100 .73% 48,717 194 1.59%
Time deposits 260,553 2,069 3.18% 232,448 2,495 4.29%
Securities sold under
agreements to repurchase 40,720 64 .63% 32,616 86 1.05%
FHLB advances 33,522 418 4.99% 34,596 450 5.20%
Federal funds purchased 56 - - 210 1 1.90%
Other debt 9,187 60 2.61% 5,039 33 2.62%
--------------------------------------------------------
Total interest-bearing
liabilities 610,081 3,240 2.12% 550,975 3,951 2.87%
--------------------------------------------------------
Non interest-bearing demand deposits 80,856 75,936
Other liabilities 4,554 8,306
Stockholders' equity 67,871 64,842
---------- ----------
Total liabilities & equity $763,362 $700,061
========== ==========
Net interest income (TE) $ 6,644 $ 6,586
========= =======
Net interest spread 3.45% 3.69%
Impact of non-interest
bearing funds .29% .41%
Net yield on interest- ---------- --------
earning assets (TE) 3.74% 4.10%
========== ========
(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 are not material and have been included in the average
balances.
Changes in net interest income may also be analyzed by segregating the
volume and rate components of interest income and interest expense. The
following table summarizes the approximate relative contribution of changes in
average volume and interest rates to changes in net interest income (TE) for the
three months ended March 31, 2003, as compared to the same period in 2002 (in
thousands):
For the three months ended March 31,
2003 compared to 2002
Increase / (Decrease)
Total Rate/
Change Volume Rate Volume(4)
-----------------------------------
Earning Assets:
Interest-bearing deposits $ 46 $ 75 $ (3) $ (26)
Federal funds sold 24 47 (9) (14)
Investment securities:
Taxable (288) 64 (336) (16)
Tax-exempt (1) (24) (8) (16) -
Loans (2)(3) (411) 583 (925) (69)
-----------------------------------
Total interest income (653) 761 (1,289) (125)
-----------------------------------
Interest-Bearing Liabilities:
Interest-bearing deposits
Demand deposits (163) 48 (197) (14)
Savings deposits (94) 24 (105) (13)
Time deposits (426) 301 (645) (82)
Securities sold under
agreements to repurchase (22) 21 (34) (9)
FHLB advances (32) (14) (18) -
Federal funds purchased (1) (1) (1) 1
Other debt 27 27 - -
-----------------------------------
Total interest expense (711) 406 (1,000) (117)
-----------------------------------
Net interest income $ 58 $ 355 $ (289) $(8)
====================================
(1) Interest income and rates are presented on a tax-equivalent basis,
assuming a federal income tax rate of 34%.
(2) Loan fees are included in interest income and are not material.
(3) Nonaccrual loans are not material and have been included in the average
balances.
(4) The changes in rate/volume are computed on a consistent basis by
multiplying the change in rates with the change in volume.
On a tax equivalent basis, net interest income increased $58,000, or
..9% to $6,644,000 for the three months ended March 31, 2003, from $6,586,000 for
the same period in 2002. The increase in net interest income was primarily due
to a larger growth in net interest earning assets than interest-bearing
deposits.
For the three months ended March 31, 2003, average earning assets
increased by $67,743,000, or 10.5%, and average interest-bearing liabilities
increased $59,106,000, or 10.7%, compared with average balances for the same
period in 2002. Changes in average balances are shown below:
< Average loans increased by $32.5 million or 6.9% in 2003 as compared
to 2002.
< Average securities increased by $5 million or 3.1% in 2003 as compared
to 2002.
< Average interest-bearing deposits increased by $48.1 million or 10.1%
in 2003 as compared to 2002.
< Average securities sold under agreements to repurchase increased by
$8.1 million or 24.8% in 2003 as compared to 2002.
< Average borrowings and other debt increased by $3.1 million or 7.8% in
2003 as compared to 2002.
< Net interest margin has decreased to 3.74% in 2003 from 4.10% in 2002.
Provision for Loan Losses
The provision for loan losses for the three months ended March 31, 2003
was $250,000 compared to $125,000 for the same period in 2002. The increase in
the provision was a result of an increased risk in the loan portfolio, uncertain
economic conditions, and an increase in charge-offs. Net charge-offs were
$132,000 for the three months ended March 31, 2003 and $76,000 during the same
period in 2002. For information on loan loss experience and nonperforming loans,
see the "Nonperforming Loans" and "Loan Quality and Allowance for Loan Losses"
sections below.
Other Income
An important source of the Company's revenue is derived from other
income. The following table sets forth the major components of other income for
the three months ended March 31, 2003 and 2002 (in thousands):
Three months ended
March 31,
2003 2002 $ Change
-------------- ------------ -------------
Trust $456 $478 $ (22)
Brokerage 57 58 (1)
Insurance commissions 411 191 220
Service charges 1,038 737 301
Security gains 370 43 327
Mortgage banking 549 326 223
Other 549 490 59
-------------- ------------ -------------
Total other income $3,430 $2,323 $1,107
============== ============ =============
Explanations for the three months ended March 31, 2003 as compared to
the same period in 2002:
< Trust revenues decreased $22,000 or 4.6% to $456,000 from $478,000.
