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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, 2004
Commission file number: 0-13368
FIRST MID-ILLINOIS BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 37-1103704
(State of incorporation)(I.R.S. employer identification no.)
1515 Charleston Avenue, Mattoon, Illinois 61938
(Address and zip code of principal executive offices)
(217) 234-7454
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the 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 7, 2004, 2,983,603 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) 2004 2003
------------- -------------
Assets
Cash and due from banks:
Non-interest bearing $ 18,340 $ 20,659
Interest bearing 2,517 2,915
Federal funds sold 18,650 1,375
------------- -------------
Cash and cash equivalents 39,507 24,949
Investment securities:
Available-for-sale, at fair value 157,829 176,481
Held-to-maturity, at amortized cost (estimated
fair value of $1,651 and $1,687 at March 31,
2004 and December 31, 2003, respectively) 1,567 1,677
Loans 550,832 552,824
Less allowance for loan losses (4,500) (4,426)
------------- -------------
Net loans 546,332 548,398
Premises and equipment, net 15,851 16,059
Accrued interest receivable 4,931 5,570
Goodwill, net 9,034 9,034
Intangible assets, net 3,794 3,969
Other assets 5,985 7,508
------------ -------------
Total assets $784,830 $ 793,645
============ =============
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 86,170 $ 94,723
Interest bearing 537,413 520,269
------------ -------------
Total deposits 623,583 614,992
Accrued interest payable 1,260 1,228
Securities sold under agreements to repurchase 48,004 59,875
Junior subordinated debentures 10,310 -
Other borrowings 30,400 39,925
Other liabilities 5,144 7,030
------------ -------------
Total liabilities 718,701 723,050
------------ -------------
Stockholders' equity:
Common stock, $4 par value; authorized 6,000,000
shares; issued 3,694,040 shares in 2004 and
3,667,887 shares in 2003 14,776 14,672
Additional paid-in capital 16,898 15,960
Retained earnings 55,333 52,942
Deferred compensation 2,065 1,881
Accumulated other comprehensive income 2,058 1,581
Less treasury stock at cost, 710,437 shares
in 2004 and 534,619 shares in 2003 (25,001) (16,441)
------------ -------------
Total stockholders' equity 66,129 70,595
------------ -------------
Total liabilities and stockholders' equity $784,830 $793,645
============ =============
See accompanying notes to unaudited consolidated financial statements.
Consolidated Statements of Income (unaudited)
(In thousands, except per share data)
Three months ended March 31,
2004 2003
-------------- -------------
Interest income:
Interest and fees on loans $ 8,167 $ 8,008
Interest on investment securities 1,515 1,602
Interest on federal funds sold 39 56
Interest on deposits with other
financial institutions 6 54
-------------- -------------
Total interest income 9,727 9,720
-------------- -------------
Interest expense:
Interest on deposits 2,138 2,698
Interest on securities sold under agreements
to repurchase 72 64
Interest on subordinated debentures 37 -
Interest on other borrowings 440 478
-------------- -------------
Total interest expense 2,687 3,240
-------------- -------------
Net interest income 7,040 6,480
-------------- -------------
Provision for loan losses 187 250
-------------- -------------
Net interest income after provision
for loan losses 6,853 6,230
-------------- -------------
Other income:
Trust revenues 616 456
Brokerage commissions 110 57
Insurance commissions 430 424
Service charges 1,124 1,038
Securities gains, net - 370
Mortgage banking revenue 94 490
Other 524 465
-------------- -------------
Total other income 2,898 3,300
-------------- -------------
Other expense:
Salaries and employee benefits 3,338 3,231
Net occupancy and equipment expense 1,073 1,063
Amortization of other intangible assets 175 184
Stationery and supplies 134 144
Legal and professional 276 231
Marketing and promotion 141 132
Other 1,031 951
-------------- -------------
Total other expense 6,168 5,936
-------------- -------------
Income before income taxes 3,583 3,594
Income taxes 1,194 1,232
-------------- -------------
Net income $ 2,389 $ 2,362
============== =============
Per share data:
Basic earnings per share $ 0.78 $ 0.74
Diluted earnings per share $ 0.77 $ 0.73
============== =============
See accompanying notes to unaudited consolidated financial statements.
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
Three months ended March 31,
2004 2003
-------------- -------------
Cash flows from operating activities:
Net income $ 2,389 $ 2,362
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 187 250
Depreciation, amortization and accretion, net 718 771
Gain on sale of securities, net - (370)
Loss on sale of other real property owned, net 10 16
Gain on sale of mortgage loans held for sale, net (109) (514)
Origination of mortgage loans held for sale (8,524) (35,912)
Proceeds from sale of mortgage loans held for sale 8,312 39,375
Decrease in other assets 2,157 1,611
Increase (decrease) in other liabilities (596) 618
-------------- -------------
Net cash provided by operating activities 4,544 8,207
-------------- -------------
Cash flows from investing activities:
Capitalization of mortgage servicing rights (1) (1)
Purchases of premises and equipment (234) (569)
Net decrease (increase) in loans 2,200 (9,973)
Proceeds from sales of securities available-for-sale - 13,815
Proceeds from maturities of securities
available-for-sale 29,397 29,900
Proceeds from maturities of securities
held-to-maturity 110 15,105
Purchases of securities available-for-sale (10,064) (45,845)
-------------- -------------
Net cash provided by investing activities 21,408 2,432
-------------- -------------
Cash flows from financing activities:
Net increase in deposits 8,591 2,193
Decrease in repurchase agreements (11,871) (6,065)
Repayment of short-term FHLB advances (5,000) (5,000)
Issuance of junior subordinated debentures 10,000 -
Proceeds from short-term debt 4,675 -
Repayment of short-term debt (9,200) (200)
Proceeds from issuance of common stock 337 392
Purchase of treasury stock (8,376) (1,689)
Dividends paid on common stock (550) (427)
-------------- -------------
Net cash used in financing activities (11,394) (10,796)
-------------- -------------
Increase (decrease) in cash and cash equivalents 14,558 (157)
Cash and cash equivalents at beginning of period 24,949 69,657
-------------- -------------
Cash and cash equivalents at end of period $39,507 $69,500
============== =============
Additional disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,719 $ 3,552
Income taxes 149 254
Loans transferred to real estate owned 61 108
Dividends reinvested in common stock 705 422
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"). 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, 2004 and 2003, and all such adjustments are
of a normal recurring nature. Certain amounts in the prior year's consolidated
financial statements have been reclassified to conform to the March 31, 2004
presentation and there was no impact on net income or stockholders' equity. The
results of the interim period ended March 31, 2004 are not necessarily
indicative of the results expected for the year ending December 31, 2004. The
Company operates as a one-segment entity for financial reporting purposes.
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 2003 Annual Report on Form 10-K.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidated Variable Interest Entities"("FIN 46"). The
objective of FIN 46 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 FIN 46 must be applied to an
interest held in a variable interest entity or potential variable interest
entity at the end of the first interim period after December 31, 2003. The
adoption of the provisions of FIN 46 did not have a material impact on the
Company's financial position or results of operations.
In December 2003, the FASB issued Interpretation No. 46 (Revised),
"Consolidation of Variable Interest Entities" ("FIN 46R"), which provides
further guidance on the accounting for variable interest entities. The
provisions of FIN 46R must be applied to an interest held in a variable interest
entity or potential variable interest entity at the end of the first interim
period after December 31, 2003. Upon adoption of FIN 46R, the Company was
required to de-consolidate its investment in First Mid-Illinois Statutory Trust
I ("Trust"), a statutory business trust and wholly owned subsidiary of the
Company. On February 27, 2004, the Company completed the issuance and sale of
$10 million of floating rate capital securities ("Trust Preferred") through the
Trust as part of a pooled offering. The $10 million proceeds of the Trust
Preferred issuance and an additional $310,000 for the Company's investment in
common equity of the Trust, a total of $10,310 000, was invested in junior
subordinated debentures of the Company. The Trust Preferred held by the Trust
presently qualify as Tier I Capital for regulatory capital purposes. The
adoption of FIN 46R and the de-consolidation of the Trust did not have a
material impact on the Company's financial position or results of operations.
Currently, the Company does not have any other investments affected by FIN 46R.
