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 September 30, 2001 Commission file number: 0-13368 FIRST MID-ILLINOIS BANCSHARES, INC. (Exact name of Registrant as specified in its charter) Delaware (State of incorporation) 37-1103704 (I.R.S. employer identification no.) 1515 Charleston Avenue, Mattoon, Illinois 61938 (Address and zip code of principal executive offices) (217) 234-7454 (Registrant's telephone number, including area code) Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of November 13, 2001, 3,375,105 common stock, $4.00 par value, were outstanding. The outstanding shares have been adjusted to reflect a three-for-two stock split payable on November 16, 2001. 1
PART I ITEM 1. FINANCIAL STATEMENTS <TABLE> Consolidated Balance Sheets (unaudited) September 30, December 31, (In thousands, except share data) 2001 2000 ---------------------- -------------------- Assets Cash and due from banks: <S> <C> <C> Non-interest bearing $ 15,379 $ 22,035 Interest bearing 14,776 80 Federal funds sold 12,300 2,725 ---------------------- -------------------- Cash and cash equivalents 42,455 24,840 Investment securities: Available-for-sale, at fair value 142,812 150,034 Held-to-maturity, at amortized cost (estimated fair value of $2,777 and $2,800 at September 30, 2001 and December 31, 2000, respectively) 2,692 2,757 Loans 467,229 429,288 Less allowance for loan losses 3,786 3,262 ---------------------- -------------------- Net loans 463,443 426,026 Premises and equipment, net 16,922 15,375 Goodwill 11,328 10,913 Other intangible assets, net 1,376 1,237 Other assets 11,344 11,817 ---------------------- -------------------- Total assets $692,372 $642,999 ---------------------- -------------------- Liabilities and Stockholders' Equity Deposits: Non-interest bearing $ 71,426 $ 66,646 Interest bearing 484,336 437,339 ---------------------- -------------------- Total deposits 555,762 503,985 Securities sold under agreements to repurchase 34,364 31,096 Federal Home Loan Bank advances-short term 5,000 20,000 Federal Home Loan Bank advances-long term 23,300 20,300 Long-term debt 4,325 4,325 Other liabilities 5,553 5,566 ---------------------- -------------------- Total liabilities 628,304 585,272 ---------------------- -------------------- Stockholders' Equity: Common stock, $4 par value; authorized 6,000,000 shares; issued 3,542,634 shares in 2001 and 3,488,204 shares in 2000 14,171 9,302 Additional paid-in-capital 13,219 12,293 Retained earnings 38,566 39,169 Deferred compensation 1,351 1,218 Accumulated other comprehensive income (loss) 1,710 (288) Less treasury stock at cost, 166,563 shares in 2001 and 128,106 shares in 2000 (4,949) (3,967) ---------------------- -------------------- Total stockholders' equity 64,068 57,727 ---------------------- -------------------- Total liabilities and stockholders' equity $692,372 $642,999 ---------------------- -------------------- See accompanying notes to unaudited consolidated financial statements. </TABLE> 2
<TABLE> Consolidated Statements of Income (unaudited) Three months ended Nine months ended (In thousands, except per share data) September 30, September 30, 2001 2000 2001 2000 ------------- ------------- --------------- -------------- Interest income: <S> <C> <C> <C> <C> Interest and fees on loans $ 9,403 $ 8,983 $27,765 $25,641 Interest on investment securities 1,926 2,286 6,309 6,856 Interest on federal funds sold 168 28 255 91 Interest on deposits with other financial institutions 28 2 30 6 ------------- ------------- --------------- -------------- Total interest income 11,525 11,299 34,359 32,594 Interest expense: Interest on deposits 4,690 4,776 14,714 13,386 Interest on securities sold under agreements to repurchase 236 343 779 943 Interest on Federal Home Loan Bank advances 409 726 1,232 1,721 Interest on fderal funds purchased - 10 12 57 Interest on long-term debt 53 86 189 244 ------------- ------------- --------------- -------------- Total interest expense 5,388 5,941 16,926 16,351 ------------- ------------- --------------- -------------- Net interest income 6,137 5,358 17,433 16,243 Provision for loan losses 150 100 450 400 ------------- ------------- --------------- -------------- Net interest income after provision for loan losses 5,987 5,258 16,983 15,843 Other income: Trust revenues 455 401 1,426 1,362 Brokerage revenues 80 95 271 370 Service charges 793 628 2,309 1,836 Securities gains (losses) 14 (3) 154 (3) Mortgage banking income 290 92 764 261 Other 444 302 1,368 915 ------------- ------------- --------------- -------------- Total other income 2,076 1,515 6,292 4,741 Other expense: Salaries and employee benefits 2,850 2,519 8,152 7,545 Net occupancy and equipment expense 990 919 2,899 2,702 Amortization of goodwill 235 210 671 630 Amortization of other intangible assets 78 84 245 266 Stationery and supplies 164 126 501 398 Legal and professional 229 232 717 607 Marketing and promotion 155 205 544 611 Other 853 658 2,602 2,142 ------------- ------------- --------------- -------------- Total other expense 5,554 4,953 16,331 14,901 ------------- ------------- --------------- -------------- Income before income taxes 2,509 1,820 6,944 5,683 Income taxes 817 536 2,172 1,474 ------------- ------------- --------------- -------------- Net income $ 1,692 $ 1,284 $ 4,772 $ 4,209 ------------- ------------- --------------- -------------- Per share data: Basic earnings per share $ .50 $ .37 $ 1.41 $ 1.24 Diluted earnings per share $ .50 $ .37 $ 1.41 $ 1.24 ------------- ------------- --------------- -------------- See accompanying notes to unaudited consolidated financial statements. </TABLE> 3
<TABLE> Consolidated Statements of Cash Flows (unaudited) Three months ended Nine months ended September 30, September 30, (In thousands) 2001 2000 2001 2000 ------------- ------------- -------------- ------------- Cash flows from operating activities: <S> <C> <C> <C> <C> Net income $ 1,692 $ 1,284 $ 4,772 $ 4,209 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 150 100 450 400 Depreciation, amortization and accretion, net 781 707 2,253 2,192 (Gain) loss on sale of securities, net (14) 3 (154) 3 (Gain) loss on sale of other real property owned, net (1) (12) 1 47 Gain on sale of mortgage loans held for sale, net (266) (75) (647) (204) Origination of mortgage loans held for sale (16,984) (3,531) (48,140) (11,025) Proceeds from sale of mortgage loans held for sale 19,227 4,816 45,827 11,929 (Increase) decrease in other assets (862) (1,304) 736 (908) Decrease in other liabilities (377) (79) (904) (486) ------------- ------------- -------------- ------------- Net cash provided by operating activities 3,347 1,909 4,195 6,157 ------------- ------------- -------------- ------------- Cash flows from investing activities: Capitalization of mortgage servicing rights (3) (15) (43) (111) Purchases of premises and equipment (556) (335) (1,344) (858) Net increase in loans (6,681) (14,276) (10,288) (35,719) Proceeds from sales of securities available-for-sale -- 607 6,850 607 Proceeds from maturities of: Securities available-for-sale 21,922 1,455 73,006 5,833 Securities held-to-maturity 35 30 35 30 Purchases of securities available-for-sale (24,006) (4,817) (66,373) (4,817) Purchases of securities held-to-maturity (48) (230) (347) (1,746) Net cash provided by acquisition -- -- 606 -- ------------- ------------- -------------- ------------- Net cash provided by (used in) investing activities (9,337) (17,581) 2,102 (36,781) ------------- ------------- -------------- ------------- Cash flows from financing activities: Net increase in deposits 14,845 1,530 21,196 6,210 Increase (decrease) in repurchase agreements 3,101 (3,445) 3,268 (9,632) Decrease in federal funds purchased -- (500) -- (675) Increase (decrease) in FHLB advances short-term -- 12,851 (15,000) 37,900 Repayment of long-term FHLB advances -- (3,000) -- (21,500) Proceeds from long-term FHLB advances -- 5,000 3,000 15,300 Proceeds from issuance of common stock 120 -- 294 12 Purchase of treasury stock (406) (226) (848) (1,637) Dividends paid on common stock -- 28 (590) (569) ------------- ------------- -------------- ------------- Net cash provided by financing activities 17,660 13,238 11,318 25,409 ------------- ------------- -------------- ------------- Increase (decrease) in cash and cash equivalents 11,670 (2,434) 17,615 (5,215) Cash and cash equivalents at beginning of period 30,785 19,061 24,840 21,842 ------------- ------------- -------------- ------------- Cash and cash equivalents at end of period $42,455 $16,627 $42,455 $16,627 ------------- ------------- -------------- ------------- Additional disclosures of cash flow information Cash paid during the period for: Interest $ 5,592 $ 5,990 $16,739 $16,587 Loans transferred to real estate owned 522 102 562 102 Income taxes 877 500 2,402 1,930 Dividends reinvested in common stock 1 29 778 724 ------------- ------------- -------------- ------------- See accompanying notes to unaudited consolidated financial statements. </TABLE> 4