Trust assets, reported at market value, were $313 million at March 31,
2003 compared to $303 million at March 31, 2002. While there was an
increase in trust assets as a result of additional accounts, the
overall decline in equity prices in the United States has resulted in
a greater reduction in levels of fees collected and overall trust
revenue. Absent an increase in overall equity prices, management does
not expect increases in trust revenue other than that generated
through new business.
< Revenues from brokerage decreased $1,000 or 1.7% to $57,000 from
$58,000 as a result of decreased sales with the decline in the stock
market.
< Insurance commissions increased $220,000 or 115.2% to $411,000 from
$191,000. The increase is due to operating Checkley, which was
acquired January 29, 2002, for the entire period in 2003. In addition,
increased sales of business property and casualty insurance has
increased revenues.
< Fees from service charges increased $301,000 or 40.8% to $1,038,000
from $737,000. This was primarily the result of increased overdraft
fees after implementation of a new program called Payment Privilege in
July 2002. Under Payment Privilege, overdrafts up to a limit of $500
are paid for qualifying customers in exchange for a fee. A greater
number of overdrafts paid has resulted in an increase in fee income.
< Sales of investment securities resulted in a net gain of $370,000, as
compared to a net gain of $43,000 for the same quarter in 2002. The
net gain in 2003 resulted primarily from the sale of $14 million of
available-for-sale securities.
< Mortgage banking income increased $223,000 or 68.4% to $549,000 from
$326,000. This increase was due to the volume of fixed rate loans
originated and sold by First Mid Bank. The increase in volume is
largely attributed to the decrease in mortgage lending rates. Loans
sold balances are as follows:
< $38.9 million (representing 437 loans) for the 1st quarter
of 2003.
< $22.4 million (representing 255 loans) for the 1st quarter
of 2002.
First Mid Bank generally releases the servicing rights on loans sold
into the secondary market. Accordingly, capitalized originated mortgage
servicing rights are not material to the consolidated financial statements.
< Other income increased $59,000 or 12.0% to $549,000 from $490,000.
This increase was primarily due to fees from ATM usage and placement
of additional ATMs late in 2002.
Other Expense
The major categories of other expense include salaries and employee
benefits, occupancy and equipment expenses and other operating expenses
associated with day-to-day operations. The following table sets forth the major
components of other expense for the three months ended March 31, 2003 and 2002
(in thousands):
Three months ended
March 31,
----------------------------------------
2003 2002 $ Change
------------- ------------ -------------
Salaries and benefits $ 3,314 $ 3,006 $ 308
Occupancy and equipment 1,063 971 92
Amortization of intangibles 184 179 5
Stationery and supplies 144 155 (11)
Legal and professional fees 231 238 (7)
Marketing and promotion 132 159 (27)
Other operating expenses 998 923 75
------------- ------------ -------------
Total other expense $ 6,066 $ 5,631 $ 435
============= ============ =============
Explanations for the three months ended March 31, 2003 as compared to
the same period in 2002:
< Salaries and employee benefits, the largest component of other
expense, increased $308,000 or 10.2% to $3,314,000 from $3,006,000.
This increase can be explained by merit increases for continuing
employees, an increase in the number of employees due to the
acquisition of Checkley in January 2002, and addition of de novo
branches in November 2002. There were 324 full-time equivalent
employees at March 31, 2003 compared to 305 at March 31, 2002.
< Occupancy and equipment expense increased $92,000 or 9.5% to
$1,063,000 from $971,000. This increase included building maintenance,
utilities and rent expense for Checkley, and Champaign and Maryville
branches added in November 2002.
< Other operating expenses increased $75,000 or 8.1% to $998,000 in 2003
from $923,000 in 2002. This increase was primarily a result of an
increase in expenses related to repossessed assets.
< All other categories of operating expenses decreased a net of $48,000
or 8.2% to $507,000 from $552,000.
Income Taxes
Total income tax expense amounted to $1,232,000 (34.3% effective tax
rate) for the three months ended March 31, 2003, compared to $972,000 (32.6%
effective tax rate) for the same period in 2002. The increase in the effective
tax rate in 2003 compared to 2002 is due to an increase in non-deductible loan
interest income and a decrease in deductible interest income from U.S. Treasury
securities, resulting in a larger amount of non-deductible interest income and
greater state income tax expense.
Analysis of Balance Sheets
Loans
The loan portfolio (net of unearned interest) is the largest category
of the Company's earning assets. The following table summarizes the composition
of the loan portfolio as of March 31, 2003 and December 31, 2002 (in thousands):
March 31, December 31,
2003 2002
-------------- -------------
Real estate - residential $109,902 $116,588
Real estate - agricultural 47,461 47,210
Real estate - commercial 192,323 176,235
-------------- -------------
Total real estate - mortgage $349,686 $340,033
Commercial and agricultural 125,800 127,065
Installment 29,860 31,119
Other 1,410 1,647
-------------- -------------
Total loans $506,756 $499,864
============== =============
At March 31, 2003, the Company had loan concentrations in agricultural
industries of $85.8 million, or 16.9%, of outstanding loans and $90.7 million,
or 18.1%, at December 31, 2002. In addition, the Company has a loan
concentration to "operators of non-residential buildings" of $16.7 million or
3.1% of outstanding loans at March 31, 2003, and $12.5 or 2.5% of outstanding
loans at December 31, 2002. The Company had no further loan concentrations in
excess of 25% of Tier 1 risk-based capital.