On December 16, 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 03-3, "Accounting for Certain Loans or
Debt Securities Acquired in a Transfer" ("SOP 03-3"). SOP 03-3 provides guidance
on the accounting for differences between contractual and expected cash flows
from the purchaser's initial investment in loans or debt securities acquired in
a transfer, if those differences are attributable, at least in part, to credit
quality. Among other things, SOP 03-3: (1) prohibits the recognition of the
excess of contractual cash flows over expected cash flows as an adjustment of
yield, loss accrual, or valuation allowance at the time of purchase; (2)
requires that subsequent increases in expected cash flows be recognized
prospectively through an adjustment of yield; and (3) requires the subsequent
decreases in expected cash flows be recognized as an impairment. In addition,
SOP 03-3 prohibits the creation or carrying over of a valuation allowance in the
initial accounting of all loans within its scope that are acquired in a
transfer. SOP 03-3 becomes effective for loans or debt securities acquired in
fiscal years beginning after December 15, 2004. The Company does not expect the
requirements of SOP 03-3 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,
2004 and 2003 was as follows (in thousands):
Three months ended
March 31,
-------------------------
2004 2003
------------ ------------
Net income $2,389 $2,362
Other comprehensive income:
Unrealized gain (loss) during the period 779 (265)
Less realized gain during the period - (370)
Tax effect (302) 246
------------ ------------
Comprehensive income $2,866 $1,973
============ ============
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, 2004 and 2003 were as follows:
Three months ended
March 31,
------------------------------
2004 2003
--------------- --------------
Basic Earnings per Share:
Net income $2,389,000 $2,362,000
Weighted average common shares outstanding 3,063,091 3,186,961
=============== ==============
Basic earnings per common share $ .78 $ .74
=============== ==============
Diluted Earnings per Share:
Weighted average common shares outstanding 3,063,091 3,186,961
Assumed conversion of stock options 54,264 35,189
--------------- --------------
Diluted weighted average common
shares outstanding 3,117,355 3,222,150
=============== ==============
Diluted earnings per common share $ .77 $ .73
=============== ==============
Goodwill and Intangible Assets
The Company has goodwill from business combinations, intangible assets from
branch acquisitions, identifiable intangible assets assigned to core deposit
relationships and customer lists of the insurance agency acquired, and
intangible assets arising from the rights to service mortgage loans for others.
The following table presents gross carrying value and accumulated amortization
by major intangible asset class as of March 31, 2004 and December 31, 2003 (in
thousands):
March 31, 2004 December 31, 2003
--------------------------- ---------------------------
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 1,408 3,015 1,358
Core deposit intangibles 2,805 2,158 2,805 2,089
Mortgage servicing rights 608 559 608 551
Customer list intangibles 1,904 413 1,904 365
----------- --------------- ------------ --------------
$21,126 $8,298 $21,126 $8,123
=========== =============== ============ ==============
Total amortization expense for the periods ended March 31, 2004 and 2003 was as
follows (in thousands):
2004 2003
------------ ------------
Intangibles from branch acquisition $ 50 $ 50
Core deposit intangibles 69 73
Mortgage servicing rights 8 13
Customer list intangibles 48 48
------------ ------------
$175 $184
============ ============
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 3/31/04 $175
Estimated amortization expense:
For period 04/1/04-12/31/04 $448
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
For period ended 12/31/09 $417
In accordance with the provisions of SFAS 142, the Company performed testing of
goodwill for impairment as of September 30, 2003, and determined that, as of
that date, goodwill was not impaired. Management also concluded that the
remaining amounts and amortization periods were appropriate for all intangible
assets.
Stock Incentive Plan
The Company accounts for its Stock Incentive Plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting For
Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost based on fair value at grant date has not been recognized for
its stock options in the consolidated financial statements. As required by SFAS
123, "Accounting for Stock-Based Compensation" as amended by SFAS 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure," the
Company provides pro forma net income and pro forma earnings per share
disclosures for employee stock option grants. The following table illustrates
the effect on net income if the fair value based method had been applied
(dollars in thousands).
Three months ended March 31,
2004 2003
--------------- --------------
Net income, as reported $2,389 $2,362
Stock based compensation expense
determined under fair value based
method, net of related tax effect (42) (32)
--------------- --------------
Pro forma net income $2,347 $2,330
=============== ==============
Basic Earnings Per Share:
As reported $.78 $.74
Pro forma .77 .73
Diluted Earnings Per Share:
As reported $.77 $.73
Pro forma .75 .72
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,
2004 and 2003. This discussion and analysis should be read in conjunction with
the consolidated financial statements, related notes and selected financial data
appearing elsewhere in this report.
Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, such as discussions of the
Company's pricing and fee trends, credit quality and outlook, liquidity, new
business results, expansion plans, anticipated expenses and planned schedules.
The Company intends such forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and is including this statement for
purposes of these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies and
expectations of the Company, are identified by use of the words "believe",
"expect", "intend", "anticipate", "estimate", "project", or similar expressions.
Actual results could differ materially from the results indicated by these
statements because the realization of those results is subject to many
uncertainties including: changes in interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
Overview
This overview of management's discussion and analysis highlights selected
information in this document and may not contain all of the information that is
important to you. For a more complete understanding of trends, events,
commitments, uncertainties, liquidity, capital resources, and critical
accounting estimates, you should carefully read this entire document. These have
an impact on the Company's financial condition and results of operations.
Net income was $2,389,000 and $2,362,000 and diluted earnings per share was $.77
and $.73 for the three months ended March 31, 2004 and 2003, respectively. The
increase in net income was primarily the result of higher net interest income.
The greater percentage increase in earnings per share was the result of a
decrease in the number of shares outstanding due to share repurchases made
through our stock buy-back program. In the first quarter of 2004, we acquired
175,818 shares at a total investment of $8,376,000. The following table shows
the Company's annualized performance ratios for the three months ended March 31,
2004 and 2003, compared to the performance ratios for the year ended December
31, 2003:
Three months ended Year ended
March 31, March 31, December 31,
2004 2003 2003
----------- ----------- --------------
Return on average assets 1.21% 1.24% 1.17%
Return on average equity 13.96% 13.92% 13.11%
Average equity to average assets 8.64% 8.89% 8.94%
Total assets at March 31, 2004 and December 31, 2003 were $784.8 million and
$793.6 million, respectively. This decline was primarily a result of called and
maturing securities during the first quarter of 2004 that were not immediately
replaced in the portfolio and the reduction of liabilities due to lower
repurchase agreement balances. Net loan balances were $546.3 million at March
31, 2004, a decrease of $2.1 million, or .4%, from $548.4 million at December
31, 2003 primarily due to seasonal paydowns in the agricultural operating loan
portfolio. Total deposit balances increased to $623.6 million at March 31, 2004
from $615.0 million at December 31, 2003.
Net interest margin, defined as net interest income divided by average
interest-earning assets, was 3.82% for the three months ended March 31, 2004, up
from 3.65% for the same period in 2003. The increase in the net interest margin
is attributable to the increase in the loan portfolio balances since March 31,
2003, which offset declines in yields of loans and securities, combined with
decreases in the cost of deposits. Net interest income before the provision for
loan losses was $7.0 million for the three months ended March 31, 2004 compared
to $6.5 million for the same period in 2003. In 2004, the growth in earning
assets primarily composed of the loan growth and net interest margin expansion
from the decline in the cost of interest-bearing liabilities increased net
interest income. During the first quarter of 2004, the Company also recovered
$85,000 in interest that had been charged-off in a prior period for an
agricultural real estate loan.
Noninterest income decreased $402,000, or 12%, to $2.9 million for the three
months ended March 31, 2004 compared to $3.3 million in 2003. The primary cause
of this decrease was a decline in mortgage banking revenue due to the slowing of
refinancings in early 2004. Also, the Company received $370,000 in gains on the
sale of securities during the first quarter of 2003, while there were no
security gains or losses recognized in 2004. These declines were partially
offset by an increase in trust and brokerage revenues due to improvement in
equity prices and growth in new business.
Noninterest expense increased 3.9% or $232,000, to $6.1 million for the three
months ended March 31, 2004 compared to $5.9 million in 2003. The primary factor
in the expense increase was increased salaries and benefits expense and
increases in accounting and legal professional fees incurred in implementing the
requirements of the Sarbanes-Oxley Act of 2002.
