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, 2002 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 May 15, 2002, 3,381,524 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. (See Notes to Consolidated Financial Statements).
PART I ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets (unaudited) March 31, December 31, (In thousands, except share data) 2002 2001 ------------ ------------ Assets Cash and due from banks: Non-interest bearing $ 17,952 $ 23,471 Interest bearing 1,008 5,400 Federal funds sold 5,400 4,225 ------------ ------------ Cash and cash equivalents 24,360 33,096 Investment securities: Available-for-sale, at fair value 160,791 160,096 Held-to-maturity, at amortized cost (estimated fair value of $2,080 and $2,136 at March 31, 2002 and December 31, 2001, respectively) 2,071 2,071 Loans 471,722 473,243 Less allowance for loan losses (3,751) (3,702) ------------ ------------ Net loans 467,971 469,541 Premises and equipment, net 16,567 16,656 Accrued interest receivable 5,885 6,790 Goodwill, net 10,971 11,093 Intangible assets, net 3,093 1,299 Other assets 4,884 5,337 ------------ ------------ Total assets $696,593 $ 705,979 ============ ============ Liabilities and Stockholders' Equity Deposits: Non-interest bearing $ 75,621 $ 80,265 Interest bearing 476,114 479,155 ------------ ------------ Total deposits 551,735 559,420 Accrued interest payable 1,932 2,370 Securities sold under agreements to repurchase 29,570 38,879 Other borrowings 43,658 37,625 Other liabilities 3,646 3,760 ------------ ------------ Total liabilities 630,541 642,054 ------------ ------------ Stockholders' Equity: Common stock, $4 par value; authorized 6,000,000 shares; issued 3,577,774 shares in 2002 and 3,546,060 shares in 2001 14,311 14,184 Additional paid-in-capital 13,898 13,288 Retained earnings 41,465 39,500 Deferred compensation 1,470 1,392 Accumulated other comprehensive income 688 740 Less treasury stock at cost, 195,412 shares in 2002 and 174,216 shares in 2001 (5,780) (5,179) ------------ ------------ Total stockholders' equity 66,052 63,925 ------------ ------------ Total liabilities and stockholders' equity $696,593 705,979 ============ ============ See accompanying notes to unaudited consolidated financial statements.
Consolidated Statements of Income (unaudited) Three months ended (In thousands, except per share data) March 31, 2002 2001 -------------- ------------ Interest income: Interest and fees on loans $ 8,419 $ 9,015 Interest on investment securities 1,906 2,221 Interest on federal funds sold 30 34 Interest on deposits with other financial institutions 10 1 -------------- ------------ Total interest income 10,365 11,271 Interest expense: Interest on deposits 3,381 5,052 Interest on securities sold under agreements to repurchase 86 292 Interest on Federal Home Loan Bank advances 450 404 Interest on federal funds purchased 1 6 Interest on debt 33 74 -------------- ------------ Total interest expense 3,951 5,828 -------------- ------------ Net interest income 6,414 5,443 Provision for loan losses 125 150 -------------- ------------ Net interest income after provision for loan losses 6,289 5,293 Other income: Trust revenues 478 500 Brokerage commissions 85 97 Insurance commissions 170 20 Service charges 737 717 Securities gains, net 43 58 Mortgage banking income 307 178 Other 484 426 -------------- ------------ Total other income 2,304 1,996 Other expense: Salaries and employee benefits 3,006 2,552 Net occupancy and equipment expense 971 951 Amortization of goodwill 122 210 Amortization of intangible assets 110 84 Stationery and supplies 155 156 Legal and professional 238 235 Marketing and promotion 159 158 Other 922 819 -------------- ------------ Total other expense 5,683 5,165 -------------- ------------ Income before income taxes 2,910 2,124 Income taxes 945 659 -------------- ------------ Net income $ 1,965 $ 1,465 ============== ============ Per common share data: Basic earnings per share $.58 $.43 Diluted earnings per share $.58 $.43 ============== ============ See accompanying notes to unaudited consolidated financial statements.