Notes To Consolidated Financial Statements (Unaudited) Summary of Significant Accounting Policies Basis of Accounting and Consolidation The unaudited consolidated financial statements include the accounts of First Mid-Illinois Bancshares, Inc. ("Company") and its wholly-owned subsidiaries: Mid-Illinois Data Services, Inc. ("MIDS") and First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank") and its wholly-owned subsidiary First Mid- Illinois Insurance Services, Inc. ("First Mid Insurance"). All significant inter-company balances and transactions have been eliminated in consolidation. The financial information reflects all adjustments which, in the opinion of management, are necessary to present a fair statement of the results of the interim periods ended September 30, 2001 and 2000, and all such adjustments are of a normal recurring nature. The results of the interim period ended September 30, 2001, are not necessarily indicative of the results expected for the year ending December 31, 2001. The unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information required by accounting principles generally accepted in the United States of America for complete financial statements and related footnote disclosures. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2000 Form 10-K. Stock Split The Company's board of directors authorized a three-for-two stock split in the form of a 50% stock dividend on its common shares on September 26, 2001. This stock dividend will be payable on November 16, 2001, to holders of record of the common shares of the Company at the close of business on October 26, 2001. Accordingly, information with respect to shares of common stock and earnings per share have been restated in all periods presented to fully reflect the stock split. Accounting Changes In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the balance sheet at fair value. The accounting for the changes in fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. The gain or loss due to changes in fair value is recognized in earnings or as other comprehensive income in the statement of stockholders' equity, depending on the type of instrument and 5
whether or not it is considered a hedge. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the effective date of Statement No. 133." This statement defers the adoption of SFAS 133 to fiscal quarters of fiscal years beginning after June 15, 2000. The FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities -- an amendment of FASB Statement No. 133" in June 2000, which addresses various implementation issues relating to SFAS 133. Adoption of the above Statements on January 1, 2001, did not have a material impact on the Company's financial position, results of operation or liquidity. SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS 140"), was issued by the Financial Accounting Standards Board in September of 2000. SFAS 140 supersedes and replaces FASB SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities". Accordingly, SFAS 140 is now the authoritative accounting literature for transfers and servicing of financial assets and extinguishment of liabilities. SFAS 140 also includes several additional disclosure requirements in the area of securitized financial assets and collateral arrangements. The provisions of SFAS 140 related to transfers of financial assets are applicable to all transfers of financial assets occurring after March 31, 2001. The collateral recognition and disclosure provisions in SFAS 140 were effective for fiscal years ending after December 15, 2000. The Company's adoption of SFAS 140 did not have a material impact on the Company's results of operations. On July 20, 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. SFAS 142 replaces the requirement to amortize intangible assets with indefinite lives and goodwill with a requirement for an impairment test. SFAS 142 also requires an evaluation of intangible assets and their useful lives and a transitional impairment test for goodwill and certain intangible assets. After transition, the impairment tests will be performed annually. Any transitional impairment losses (goodwill and intangible assets with indefinite lives) or write-offs of negative goodwill must be accounted for as the cumulative effect of a change in accounting principle. SFAS 142 must be adopted in fiscal years beginning after December 15, 2001, as of the beginning of the year. Management is in the process of evaluating the effect this will have on the Company's financial statements. Comprehensive Income The Company's comprehensive income for the three month and nine month periods ended September 30, 2001 and 2000 is as follows: <TABLE> Three months ended Nine months ended September 30, September 30, ---------------------------- ---------------------------- (In thousands) 2001 2000 2001 2000 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Net income $1,692 $1,284 $4,772 $4,209 Other comprehensive income: Unrealized gain during the period 1,126 1,489 3,416 1,540 Less: realized (gain) loss during the period (14) 3 (154) 3 Tax effect (431) (578) (1,264) (598) ------------- ------------- ------------- ------------- Comprehensive income $2,373 $2,198 $6,770 $5,154 ------------- ------------- ------------- ------------- </TABLE> 6
Earnings Per Share A three-for-two common stock split was distributed in the form of a 50% stock dividend for the stockholders of record at the close of the business day of October 26, 2001. Accordingly, information with respect to shares of common stock and earnings per share have been restated in all periods presented to fully reflect the stock split. Income for basic earnings per share ("EPS") is based on the weighted average number of common shares outstanding. Diluted EPS is computed using the weighted average number of common shares outstanding increased by the assumed conversion of the Company's stock options, unless anti-dilutive. The components of basic and diluted earnings per common share for the three month and nine month periods ended September 30, 2001 and 2000 are as follows: <TABLE> Three months ended Nine months ended September 30, September 30, -------------------------------- --------------------------------- 2001 2000 2001 2000 --------------- --------------- ---------------- ---------------- Basic Earnings per Share: <S> <C> <C> <C> <C> Net income $1,692,000 $1,284,000 $4,772,000 $4,209,000 Weighted average common shares outstanding 3,386,038 3,377,311 3,378,931 3,405,857 --------------- --------------- ---------------- ---------------- Basic earnings per common share $ .50 $ .37 $ 1.41 $ 1.24 --------------- --------------- ---------------- ---------------- Diluted Earnings per Share: Weighted average common shares outstanding 3,386,038 3,377,311 3,378,931 3,405,857 Assumed conversion of stock options 8,170 2,926 6,781 4,218 --------------- --------------- ---------------- ---------------- Diluted weighted average common shares outstanding 3,394,208 3,380,237 3,385,713 3,410,075 --------------- --------------- ---------------- ---------------- Diluted earnings per common share $ .50 $ .37 $ 1.41 $ 1.24 --------------- --------------- ---------------- ---------------- </TABLE> Merger and Acquisition On April 20, 2001, First Mid Bank acquired all the outstanding stock of American Bank of Illinois located in Highland, Illinois, for $3.7 million in cash. This acquisition added approximately $30.8 million to total deposits, $24.9 million to loans, $2 million to securities, $1.7 million to premises and equipment and $1.4 million to intangible assets. The acquisition was accounted for using the purchase method of accounting whereby the acquired assets and liabilities were recorded at fair value as of the acquisition date and the excess cost over fair value of net assets was recorded as goodwill. The consolidated financial statements include the results of operations of American Bank of Illinois since the acquisition date. 7