Following is a summary of the factors that contributed to the changes in net
income (in thousands):
2004 vs 2003
---------------
Net interest income $560
Provision for loan losses 63
Other income, including securities transactions (402)
Other expenses (232)
Income taxes 38
---------------
Increase in net income $27
===============
Credit quality is an area of importance to the Company and the first quarter of
2004 reflected favorable results in this area. Net charge-offs were 0.08% of
average loans compared to .11% in 2003. Total nonperforming loans, which did not
change materially, were $3.3 million and $3.2 million at March 31, 2004 and
2003, respectively. At March 31, 2004 the composition of the loan portfolio
remained similar to the same period last year. Loans secured by both commercial
and residential real estate comprised 73% of the loan portfolio as of March 31,
2004 compared to 69% as of March 31, 2003.
The Company's capital position remains strong and has consistently maintained
regulatory capital ratios above the "well-capitalized" standards. The Company's
Tier 1 capital to risk weighted assets ratio calculated under the regulatory
risk-based capital requirements at March 31, 2004 and 2003 was 10.85% and 9.88%,
respectively. The Company's total capital to risk weighted assets ratio
calculated under the regulatory risk-based capital requirements at March 31,
2004 and 2003 was 11.65% and 10.60%, respectively. The increase in 2004 was the
result of the issuance of trust preferred securities held by First Mid-Illinois
Statutory Trust I ("Trust"), which qualify as Tier I capital for the Company
under Federal Reserve Board guidelines. The Trust invested the proceeds of the
issuance in junior subordinated debentures of the Company. This was partially
offset by a decline in equity as a result of the increase in the number of
shares repurchased under the Company's stock repurchase program.
The Company's liquidity position remains sufficient to fund operations and meet
the requirements of borrowers, depositors, and creditors. The Company maintains
various sources of liquidity to fund its cash needs. See discussion under the
heading "Liquidity" for a full listing of sources and anticipated significant
contractual obligations. The Company enters into financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include lines of credit,
letters of credit and other commitments to extend credit. The total outstanding
commitments at March 31, 2004 and 2003 were $100.2 million and $113.5 million,
respectively.
Critical Accounting Policies
The Company has established various accounting policies that govern the
application of accounting principles generally accepted in the United States in
the preparation of the Company's financial statements. The significant
accounting policies of the Company are described in the footnotes to the
consolidated financial statements included in the Company's 2003 Annual Report
on Form 10-K. Certain accounting policies involve significant judgments and
assumptions by management that have a material impact on the carrying value of
certain assets and liabilities; management considers such accounting policies to
be critical accounting policies. The judgments and assumptions used by
management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of the
judgments and assumptions made by management, actual results could differ from
these judgments and assumptions, which could have a material impact on the
carrying values of assets and liabilities and the results of operations of the
Company.
The Company believes the allowance for loan losses is the critical accounting
policy that requires the most significant judgments and assumptions used in the
preparation of its consolidated financial statements. In estimating the
allowance for loan losses, management utilizes historical experience, as well as
other factors, including the effect of changes in the local real estate market
on collateral values, the effect on the loan portfolio of current economic
indicators and their probable impact on borrowers, and increases or decreases in
nonperforming and impaired loans. Changes in these factors may cause
management's estimate of the allowance to increase or decrease and result in
adjustments to the Company's provision for loan losses. See heading "Loan
Quality and Allowance for Loan Losses" for a more detailed description of the
Company's estimation process and methodology related to the allowance for loan
losses.
Results of Operations
Net Interest Income
The largest source of revenue for the Company is net interest income. Net
interest income represents the difference between total interest income earned
on earning assets and total interest expense paid on interest-bearing
liabilities. The amount of interest income is dependent upon many factors,
including the volume and mix of earning assets, the general level of interest
rates and the dynamics of changes in interest rates. The cost of funds necessary
to support earning assets varies with the volume and mix of interest-bearing
liabilities and the rates paid to attract and retain such funds.
The Company's average balances, interest income and expense and rates earned or
paid for major balance sheet categories are set forth in the following table
(dollars in thousands):
Three months ended Three months ended
March 31, 2004 March 31, 2003
------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------
ASSETS
Interest-bearing deposits $2,813 $ 6 0.85% $20,710 $ 56 1.08%
Federal funds sold 18,070 39 0.86% 19,574 54 1.10%
Investment securities
Taxable 141,301 1,206 3.41% 139,997 1,284 3.67%
Tax-exempt 27,741 309 4.46% 28,899 318 4.40%
Loans (1)(2) 547,729 8,167 5.96% 500,767 8,008 6.40%
------------------------------------------------------------------------
Total earning assets 737,654 9,727 5.27% 709,947 9,720 5.48%
------------------------------------------------------------------------
Cash and due from banks 19,114 17,809
Premises and equipment 15,946 16,818
Other assets 27,465 22,578
Allowance for loan losses (4,495) (3,790)
------------ ---------------
Total assets $795,684 $763,362
============ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
Demand deposits $220,957 $ 341 .62% $211,168 $ 529 1.00%
Savings deposits 59,757 56 .37% 54,875 100 0.73%
Time deposits 251,022 1,741 2.77% 260,553 2,069 3.18%
Securities sold under
agreements to repurchase 55,345 72 .52% 40,720 64 0.63%
FHLB advances 28,597 387 5.41% 33,522 418 4.99%
Federal funds purchased 35 - - 56 - -
Junior subordinated debt 3,852 37 3.84% - - -
Other debt 8,795 53 2.41% 9,187 60 2.61%
------------------------------------------------------------------------
Total interest-bearing
liabilities 628,360 2,687 1.71% 610,081 3,240 2.12%
------------------------------------------------------------------------
Non interest-bearing demand deposits 89,243 80,856
Other liabilities 9,452 4,554
Stockholders' equity 68,629 67,871
------------ ---------------
Total liabilities & equity $795,684 $763,362
============ ===============
Net interest income $ 7,040 $ 6,480
============ ===========
Net interest spread 3.56% 3.36%
Impact of non-interest
bearing funds .26% .29%
------------ ------------
Net yield on interest-
earning assets 3.82% 3.65%
============ ============
(1) Loan fees are included in interest income and are not material.
(2) Nonaccrual loans are not material and have been included in the average
balances.
Changes in net interest income may also be analyzed by segregating the volume
and rate components of interest income and interest expense. The following table
summarizes the approximate relative contribution of changes in average volume
and interest rates to changes in net interest income for the three months ended
March 31, 2004, compared to the same period in 2003 (in thousands):
For the three months ended March 31,
2004 compared to 2003
Increase / (Decrease)
Total Rate/
Change Volume Rate Volume (3)
-------------------------------------------
Earning Assets:
Interest-bearing deposits $ (50) $ (48) $ (12) $ 10
Federal funds sold (15) (4) (12) 1
Investment securities:
Taxable (78) 12 (91) 1
Tax-exempt (9) (13) 4 -
Loans (1)(2) 159 751 (551) (41)
-------------------------------------------
Total interest income 7 698 (662) (29)
-------------------------------------------
Interest-Bearing Liabilities:
Interest-bearing deposits
Demand deposits (188) 24 (201) (11)
Savings deposits (44) 9 (49) (4)
Time deposits (328) (76) (267) 15
Securities sold under
agreements to repurchase 8 23 (11) (4)
FHLB advances (31) (61) 35 (5)
Federal funds purchased - - - -
Junior subordinated debt 37 - - 37
Other debt (7) (3) (5) 1
-------------------------------------------
Total interest expense (553) (84) (498) 29
-------------------------------------------
Net interest income $560 $782 $(164) $(58)
===========================================
(1) Loan fees are included in interest income and are not material.
(2) Nonaccrual loans are not material and have been included in the average
balances.
(3) The changes in rate/volume are computed on a consistent basis by
multiplying the change in rates with the change in volume.
Net interest income increased $560,000, or 8.6% to $7,040,000 for the three
months ended March 31, 2004, from $6,480,000 for the same period in 2003. The
increase in net interest income was primarily due to growth in earning assets
primarily composed of loan growth and net interest margin expansion from the
decline in the cost of interest-bearing liabilities. The Company also recovered
$85,000 in interest that had been charged-off in a prior period for an
agricultural real estate loan.