Consolidated Statements of Cash Flows (unaudited) Three months ended March 31, (In thousands) 2002 2001 ------------ ------------ Cash flows from operating activities: Net income $ 1,965 $ 1,465 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 125 150 Depreciation, amortization and accretion, net 903 738 Gain on sale of securities, net (43) (58) Loss on sale of other real property owned, net 6 3 Gain on sale of mortgage loans held for sale, net (291) (116) Origination of mortgage loans held for sale (19,593) (9,881) Proceeds from sale of mortgage loans held for sale 22,688 8,402 (Increase) decrease in other assets (878) 2,383 Increase (decrease) in other liabilities (242) ------------ ------------ Net cash provided by operating activities 6,184 2,844 Cash flows from investing activities: Capitalization of mortgage servicing rights (1) (35) Purchases of premises and equipment (335) (260) Net (increase) decrease in loans (1,359) 7,036 Proceeds from sales of securities available-for-sale 4,039 1,739 Proceeds from maturities of: Securities available-for-sale 7,600 18,279 Securities held-to-maturity 246 - Purchases of securities available-for-sale (12,728) (19,355) Purchases of securities held-to-maturity (45) (54) Net cash provided by acquisition 15 - ------------ ------------ Net cash provided by (used in) investing activities (2,568) 7,350 Cash flows from financing activities: Net increase (decrease) in deposits (7,687) 13,522 Decrease in repurchase agreements (9,309) (5,690) Decrease in short-term FHLB advances - (20,000) Increase in long-term FHLB advances 5,000 3,000 Increase in other borrowings 239 - Proceeds from issuance of common stock 259 94 Purchase of treasury stock (524) (258) Dividends paid on common stock (330) (318) ------------ ------------ Net cash used in financing activities (12,352) (9,650) ------------ ------------ Increase (decrease) in cash and cash equivalents (8,736) 544 Cash and cash equivalents at beginning of period 33,096 24,840 ------------ ------------ Cash and cash equivalents at end of period $24,360 $25,384 ============ ============ Additional disclosures of cash flow information Cash paid during the period for: Interest $4,389 $ 5,460 Income taxes 218 - Dividends reinvested in common stock 479 398 Loans transferred to real estate owned 116 - ============ ============ See accompanying notes to unaudited consolidated financial statements.
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"), First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank") and its wholly-owned subsidiary First Mid-Illinois Insurance Services, Inc. ("First Mid Insurance") and The Checkley Agency, Inc. ("Checkley"). 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 March 31, 2002 and 2001, and all such adjustments are of a normal recurring nature. The results of the interim period ended March 31, 2002, are not necessarily indicative of the results expected for the year ending December 31, 2002. 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 2001 Form 10-K. Stock Split On November 16, 2001 the Company effected a three-for-two stock split in the form of a 50 percent stock dividend. Par value remained at $4 per share. The stock split increased the Company's outstanding common shares from 2,250,714 to 3,376,071 shares. All prior period share and per share amounts have been restated giving retroactive recognition to the stock split. Recent Accounting Pronouncements In June 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 that the purchase method of accounting be used for all business combinations. SFAS 141 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company adopted the provisions of SFAS 141 as of July 1, 2001, and SFAS 142 as of January 1, 2002. Goodwill and intangible assets, acquired in business combinations completed before July 1, 2001, continued to be amortized and tested for impairment prior to the full adoption of SFAS 142. Since its adoption of SFAS 142 as of January 1, 2002, the Company is required to evaluate its existing intangible assets and goodwill that were acquired in purchase business combinations, and to make any necessary reclassifications in order to conform with the new classification criteria in SFAS 141 for recognition separate from goodwill. The Company is also required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. If an intangible asset is identified as having an indefinite useful life, the Company is required to test the intangible asset for impairment in accordance with the provisions of SFAS 142 within the first interim period. Impairment is measured as the excess of the carrying value over the fair value of an intangible asset with an indefinite life. Any impairment loss is measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.