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, September 30, 2001 and 2000. This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes and selected financial data appearing elsewhere in this report. Forward-Looking Statements This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, such as, discussions of the Company's pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses and planned schedules. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many uncertainties including: changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. Overview Net income for the three months ended September 30, 2001 was $1,692,000 ($.50 diluted EPS), an increase of $408,000 from $1,284,000 ($.37 diluted EPS) for the same period in 2000. Net income for the nine months ended September 30, 2001 was $4,772,000 ($1.41 diluted EPS), an increase of $563,000 from $4,209,000 ($1.24 diluted EPS) for the same period in 2000. A summary of the factors which contributed to the changes in net income is shown in the table below. 8
<TABLE> 2001 vs 2000 (In thousands) Three months Nine months ------------------- -------------------- <S> <C> <C> Net interest income $ 729 $ 1,140 Other income, including securities transactions 561 1,551 Other expenses (601) (1,430) Income taxes (281) (698) ------------------- -------------------- Increase in net income $ 408 $ 563 ------------------- -------------------- </TABLE> The following table shows the Company's annualized performance ratios for the nine months ended September 30, 2001 and 2000, as compared to the performance ratios for the year ended December 31, 2000: <TABLE> September 30, September 30, December 31, 2001 2000 2000 -------------------- -------------------- -------------------- <S> <C> <C> <C> Return on average assets .96% .92% .92% Return on average equity 10.45% 10.63% 10.55% Average equity to average assets 9.22% 8.65% 8.70% </TABLE> Results of Operations Net Interest Income The largest source of operating revenue for the Company is net interest income. Net interest income represents the difference between total interest income earned on earning assets and total interest expense paid on interest- bearing liabilities. The amount of interest income is dependent upon many factors, including the volume and mix of earning assets, the general level of interest rates and the dynamics of changes in interest rates. The cost of funds necessary to support earning assets varies with the volume and mix of interest- bearing liabilities and the rates paid to attract and retain such funds. For purposes of the following discussion and analysis, the interest earned on tax-exempt securities is adjusted to an amount comparable to interest subject to income taxes at 34%. The adjustment is referred to as the tax-equivalent ("TE") adjustment. The Company's average balances, interest income and expense and rates earned or paid for major balance sheet categories are set forth in the following table (dollars in thousands): 9
<TABLE> Nine Months Ended Nine Months Ended September 30, 2001 September 30, 2000 ------------------------------------------------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ------------------------------------------------------------------------- ASSETS <S> <C> <C> <C> <C> <C> <C> Interest-bearing deposits $ 1,499 $ 30 2.69% $ 117 $ 6 6.27% Federal funds sold 8,889 255 3.83% 2,015 91 6.03% Investment securities Taxable 117,261 5,260 5.98% 120,984 5,774 6.36% Tax-exempt (1) 30,635 1,589 6.92% 30,152 1,639 7.25% Loans (2)(3) 448,357 27,765 8.26% 403,638 25,641 8.47% ------------------------------------------------------------------------- Total earning assets 606,641 34,899 7.67% 556,906 33,151 7.94% ------------------------------------------------------------------------- Cash and due from banks 16,873 16,483 Premises and equipment 16,249 15,897 Other assets 23,823 24,080 Allowance for loan losses (3,593) (3,113) ------------- ------------- Total assets $659,992 $610,253 ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits Demand deposits $175,875 $ 3,499 2.65% $163,440 $ 3,765 3.07% Savings deposits 40,667 695 2.28% 39,891 716 2.39% Time deposits 249,640 10,520 5.62% 222,889 8,905 5.33% Securities sold under agreements to repurchase 27,688 779 3.75% 23,349 943 5.38% FHLB advances 28,342 1,232 5.79% 35,559 1,721 6.45% Federal funds purchased 301 12 5.20% 1,223 57 6.23% Long-term debt 4.325 189 5.81% 4,325 244 7.53% ------------------------------------------------------------------------- Total interest-bearing liabilities 526,838 16,926 4.28% 490,676 16,351 4.44% ------------------------------------------------------------------------- Demand deposits 66,575 62,148 Other liabilities 5,711 4,623 Stockholders' equity 60,868 52,806 ------------- ------------- Total liabilities & equity $659,992 $610,253 ------------- ------------- Net interest income (TE) $17,973 $16,800 ------------ ----------- Net interest spread 3.39% 3.48% Impact of non-interest bearing funds .56% .53% ------------ ------------ Net yield on interest- earning assets (TE) 3.95% 4.02% ------------ ------------ </TABLE> (1) Interest income and rates are presented on a tax-equivalent basis ("TE") assuming a federal income tax rate of 34%. (2) Loan fees are included in interest income and are not material. (3) Nonaccrual loans are not material and have been included in the average balances. Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income (TE) for the nine months ended September 30, 2001, as compared to the same period in 2000 (in thousands): 10
<TABLE> For the nine months ended September 30, 2001 compared to 2000 Increase / (Decrease) ------------------------------------------------------------- Total Rate/ Change Volume Rate Volume (4) ------------------------------------------------------------- Earning Assets: <S> <C> <C> <C> <C> Interest-bearing deposits $ 24 $ 64 $ (3) $ (37) Federal funds sold 164 311 (33) (114) Investment securities: Taxable (514) (181) (344) 11 Tax-exempt (1) (50) 26 (75) (1) Loans (2)(3) 2,123 2,841 (646) (72) ------------------------------------------------------------- Total interest income 1,747 3,061 (1,101) (213) ------------------------------------------------------------- Interest-Bearing Liabilities: Interest-bearing deposits Demand deposits (266) 285 (512) (39) Savings deposits (21) 13 (33) (1) Time deposits 1,616 1,074 484 58 Securities sold under agreements to repurchase (164) 174 (285) (53) FHLB advances (489) (349) (175) 35 Federal funds purchased (45) (43) (9) 7 Long-term debt (55) -- (55) -- ------------------------------------------------------------- Total interest expense 576 1,154 (585) 7 ------------------------------------------------------------- Net interest income $ 1,171 $ 1,907 $ (516) $ (220) ------------------------------------------------------------- (1) Interest income and rates are presented on a tax-equivalent basis, assuming a federal income tax rate of 34%. (2) Loan fees are included in interest income and are not material. (3) Nonaccrual loans are not material and have been included in the average balances. (4) The changes in rate/volume are computed on a consistent basis by multiplying the change in rates with the change in volume. </TABLE> On a tax equivalent basis, net interest income increased $1,171,000, or 7.0% to $17,971,000 for the nine months ended September 30, 2001, from $16,800,000 for the same period in 2000. The increase in net interest income was primarily due to a growth in interest earning assets including the acquisition of American Bank of Illinois. For the nine months ended September 30, 2001, average earning assets increased by $49,735,000, or 8.9%, and average interest-bearing liabilities increased $36,162,000, or 7.4%, compared with average balances for the same period in 2000. Changes in average balances, as a percent of average earnings assets, are shown below: o average loans (as a percent of average earnings assets) increased .1% to 72.6% for the nine months ended September 30, 2001, from 72.5% for the same period in 2000. o average securities (as a percent of average earnings assets) decreased 2.7% to 24.4% for the nine months ended September 30, 2001, from 27.1% for the same period in 2000. 11