For the three months ended March 31, 2004, average earning assets increased by
$27.7 million, or 3.9%, and average interest-bearing liabilities increased $18.3
million, or 3.0%, compared with average balances for the same period in 2003.
Changes in average balances are shown below:
< Average loans increased by $47.0 million or 9.4% in 2004 compared to
2003.
< Average securities increased by $.1 million or .1% in 2004 compared to
2003.
< Average interest-bearing deposits increased by $5.1 million or 1.0% in
2004 compared to 2003.
< Average securities sold under agreements to repurchase increased by
$14.6 million or 35.9% in 2004 compared to 2003.
< Average borrowings and other debt decreased by $5.3 million or 12.4%
in 2004 compared to 2003.
< Net interest margin increased to 3.82% in 2004 from 3.65% in 2003.
To compare the tax-exempt yields on interest-earning assets to taxable yields,
the Company also computes non-GAAP net interest income on a tax equivalent basis
(TE) where the interest earned on tax-exempt securities is adjusted to an amount
comparable to interest subject to normal income taxes assuming a federal tax
rate of 34% (referred to as the tax equivalent adjustment). The TE adjustments
to net interest income for March 31, 2004 and 2003 were $159,000 and $164,000,
respectively. The net yield on interest-earning assets (TE) was 3.90% in 2004
and 3.74% in 2003.
Provision for Loan Losses
The provision for loan losses for the three months ended March 31, 2004 was
$187,000 compared to $250,000 for the same period in 2003. The decrease in the
provision was due to a decrease in net charge-offs, partially offset by an
increase in non-performing loans. Net charge-offs were $113,000 for the three
months ended March 31, 2004 compared to $132,000 during the same period in 2003.
Nonperforming loans increased slightly from $3,233,000 as of March 31, 2003 to
$3,271,000 as of March 31, 2004. For information on loan loss experience and
nonperforming loans, see discussion under the "Nonperforming Loans" and "Loan
Quality and Allowance for Loan Losses" sections below.
Other Income
An important source of the Company's revenue is derived from other income. The
following table sets forth the major components of other income for the
three-month periods ended March 31, 2004 and 2003 (in thousands):
Three months ended March 31,
2004 2003 $ Change
-------------- ------------- -------------
Trust $616 $456 $160
Brokerage 110 57 53
Insurance commissions 430 424 6
Service charges 1,124 1,038 86
Security gains - 370 (370)
Mortgage banking 94 490 (396)
Other 524 465 59
-------------- ------------- -------------
Total other income $2,898 $3,300 $(402)
============== ============= =============
Following are explanations for the three months ended March 31, 2004 compared to
the same period in 2003:
< Trust revenues increased $160,000 or 35.1% to $616,000 from $456,000.
Trust assets, reported at market value, were $361 million at March 31,
2004 compared to $313 million at March 31, 2003. The increase in trust
revenues was the result of new business and an increase in equity
prices.
< Revenues from brokerage increased $53,000 or 93.0% to $110,000 from
$57,000 as a result of an increase in the number of stock
transactions.
< Insurance commissions increased $6,000 or 1.4% to $430,000 from
$424,000. Increased sales of business property and casualty insurance
increased revenues.
< Fees from service charges increased $86,000 or 8.3% to $1,124,000 from
$1,038,000. This was primarily the result of continued increases in
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.
< There were no sales of securities resulting in net security gains in
the first quarter of 2004 compared to $370,000 in the same period of
2003.
< Mortgage banking income decreased $396,000 or 80.8% to $94,000 from
$490,000. This decrease was due to the declining volume of fixed rate
loans originated and sold by First Mid Bank. The decrease in volume is
largely attributed to the slowdown in mortgage refinancing activity.
Loans sold balances are as follows:
< $3.1 million (representing 33 loans) for the 1st quarter of 2004.
< $38.9 million (representing 437 loans) for the 1st quarter of
2003.
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 12.7% to $524,000 from $465,000.
This increase was primarily due to prior years' income tax refunds
received during the first quarter of 2004.
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, 2004 and 2003 (in thousands):
Three months ended March 31,
2004 2003 $ Change
------------ ------------- -------------
Salaries and benefits $ 3,338 $ 3,231 $ 107
Occupancy and equipment 1,073 1,063 10
Amortization of intangibles 175 184 (9)
Stationery and supplies 134 144 (10)
Legal and professional fees 276 231 45
Marketing and promotion 141 132 9
Other operating expenses 1,031 951 80
------------ ------------- -------------
Total other expense $ 6,168 $ 5,936 $ 232
============ ============= =============
Following are explanations for the three months ended March 31, 2004 compared to
the same period in 2003:
< Salaries and employee benefits, the largest component of other
expense, increased $107,000 or 3.3% to $3,338,000 from $3,231,000.
This increase is primarily due to merit increases for continuing
employees. There were 311 full-time equivalent employees at March 31,
2004 compared to 324 at March 31, 2003.
< Occupancy and equipment expense increased $10,000 or 0.9% to
$1,073,000 from $1,063,000, primarily due to increased property taxes.
< Other operating expenses increased $80,000 or 8.4% to $1,031,000 in
2004 from $951,000 in 2003. This increase was a result of increases in
various operating expenses in the first quarter of 2004, including an
increase of $27,000 in postage expense.
< All other categories of operating expenses increased a net of $35,000
or 5.1% to $726,000 from $691,000. The increase was primarily due to
increased legal and professional fees resulting from the provisions of
the Sarbanes-Oxley of 2002 and from fees associated with the issuance
of trust preferred securities, the proceeds of which were invested in
junior subordinated debentures of the Company, during the first
quarter of 2004.
Income Taxes
Total income tax expense amounted to $1,194,000 (33.3% effective tax rate) for
the three months ended March 31, 2004, compared to $1,232,000 (34.3% effective
tax rate) for the same period in 2003. The decrease in the effective tax rate in
2004 compared to 2003 is due to an increase in state tax-exempt interest income
from U.S. agency securities.
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, 2004 and December 31, 2003 (in thousands):
March 31, December 31,
2004 2003
--------------- --------------
Real estate - residential $115,796 $113,905
Real estate - agricultural 51,186 52,509
Real estate - commercial 232,415 224,427
--------------- --------------
Total real estate - mortgage $399,397 $390,841
Commercial and agricultural 121,696 131,609
Installment 28,352 28,932
Other 1,387 1,442
--------------- --------------
Total loans $550,832 $552,824
=============== ==============
Overall loans decreased $2.0 million, or .4% as a result of seasonal declines in
agricultural operating loans. Total 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 $1,071,000 and $751,000 as of
March 31, 2004 and December 31, 2003, respectively.
At March 31, 2004, the Company had loan concentrations in agricultural
industries of $85.1 million, or 15.4%, of outstanding loans and $93.3 million,
or 18.1%, at December 31, 2003. In addition, the Company had loan concentrations
in the following industries as of March 31, 2004 compared to December 31, 2003
(dollars in thousands):
March 31, 2004 December 31, 2003
Principal % outstanding Principal % outstanding
balance loans balance loans
---------------- --------------- ----------------- ---------------
Operators of non-residential
buildings $17,025 3.1% $11,633 2.1%
Apartment building owners 19,328 3.5% 21,207 3.8%
Motels, hotels & tourist courts 26,874 4.9% 26,962 4.9%
The Company had no further loan concentrations in excess of 25% of Tier 1
risk-based capital.
The following table presents the balance of loans outstanding as of March 31,
2004, by maturities (in thousands):
Maturity (1)
----------------------------------------------------------------
Over 1
One year through Over
or less (2) 5 years 5 years Total
----------------------------------------------------------------
Real estate - residential $ 54,506 $ 59,561 $1,729 $115,796
Real estate - agricultural 9,752 36,373 5,062 51,187
Real estate - commercial 68,223 139,300 24,892 232,415
----------------------------------------------------------------
Total real estate - mortgage $132,481 $235,234 $ 31,683 $399,398
Commercial and agricultural 86,339 34,034 1,322 121,695
Installment 14,911 13,392 49 28,352
Other 583 671 133 1,387
----------------------------------------------------------------
Total loans $234,314 $283,331 $ 33,187 $550,832
================================================================
(1) Based on scheduled principal repayments.