In connection with the SFAS 142 transitional goodwill impairment evaluation, the Statement requires the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. The Company then has up to six months from January 1, 2002 to determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, an indication exists that the reporting unit goodwill may be impaired and the Company must perform the second step of the transitional impairment test. The second step is required to be completed as soon as possible, but no later than the end of the year of adoption. In the second step, the Company must compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill, both of which would be measured as of the date of adoption. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS 141. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of income. As of January 1, 2002, the date of adoption of SFAS 142, the Company had unamortized goodwill in the amount of $11.1 million, of which $4 million will be subject to the transition provisions of SFAS 142 and no longer amortized. The remaining $7.1 million is for acquisition of branches whereby the liabilities assumed were greater than the assets obtained and continues to be amortized. The Company also had core deposit intangibles of $1.3 million, which also continue to be amortized. As of March 31, 2002, the Company has added an additional $1.9 million of amortizable intangibles as a result of the acquisition of Checkley. The following table presents gross carrying amount and accumulated amortization by major intangible asset class as of March 31, 2002 and December 31, 2001 (in thousands): <TABLE> <CAPTION> 3/31/02 12/31/01 -------------------------------- -------------------------------- Gross Gross Carrying Accumulated Carrying Accumulated Value Amortization Value Amortization ------------- ------------------ -------------- ----------------- <S> <C> <C> <C> <C> Goodwill not subject to amortization $4,035 $3,019 $4,035 $3,019 Goodwill from branch acquisitions 6,937 1,818 7,059 1,696 Core deposit intangibles 1,221 1,585 1,298 1,507 Other intangibles 1,872 32 - - ------------- ------------------ -------------- ----------------- $14,064 $6,454 $12,392 6,222 ============= ================== ============== ================= </TABLE>
Aggregate amortization 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 year ended 12/31/02 $783 Estimated amortization expense: For year ended 12/31/03 $770 For year ended 12/31/04 $669 For year ended 12/31/05 $649 For year ended 12/31/06 $649 For year ended 12/31/07 $596 The adoption of SFAS 142 resulted in a net income increase of $103,000 or $.03 in basic and diluted earnings per share for the quarter. For the period ended March 31, 2002, amortization expense related to core deposit intangibles was $78,000, amortization expense related to other intangibles was $32,000 and amortization expense related to goodwill from branch acquisitions was $122,000. For the period ended March 31, 2001, amortization expense related to goodwill no longer amortizable due to adoption of SFAS 142 was $88,000, amortization expense related to core deposit intangibles was $84,000 and amortization expense related to goodwill from branch acquisitions was $122,000. The Company is evaluating its goodwill for impairment in accordance with SFAS 142 and expects the assessment to be complete by June 30, 2002. Comprehensive Income The Company's comprehensive income for the three-month periods ended March 31, 2002 and 2001 is as follows (in thousands): Three months ended March 31, 2002 2001 --------------- -------------- Net income $1,965 $1,465 Other comprehensive income: Unrealized gain (loss) during the period (42) 1,909 Less: realized gains during the period (43) (58) Tax effect 33 (717) --------------- -------------- Comprehensive income $1,913 $2,599 =============== ============== Earnings Per Share A three-for-two common stock split was distributed in the form of a 50% stock dividend payable on November 16, 2001 to 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 has been restated for all prior 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 periods ended March 31, 2002 and 2001 are as follows:
Three months ended March 31, 2002 2001 ---------------- ---------------- Basic Earnings per Share: Net income $1,965,000 $1,465,000 Weighted average common shares outstanding 3,384,619 3,377,364 ================ ================ Basic earnings per common share $ .58 $ .43 ================ ================ Diluted Earnings per Share: Weighted average common shares outstanding 3,384,619 3,377,364 Assumed conversion of stock options 19,724 9,089 ---------------- ---------------- Diluted weighted average common shares outstanding 3,404,343 3,386,453 ================ ================ Diluted earnings per common share $ .58 $ .43 ================ ================ Mergers and Acquisitions On April 20, 2001, First Mid Bank acquired all the outstanding stock of American Bank of Illinois in Highland, 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. On January 29, 2002, the Company acquired all of the issued and outstanding stock of Checkley, an insurance agency headquartered in Mattoon, Illinois. Checkley was purchased for cash with a portion ($750,000) paid at closing and the remainder ($1,000,000) to be paid over a five-year earn-out agreement ending January 2007. Checkley operates as a separate subsidiary of the Company and provides customers with commercial property, casualty, life, auto and home insurance. In order to facilitate this acquisition, the Company became a financial holding company under the Gramm-Leach-Bliley Act on December 14, 2001. The results of Checkley's operations are included in the consolidated financial statements since that date. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands): At January 29, 2002: - ----------------------------------------------------- Current assets $643 Property and equipment 76 Intangible assets 1,904 ---------------- Total assets acquired 2,623 ---------------- Current liabilities (771) Debt (20) ---------------- Total liabilities (791) ---------------- Net assets acquired $1,832 ================ The Company estimates that $1,904,000 of acquired intangible assets were obtained. The identifiable intangible assets were allocated to customer lists to be fully amortized over a period of ten years.