Real estate mortgage loans have averaged approximately 70% of the
Company's total loan portfolio for the past several years. This is the result of
the Company's focus on commercial real estate lending and long-term commitment
to residential real estate lending. The balance of real estate loans held for
sale amounted to $4,121,000 and $7,070,000 as of March 31, 2003 and December 31,
2002, respectively.
The following table presents the balance of loans outstanding as of
March 31, 2003, by maturities (dollars in thousands):
Maturity (1)
--------------------------------------------
Over 1
One year through Over
or less (2) 5 years 5 years Total
--------------------------------------------
Real estate - residential $ 51,812 $ 55,037 $3,053 $109,902
Real estate - agricultural 7,540 32,328 7,593 47,461
Real estate - commercial 47,231 120,827 24,264 192,322
--------------------------------------------
Total real estate - mortgage $106,583 $208,192 $ 34,910 $349,685
Commercial and agricultural 90,346 33,378 2,076 125,800
Installment 16,033 13,783 44 29,860
Other 187 512 712 1,411
--------------------------------------------
Total loans $213,149 $255,865 $ 37,742 $506,756
============================================
(1) Based on scheduled principal repayments.
(2) Includes demand loans, past due loans and overdrafts.
As of March 31, 2003, loans with maturities over one year consisted of
approximately $213,422,000 in fixed rate loans and $80,185,000 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 are defined as: (a) loans accounted for on a
nonaccrual basis; (b) accruing loans contractually past due ninety days or more
as to interest or principal payments; and (c) loans not included in (a) and (b)
above which are defined as "renegotiated loans". The Company's policy is to
cease accrual of interest on all loans that become ninety days past due as to
principal or interest. Nonaccrual loans are returned to accrual status when, in
the opinion of management, the financial position of the borrower indicates
there is no longer any reasonable doubt as to the timely collection of interest
or principal.
The following table presents information concerning the aggregate
amount of nonperforming loans at March 31, 2003 and December 31, 2002 (in
thousands):
March 31, December 31,
2003 2002
------------- -------------
Nonaccrual loans $3,143 $2,961
Renegotiated loans which are performing
in accordance with revised terms 90 188
------------- -------------
Total nonperforming Loans $3,233 $3,149
============= =============
At March 31, 2003, approximately $1,479,000 of the nonperforming loans
resulted from collateral-dependent loans to one borrower. The $182,000 increase
in nonaccrual loans during the three months ended March 31, 2003, resulted from
the net of $1,159,000 of loans put on nonaccrual status, $882,000 of loans made
current or paid-off and $95,000 of loans transferred to other real estate owned.
Interest income that would have been reported if nonaccrual and
renegotiated loans had been performing totaled $88,000 for the three months
ended March 31, 2003 and $158,000 for the year ended December 31, 2002.
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 allowance for loan
losses that is adequate but not excessive. 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. Management considers collateral values in the
determination of such specific allocations. Additional factors considered by
management in evaluating the overall adequacy of the allowance include
historical net loan losses, the level and composition of nonaccrual, past due
and renegotiated loans and the current economic conditions in the region where
the Company operates. Management considers the allowance for loan losses a
critical accounting policy.
Management recognizes that there are risk factors which are inherent in
the Company's loan portfolio. All financial institutions face risk factors in
their loan portfolios because risk exposure is a function of the business. The
Company's operations (and therefore its loans) are concentrated in east central
Illinois, an area where agriculture is the dominant industry. Accordingly,
lending and other business relationships with agriculture-based businesses are
critical to the Company's success. At March 31, 2003 the Company's loan
portfolio included $85.8 million of loans to borrowers whose businesses are
directly related to agriculture. The balance decreased by $4.9 million from
$90.7 million at December 31, 2002. While the Company adheres to sound
underwriting practices, including collateralization of loans, any extended
period of low commodity prices, significantly reduced yields on crops and/or
reduced levels of government assistance to the agricultural industry could
result in an increase in the level of problem agriculture loans and potentially
result in loan losses within the agricultural portfolio.
Analysis of the allowance for loan losses as of March 31, 2003 and
2002, and of changes in the allowance for the three month periods ended March
31, 2003 and 2002, was as follows (dollars in thousands):
Three months ended
March 31,
2003 2002
------------- -------------
Average loans outstanding,
net of unearned income $500,767 $468,308
Allowance-beginning of period $ 3,723 $ 3,702
Charge-offs:
Real estate-mortgage 12 31
Commercial, financial & agricultural 114 25
Installment 26 33
------------- -------------
Total charge-offs 152 89
Recoveries:
Real estate-mortgage - -
Commercial, financial & agricultural 11 1
Installment 9 12
------------- -------------
Total recoveries 20 13
------------- -------------
Net charge-offs 132 76
------------- -------------
Provision for loan losses 250 125
------------- -------------
Allowance-end of period $ 3,841 $ 3,751
============= =============
Ratio of annualized net charge offs
to average loans .11% .07%
============= =============
Ratio of allowance for loan losses to
loans outstanding (less unearned
interest at end of period) .76% .80%
============= =============
Ratio of allowance for loan losses
to nonperforming loans 118.8% 129.0%
============= =============
The Company minimizes credit risk by adhering to sound underwriting and
credit review policies. Management and the board of directors of the Company
review these policies at least annually. Senior management is actively involved
in business development efforts and the maintenance and monitoring of credit
underwriting and approval. The loan review system and controls are designed to
identify, monitor and address asset quality problems in an accurate and timely
manner. The board of directors and management review the status of problem loans
and determine the adequacy of the allowance. In addition to internal policies
and controls, regulatory authorities periodically review asset quality and the
overall adequacy of the allowance for loan losses.