(2) Includes demand loans, past due loans and overdrafts.
As of March 31, 2004, loans with maturities over one year consisted of
approximately $224,681,000 in fixed rate loans and $91,837,000 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, 2004 and December 31, 2003 (in thousands):
March 31, December 31,
2004 2003
-------------- ---------------
Nonaccrual loans $3,235 $3,296
Renegotiated loans which are performing
in accordance with revised terms 35 35
-------------- ---------------
Total nonperforming Loans $3,270 $3,331
============== ===============
At March 31, 2004, approximately $1,373,000 of nonperforming loans resulted from
collateral-dependent loans to two borrowers. The $61,000 decrease in nonaccrual
loans during the three months ended March 31, 2004 resulted from the net of
$1,427,000 of loans put on nonaccrual status, $1,470,000 of loans brought
current or paid-off and $18,000 of loans transferred to other real estate owned.
Interest income that would have been reported if nonaccrual and renegotiated
loans had been performing totaled $53,000 for the three months ended March 31,
2004 and $211,000 for the year ended December 31, 2003.
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 that extends to the full range of the Company's credit
exposure. The review process is directed by overall lending policy and is
intended to identify, at the earliest possible stage, borrowers facing financial
difficulty. Once identified, the magnitude of exposure to individual borrowers
is quantified in the form of specific allocations of the allowance for loan
losses. Management considers collateral values in the determination of such
specific allocations. Additional factors considered by management in evaluating
the overall adequacy of the allowance for loan losses include historical net
loan losses, the level and composition of nonaccrual, past due and renegotiated
loans and the current economic conditions in the region where the Company
operates. Management considers the allowance for loan losses a critical
accounting policy.
Management recognizes that there are risk factors that are inherent in the
Company's loan portfolio. All financial institutions face risk factors in their
loan portfolios because risk exposure is a function of the business. The
Company's operations (and therefore its loans) are concentrated in east central
Illinois, an area where agriculture is the dominant industry. Accordingly,
lending and other business relationships with agriculture-based businesses are
critical to the Company's success. At March 31, 2004, the Company's loan
portfolio included $85.1 million of loans to borrowers whose businesses are
directly related to agriculture. The balance decreased by $8.2 million from
$93.3 million at December 31, 2003. While the Company adheres to sound
underwriting practices, including collateralization of loans, any extended
period of low commodity prices, significantly reduced yields on crops and/or
reduced levels of government assistance to the agricultural industry could
result in an increase in the level of problem agriculture loans and potentially
result in loan losses within the agricultural portfolio.
The Company has $26.9 million of loans to motels, hotels and tourist courts. The
performance of these loans is dependent on borrower specific issues as well as
the general level of business and personal travel within the region. While the
Company adheres to sound underwriting standards, a prolonged period of reduced
business or personal travel could result in an increase in nonperforming loans
to this business segment and potentially in loan losses. The Company also has
$17.0 million of loans to operators of non-residential buildings and $19.3
million of loans to apartment building owners.
Analysis of the allowance for loan losses as of March 31, 2004 and 2003, and of
changes in the allowance for the three-month periods ended March 31, 2004 and
2003, was as follows (dollars in thousands):
Three months ended March 31,
2004 2003
--------------------------------
Average loans outstanding,
net of unearned income $547,729 $500,767
Allowance-beginning of period $ 4,426 $ 3,723
Charge-offs:
Real estate-mortgage 18 12
Commercial, financial & agricultural 101 114
Installment 19 26
--------------------------------
Total charge-offs 138 152
Recoveries:
Real estate-mortgage 15 -
Commercial, financial & agricultural 10 11
Installment - 9
--------------------------------
Total recoveries 25 20
--------------------------------
Net charge-offs (recoveries) 113 132
Provision for loan losses 187 250
--------------------------------
Allowance-end of period $ 4,500 $ 3,841
================================
Ratio of annualized net charge-offs
to average loans .08% .11%
================================
Ratio of allowance for loan losses to
loans outstanding (less unearned
interest at end of period) .82% .76%
================================
Ratio of allowance for loan losses
to nonperforming loans 137.6% 118.8%
================================
During the first quarter of 2004, the Company had a charge-off of $83,000 on a
commercial loan of a single borrower.
The Company minimizes credit risk by adhering to sound underwriting and credit
review policies. Management and the board of directors of the Company review
these policies at least annually. Senior management is actively involved in
business development efforts and the maintenance and monitoring of credit
underwriting and approval. The loan review system and controls are designed to
identify, monitor and address asset quality problems in an accurate and timely
manner. On a quarterly basis, the board of directors and management review the
status of problem loans and determine 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, 2004 and December 31, 2003 (dollars in thousands):
March 31, 2004 December 31, 2003
----------------------------- ---------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Yield
-------------- -------------- ------------- -------------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 92,932 3.27% $109,544 3.25%
Obligations of states and
political subdivisions 26,101 4.60% 26,895 4.86%
Mortgage-backed securities 19,404 2.54% 21,607 3.64%
Other securities 17,587 5.74% 17,521 5.87%
-------------- -------------- ------------- -------------
Total securities $156,024 3.68% $175,567 3.81%
============== ============== ============= =============
At March 31, 2004, the Company's investment portfolio showed a slight increase
in other securities and a decrease in U.S. Treasury securities and obligations
of U.S. government corporations and agencies and 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, 2004 and December 31, 2003 were as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- ---------------- --------------
March 31, 2004
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. government corporations & agencies $ 92,932 $1,072 $ - $ 94,004
Obligations of states and political
subdivisions 24,534 1,367 - 25,901
Mortgage-backed securities 19,404 282 (50) 19,636
Federal Home Loan Bank stock 5,064 - - 5,064
Other securities 12,523 701 - 13,224
--------------- --------------- ---------------- --------------
Total available-for-sale $154,457 $ 3,422 $ (50) $157,829
=============== =============== ================ ==============
Held-to-maturity:
Obligations of states and political subdivisions $ 1,567 $ 84 - $ 1,651
=============== =============== ================ ==============
December 31, 2003
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. government corporations & agencies $109,544 $ 786 $(98) $110,232
Obligations of states and political
subdivisions 25,218 1,229 - 26,447
Mortgage-backed securities 21,607 259 (94) 21,772
Federal Home Loan Bank stock 5,000 - - 5,000
Other securities 12,521 509 - 13,030
--------------- --------------- ---------------- --------------
Total available-for-sale $173,890 $ 2,783 $(192) $176,481
=============== =============== ================ ==============
Held-to-maturity:
Obligations of states and political subdivisions $ 1,677 $ 12 $ (2) $ 1,687
=============== =============== ================ ==============
At March 31, 2004, there were no securities in a continuous unrealized loss
position for twelve months or more.
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, 2004 and the weighted average yield for each range of
maturities. Mortgage-backed securities are included based on their weighted
average life. All other securities are shown at their contractual maturity
(dollars in thousands).
After 1 After 5 After
One year through through ten
or less 5 years 10 years years Total
------------ ------------ ------------ ---------- -----------
Available-for-sale:
U.S. Treasury securities and
Obligations of U.S. government
corporations and agencies $16,980 $ 60,038 $10,940 $ 4,974 $ 92,932
Obligations of state and
political subdivisions 2,465 8,581 9,406 4,082 24,534
Mortgage-backed securities 566 18,838 - - 19,404
Federal Home Loan Bank stock - - - 5,064 5,064
Other securities - - - 12,523 12,523
------------ ------------ ------------ ---------- -----------
Total investments $20,011 $87,457 $20,346 $26,643 $154,457
============ ============ ============ ========== ===========
Weighted average yield 4.06% 2.99% 4.23% 5.13% 3.66%
Full tax-equivalent yield 4.27% 3.18% 5.16% 5.47% 3.98%
============ ============ ============ ========== ===========
Held-to-maturity:
Obligations of state and
political subdivisions $ 135 $ 600 $ 270 $ 562 $ 1,567
============ ============ ============ ========== ===========
Weighted average yield 5.17% 5.41% 5.67% 5.40% 5.43%
Full tax-equivalent yield 7.48% 7.84% 8.23% 7.80% 7.86%
============ ============ ============ ========== ===========
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, 2004.