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, 2002 and 2001. This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes and selected financial data appearing elsewhere in this report. Forward-Looking Statements This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, such as discussions of the Company's pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses and planned schedules. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are identified by use of the words "believe", "expect", "intend", "anticipate", "estimate", "project", or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many uncertainties, including: changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. Overview Net income for the three months ended March 31, 2002 was $1,965,000 ($.58 diluted EPS), an increase of $500,000 from $1,465,000 ($.43 diluted EPS) for the same period in 2001. Of this amount, $103,000 ($.03 diluted EPS) resulted from adoption of SFAS 142. A summary of the factors that contributed to the changes in net income follows (in thousands): 2002 vs. 2001 --------------- Net interest income $ 996 Other income, including securities transactions 308 Other expenses (518) Income taxes (286) --------------- Increase in net income $ 500 =============== The following table shows the Company's annualized performance ratios for the three months ended March 31, 2002 and 2001, as compared to the performance ratios for the year ended December 31, 2001:
Three months ended Year ended ----------------------------- -------------- March 31, March 31, December 31, 2002 2001 2001 -------------- -------------- -------------- Return on average assets 1.12% .93% .97% Return on average equity 12.12% 9.91% 10.56% Average equity to average assets 9.24% 9.37% 9.20% Results of Operations Net Interest Income The largest source of operating revenue for the Company is net interest income. Net interest income represents the difference between total interest income earned on earning assets and total interest expense paid on interest-bearing liabilities. The amount of interest income is dependent upon many factors, including the volume and mix of earning assets, the general level of interest rates and the dynamics of changes in interest rates. The cost of funds necessary to support earning assets varies with the volume and mix of interest-bearing liabilities and the rates paid to attract and retain such funds. For purposes of the following discussion and analysis, the interest earned on tax-exempt securities is adjusted to an amount comparable to interest subject to normal income taxes. The adjustment is referred to as the tax-equivalent ("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):
<TABLE> <CAPTION> Three Months Ended Three Months Ended March 31, 2002 March 31, 2001 ----------------------------------------------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ------------ ---------- ---------- ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> ASSETS Interest-bearing deposits $2,420 $ 10 1.65% $68 $ 1 5.84% Federal funds sold 7,599 30 1.58% 2,577 34 5.31% Investment securities Taxable 134,516 1,572 4.67% 120,155 1,870 6.22% Tax-exempt (1) 29,361 506 6.89% 30,681 532 6.93% Loans (2)(3) 468,308 8,419 7.19% 427,476 9,015 8.44% ------------ ---------- ---------- ------------ ---------- ---------- Total earning assets 642,204 10,537 6.56% 580,957 11,452 7.88% Cash and due from banks 19,113 15,965 Premises and equipment 16,646 15,319 Other assets 26,131 22,431 Allowance for loan losses (4,033) (3,332) ------------ ------------ Total assets $700,061 $631,340 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits Demand deposits $197,349 $ 692 1.40% $162,805 $ 1,238 3.04% Savings deposits 48,717 194 1.59% 36,999 220 2.38% Time deposits 232,448 2,495 4.29% 248,737 3,594 5.78% Securities sold under agreements to repurchase 32,616 86 1.05% 24,053 292 4.86% FHLB advances 34,596 450 5.20% 27,094 404 5.96% Federal funds purchased 210 1 1.90% 387 6 5.82% Other debt 5,039 33 2.62% 4,325 74 6.84% ------------ ---------- ---------- ------------ ---------- ---------- Total interest-bearing liabilities 550,975 3,951 2.87% 504,400 5,828 4.62% ------------ ---------- ---------- ------------ ---------- ---------- Demand deposits 75,936 62,358 Other liabilities 8,308 5,422 Stockholders' equity 64,842 59,160 ------------ ------------ Total liabilities & equity $700,061 $631,340 ============ ============ Net interest income (TE) $6,586 $5,624 ========== ========== Net interest spread 3.69% 3.26% Impact of non-interest bearing funds .41% .61% ---------- ---------- Net yield on interest- earning assets (TE) 4.10% 3.87% ========== ========== </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 have been included in the average balances.
Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income (TE) for the three months ended March 31, 2002, as compared to the same period in 2001 (in thousands): For the three months ended March 31, 2002 compared to 2001 -------------------------------------- Total Rate/ Change Volume Rate Volume (4) ------- ------ ------- ---------- Earning Assets: Interest-bearing deposits $ 9 $ 34 $ (1) $ (24) Federal funds sold (4) 67 (24) (47) Investment securities: Taxable (298) 223 (466) (55) Tax-exempt (1) (26) (23) (3) - Loans (2)(3) (596) 862 (1,336) (122) ------- ------ ------- ---------- Total interest income (915) 1,163 (1,830) (248) ------- ------ ------- ---------- Interest-Bearing Liabilities: Interest-bearing deposits Demand deposits (546) 263 (668) (141) Savings deposits (26) 70 (73) (23) Time deposits (1,099) (235) (927) 63 Securities sold under agreements to repurchase (206) 104 (229) (81) FHLB advances 46 112 (51) (15) Federal funds purchased (5) (3) (4) 2 Long-term debt (41) 12 (46) (7) ------- ------ ------- ---------- Total interest expense (1,877) 323 (1,998) (202) ------- ------ ------- ---------- Net interest income $ 962 $ 840 $ 168 $ (46) ======= ====== ======= ========== (1) Interest income and rates are presented on a tax-equivalent basis, assuming a federal income tax rate of 34%. (2) Loan fees are included in interest income and are not material. (3) Nonaccrual loans are not material and have been included in the average balances. (4) The changes in rate/volume are computed on a consistent basis by multiplying the change in rates with the change in volume. On a tax equivalent basis, net interest income increased $962,000, or 17.10% to $6,586,000 for the three months ended March 31, 2002, from $5,624,000 for the same period in 2001. 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 three months ended March 31, 2002, average earning assets increased by $61,247,000, or 10.5%, and average interest-bearing liabilities increased $46,575,000, or 9.2%, compared with average balances for the same period in 2001. Changes in average balances, as a percent of average earnings assets, are shown below: < average loans (as a percent of average earnings assets) decreased 0.7% to 72.9% for the three months ended March 31, 2002, from 73.6% for the same period in 2001. < average securities (as a percent of average earnings assets) decreased 0.5% to 25.5% for the three months ended March 31, 2002, from 26.0% for the same period in 2001.