Securities
The Company's overall investment objectives are to insulate the
investment portfolio from undue credit risk, maintain adequate liquidity,
insulate capital against changes in market value and control excessive changes
in earnings while optimizing investment performance. The types and maturities of
securities purchased are primarily based on the Company's current and projected
liquidity and interest rate sensitivity positions. The following table sets
forth the amortized cost of the securities as of March 31, 2003 and December 31,
2002 (in thousands):
March 31, December 31,
2003 2002
--------------------- ---------------------
Weighted Weighted
Average Average
Amount Yield Amount Yield
--------- ----------- --------- -----------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 78,423 3.39% $ 76,342 3.80%
Obligations of states and
political subdivisions 27,551 4.62% 27,597 4.63%
Mortgage-backed securities 29,881 4.17% 44,697 3.72%
Other securities 15,877 5.45% 15,807 5.86%
--------- ----------- --------- -----------
Total securities $151,732 3.98% $164,443 4.12%
========= =========== ========= ===========
At March 31, 2003, the Company's investment portfolio showed an
increase in U.S. Treasury securities and obligations of U.S. government
corporations and agencies and other securities and a decrease in mortgage-backed
securities. The amortized cost, gross unrealized gains and losses and estimated
fair values for available-for-sale and held-to-maturity securities by major
security type at March 31, 2003 and December 31, 2002 were as follows (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ---------- -----------
March 31, 2003
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. government corporations & agencies $ 78,423 $1,201 $ - $ 79,624
Obligations of states and political
subdivisions 25,754 1,313 - 27,067
Mortgage-backed securities 29,881 438 (37) 30,282
Federal Home Loan Bank stock 3,357 - - 3,357
Other securities 12,520 337 (13) 12,844
------------- ------------- ---------- -----------
Total available-for-sale $149,935 $ 3,289 $ (50) $153,174
============= ============= ========== ===========
Held-to-maturity:
Obligations of states and political
subdivisions $ 1,797 $ 28 $ (1) $ 1,824
============= ============= ========== ===========
December 31, 2002
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. government corporations & agencies $ 76,342 $ 1,665 $(30) $ 77,977
Obligations of states and political
subdivisions 25,695 1,232 - 26,927
Mortgage-backed securities 44,697 749 (4) 45,442
Federal Home Loan Bank stock 3,266 - - 3,266
Other securities 12,541 293 (31) 12,803
------------- ------------- ---------- -----------
Total available-for-sale $162,541 $ 3,939 $(65) $166,415
============= ============= ========== ===========
Held-to-maturity:
Obligations of states and political
subdivisions $ 1,902 $ 27 $ (2) $ 1,927
============= ============= ========== ===========
The following table indicates the expected maturities of investment
securities classified as available-for-sale and held-to-maturity, presented at
amortized cost, at March 31, 2003 and the weighted average yield for each range
of maturities. Mortgage-backed securities are included based on their weighted
average life. All other securities are shown at their contractual maturity.
One After 1 After 5 After
year through through ten
(In thousands) or less 5 years 10 years years Total
--------- ---------- ---------- --------- ----------
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $19,535 $ 52,918 $ 1,000 $ 4,970 $ 78,423
Obligations of state and
political subdivisions - 7,527 11,335 6,892 25,754
Mortgage-backed securities 3,749 26,132 - - 29,881
Federal Home Loan Bank stock - - - 3,357 3,357
Other securities - - - 12,520 12,520
--------- ---------- ---------- --------- ----------
Total investments $23,284 $86,577 $12,335 $27,739 $149,935
========= ========== ========== ========= ==========
Weighted average yield 3.23% 3.70% 4.71% 5.08% 3.97%
Full tax-equivalent yield 3.23% 3.86% 6.52% 5.63% 4.31%
========= ========== ========== ========= ==========
Held-to-maturity:
Obligations of state and
political subdivisions $ 230 $ 610 $ 400 $ 557 $ 1,797
========= ========== ========== ========= ==========
Weighted average yield 5.50% 5.34% 5.61% 5.40% 5.44%
Full tax-equivalent yield 7.98% 7.74% 8.14% 7.82% 7.88%
========= ========== ========== ========= ==========
The weighted average yields are calculated on the basis of the
amortized cost and effective yields weighted for the scheduled maturity of each
security. Tax-equivalent yields have been calculated using a 34% tax rate. With
the exception of obligations of the U.S. Treasury and other U.S. government
agencies and corporations, there were no investment securities of any single
issuer the book value of which exceeded 10% of stockholders' equity at March 31,
2003.
Investment securities carried at approximately $130,708,000 and
$141,462,000 at March 31, 2003 and December 31, 2002, respectively, were pledged
to secure public deposits and repurchase agreements and for other purposes as
permitted or required by law.