Provision for Loan Losses The provision for loan losses for the nine months ended September 30, 2001 and 2000 was $450,000 and $300,000, respectively. For information on loan loss experience and nonperforming loans, see the "Nonperforming Loans" and "Loan Quality and Allowance for Loan Losses" sections later in this document. Other Income An important source of the Company's revenue is derived from other income. The following table sets forth the major components of other income for the three months and nine months ended September 30, 2001 and 2000 (in thousands): <TABLE> Three months ended Nine months ended 2001 2000 $ change 2001 2000 $ change --------------- ------------- ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> <C> <C> Trust $ 455 $ 401 $ 54 $1,426 $1,362 $ 64 Brokerage 80 95 (15) 271 370 (99) Service charges 793 628 165 2,309 1,836 473 Security gains (losses) 14 (3) 17 154 (3) 157 Mortgage banking 290 92 198 764 261 503 Other 444 302 142 1,368 915 453 --------------- ------------- ------------- ------------- -------------- ------------- Total other income $2,076 $1,515 $ 561 $6,292 $4,741 $1,551 --------------- ------------- ------------- ------------- -------------- ------------- </TABLE> Explanations for the three months ended September 30, 2001 as compared to the same period in 2000: o Trust revenues increased $54,000 or 13.5% to $455,000 from $401,000. This increase was partially due to an increase in trust fees. Trust assets, reported at market value, were $288 million at September 30, 2001 compared to $307 million at September 30, 2000. o Revenues from brokerage and annuity sales decreased $15,000 or 15.8% to $80,000 from $95,000. This was primarily due to an overall downturn in the stock market. o Fees from service charges increased $165,000 or 26.3% to $793,000 from $628,000. This increase was primarily due to an increase in the number of transaction accounts with the acquisition of American Bank of Illinois, as well as a fee increase in the 4th quarter 2000. o Sales of investment securities resulted in a net gain of $14,000, as compared to a net loss of $3,000 for the same quarter in 2000. This net gain resulted from calls of several available-for-sale securities. o Mortgage banking income increased $198,000 or 215.2% to $290,000 from $92,000. This increase was due to a higher number of fixed rate loans originated and sold by First Mid Bank as a result of falling interest rates. Loans sold balances are as follows: o $19.0 million (representing 218 loans) for the 3rd quarter 2001. o $4.7 million (representing 70 loans) for the 3rd quarter 2000. First Mid Bank generally releases servicing on these loans thereby reducing the capitalization of orginated mortgage servicing rights. 12
o Other income increased $142,000 or 47.0% to $444,000 from $302,000. This increase is primarily due to an increase in late charge fees and an increase in ATM service charges due to the number of ATM's increasing. Explanations for the nine months ended September 30, 2001 as compared to the same period in 2000: o Trust revenues increased $64,000 or 4.7% to $1,426,000 from $1,362,000. This increase was partially due to an increase in trust fees. Trust assets, reported at market value, were $288 million at September 30, 2001, $303 million at December 31, 2000, and $307 million at September 30, 2000. o Revenues from brokerage and annuity sales decreased $99,000 or 26.8% to $271,000 from $370,000. This was primarily due to an overall downturn in the stock market. o Fees from service charges increased $473,000 or 25.8% to $2,309,000 from $1,836,000. This increase was primarily due to an increase in the number of transaction accounts with the acquisition of American Bank of Illinois, as well as a fee increase in the 4th quarter 2000. o Sales of investment securities resulted in a net gain of $154,000. This primarily resulted from the sale of several securities in the available- for-sale portfolio to improve the overall portfolio mix and the margin, including the sale of four corporate bonds with a narrow change in spread due to the downturn in the market. o Mortgage banking income increased $503,000 or 192.7% to $764,000 from $261,000. This increase was due to a higher number of fixed rate loans originated and sold by First Mid Bank as a result of falling interest rates. Loans sold balances are as follows: o $45.2 million (representing 520 loans) for the 9 months in 2001. o $11.7 million (representing 163 loans) for the 9 months in 2000. o Other income increased $453,000 or 49.5% to $1,368,000 from $915,000. This increase is primarily due to additional income on credit life insurance sales and an increase in ATM service charges due to the number of ATM's increasing. Other Expense The major categories of other expense include salaries and employee benefits, occupancy and equipment expenses and other operating expenses associated with day-to-day operations. The following table sets forth the major components of other expense for the three months and nine months ended September 30, 2001 and 2000 (in thousands): 13
<TABLE> Three months ended Nine months ended 2001 2000 $ change 2001 2000 $ change ------------- ------------- ------------- -------------- ------------- ------------- <S> <C> <C> <C> <C> <C> <C> Salaries and benefits $ 2,850 $ 2,519 $331 $ 8,152 $ 7,545 $607 Occupancy and equipment 990 919 71 2,899 2,702 197 Amortization of intangibles 313 294 19 916 896 20 Stationery and supplies 164 126 38 501 398 103 Legal and professional fees 229 232 (3) 717 607 110 Marketing and promotion 155 205 (50) 544 611 (67) Other operating expenses 853 658 195 2,602 2,142 460 ------------- ------------- ------------- -------------- ------------- ------------- Total other expense $ 5,554 $ 4,953 $ 601 $16,331 $14,901 $1,430 ------------- ------------- ------------- -------------- ------------- ------------- </TABLE> Explanations for the three months ended September 30, 2001 as compared to the same period in 2000: o Salaries and employee benefits, the largest component of other expense, increased $331,000 or 13.1% to $2,850,000 from $2,519,000. This increase can be explained by merit increases for continuing employees, an increase in the number of employees due to the acquisition of American Bank of Illinois in April, 2001, and due to a new branch being opened at Eastern Illinois University during the 3rd quarter 2000. There were 293 full-time equivalent employees at September 30, 2001 compared to 269 at September 30, 2000. o Occupancy and equipment expense increased $71,000 or 7.7% to $990,000 from $919,000. This increase included building maintenance, utilities and depreciation expense recorded on assets acquired in the American Bank of Illinois acquisition. o All other categories of operating expenses increased a net of $199,000 or 13.1% to $1,714,000 from $1,515,000. This increase is primarily due to higher expense for customer supplies and printing forms, as well as an increase in intangible amortization associated with the purchase of American Bank of Illinois. Explanations for the nine months ended September 30, 2001 as compared to the same period in 2000: o Salaries and employee benefits, the largest component of other expense, increased $607,000 or 8.0% to $8,152,000 from $7,545,000. This increase can be explained by merit increases for continuing employees, an increase in the number of employees due to the acquisition of American Bank of Illinois in April, 2001, and due to a new branch being opened at Eastern Illinois University during 3rd quarter 2000. o Occupancy and equipment expense increased $197,000 or 7.3% to $2,899,000 from $2,702,000. This increase included building maintenance, utilities and depreciation expense recorded on assets acquired in the American Bank of Illinois acquisition as well as higher utilities expense for all buildings. o All other categories of operating expenses increased a net of $626,000 or 13.5% to $5,280,000 from $4,654,000. This increase is primarily due to higher expense for printing forms associated with the purchase of American Bank of Illinois, and an increase in mortgage servicing expense. 14