Provision for Loan Losses The provision for loan losses for the three months ended March 31, 2002 and 2001 was $125,000 and $150,000, 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 ended March 31, 2002 and 2001 (in thousands): Three months ended March 31, 2002 2001 $ Change --------------- ------------ ------------- Trust $478 $500 $ (22) Brokerage 85 97 (12) Service charges 737 717 20 Insurance commissions 170 20 150 Security gains 43 58 (15) Mortgage banking 307 178 129 Other 484 426 58 --------------- ------------ ------------- Total other income $2,304 $1,996 $ 308 =============== ============ ============= The primary reasons for the more significant period-to-period changes are as follows: < Trust revenues decreased $22,000 or 4.4% to $478,000 from $500,000 mostly due to the volatility in the stock market. Trust assets, reported at market value, were $303 million at March 31, 2002 compared to $307 million at March 31, 2001. < Revenues from brokerage and annuity sales decreased $12,000 or 12.4% to $85,000 from $97,000. This was primarily due to an overall downturn in the stock market. < Fees from service charges increased $20,000 or 2.8% to $737,000 from $717,000. This was primarily the result of additional deposit accounts from the acquisition of the American Bank of Illinois. < Insurance commissions increased in 2002 as a result of the acquisition of Checkley in January 2002. < Sales of investment securities resulted in a net gain of $43,000, as compared to a net gain of $58,000 for the same quarter in 2001. This net gain resulted from sales and calls of several available-for-sale securities. < Mortgage banking income increased $129,000 or 72.5% to $307,000 from $178,000. 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: < $22.4 million (representing 255 loans) for the 1st quarter 2002. < $8.3 million (representing 97 loans) for the 1st quarter 2001. First Mid Bank generally releases servicing on these loans, thereby reducing the capitalization of originated mortgage servicing rights.
< Other income increased $38,000 or 8.5% to $484,000 from $446,000. This increase is primarily due to an increase in late charge fees and an increase in ATM service charges due to the number of ATMs 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 ended March 31, 2002 and 2001 (in thousands): Three months ended March 31, 2002 2001 $ Change ------------- ------------ ------------- Salaries and benefits $ 3,006 $ 2,552 $454 Occupancy and equipment 971 951 20 Amortization of goodwill 122 210 (88) Amortization of other intangibles 110 84 26 Stationery and supplies 155 156 (1) Legal and professional fees 238 235 3 Marketing and promotion 159 158 1 Other operating expenses 922 819 103 ------------- ------------ ------------- Total other expense $ 5,683 $ 5,165 $518 ============= ============ ============= The primary reasons for the more significant period-to-period changes are as follows: < Salaries and employee benefits, the largest component of other expense, increased $454,000 or 17.8% to $3,006,000 from $2,552,000. 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 the acquisition of Checkley in January 2002. There were 305 full-time equivalent employees at March 31, 2002 compared to 275 at March 31, 2001. < Occupancy and equipment expense increased $20,000 or 2.1% to $971,000 from $951,000. This increase included building maintenance, utilities and depreciation expense recorded on assets acquired in the American Bank of Illinois acquisition. < Amortization of goodwill expense decreased due to the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. Goodwill totaling $4 million at January 1, 2002 will no longer be amortized however, the Company continues to amortize goodwill for acquisition of branches whereby the liabilities assumed were greater than the assets obtained, which totaled $7.1 million at January 1, 2002. Amortization of other intangibles expense increased $26,000 as a result of the acquisition of Checkley ($32,000) and the reduction of core deposit intangible expense ($6,000). < All other categories of operating expenses increased a net of $44,000 or 26.0% to $1,706,000 from $1,662,000. This increase is primarily due to higher expense for customer supplies and printing forms.