Deposits
Funding of the Company's earning assets is substantially provided by a
combination of consumer, commercial and public fund deposits. The Company
continues to focus its strategies and emphasis on retail core deposits, the
major component of funding sources. The following table sets forth the average
deposits and weighted average rates for the three months ended March 31, 2003
and for the year ended December 31, 2002 (dollars in thousands):
March 31, December 31,
2003 2002
---------------------- ----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
---------- ----------- ---------- -----------
Demand deposits:
Non-interest-bearing $ 80,856 - $ 79,082 -
Interest-bearing 211,168 1.00% 200,653 1.33%
Savings 54,875 .73% 51,634 1.55%
Time deposits 260,553 3.18% 242,301 3.63%
---------- ----------- ---------- -----------
Total average deposits $607,452 1.78% $573,670 2.14%
========== =========== ========== ===========
The following table sets forth the maturity of time deposits of
$100,000 or more at March 31, 2003 and December 31, 2002 (in thousands):
March 31, December 31,
2003 2002
--------------- -------------
3 months or less $ 26,323 $ 29,085
Over 3 through 6 months 12,673 18,926
Over 6 through 12 months 14,484 13,715
Over 12 months 31,750 32,225
--------------- -------------
Total $ 85,230 $ 93,951
=============== =============
Repurchase Agreements and Other Borrowings
Securities sold under agreements to repurchase are short-term
obligations of First Mid Bank. First Mid Bank collateralizes these obligations
with certain government securities that are direct obligations of the United
States or one of its agencies. First Mid Bank offers these retail repurchase
agreements as a cash management service to its corporate customers. Other
borrowings consist of Federal Home Loan Bank ("FHLB") advances, federal funds
purchased, and loans (short-term or long-term debt) that the Company has
outstanding.
Information relating to securities sold under agreements to repurchase
and other borrowings as of March 31, 2003 and December 31, 2002 is presented
below (in thousands):
March 31, December 31,
2003 2002
------------- -------------
Securities sold under agreements to repurchase $38,119 $44,184
Federal Home Loan Bank advances:
Fixed term - due in one year or less 5,000 5,000
Fixed term - due after one year 25,300 30,300
Debt:
Loans due in one year or less 8,525 8,525
Loans due after one year 600 800
------------- -------------
Total $77,544 $88,809
============= =============
Average interest rate at end of period 2.68% 2.53%
Maximum outstanding at any month-end
Securities sold under agreements to repurchase $42,348 $44,588
Federal Home Loan Bank advances:
Overnight - 400
Fixed term - due in one year or less 5,000 8,000
Fixed term - due after one year 30,300 30,300
Federal funds purchased - 3,250
Debt:
Loans due in one year or less 8,525 9,525
Loans due after one year 600 800
------------- -------------
Total $86,773 $96,863
============= =============
Averages for the period (YTD)
Securities sold under agreements to repurchase $40,720 $34,389
Federal Home Loan Bank advances:
Overnight - 521
Fixed term - due in one year or less 5,000 6,153
Fixed term - due after one year 28,522 30,300
Federal funds purchased 56 299
Debt:
Loans due in one year or less 8,525 5,350
Loans due after one year 661 738
------------- -------------
Total $83,484 $77,750
============= =============
Average interest rate during the period 2.49% 3.10%
FHLB advances represent borrowings by First Mid Bank to economically
fund loan demand. The fixed term advances consist of $30.3 million as follows:
< $5 million advance at 3.45% with a 2-year maturity, due 02/28/04
< $5 million advance at 6.16% with a 5-year maturity, due 03/20/05
< $2.3 million advance at 6.10% with a 5-year maturity, due 04/07/05
< $5 million advance at 6.12% with a 5-year maturity, due 09/06/05
< $5 million advance at 5.34% with a 5-year maturity, due 12/14/05
< $3 million advance at 5.98% with a 10-year maturity, due 03/01/11
< $5 million advance at 4.33% with a 10-year maturity, due 11/23/11
Other debt, both short-term and long-term, represents the outstanding
loan balances for the Company. At March 31, 2003, outstanding loan balances
include $8,325,000 on a revolving credit agreement with The Northern Trust
Company with a floating interest rate of 1.25% over the Federal funds rate
(2.54% as of March 31, 2003) and that is set to mature on October 24, 2003. The
loan has a maximum available balance of $15 million. The loan is secured by all
of the common stock of First Mid Bank. The credit agreement contains
requirements for the Company and First Mid Bank to maintain various operating
and capital ratios and also contains requirements for prior lending approval for
certain sales of assets, merger activity, the acquisition or issuance of debt,
and the acquisition of treasury stock. The Company and First Mid Bank were in
compliance with the existing covenants at March 31, 2003 and at December 31,
2002. The balance also includes a $600,000 balance remaining on a promissory
note resulting from the acquisition of Checkley with an annual interest rate
equal to the prime rate listed in the money rate section of the Wall Street
Journal (4.25% as of March 31, 2003) and principal payable annually over five
years, with a final maturity of January 2007.
Interest Rate Sensitivity
The Company seeks to maximize its net interest margin while maintaining
an acceptable level of interest rate risk. Interest rate risk can be defined as
the amount of forecasted net interest income that may be gained or lost due to
changes in the interest rate environment, a variable over which management has
no control. Interest rate risk, or sensitivity, arises when the maturity or
repricing characteristics of interest-bearing assets differ significantly from
the maturity or repricing characteristics of interest-bearing liabilities.