Income Taxes Total income tax expense amounted to $2,172,000 (31.3% effective tax rate) for the nine months ended September 30, 2001, compared to $1,474,000 (25.9% effective tax rate) for the same period in 2000. During the nine months ended September 30, 2000, the Company donated property with a market value in excess of the remaining book value to the local school district which led to a lower effective tax rate. Analysis of Balance Sheets Loans The loan portfolio is the largest category of the Company's earning assets. The following table summarizes the composition of the loan portfolio as of September 30, 2001 and December 31, 2000 (in thousands): September 30, December 31, 2001 2000 ------------------------------------- Real estate - residential $139,787 $140,842 Real estate - agriculture 40,385 33,689 Real estate - commercial 146,862 124,721 ------------------------------------- Total real estate - mortgage $327,034 $299,252 Commercial and agricultural 105,400 100,201 Installment 33,423 28,674 Other 1,372 1,161 ------------------------------------- Total loans $467,229 $429,288 ------------------------------------- At September 30, 2001, the Company had loan concentrations in agricultural industries of $80.1 million, or 17.2%, of outstanding loans and $67.9 million, or 15.8%, at December 31, 2000. The Company had no further loan concentrations in excess of 10% of outstanding loans. Real estate mortgage loans have averaged approximately 70% of the Company's total loan portfolio for the past several years. This is the result of a strong local housing market and the Company's historical focus on residential real estate lending. The balance of real estate loans held for sale amounted to $3,547,000 and $587,000 as of September 30, 2001 and December 31, 2000, respectively. 15
The following table presents the balance of loans outstanding as of September 30, 2001, by maturities (dollars in thousands): <TABLE> Maturity (1) ----------------------------------------------------------------- Over 1 One year through Over or less (2) 5 years 5 years Total ----------------------------------------------------------------- <S> <C> <C> <C> <C> Real estate - residential $ 38,577 $ 81,952 $ 19,258 $139,787 Real estate - agriculture 5,846 27,267 7,272 40,385 Real estate - commercial 42,419 94,891 9,552 146,862 ----------------------------------------------------------------- Total real estate - mortgage $ 86,842 $204,110 $ 36,082 $327,034 Commercial and agricultural 64,631 39,471 1,298 105,400 Installment 6,282 24,829 2,312 33,423 Other 115 811 446 1,372 ----------------------------------------------------------------- Total loans $157,870 $269,221 $ 40,138 $467,229 ----------------------------------------------------------------- </TABLE> (1) Based on scheduled principal repayments. (2) Includes demand loans, past due loans and overdrafts. As of September 30, 2001, loans with maturities over one year consisted of approximately $289,401,000 in fixed rate loans and $19,958,000 in variable rate loans. The loan maturities noted above are based on the contractual provisions of the individual loans. Rollovers and borrower requests are handled on a case- by-case basis. Nonperforming Loans Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due ninety days or more as to interest or principal payments; and loans not included in (a) and (b) above which are defined as "renegotiated loans". The following table presents information concerning the aggregate amount of nonperforming loans at September 30, 2001 and December 31, 2000 (in thousands): September 30, December 31, 2001 2000 -------------------------------------- Nonaccrual loans $3,750 $2,982 Loans past due ninety days or more and still accruing -- 245 Renegotiated loans which are performing in accordance with revised terms 195 232 -------------------------------------- Total Nonperforming Loans $3,945 $3,459 -------------------------------------- At September 30, 2001, approximately $1,543,000 of the nonperforming loans resulted from collateral dependent loans to three borrowers. The Company's policy generally is to discontinue the accrual of interest income on any loan for which principal or interest is ninety days past due. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. Interest income that would have been reported if nonaccrual and renegotiated loans had been performing totaled $205,000 for the nine months ended September 30, 2001 and $154,000 for the year ended December 31, 2000. Interest income on these loans that was included in income totaled $12,000 and $20,000 for the same periods. 16
Loan Quality and Allowance for Loan Losses The allowance for loan losses represents management's best estimate of the reserve necessary to adequately cover probable losses in the loan portfolio. The provision for loan losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate allowance for loan losses. In determining the adequacy of the allowance for loan losses, and therefore the provision to be charged to current earnings, management relies predominantly on a disciplined credit review and approval process which extends to the full range of the Company's credit exposure. The review process is directed by overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Once identified, the magnitude of exposure to individual borrowers is quantified in the form of specific allocations of the allowance for loan losses. Collateral values are considered by management in the determination of such specific allocations. Additional factors considered by management in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and renegotiated loans and the current economic conditions in the region where the Company operates. Management recognizes that there are risk factors which are inherent in the Company's loan portfolio. All financial institutions face risk factors in their loan portfolios because risk exposure is a function of the business. The Company's operations (and therefore its loans) are concentrated in east central Illinois, an area where agriculture is the dominant industry. Accordingly, lending and other business relationships with agriculture-based businesses are critical to the Company's success. At September 30, 2001 the Company's loan portfolio included $80.1 million of loans to borrowers whose businesses are directly related to agriculture. The balance increased by $12.2 million from $67.9 million at December 31, 2000. While the Company adheres to sound underwriting practices including collateralization of loans, an extended period of low commodity prices and/or significantly reduced yields on crops could nevertheless result in an increase in the level of problem agriculture loans. 17