Investment securities carried at approximately $130,673,000 and $147,603,000 at
March 31, 2004 and December 31, 2003, 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, 2004
and for the year ended December 31, 2003 (dollars in thousands):
March 31, 2004 December 31, 2003
------------------------ ---------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------------ ----------- ------------ -----------
Demand deposits:
Non-interest-bearing $ 89,243 - $ 85,368 -
Interest-bearing 220,957 .61% 219,809 .81%
Savings 59,757 .37% 56,402 .54%
Time deposits 251,022 2.78% 250,403 3.06%
------------ ----------- ------------ -----------
Total average deposits $620,979 1.38% $611,982 1.59%
============ =========== ============ ===========
The following table sets forth the maturity of time deposits of $100,000 or more
at March 31, 2004 and December 31, 2003 (in thousands):
March 31, December 31,
2004 2003
-------------- ----------------
3 months or less $ 17,685 $ 20,510
Over 3 through 6 months 22,273 10,906
Over 6 through 12 months 22,365 24,654
Over 12 months 30,945 28,446
-------------- ----------------
Total $ 93,268 $ 84,516
============== ================
During the first quarter of 2004, the balance of time deposits of $100,000 or
more increased by $8.8 million. The increase in balances was primarily
attributable to an increase in brokered CDs of $6 million.
Balances of time deposits of $100,000 or more includes brokered CDs, time
deposits maintained for public fund entities, and consumer time deposits. The
balance of brokered CDs was $29.0 million and $22.9 as of March 31, 2004 and
December 31, 2003, respectively. The Company also maintains time deposits for
the State of Illinois with balances of $6.2 million and $6.3 million as of March
31, 2004 and December 31, 2003, respectively. The State of Illinois deposits are
subject to bid annually and could increase or decrease in any given year.
Repurchase Agreements and Other Borrowings
Securities sold under agreements to repurchase are short-term obligations of
First Mid Bank. First Mid Bank collateralizes these obligations with certain
government securities that are direct obligations of the United States or one of
its agencies. First Mid Bank offers these retail repurchase agreements as a cash
management service to its corporate customers. Other borrowings consist of
Federal Home Loan Bank ("FHLB") advances, federal funds purchased, loans
(short-term or long-term debt) that the Company has outstanding and junior
subordinated debentures.
Information relating to securities sold under agreements to repurchase and other
borrowings as of March 31, 2004 and December 31, 2003 is presented below
(dollars in thousands):
March 31, December 31,
2004 2003
------------- ---------------
Securities sold under agreements to repurchase $48,004 $ 59 875
Federal Home Loan Bank advances:
Fixed term - due in one year or less 5,000 5,000
Fixed term - due after one year 20,300 25,300
Debt:
Loans due in one year or less 4,700 9,025
Loans due after one year 400 600
Junior subordinated debentures 10,310 -
------------- ---------------
Total $88,714 $99,800
============= ===============
Average interest rate at end of period 2.55% 2.13%
Maximum outstanding at any month-end
Securities sold under agreements to repurchase $53,609 $59,875
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 9,025 9,025
Loans due after one year 400 600
Junior subordinated debentures 10,310 -
------------- ---------------
Total $103,644 $104,800
============= ===============
March 31, December 31,
2004 2003
------------- ---------------
Averages for the period (YTD)
Securities sold under agreements to repurchase $55,345 $47,795
Federal Home Loan Bank advances:
Fixed term - due in one year or less 5,000 5,000
Fixed term - due after one year 23,597 26,094
Federal funds purchased 35 14
Debt:
Loans due in one year or less 8,334 8,796
Loans due after one year 462 615
Junior subordinated debentures 3,852 -
------------- ---------------
Total $96,625 $88,314
============= ===============
Average interest rate during the period 2.34% 2.41%
FHLB advances represent borrowings by First Mid Bank to economically fund loan
demand. The fixed term advances consist of $25.3 million as follows:
< $5 million advance at 6.16% with a 5-year maturity, due March 20, 2005
< $2.3 million advance at 6.10% with a 5-year maturity, due April 7,
2005
< $5 million advance at 6.12% with a 5-year maturity, due September 6,
2005
< $5 million advance at 5.34% with a 5-year maturity, due December 14,
2005
< $3 million advance at 5.98% with a 10-year maturity, due March 1, 2011
< $5 million advance at 4.33% with a 10-year maturity, due November 23,
2011
Other debt, both short-term and long-term, represents the outstanding loan
balances for the Company. At March 31, 2004, outstanding loan balances include
$4,500,000 on a revolving credit agreement with The Northern Trust Company with
a floating interest rate of 1.25% over the Federal funds rate (2.25% as of March
31, 2004) and set to mature October 23, 2004. 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, 2004 and at December 31, 2003.
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
(4.00% as of March 31, 2004) and principal payable annually over five years,
with a final maturity of January 2007.
On February 27, 2004, the Company completed the issuance and sale of $10 million
of floating rate trust preferred securities through First Mid-Illinois Statutory
Trust I (the "Trust"), a statutory business trust and wholly owned subsidiary of
the Company, as part of a pooled offering. The Company established the Trust for
the purpose of issuing the trust preferred securities. Upon adoption of FIN 46R,
the Company was required to de-consolidate its investment in the Trust. The $10
million proceeds of the Trust Preferred issuance and an additional $310,000 for
the Company's investment in common equity of the Trust, a total of $10,310 000,
was invested in junior subordinated debentures of the Company. The underlying
junior subordinated debentures issued by the Company to the Trust mature in
2034, bear interest at three-month London Interbank Offered Rate ("LIBOR") plus
280 basis points, reset quarterly, and are callable, at the option of the
Company, at par on or after April 7, 2009. The Company intends to use the
proceeds of the offering for general corporate purposes. The trust preferred
securities issued by the Trust are included as Tier 1 capital of the Company for
regulatory capital purposes. On July 2, 2003, the Federal Reserve Board issued a
supervisory letter instructing bank holding companies to continue to include the
trust preferred securities in the calculation of Tier 1 capital for regulatory
purposes until further notice. As a result of the issuance of FIN 46R, the
Federal Reserve Board is currently evaluating whether deconsolidation of the
Trust will effect the qualification of the trust preferred securities as Tier 1
capital. If it is determined that the trust preferred securities no longer
qualify as Tier 1 capital, the Company would still be classified as well
capitalized.
Interest Rate Sensitivity
The Company seeks to maximize its net interest margin while maintaining an
acceptable level of interest rate risk. Interest rate risk can be defined as the
amount of forecasted net interest income that may be gained or lost due to
changes in the interest rate environment, a variable over which management has
no control. Interest rate risk, or sensitivity, arises when the maturity or
repricing characteristics of interest-bearing assets differ significantly from
the maturity or repricing characteristics of interest-bearing liabilities.
The Company monitors its interest rate sensitivity position to maintain a
balance between rate sensitive assets and rate sensitive liabilities. This
balance serves to limit the adverse effects of changes in interest rates. The
Company's asset liability management committee (ALCO) oversees the interest rate
sensitivity position and directs the overall allocation of funds.
In the banking industry, a traditional way to measure potential net interest
income exposure to changes in interest rates is through a technique known as
"static GAP" analysis which measures the cumulative differences between the
amounts of assets and liabilities maturing or repricing at various intervals. By
comparing the volumes of interest-bearing assets and liabilities that have
contractual maturities and repricing points at various times in the future,
management can gain insight into the amount of interest rate risk embedded in
the balance sheet.