The Company monitors its interest rate sensitivity position to maintain
a balance between rate sensitive assets and rate sensitive liabilities. This
balance serves to limit the adverse effects of changes in interest rates. The
Company's asset/liability management committee oversees the interest rate
sensitivity position and directs the overall allocation of funds.
In the banking industry, a traditional way to measure potential net
interest income exposure to changes in interest rates is through a technique
known as "static GAP" analysis which measures the cumulative differences between
the amounts of assets and liabilities maturing or repricing at various
intervals. By comparing the volumes of interest-bearing assets and liabilities
that have contractual maturities and repricing points at various times in the
future, management can gain insight into the amount of interest rate risk
embedded in the balance sheet.
The following table sets forth the Company's interest rate repricing
gaps for selected maturity periods at March 31, 2003 (in thousands):
Number of Months Until Next Repricing Opportunity
0-1 1-3 3-6 6-12 12+
----------- ----------- ----------- ----------- -----------
Interest-earning assets:
Federal funds sold $47,636 $ - $ - $ - $ -
Taxable investment securities 33,706 16,250 6,095 20,631 49,426
Nontaxable investment securities - 1,247 105 1,749 25,763
Loans 144,673 24,847 36,403 63,344 237,489
----------- ----------- ----------- ----------- -----------
Total $ 226,015 $ 42,344 $42,603 $ 85,724 $312,678
----------- ----------- ----------- ----------- -----------
Interest-bearing liabilities:
Savings and N.O.W. accounts 49,018 1,053 1,710 5,284 145,614
Money market accounts 45,281 551 826 1,566 27,070
Other time deposits 33,642 24,763 38,813 51,611 104,764
Short-term borrowings/debt 38,120 - - 5,000 -
Long-term borrowings/debt - - - - 25,300
----------- ----------- ----------- ----------- -----------
Total $ 166,061 $ 26,367 $ 41,349 $ 63,461 $302,748
----------- ----------- ----------- ----------- -----------
Periodic GAP $59,954 $ 15,977 $1,254 $ 22,263 $9,930
----------- ----------- ----------- ----------- -----------
Cumulative GAP $59,954 $ 75,931 $ 77,185 $ 99,448 $109,378
=========== =========== =========== =========== ===========
GAP as a % of interest-earning assets:
Periodic 8.5% 2.3% .2% 3.1% 1.4%
Cumulative 8.5% 10.7% 10.9% 14.0% 15.4%
The static GAP analysis shows that at March 31, 2003, the Company was
asset sensitive, on a cumulative basis, through the twelve-month time horizon.
This indicates that future increases in interest rates, if any, could have a
positive effect on net interest income. Conversely, future decreases in interest
rates could have an adverse effect on net interest income.
There are several ways the Company measures and manages the exposure to
interest rate sensitivity, static GAP analysis being one. The Company's asset
liability management committee (ALCO) also uses other financial models to
project interest income under various rate scenarios and prepayment/extension
assumptions consistent with the bank's historical experience and with known
industry trends. ALCO meets at least monthly to review the Company's exposure to
interest rate changes as indicated by the various techniques and to make
necessary changes in the composition terms and/or rates of the assets and
liabilities. Based on all information available, management does not believe
that changes in interest rates, which might reasonably be expected to occur in
the next twelve months, will have a material adverse effect on the Company's net
interest income.
Capital Resources
At March 31, 2003, the Company's stockholders' equity had increased
$1,110,000 or 1.7% to $67,917,000 from $66,807,000 as of December 31, 2002.
During the first three months of 2003, net income contributed $2,362,000 to
equity before the payment of dividends to common stockholders. The change in
market value of available-for-sale investment securities decreased stockholders'
equity by $388,000, net of tax. Additional purchases of treasury stock decreased
stockholders' equity by $1,689,000.
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Bank holding companies follow
minimum regulatory requirements established by the Board of Governors of the
Federal Reserve System ("Federal Reserve System"), and First Mid Bank follows
similar minimum regulatory requirements established for national banks by the
Office of the Comptroller of the Currency. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary action by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements.
Quantitative measures established by each regulatory agency to ensure
capital adequacy require the reporting institutions to maintain a minimum total
risk-based capital ratio of 8% and a minimum leverage ratio of 3% for the most
highly rated banks that do not expect significant growth. All other institutions
are required to maintain a minimum leverage ratio of 4%. Management believes
that, as of March 31, 2003 and December 31, 2002, the Company and First Mid Bank
have met all capital adequacy requirements.