Analysis of the allowance for loan losses as of September 30, 2001 and 2000, and of changes in the allowance for the nine months ended September 30, 2001 and 2000, is as follows (dollars in thousands): <TABLE> September 30, 2001 2000 -------------------------------------- <S> <C> <C> Average loans outstanding, net of unearned income $448,357 $403,638 Allowance-beginning of period $ 3,262 $ 2,939 Balance of acquired American Bank of Illinois 275 -- Charge-offs: Real estate-mortgage 21 18 Commercial, financial & agricultural 141 55 Installment 85 115 -------------------------------------- Total charge-offs 247 188 Recoveries: Real estate-mortgage -- 1 Commercial, financial & agricultural 16 16 Installment 30 14 -------------------------------------- Total recoveries 46 31 -------------------------------------- Net charge-offs 201 157 -------------------------------------- Provision for loan losses 450 400 -------------------------------------- Allowance-end of period $ 3,786 $ 3,182 -------------------------------------- Ratio of annualized net charge-offs to average loans .059% .051% -------------------------------------- Ratio of allowance for loan losses to loans outstanding (less unearned interest at end of period) .81% .76% -------------------------------------- Ratio of allowance for loan losses to nonperforming loans 96.0% 122.7% -------------------------------------- </TABLE> The Company minimizes credit risk by adhering to sound underwriting and credit review policies. These policies are reviewed at least annually, and changes are approved by the board of directors. Senior management is actively involved in business development efforts and the maintenance and monitoring of credit underwriting and approval. The loan review system and controls are designed to identify, monitor and address asset quality problems in an accurate and timely manner. The board of directors and management review the status of problem loans and determines the adequacy of the allowance. In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for loan losses. 18
Securities The Company's overall investment goal is to maximize earnings while maintaining liquidity in securities having minimal credit risk. The types and maturities of securities purchased are primarily based on the Company's current and projected liquidity and interest rate sensitivity positions. The following table sets forth the amortized cost of the securities as of September 30, 2001 and December 31, 2000 (in thousands): <TABLE> September 30, December 31, 2001 2000 -------------------------- --------------------------- % of % of Amount Total Amount Total -------------- ----------- -------------- ----------- <S> <C> <C> <C> <C> U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 59,841 42% $ 89,202 58% Obligations of states and political subdivisions 30,202 21% 30,434 20% Mortgage-backed securities 41,088 29% 27,750 18% Other securities 11,582 8% 5,873 4% -------------- ----------- -------------- ----------- Total securities $142,713 100% $153,259 100% -------------- ----------- -------------- ----------- </TABLE> At September 30, 2001, the Company's investment portfolio showed an increase in other securities and in mortgage-backed securities with a decrease in U.S. Treasury securities and obligations of U.S. government corporations and agencies. All other types of securities remained consistent. The amortized cost, gross unrealized gains and losses and estimated fair values for available- for-sale and held-to-maturity securities by major security type at September 30, 2001 and December 31, 2000 were as follows (in thousands): <TABLE> Gross Gross Estimated Amortized Unrealized Unrealized Fair Septmeber 30, 2001 - Available-for-sale: Cost Gains Losses Value - ------------------------------------------------------------ ---------------- ---------------- --------------- --------------- <S> <C> <C> <C> <C> U.S. Treasury securities and obligations of U.S. Government corporations & agencies $ 59,841 $1,481 $ (60) $ 61,262 Obligations of states and political subdivisions 27,509 733 (2) 28,240 Mortgage-backed securities 41,088 659 (13) 41,734 Federal Home Loan Bank stock 3,055 - - 3,055 Other securities 8,527 62 (68) 8,521 ---------------- ---------------- --------------- --------------- Total available-for-sale $140,020 $ 2,935 $ (143) $142,812 ---------------- ---------------- --------------- --------------- September 30, 2001 - Held-to-maturity: Obligations of states and political subdivisions $ 2,692 $ 85 $ - $ 2,777 ---------------- ---------------- --------------- --------------- December 31, 2000 - Available-for-sale: U.S. Treasury securities and obligations of U.S. Government corporations & agencies $ 89,202 $ 185 $(707) $ 88,680 Obligations of states and political subdivisions 27,677 248 (283) 27,642 Mortgage-backed securities 27,750 102 (144) 27,708 Federal Home Loan Bank stock 2,708 - - 2,708 Other securities 3,165 131 - 3,296 ---------------- ---------------- --------------- --------------- Total available-for-sale $150,502 $ 666 $(1,134) $150,034 ---------------- ---------------- --------------- --------------- December 31, 2000 - Held-to-maturity: Obligations of states and political subdivisions $ 2,757 $ 43 $ - $ 2,800 ---------------- ---------------- --------------- --------------- </TABLE> 19
The following table indicates the expected maturities of investment securities classified as available-for-sale and held-to-maturity, presented at amortized cost, at September 30, 2001 and the weighted average yield for each range of maturities. Mortgage-backed securities are aged according to their weighted average life. All other securities are shown at their contractual maturity. <TABLE> One After 1 After 5 After year through through ten (In thousands) or less 5 years 10 years years Total ----------------------------------------------------------------------- Available-for-sale: <S> <C> <C> <C> <C> <C> U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 1,999 $52,010 $ 3,500 $ 2,332 $ 59,841 Obligations of state and political subdivisions 238 4,549 12,844 9,878 27,509 Mortgage-backed securities 1,200 27,893 11,995 -- 41,088 Federal Home Loan Bank stock -- -- -- 3,055 3,055 Other securities -- 2,060 -- 6,467 8,527 ----------------------------------------------------------------------- Total Investments $ 3,437 $86,512 $28,339 $21,732 $140,020 ----------------------------------------------------------------------- Weighted average yield 5.61% 5.19% 5.16% 6.67% 5.46% Full tax-equivalent yield 5.82% 5.30% 6.19% 8.05% 5.94% ----------------------------------------------------------------------- Held-to-maturity: Obligations of state and political subdivisions $ 676 $ 700 $ 675 $ 641 $ 2,692 ----------------------------------------------------------------------- Weighted average yield 4.87% 5.28% 5.49% 5.44% 5.27% Full tax-equivalent yield 7.39% 8.00% 8.32% 8.25% 7.99% ----------------------------------------------------------------------- </TABLE> The weighted average yields are calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. Full tax-equivalent yields have been calculated using a 34% tax rate. With the exception of obligations of the U.S. Treasury and other U.S. Government agencies and corporations, there were no investment securities of any single issuer the book value of which exceeded 10% of stockholders' equity at September 30, 2001. Investment securities carried at approximately $129,894,000 and $131,654,000 at September 30, 2001 and December 31, 2000, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law. Deposits Funding of the Company's assets is substantially provided by a combination of consumer, commercial and public fund deposits. The Company continues to focus its strategies and emphasis on retail core deposits, the major component of funding sources. The following table sets forth the average deposits and weighted average rates for the nine months ended September 30, 2001 and for the year ended December 31, 2000 (dollars in thousands): 20