The following table sets forth the Company's interest rate repricing gap for
selected maturity periods at March 31, 2004 (dollars in thousands):
Number of Months Until Next Repricing Opportunity
0-1 1-3 3-6 6-12 12+
--------------- --------------- ---------------- --------------- ---------------
Interest-earning assets:
Federal funds sold $21,167 $ - $ - $ - $ -
Taxable investment securities 20,997 11,610 4,775 6,729 87,816
Nontaxable investment securities - - - 3,993 23,475
Loans 163,333 34,552 36,504 70,557 245,886
--------------- --------------- ---------------- --------------- ---------------
Total $ 205,497 $ 46,162 $41,279 $ 81,279 $357,177
--------------- --------------- ---------------- --------------- ---------------
Interest-bearing liabilities:
Savings and N.O.W. accounts $41,744 $2,741 $ 1,693 $ 3,728 $158,559
Money market accounts 47,371 565 847 1,605 27,752
Other time deposits 19,895 23,046 53,384 61,813 92,808
Short-term borrowings/debt 48,004 - - 9,700 -
Long-term borrowings/debt - - - - 31,010
--------------- --------------- ---------------- --------------- ---------------
Total $157,014 $ 26,352 $55,924 $ 76,846 $310,129
=============== =============== ================ =============== ===============
Periodic GAP $48,483 $ 19,810 $(14,645) $ 4,433 $47,048
=============== =============== ================ =============== ===============
Cumulative GAP $48,483 $ 68,293 $53,648 $ 58,081 $105,129
=============== =============== ================ =============== ===============
GAP as a % of interest-earning assets:
Periodic 6.6% 2.7% -2.0% 0.6% 6.4%
Cumulative 6.6% 9.3% 7.3% 7.9% 14.4%
The static GAP analysis shows that at March 31, 2004, the Company was asset
sensitive, on a cumulative basis, through the twelve-month time horizon. This
indicates that future increases in interest rates, if any, could have a positive
effect on net interest income. Conversely, future decreases in interest rates
could have an adverse effect on net interest income.
There are several ways the Company measures and manages the exposure to interest
rate sensitivity, including static GAP analysis. The Company's ALCO also uses
other financial models to project interest income under various rate scenarios
and prepayment/extension assumptions consistent with First Mid Bank's historical
experience and with known industry trends. ALCO meets at least monthly to review
the Company's exposure to interest rate changes as indicated by the various
techniques and to make necessary changes in the composition terms and/or rates
of the assets and liabilities. Based on all information available, management
does not believe that changes in interest rates, which might reasonably be
expected to occur in the next twelve months, will have a material adverse effect
on the Company's net interest income.
Capital Resources
At March 31, 2004, the Company's stockholders' equity had decreased $4,466,000
or 6.3% to $66,129,000 from $70,595,000 as of December 31, 2003. During the
first three months of 2004, net income contributed $2,389,000 to equity before
the payment of dividends to common stockholders. The change in market value of
available-for-sale investment securities increased stockholders' equity by
$477,000, net of tax. Additional purchases of treasury stock (175,818 shares at
an average cost of $47.64 per share) decreased stockholders' equity by
$8,376,000.
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Bank holding companies follow minimum
regulatory requirements established by the Board of Governors of the Federal
Reserve System ("Federal Reserve System"), and First Mid Bank follows similar
minimum regulatory requirements established for national banks by the Office of
the Comptroller of the Currency ("OCC"). Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary action by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements.
Quantitative measures established by each regulatory agency to ensure capital
adequacy require the reporting institutions to maintain a minimum total
risk-based capital ratio of 8% and a minimum leverage ratio of 3% for the most
highly rated banks that do not expect significant growth. All other institutions
are required to maintain a minimum leverage ratio of 4%. Management believes
that, as of March 31, 2004 and December 31, 2003, the Company and First Mid Bank
met all capital adequacy requirements.
The trust preferred securities issued by First Mid-Illinois Statutory Trust I
are included as Tier 1 capital of the Company for regulatory capital purposes.
On July 2, 2003, the Federal Reserve Board issued a supervisory letter
instructing bank holding companies to continue to include the trust preferred
securities in the calculation of Tier 1 capital for regulatory purposes until
further notice. As a result of the issuance of FIN 46R, the Federal Reserve
Board is currently evaluating whether deconsolidation of the Trust will effect
the qualification of the trust preferred securities as Tier 1 capital. If it is
determined that the trust preferred securities no longer qualify as Tier 1
capital, the Company would still be classified as well capitalized.
As of March 31, 2004, the most recent notification from the OCC categorized
First Mid Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios must be maintained as
set forth in the following table (dollars in thousands). There are no conditions
or events since that notification that management believes have changed this
categorization.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ------------ ------------ ------------ ------------ ------------
March 31, 2004
Total Capital (to risk-weighted assets)
Company $65,791 11.65% $45.190 > 8.00% N/A N/A
-
First Mid Bank 67,075 11.98% 44,810 > 8.00% $56,012 >10.00%
- -
Tier 1 Capital (to risk-weighted assets)
Company 61,291 10.85% 22,595 > 4.00% N/A N/A
-
First Mid Bank 62,575 11.17% 22,405 > 4.00% 33,607 > 6.00%
- -
Tier 1 Capital (to average assets)
Company 61,291 7.86% 31,177 > 4.00% N/A N/A
-
First Mid Bank 62,575 7.08% 30,987 > 4.00% 38,734 > 5.00%
- -
December 31, 2003
Total Capital (to risk-weighted assets)
Company $60,494 10.61% $45,613 > 8.00% N/A N/A
-
First Mid Bank 65,356 11.57% 45,190 > 8.00% $56,488 >10.00%
- -
Tier 1 Capital (to risk-weighted assets)
Company 56,068 9.83% 22,807 > 4.00% N/A N/A
-
First Mid Bank 60,930 10.79% 22,595 > 4.00% 33,893 > 6.00%
- -
Tier 1 Capital (to average assets)
Company 56,068 7.18% 31,217 > 4.00% N/A N/A
-
First Mid Bank 60,930 7.85% 31,059 > 4.00% 38,824 > 5.00%
- -
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 2003 Annual Report on Form
10-K.
On August 5, 1998, the Company announced a stock repurchase program for up to 3%
of its common stock. In March 2000, the Board approved the repurchase of an
additional 5% of the Company's common stock. In September 2001, the Board
approved the repurchase of $3 million of additional shares of the Company's
common stock and in August 2002, the Board approved the repurchase of $5 million
of additional shares of the Company's common stock. In September 2003, the Board
approved the repurchase of $10 million of additional shares of the Company's
common stock, bringing the aggregate total on March 31, 2004 to 8% of the
Company's common stock plus $18 million of additional shares. Subsequently, on
April 27, 2004, the Board approved the repurchase of an additional $5 million
shares of the Company's common stock, bringing the current aggregate total to 8%
of the Company's common stock plus $23 million of additional shares.
During the three-month period ending March 31, 2004, the Company repurchased
175,818 shares at a total price of $8,376,000. On February 9, 2004, the Company
acquired as treasury stock, a total of 100,000 shares of outstanding common
stock from three shareholders pursuant to privately negotiated transactions.
Total consideration for these shares amounted to $4,750,000. Since 1998, the
Company has repurchased a total of 707,437 shares at a total price of
$22,911,000. As of March 31, 2004, the Company was authorized per all repurchase
programs to purchase $1,295,000 in additional shares.
Liquidity
Liquidity represents the ability of the Company and its subsidiaries to meet all
present and future financial obligations arising in the daily operations of the
business. Financial obligations consist of the need for funds to meet extensions
of credit, deposit withdrawals and debt servicing. The Company's liquidity
management focuses on the ability to obtain funds economically through assets
that may be converted into cash at minimal costs or through other sources. The
Company's other sources of cash include overnight Federal fund lines, Federal
Home Loan Bank advances, deposits of the State of Illinois, the ability to
borrow at the Federal Reserve Bank of Chicago, and the Company's operating line
of credit with The Northern Trust Company. Details for the sources include:
< First Mid Bank has $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 First Mid Bank meeting minimum regulatory
capital requirements for total capital to risk-weighted assets and
Tier 1 capital to total average assets. As of March 31, 2004, First
Mid Bank's ratios of total capital to risk-weighted assets of 11.98%
and Tier 1 capital to total average assets of 7.08% 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, 2004, the excess collateral at the
Federal Home Loan Bank will support approximately $41 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 $4,500,000 as of March 31, 2004, and
$10,500,000 in available funds. The credit agreement matures on
October 23, 2004. The agreement contains requirements for the Company
and First Mid Bank to maintain various operating and capital ratios
and for prior lender approval for certain sales of assets, merger
activity, the acquisition or issuance of debt, and the acquisition of
treasury stock. The Company and First Mid Bank were in compliance with
the existing covenants at March 31, 2004.