Income Taxes Total income tax expense amounted to $945,000 (32.5% effective tax rate) for the three months ended March 31, 2002, compared to $659,000 (31.1% effective tax rate) for the same period in 2001. The increase in the effective tax rate is due to a decrease in tax-exempt income from municipal securities. 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 March 31, 2002 and December 31, 2001 (in thousands): March 31, December 31, 2002 2001 ------------ ------------ Real estate - residential $125,031 $136,965 Real estate - agricultural 43,250 41,922 Real estate - commercial 157,610 152,986 ------------ ------------ Total real estate - mortgage 325,891 331,873 Commercial and agricultural 113,304 107,620 Installment 31,235 32,522 Other 1,292 1,228 ------------ ------------ Total loans $471,722 $473,243 ============ ============ At March 31, 2002, the Company had loan concentrations in agricultural industries of $80.1 million, or 17.2%, of outstanding loans and $82.6 million, or 17.5%, at December 31, 2001. 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 the Company's focus on commercial real estate lending. The balance of real estate loans held for sale amounted to $2,767,000 and $5,571,000 as of March 31, 2002 and December 31, 2001, respectively. The following table presents the balance of loans outstanding as of March 31, 2002, by maturities (in thousands): Maturity (1) --------------------------------------------- Over 1 One year through Over or less (2) 5 years 5 years Total ------------ ---------- ---------- ---------- Real estate - residential $ 36,929 $ 73,212 $ 14,890 $125,031 Real estate - agricultural 8,368 28,618 6,264 43,250 Real estate - commercial 58,693 84,504 14,413 157,610 ------------ ---------- ---------- ---------- Total real estate - mortgage $103,990 $186,334 $ 35,567 $325,891 Commercial and agricultural 68,598 42,084 2,622 113,304 Installment 5,751 23,452 2,032 31,235 Other 36 608 648 1,292 ------------ ---------- ---------- ---------- Total loans $178,375 $252,478 $ 40,869 $471,722 ============ ========== ========== ========== (1) Based on scheduled principal repayments. (2) Includes demand loans, past due loans and overdrafts.
As of March 31, 2002, loans with maturities over one year consisted of approximately $266,734,000 in fixed rate loans and $26,613,000 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 March 31, 2002 and December 31, 2001 (in thousands): March 31, December 31, 2002 2001 ------------ ------------ Nonaccrual loans $2,640 $3,419 Renegotiated loans which are performing in accordance with revised terms 185 188 ------------ ------------ Total Nonperforming Loans $2,825 $3,607 ============ ============ At March 31, 2002, approximately $457,000 of the nonperforming loans resulted from collateral dependent loans to one borrower currently classified as nonaccrual. 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 $94,000 for the three months ended March 31, 2002 and $247,000 for the year ended December 31, 2001. Interest income on these loans that was included in income totaled $16,000 and $16,000 for the same periods. Loan Quality and Allowance for Loan Losses The allowance for loan losses represents management's best estimate of the reserve necessary to adequately cover probable losses in the loan portfolio. The provision for loan losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate allowance for loan losses. In determining the adequacy of the allowance for loan losses, and therefore the provision to be charged to current earnings, management relies predominantly on a disciplined credit review and approval process 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 who might be facing financial difficulty. Once identified, the magnitude of exposure to individual borrowers is quantified in the form of specific allocations of the allowance for loan losses. Management considers collateral values in the determination of such specific allocations. Additional factors considered by management in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and renegotiated loans and the current economic conditions in the region where the Company operates. Management considers the allowance for loan losses a critical accounting policy.
Management recognizes that there are risk factors which are inherent in the Company's loan portfolio. All financial institutions face risk factors in their loan portfolios because risk exposure is a function of the business. The Company's operations (and therefore its loans) are concentrated in east central Illinois, an area where agriculture is the dominant industry. Accordingly, lending and other business relationships with agriculture-based businesses are critical to the Company's success. At March 31, 2002 the Company's loan portfolio included $80.1 million of loans to borrowers whose businesses are directly related to agriculture. The balance decreased by $1.7 million from $82.6 million at December 31, 2001. 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. Analysis of the allowance for loan losses as of March 31, 2002 and 2001, and of changes in the allowance for the three months ended March 31, 2002 and 2001, is as follows (dollars in thousands): March 31, 2002 2001 ---------- ---------- Average loans outstanding, net of unearned income $468,308 $427,476 Allowance-beginning of period $ 3,702 $ 3,262 Charge-offs: Real estate-mortgage 31 - Commercial, financial & agricultural 25 4 Installment 33 24 ---------- ---------- Total charge-offs 89 28 Recoveries: Real estate-mortgage - - Commercial, financial & agricultural 1 6 Installment 12 13 ---------- ---------- Total recoveries 13 19 ---------- ---------- Net charge-offs 76 5 ---------- ---------- Provision for loan losses 125 150 ---------- ---------- Allowance-end of period $ 3,751 $ 3,403 ========== ========== Ratio of annualized net charge offs to average loans .07% .01% ========== ========== Ratio of allowance for loan losses to loans outstanding (less unearned interest at end of period) .80% .80% ========== =========== Ratio of allowance for loan losses to nonperforming loans 129.0% 85.7% ========== =========== The Company minimizes credit risk by adhering to sound underwriting and credit review policies. These policies are reviewed at least annually, and the board of directors approves changes. Senior management is actively involved in business development efforts and the maintenance and monitoring of credit underwriting and approval. The loan review system and controls are designed to identify, monitor and address asset quality problems in an accurate and timely manner. The board of directors and management review the status of problem loans and determine the adequacy of the allowance. In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for loan losses.