<TABLE> September 30, December 31, 2001 2000 ------------------------------------------------------------- Weighted Weighted Average Average Amount Rate Amount Rate ------------------------------------------------------------- <S> <C> <C> <C> <C> Demand deposits: Non-interest bearing $ 66,575 - $ 62,579 - Interest bearing 175,875 2.65% 163,531 3.13% Savings 40,667 2.28% 39,215 2.43% Time deposits 249,640 5.62% 226,259 5.42% ------------------------------------------------------------- Total average deposits $532,757 3.68% $491,584 3.73% ------------------------------------------------------------- </TABLE> The following table sets forth the maturity of time deposits of $100,000 or more at September 30, 2001 and December 31, 2000 (in thousands): September 30, December 31, 2001 2000 ------------------------------------- 3 months or less $ 16,070 $ 15,413 Over 3 through 6 months 14,317 20,283 Over 6 through 12 months 27,656 18,663 Over 12 months 3,996 8,558 ------------------------------------- Total $ 62,039 $ 62,922 ------------------------------------- Other Borrowings Other borrowings consist of securities sold under agreements to repurchase, Federal Home Loan Bank advances, and federal funds purchased. Information relating to other borrowings as of September 30, 2001 and December 31, 2000 is presented below (in thousands): <TABLE> September 30, December 31, 2001 2000 -------------------- -------------------- <S> <C> <C> Securities sold under agreements to repurchase $34,364 $31,096 Federal Home Loan Bank advances: Overnight -- 20,000 Fixed term - due before one year 5,000 -- Fixed term - due after one year 23,300 20,300 Total $62,664 $71,396 -------------------- -------------------- Average interest rate at end of period 3.78% 6.06% Maximum Outstanding at any Month-end Securities sold under agreements to repurchase $35,383 $34,546 Federal Home Loan Bank advances: Overnight 12,800 44,000 Fixed term - due before one year 5,000 -- Fixed term - due after one year 23,300 20,300 Federal funds purchased 2,850 1,000 -------------------- -------------------- Total $79,333 $99,846 -------------------- -------------------- Averages for the Period Ended Securities sold under agreements to repurchase $27,688 $23,349 Federal Home Loan Bank advances: Overnight 2,889 25,214 Fixed term - due before one year 2,778 -- Fixed term - due after one year 22,676 10,345 Federal funds purchased 301 1,223 -------------------- -------------------- Total $56,331 $60,131 -------------------- -------------------- Average interest rate during the period 4.79% 6.12% </TABLE> 21
Securities sold under agreements to repurchase are short-term obligations of First Mid Bank. First Mid Bank collateralizes these obligations with certain government securities which are direct obligations of the United States or one of its agencies. First Mid Bank offers these retail repurchase agreements as a cash management service to its corporate customers. Federal Home Loan Bank advances represent borrowings by First Mid Bank to economically fund loan demand. This loan demand was previously funded primarily through deposits by the State of Illinois. The fixed term advances consists of $28.3 million which First Mid is using to fund loans: o $5 million advance at 6.16% with a 5-year maturity, due 03/20/05 o $2.3 million advance at 6.10% with a 5-year maturity, due 04/07/05 o $5 million advance at 6.12% with a 5-year maturity, due 09/06/05 o $3 million advance at 6.58% with a 2-year maturity, due 10/10/02 o $5 million advance at 6.00% with a 5-year maturity, due 12/14/05 o $3 million advance at 5.98% with a 10-year maturity, due 03/01/11 o $5 million advance at 4.35% with a 9-month maturity, due 02/01/02 Interest Rate Sensitivity The Company seeks to maximize its net interest margin within an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to favorable or unfavorable movements in interest rates. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of assets differ significantly from the maturity or repricing characteristics of liabilities. The Company monitors its interest rate sensitivity position to maintain a balance between rate sensitive assets and rate sensitive liabilities. This balance serves to limit the adverse effects of changes in interest rates. The Company's asset/liability management committee oversees the interest rate sensitivity position and directs the overall allocation of funds. In the banking industry, a traditional measurement of interest rate sensitivity is known as a "GAP" analysis, which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. The following table sets forth the Company's interest rate repricing gaps for selected maturity periods at September 30, 2001 (in thousands): 22
<TABLE> Number of Months Until Next Repricing Opportunity Interest earning assets: 0-1 1-3 3-6 6-12 12+ --------------- --------------- --------------- --------------- ---------------- <S> <C> <C> <C> <C> <C> Federal funds sold $27,076 $ -- $ -- $ -- $ -- Taxable investment securities 16,063 12,368 3,963 11,145 71,032 Nontaxable investment securities 407 1,452 781 1,076 27,216 Loans 76,688 26,148 54,860 61,064 244,495 --------------- --------------- --------------- --------------- ---------------- Total $120,234 $ 39,968 $ 59,604 $ 73,285 $ 342,743 --------------- --------------- --------------- --------------- ---------------- Interest bearing liabilities: Savings and N.O.W. accounts 178,524 -- -- -- -- Money market accounts 62,569 -- -- -- -- Other time deposits 30,536 34,065 67,668 70,689 40,286 Other borrowings 34,364 -- 5,000 -- 23,300 Long-term debt 4,325 -- -- -- -- --------------- --------------- --------------- --------------- ---------------- Total $ 310,318 $ 34,065 $ 72,668 $ 70,689 $ 63,586 --------------- --------------- --------------- --------------- ---------------- Periodic GAP $(190,084) $ 5,903 $(13,064) $ 2,596 $279,157 --------------- --------------- --------------- --------------- ---------------- Cumulative GAP $(190,084) $(184,181) $(197,245) $(194,649) $ 84,508 --------------- --------------- --------------- --------------- ---------------- GAP as a % of interest earning assets: Periodic (29.9%) 0.9% (2.1%) 0.4% 43.9% Cumulative (29.9%) (29.0%) (31.0%) (30.6%) 13.3% --------------- --------------- --------------- --------------- ---------------- </TABLE> At September 30, 2001, the Company was liability sensitive on a cumulative basis through the twelve-month time horizon. Accordingly, future increases in interest rates, if any, could have an unfavorable effect on net interest margin. The Company's ability to lag the market in repricing deposits in a rising interest rate environment eases the implied liability sensitivity of the Company. Interest rate sensitivity using a static GAP analysis basis is only one of several measurements of the impact of interest rate changes on net interest income used by the Company. Its actual usefulness in assessing the effect of changes in interest rates varies with the constant changes which occur in the composition of the Company's earning assets and interest-bearing liabilities. For this reason, the Company uses financial models to project interest income under various rate scenarios and assumptions relative to the prepayments, reinvestment and rollovers of assets and liabilities, of which First Mid Bank represents substantially all of the Company's rate sensitive assets and liabilities. Capital Resources At September 30, 2001, the Company's stockholders' equity had increased $6,341,000 or 11.0% to $64,068,000 from $57,727,000 as of December 31, 2000. During the first nine months of 2001, net income contributed $4,772,000 to equity before the payment of dividends to common stockholders. The change in net unrealized gain/loss on available-for-sale investment securities increased stockholders' equity by $1,998,00, net of tax. The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Bank holding companies follow minimum regulatory requirements established by the Federal Reserve Board, and First Mid Bank follows similar minimum regulatory requirements established for national banks by the Office of the Comptroller of the Currency. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. 23