As of March 31, 2003, 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 categorization.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------- --------- --------- ---------- --------
March 31, 2003
Total Capital (to risk-weighted assets)
Company $56,326 10.60% $42,498 > 8.00% N/A N/A
-
First Mid Bank 61,358 11.64% 42,153 > 8.00% $52,692 >10.00%
- -
Tier 1 Capital (to risk-weighted assets)
Company 52,485 9.88% 21,249 > 4.00% N/A N/A
-
First Mid Bank 57,517 10.92% 21,077 > 4.00% 31,615 > 6.00%
- -
Tier 1 Capital (to average assets)
Company 52,485 7.00% 29,997 > 4.00% N/A N/A
-
First Mid Bank 57,517 7.71% 29,846 > 4.00% 37,308 > 5.00%
- -
December 31, 2002
Total Capital (to risk-weighted assets)
Company $54,380 10.35% $42,051 > 8.00% N/A N/A
-
First Mid Bank 59,476 11.42% 41,653 > 8.00% $52,067 >10.00%
- -
Tier 1 Capital (to risk-weighted assets)
Company 50,657 9.64% 21,026 > 4.00% N/A N/A
-
First Mid Bank 55,753 10.71% 20,827 > 4.00% 31,240 > 6.00%
- -
Tier 1 Capital (to average assets)
Company 50,657 6.62% 30,630 > 4.00% N/A N/A
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First Mid Bank 55,753 7.39% 30,158 > 4.00% 37,698 > 5.00%
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Banks and financial holding companies and bank holding companies are
expected to operate at or above the minimum capital requirements. These ratios
are in excess of regulatory minimums and allow the Company to operate without
capital adequacy concerns.
Stock Plans
Participants may purchase Company stock under the following four plans
of the Company: the Deferred Compensation Plan, the First Retirement and Savings
Plan, the Dividend Reinvestment Plan, and the Stock Incentive Plan. For more
detailed information on these plans, refer to the Company's 2002 Annual Report
on Form 10-K.
On August 5, 1998, the Company announced a stock repurchase program of
up to 3% of its common stock. In March 2000, the Board approved the repurchase
of an additional 5% of the Company's common stock. In September 2001, the Board
approved the repurchase of $3 million of additional shares of the Company's
common stock. In August 2002, the Board approved the repurchase of $5 million of
additional shares of the Company's common stock, bringing the aggregate total to
8% of the Company's common stock plus $8 million of additional shares. During
the three-month period ending March 31, 2003, the Company repurchased 57,561
shares (1.8%) at a total price of $1,689,000. Since 1998, the Company has
repurchased a total of 469,123 shares at a total price of $11,992,000. As of
March 31, 2003, the Company was authorized per all repurchase programs to
purchase $2,215,000 in additional shares. Treasury stock is further affected by
activity in the Deferred Compensation Plan.
Liquidity
Liquidity represents the ability of the Company and its subsidiaries to
meet all present and future financial obligations arising in the daily
operations of the business. Financial obligations consist of the need for funds
to meet extensions of credit, deposit withdrawals and debt servicing. The
Company's liquidity management focuses on the ability to obtain funds
economically through assets that may be converted into cash at minimal costs or
through other sources. The Company's other sources for cash include overnight
Federal fund lines, Federal Home Loan Bank advances, deposits of the State of
Illinois, the ability to borrow at the Federal Reserve Bank of Chicago, and the
Company's operating line of credit with The Northern Trust Company. Details for
the sources include:
< First Mid Bank has $17 million available in overnight Federal fund
lines, including $10 million from Harris Trust and Savings Bank of
Chicago and $7 million from The Northern Trust Company. Availability
of the funds is subject to the First Mid Bank's meeting minimum
regulatory capital requirements for Total Capital to Risk-Weighted
Assets and Tier 1 Capital to Total Assets. As of March 31, 2003, the
First Mid Bank's ratios of Total Capital to Risk-Weighted Assets of
11.64% and Tier 1 Capital to Total Assets of 7.71% exceeded minimum
regulatory requirements.
< First Mid Bank can also borrow from the Federal Home Loan Bank as a
source of liquidity. Availability of the funds is subject to the
pledging of collateral to the Federal Home Loan Bank. Collateral that
can be pledged includes one-to-four family residential real estate
loans and securities. At March 31, 2003, the excess collateral at the
Federal Home Loan Bank will support approximately $27 million of
additional advances.
< First Mid Bank also receives deposits from the State of Illinois. The
receipt of these funds is subject to competitive bid and requires
collateral to be pledged at the time of placement.
< First Mid Bank is also a member of the Federal Reserve System and can
borrow funds provided that sufficient collateral is pledged.
< In addition, the Company has a revolving credit agreement in the
amount of $15 million with The Northern Trust Company. The Company has
an outstanding balance of $8,325,000 as of March 31, 2003, and
$6,675,000 in available funds. The credit agreement matures on October
24, 2003. The agreement contains requirements for the Company and
First Mid Bank to maintain various operating and capital ratios and
also contains requirements for the Company and First Mid Bank to
maintain various operating and capital ratios and also contains
requirements for prior lender approval for certain sales of assets,
merger activity, the acquisition or issuance of debt, and the
acquisition of treasury stock. The Company and First Mid Bank were in
compliance with the existing covenants at March 31, 2003.
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 stockholders.
The following table summarizes significant contractual obligations and
other commitments at March 31, 2003 (in thousands):
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
---------- ----------- ------------ ------------ -----------
Time deposits
$256,889 $151,920 $67,925 $36,800 $244
Debt 9,325 8,525 400 400 -
Other borrowings 79,484 66,484 5,000 5,000 3,000
Operating leases 2,540 301 535 412 1,292
---------- ----------- ------------ ------------ -----------
$348,238 $227,230 $73,860 $42,612 $4,536
========== =========== ============ ============ ===========
For the three-month period ended March 31, 2003, net cash of $8.2
million and $2.4 million was provided from operating activities and investing
activities, respectively, while financing activities used net cash of $10.8
million. Thus, cash and cash equivalents increased by $.2 million since year-end
2002. Generally, during 2003, the decreases in deposits and customer repurchase
agreements due to seasonal outflow reduced cash balances. Also, declines in
residential real estate loan balances due to the low rate environment were
greater than the growth in commercial loans and securities since year-end 2002.