Securities The Company's overall investment 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 March 31, 2002 and December 31, 2001 (dollars in thousands): March 31, December 31, 2002 2001 ---------------------- ---------------------- % of % of Amount Total Amount Total ----------- ---------- ----------- ---------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 64,986 42% $ 60,852 38% Obligations of states and political subdivisions 28,489 21% 29,211 18% Mortgage-backed securities 51,666 29% 54,306 34% Other securities 16,598 8% 16,591 10% ----------- ---------- ----------- ---------- Total securities $161,739 100% $160,960 100% =========== ========== =========== ========== At March 31, 2002, the Company's investment portfolio showed an increase in U.S. Treasury securities and a slight decrease in mortgage-backed securities. 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 March 31, 2002 and December 31, 2001 were as follows (in thousands): <TABLE> <CAPTION> Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- --------- <S> <C> <C> <C> <C> March 31, 2002 Available-for-sale: U.S. Treasury securities and obligations of U.S. Government corporations & agencies $ 64,986 $ 754 $ (422) $ 65,318 Obligations of states and political subdivisions 26,418 497 (36) 26,879 Mortgage-backed securities 51,666 467 (87) 52,041 Federal Home Loan Bank stock 3,147 - - 3,147 Other securities 13,451 181 (225) 13,406 ---------- ---------- ---------- --------- Total available-for-sale $159,668 $ 1,894 $ (771) $160,791 ========== ========== ========== ========= Held-to-maturity: Obligations of states and political subdivisions $ 2,071 $ 26 $(17) $ 2,080 ========== ========== ========== =========
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- --------- December 31, 2001 Available-for-sale: U.S. Treasury securities and obligations of U.S. Government corporations & agencies $ 60,852 $ 1,165 $(181) $ 61,836 Obligations of states and political subdivisions 27,140 247 (212) 27,175 Mortgage-backed securities 54,306 427 (242) 54,491 Federal Home Loan Bank stock 3,102 - - 3,102 Other securities 13,489 23 (20) 13,492 ---------- ---------- ---------- --------- Total available-for-sale $158,889 $ 1,862 $(655) $160,096 ========== ========== ========== ========= Held-to-maturity: Obligations of states and political subdivisions $ 2,071 $ 70 $ (5) $ 2,136 ========== ========== ========== ========= </TABLE> 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, 2002 and the weighted average yield for each range of maturities. Mortgage-backed securities are aged according to their weighted average life. All other securities are shown at their contractual maturity. One After 1 After 5 After year through through ten (Dollars in thousands) or less 5 years 10 years years Total -------- --------- -------- -------- -------- Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 996 $61,699 $ 1,500 $ 791 $ 64,986 Obligations of state and political subdivisions - 6,511 11,138 8,769 26,418 Mortgage-backed securities 507 39,436 11,723 - 51,666 Federal Home Loan Bank stock - - - 3,147 3,147 Other securities - 2,044 - 11,407 13,451 -------- --------- -------- -------- -------- Total Investments 1,503 $109,690 $24,361 $24,114 $159,668 ======== ========= ======== ======== ======== Weighted average yield 5.99% 4.37% 4.91% 6.04% 4.72% Full tax-equivalent yield 5.99% 4.48% 5.80% 6.99% 5.06% ======== ========= ======== ======== ======== Held-to-maturity: Obligations of state and political subdivisions $ 85 $ 839 $ 555 $ 592 $ 2,071 ======== ========= ======== ======== ======== Weighted average yield 5.88% 5.29% 5.56% 5.42% 5.42% Full tax-equivalent yield 8.56% 7.65% 8.07% 7.85% 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. 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 March 31, 2002. Investment securities carried at approximately $132,296,000 and $133,208,000 at March 31, 2002 and December 31, 2001, 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, 2002 and for the year ended December 31, 2001 (dollars in thousands): March 31, December 31, 2002 2001 --------------------------------------- Weighted Weighted Average Average Amount Rate Amount Rate ---------- -------- ---------- -------- Demand deposits: Non-interest bearing $ 75,936 - $ 69,020 - Interest bearing 197,349 1.40% 182,404 2.40% Savings 48,717 1.59% 41,437 2.23% Time deposits 232,448 4.29% 247,348 5.45% ---------- -------- ---------- -------- Total