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 September 30, 2001 and December 31, 2000, all capital adequacy requirements have been met by the Company and First Mid Bank. As of September 30, 2001, the most recent notification from the primary regulator categorized First Mid Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios must be maintained as set forth in the table. There are no conditions or events since that notification that management believes have changed this category. <TABLE> To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------------------- ---------------------------- ---------------------------- Amount Ratio Amount Ratio Amount Ratio ------------- ------------- ------------- ------------- -------------- ------------- September 30, 2001 <S> <C> <C> <C> <C> <C> <C> Total Capital (to risk-weighted assets) Company $ 53,440 11.40% $ 37,492 > 8.00% N/A N/A - First Mid Bank 53,414 11.48% 37,223 > 8.00% $ 46,529 > 10.00% - - Tier 1 Capital (to risk-weighted assets) Company 49,654 10.60% 18,746 > 4.00% N/A N/A - First Mid Bank 49,628 10.67% 18,611 > 4.00% 27,917 > 6.00% - - Tier 1 Capital (to average assets) Company 49,654 7.38% 26,896 > 4.00% N/A N/A - First Mid Bank 49,628 7.43% 26,715 > 4.00% 33,394 > 5.00% - - ------------- ------------- ------------- ------------- -------------- ------------- </TABLE> 24
<TABLE> To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------------------- ---------------------------- ---------------------------- Amount Ratio Amount Ratio Amount Ratio ------------- ------------- ------------- ------------- -------------- ------------- December 31, 2000 <S> <C> <C> <C> <C> <C> <C> Total Capital (to risk-weighted assets) Company $ 49,111 11.74% $ 33,453 > 8.00% N/A N/A - First Mid Bank 50,226 12.04% 33,374 > 8.00% $ 41,718 > 10.00% - - Tier 1 Capital (to risk-weighted assets) Company 45,849 10.96% 16,727 > 4.00% N/A N/A - First Mid Bank 46,964 11.26% 16,687 > 4.00% 25,031 > 6.00% - - Tier 1 Capital (to average assets) Company 45,849 7.32% 25,070 > 4.00% 31,338 > 5.00% - - First Mid Bank 46,964 7.54% 24,931 > 4.00% 31,163 > 5.00% - - ------------- ------------- ------------- ------------- -------------- ------------- </TABLE> Banks and bank holding companies are generally expected to operate at or above the minimum capital requirements. These ratios are in excess of regulatory minimums and allow the Company to operate without capital adequacy concerns. Stock Plans Company stock may be purchased by participants under the following four plans of the Company's, the Deferred Compensation Plan, the First Retirement and Savings Plan, the Dividend Reinvestment Plan, and the Stock Incentive Plan. For more detailed information on these plans, refer to the Company's 2000 Form 10-K. On August 5, 1998, the Company announced a stock repurchase program of up to 3% of its common stock. During 2000, the Board of Directors of the Company authorized the repurchase of 5%, in addition to the original 3%, of its common stock under this stock repurchase program. Shares are repurchased at the most recent market price of the stock. The Company repurchased 38,457 shares (1.09%) at a total price of $848,000 during the nine months ended September 30, 2001 and 90,254 shares (2.74%) at a total price of $1,881,000 for the year ended December 31, 2000. A total of 163,563 shares, with an average cost of $21.80, have been repurchased from the inception of this program to September 30, 2001, and are held in treasury. In October, 2001, the Company's Board of Directors authorized the repurchase, in open market or in privately negotiated transactions, up to an aggregate of $3 million of additional shares of common stock. Liquidity Liquidity represents the ability of the Company and its subsidiaries to meet the requirements of customers for loans and deposit withdrawals. Liquidity management focuses on the ability to obtain funds economically for these purposes and to maintain assets which may be converted into cash at minimal costs. Other 25
sources for cash include deposits of the State of Illinois, brokered deposits, and Federal Home Loan Bank (FHLB) advances. At September 30, 2001, the excess collateral available under the FHLB advance program will support approximately $40 million of additional FHLB advances. Management monitors its expected liquidity requirements carefully, focusing primarily on cash flows from: o lending activities, including loan commitments, letters of credit and mortgage prepayment assumptions. o deposit activities, including seasonal demand of private and public funds. o investing activities, including prepayments of mortgage-backed securities and call provisions on U.S. Government Treasuries and Agency securities. o operating activities, including scheduled debt repayments and dividends to shareholders. As of September 30, 2001, the Company believes it will have sufficient funds to meet obligations such as loan commitments and anticipated stock repurchases. Effects of Inflation Unlike industrial companies, virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or experience the same magnitude of changes as goods and services, since such prices are effected by inflation. In the current economic environment, liquidity and interest rate adjustments are features of the Company's assets and liabilities which are important to the maintenance of acceptable performance levels. The Company attempts to maintain a balance between monetary assets and monetary liabilities, over time, to offset these potential effects. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the market risks faced by the Company since December 31, 2000. For information regarding the Company's market risk, refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. PART II ITEM 1. LEGAL PROCEEDINGS Since First Mid Bank acts a depository of funds, it is named from time to time as a defendant in lawsuits (such as garnishment proceedings) involving claims to the ownership of funds in particular accounts. Management believes that all such litigation as well as other pending legal proceedings in which the 26
Company is involved constitute ordinary, routine litigation incidental to the business of the Company and that such litigation will not materially adversely affect the Company's consolidated financial condition. In addition to the normal proceedings referred to above, Heartland Savings Bank ("Heartland"), a subsidiary of the Company that merged with First Mid Bank during 1997, filed a complaint on December 5, 1995, against the U.S. Government which is now pending in the U.S. Court of Federal Claims in Washington D.C. This complaint relates to Heartland's interest as successor to Mattoon Federal Savings and Loan Association which incurred a significant amount of supervisory goodwill when it acquired Urbana Federal Savings and Loan in 1982. The complaint alleges that the U.S. Government breached its contractual obligations when, in 1989, it issued new rules which eliminated supervisory goodwill from inclusion in regulatory capital. On August 6, 1998, First Mid Bank filed a motion with the U.S. Court of Federal Claims to grant summary judgement on liability for breach of contract in this matter. On August 13, 1998, the U.S. Government filed a motion to stay such proceedings. At this time, it is too early to tell if First Mid Bank will prevail in its motion and, if so, what damages, if any, may be recovered. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Exhibits: The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit Index which follows the Signature Page and immediately precedes the exhibits filed. (b) Reports on Form 8-K: None. 27
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST MID-ILLINOIS BANCSHARES, INC. (Company) /s/ William S. Rowland - -------------------------------------- William S. Rowland President and Chief Executive Officer /s/ Michael L. Taylor - -------------------------------------- Michael L. Taylor Chief Financial Officer Dated: November 13, 2001 ----------------------- 28
Exhibit Index to Form 10-Q Exhibit Number Description and Filing or Incorporation Reference - ----------------------------------------------------------------- 11.1 Statement re: Computation of Earnings Per Share (Filed herewith on page 6) 29