Management monitors its expected liquidity requirements carefully, focusing
primarily on cash flows from:
< lending activities, including loan commitments, letters of credit and
mortgage prepayment assumptions;
< deposit activities, including seasonal demand of private and public
funds;
< investing activities, including prepayments of mortgage-backed
securities and call provisions on U.S. government treasuries and
agency securities; and
< operating activities, including scheduled debt repayments and
dividends to stockholders.
The following table summarizes significant contractual obligations and other
commitments at March 31, 2004 (in thousands):
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
-------------- --------------- --------------- --------------- --------------
Time deposits $253,856 $160,646 $42,514 $50,123 $573
Debt 15,410 4,700 400 - -
Junior subordinated debentures - - - - 10,310
Other borrowings 73,304 53,004 12,300 - 8,000
Operating leases 2,233 306 452 326 1,149
-------------- --------------- --------------- --------------- --------------
$344,803 $218,656 $55,666 $50,449 $20,032
============== =============== =============== =============== ==============
For the three-month period ended March 31, 2004, net cash of $4.5 million and
$21.4 million was provided from operating activities and investing activities,
respectively, while financing activities used net cash of $11.4 million. Thus,
cash and cash equivalents increased by $14.5 million since year-end 2003.
Generally, during 2004, proceeds from maturities of available-for-sale
securities not immediately reinvested increased cash balances.
On February 27, 2004, the Company completed the issuance and sale of $10 million
of floating rate trust preferred securities through First Mid-Illinois Statutory
Trust I (the "Trust"), a statutory business trust and wholly owned subsidiary of
the Company, as part of a pooled offering. The Company established the Trust for
the purpose of issuing the trust preferred securities. Upon adoption of FIN 46R,
the Company was required to de-consolidate its investment in the Trust. The $10
million proceeds of the Trust Preferred issuance and an additional $310,000 for
the Company's investment in common equity of the Trust, a total of $10,310 000,
was invested in junior subordinated debentures of the Company. The underlying
junior subordinated debentures issued by the Company to the Trust mature in
2034, bear interest at three-month London Interbank Offered Rate ("LIBOR") plus
280 basis points, reset quarterly, and are callable, at the option of the
Company, at par on or after April 7, 2009. The Company intends to use the
proceeds of the offering for general corporate purposes. The trust preferred
securities issued by the Trust are included as Tier 1 capital of the Company for
regulatory capital purposes.
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 Bank enters into financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include lines of credit, letters of credit and other
commitments to extend credit. Each of these instruments involves, to varying
degrees, elements of credit, interest rate and liquidity risk in excess of the
amounts recognized in the consolidated balance sheets. The Company uses the same
credit policies and requires similar collateral in approving lines of credit and
commitments and issuing letters of credit as it does in making loans. The
exposure to credit losses on financial instruments is represented by the
contractual amount of these instruments. However, the Company does not
anticipate any losses from these instruments.
The off-balance sheet financial instruments whose contract amounts represent
credit risk at March 31, 2004 and December 31, 2003 were as follows (in
thousands):
March 31, December 31,
2004 2003
-------------- --------------
Unused commitments, including lines of credit:
Commercial real estate $ 26,965 $ 24,283
Commercial operating 34,922 32,928
Home equity 14,239 13,207
Other 21,343 14,991
-------------- --------------
Total $ 97,469 $ 85,409
============== ==============
Standby letters of credit $ 2,732 $ 2,440
============== ==============
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, 2003. 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, 2003.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the Company's and all of its wholly owned subsidiaries' "disclosure controls and
procedures" (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end
of the period covered by this report. Based on such evaluation, such officers
have concluded that, as of the end of the period covered by this report, the
Company's and all of its wholly owned subsidiaries' disclosure controls and
procedures are effective in bringing to their attention on a timely basis
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic filings under
the Exchange Act. Further, there have been no changes in the Company's internal
controls during the last fiscal quarter that have materially affected or that
are reasonably likely to affect materially the Company's internal controls over
financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
Since First Mid Bank acts as a depository of funds, it is named from time to
time as a defendant in lawsuits (such as garnishment proceedings) involving
claims as to the ownership of funds in particular accounts. Management believes
that all such litigation as well as other pending legal proceedings in which the
Company is involved constitute ordinary, routine litigation incidental to the
business of the Company and that such litigation will not materially adversely
affect the Company's consolidated financial condition.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The information called for by Item 2 with respect to purchases of equity
securities by the Company is provided in the table below.
ISSUER PURCHASES OF EQUITY SECURITIES
------------------------------------------------------------------------------------------------------
(c) Total Number of Shares (d) Approximate Dollar
Purchased as Part of Value of Shares that May
(a) Total Number of (b) Average Price Publicly Announced Plans Yet Be Purchased Under
Period Shares Purchased Paid per Share or Programs the Plans or Programs
- ------------------- ----------------------- ----------------------- ---------------------------- -------------------------
January 1, 2004 - -- -- -- $9,671,006
January 31, 2004
February 1, 2004 -
February 29, 2004 153,104 $47.49 153,104 $2,400,247
March 1, 2004 -
March 31, 2004 22,714 $48.65 22,714 $1,294,861
----------------------- ----------------------- ---------------------------- -------------------------
Total 175,818 $47.64 175,818 $1,294,861
======================= ======================= ============================ =========================
On August 5, 1998, the Company announced a stock repurchase program for up to 3%
of its common stock. In March 2000, the Board approved the repurchase of an
additional 5% of the Company's common stock. In September 2001, the Board
approved the repurchase of $3 million of additional shares of the Company's
common stock and in August 2002, the Board approved the repurchase of $5 million
of additional shares of the Company's common stock. In September 2003 the Board
approved the repurchase of $10 million of additional shares of the Company's
common stock, bringing the aggregate total on March 31, 2004 to 8% of the
Company's common stock plus $18 million of additional shares. Subsequently, on
April 27, 2004, the Board approved the repurchase of an additional $5 million
shares of the Company's common stock, bringing the current aggregate total to 8%
of the Company's common stock plus $23 million of additional shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS 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 that
immediately precedes the exhibits filed.
(b) Reports on Form 8-K:
The Company filed Form 8-K on January 28, 2004 regarding the Company's
financial statements as of December 31, 2003.
The Company filed Form 8-K on February 9, 2004 regarding the Company's
acquisition, as treasury stock, of 100,000 shares of outstanding common
stock.
The Company filed Form 8-K on February 27, 2004 regarding the Company's
issuance and sale of $10 million of floating rate trust preferred
securities.
The Company filed Form 8-K on April 29, 2004 regarding the Company's
financial statements as of March 31, 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST MID-ILLINOIS BANCSHARES, INC.
(Registrant)
Date: May 7, 2004
/s/ William S. Rowland
William S. Rowland
President and Chief Executive Officer
/s/ Michael L. Taylor
Michael L. Taylor
Chief Financial Officer
Exhibit Index to Quarterly Report on Form 10-Q
Exhibit
Number Description and Filing or Incorporation Reference
- --------------------------------------------------------------------------------
11.1 Statement re: Computation of Earnings Per Share
(Filed herewith on page 8)
31.1 Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
Certification pursuant to section 302
of the Sarbanes-Oxley Act of 2002
I, William S. Rowland, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First
Mid-Illinois Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) [Reserved]
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 7, 2004
By: /s/ William S. Rowland
William S. Rowland, President and
Chief Executive Officer
Exhibit 31.2
Certification pursuant to section 302
of the Sarbanes-Oxley Act of 2002
I, Michael L. Taylor, certify that:
1. I have reviewed this report on Form 10-Q of First Mid-Illinois
Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) [Reserved]
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 7, 2004
By: /s/ Michael L. Taylor
Michael L. Taylor, Chief Financial Officer
Exhibit 32.1
Certification pursuant to
18 U.S.C. section 1350,
as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of First Mid-Illinois Bancshares, Inc.
(the "Company") on Form 10-Q for the period ending March 31, 2004 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, and I,
Michael L. Taylor, Chief Financial Officer of the Company, each 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 7, 2004
/s/ William S. Rowland
William S. Rowland
President and Chief Executive Officer
/s/ Michael L. Taylor
Michael L. Taylor
Chief Financial Officer