Management believes that it has adequate sources of liquidity to meet
its contractual obligations as well as to provide for contingencies that might
reasonably be expected to occur.
First Mid enters into financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include lines of credit, letters of credit and other
commitments to extend credit. Each of these instruments involves, to varying
degrees, elements of credit, and interest rate and liquidity risk in excess of
the amounts recognized in the consolidated balance sheets. The Company uses the
same credit policies and requires similar collateral in approving lines of
credit and commitments and issuing letters of credit as it does in making loans.
The exposure to credit losses on financial instruments is represented by the
contractual amount of these instruments. However, the Company does not
anticipate any losses from these instruments.
The off-balance sheet financial instruments whose contract amounts
represent credit risk at March 31, 2003 and December 31, 2002 were as follows
(in thousands):
March 31, December 31,
2003 2002
------------- --------------
Unused commitments including lines of credit:
Commercial real estate $ 50,795 $31,506
Commercial operating 33,073 31,160
Home equity 10,011 9,509
Other 17,137 13,753
------------- --------------
Total $111,016 $85,928
============= ==============
Standby letters of credit $2,440 $997
============= ==============
Commitments to originate credit represent approved commercial,
residential real estate and home equity loans that generally are expected to be
funded within ninety days. Lines of credit are agreements by which the Company
agrees to provide a borrowing accommodation up to a stated amount as long as
there is no violation of any condition established in the loan agreement. Both
commitments to originate credit and lines of credit generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the lines and some commitments are expected to expire without
being drawn upon, the total amounts do not necessarily represent future cash
requirements.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the financial performance of customers to third parties.
Standby letters of credit are primarily issued to facilitate trade or support
borrowing arrangements and generally expire in one year or less. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending credit facilities to customers. The maximum amount of credit that
would be extended under letters of credit is equal to the total off-balance
sheet contract amount of such instrument.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the market risk faced by the
Company since December 31, 2002. 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, 2002.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of a date within 90 days prior to filing date
of this quarterly report (the "Evaluation Date"). Based on such evaluation, such
officers have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures are effective in bringing to their attention
on a timely basis material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
filings under the Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have not been
any significant changes in the Company's internal controls or in other factors
that could significantly affect such controls.
PART II
ITEM 1. LEGAL PROCEEDINGS
Since First Mid Bank acts as a depository of funds, it is named from
time to time as a defendant in lawsuits (such as garnishment proceedings)
involving claims as to the ownership of funds in particular accounts. Management
believes that all such litigation as well as other pending legal proceedings in
which the Company is involved constitute ordinary, routine litigation incidental
to the business of the Company and that such litigation will not materially
adversely affect the Company's consolidated financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits required by Item 601 of Regulation S-K and filed
herewith are listed in the Exhibit Index that follows the Signature
Page and the Certifications that immediately precedes the exhibits
filed.
(b) Reports on Form 8-K:
The Company filed Form 8-K on January 29, 2003 regarding the
Company's financial statements as of December 31, 2002.
The Company filed Form 8-K on April 24, 2003 regarding the
Company's financial statements as of March 31, 2003.
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/ William S. Rowland /s/ Michael L. Taylor
- --------------------------------- ---------------------------------
William S. Rowland Michael L. Taylor
President and Chief Executive Officer Chief Financial Officer
Date: May 13, 2003 Date: May 13, 2003
CERTIFICATION
I, William S. Rowland, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Mid-Illinois
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date May 13, 2003
By /s/ William S. Rowland
William S. Rowland, President
and Chief Executive Officer
CERTIFICATION
I, Michael L. Taylor, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Mid-Illinois
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date May 13, 2003
By /s/ Michael L. Taylor
Michael L. Taylor, Chief Financial Officer
Exhibit Index to Quarterly Report on Form 10-Q
Exhibit
Number Description and Filing or Incorporation Reference
- --------------------------------------------------------------------------------
11.1 Statement re: Computation of Earnings Per Share
(Filed herewith on page 7)
99.1 President and Chief Executive Officer Certification pursuant to
18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer Certification pursuant to 18 U.S.C. section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
Exhibit 99.1
Certification pursuant to
18 U.S.C. section 1350,
as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of First Mid-Illinois
Bancshares, Inc. (the "Company") on Form 10-Q for the period ending March 31,
2003 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, William S. Rowland, President and Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss.
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: May 13, 2003 /s/ William S. Rowland
William S. Rowland
President and Chief Executive Officer
Exhibit 99.2
Certification pursuant to
18 U.S.C. section 1350,
as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of First Mid-Illinois
Bancshares, Inc. (the "Company") on Form 10-Q for the period ending March 31,
2003 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Michael L. Taylor, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: May 13, 2003 /s/ Michael L. Taylor
Michael L. Taylor
Chief Financial Officer