average deposits $554,450 2.44% $540,209 3.48% ========== ======== ========== ======== The following table sets forth the maturity of time deposits of $100,000 or more at March 31, 2002 and December 31, 2001 (in thousands): March 31, December 31, 2002 2001 ------------ ------------ 3 months or less $ 26,269 $ 25,503 Over 3 through 6 months 21,705 20,228 Over 6 through 12 months 22,697 10,913 Over 12 months 7,183 4,794 ------------ ------------ Total $ 77,854 $ 61,438 ============ ============ Other Borrowings Other borrowings consist of securities sold under agreements to repurchase, Federal Home Loan Bank ("FHLB") advances, federal funds purchased, and loans (short-term or long-term debt) that the Company has outstanding. Information relating to other borrowings as of March 31, 2002 and December 31, 2001 is presented below (dollars in thousands):
March 31, December 31, 2002 2001 ------------- -------------- Securities sold under agreements to repurchase $29,570 $38,879 Federal Home Loan Bank advances: Fixed term - due in one year or less 8,000 33,300 Fixed term - due after one year 30,300 33,300 Other debt: Loans due in one year or less 4,558 4,325 Loans due after one year 800 - ------------- -------------- Total $73,228 $76,504 ============= ============== Average interest rate at end of period 3.24% 3.15% Maximum Outstanding at any Month-end Securities sold under agreements to repurchase $36,303 $40,646 Federal Home Loan Bank advances: Overnight - 12,800 Fixed term - due in one year or less 8,000 5,000 Fixed term - due after one year 30,300 28,300 Federal funds purchased - 2,850 Other debt: Loans due in one year or less 4,564 4,325 Loans due after one year 800 - ------------- -------------- Total $79,967 $93,921 ============= ============== Averages for the Period Ended Securities sold under agreements to repurchase $32,616 $29,547 Federal Home Loan Bank advances: Overnight 1,018 2,161 Fixed term - due in one year or less 3,278 3,356 Fixed term - due after one year 30,300 23,349 Federal funds purchased 210 236 Other debt: Loans due in one year or less 4,488 4,325 Loans due after one year 551 - ------------- -------------- Total $72,461 $62,974 ============= ============== Weighted average interest rate during the period 3.15% 4.47% 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.
FHLB advances represent borrowings by First Mid Bank to economically fund loan demand. The fixed term advances consists of $38.3 million which First Mid is using to fund loans: < $3 million advance at 6.58% with a 2-year maturity, due 10/10/02 < $5 million advance at 2.54% with a 1-year maturity, due 02/28/03 < $5 million advance at 3.45% with a 2-year maturity, due 02/28/04 < $5 million advance at 6.16% with a 5-year maturity, due 03/20/05 < $2.3 million advance at 6.10% with a 5-year maturity, due 04/07/05 < $5 million advance at 6.12% with a 5-year maturity, due 09/06/05 < $5 million advance at 5.34% with a 5-year maturity, due 12/14/05 < $3 million advance at 5.98% with a 10-year maturity, due 03/01/11 < $5 million advance at 4.33% with a 10-year maturity, due 11/23/11 Other debt, both short-term and long-term, represents the outstanding loan balances for the Company. At March 31, 2002, outstanding loan balances include $4,325,000 on a revolving credit agreement with The Northern Trust Company with a floating interest rate of 1.25% over the Federal Funds rate (3.0% as of March 31, 2002) and set to mature November 19, 2002. The balance also includes a $1 million note payable 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 (4.75% as of March 31, 2002) and principal payable annually over five years, with a final maturity of January 2007. The balance also includes a $33,000 note payable on an operating loan assumed with the Checkley acquisition. 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 an effort to maintain a cumulative one-year gap to earning assets ratio of less than 30% of total earning assets. In the banking industry, a traditional measurement of interest rate sensitivity is known as 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 March 31, 2002 (dollars in thousands):
<TABLE> <CAPTION> Number of Months Until Next Repricing Opportunity 0-1 1-3 3-6 6-12 12+ ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> Interest earning assets: Deposits with other financial institutions $ 1,008 $ - $ - $ - $ - Federal funds sold 5,400 - - - - Taxable investment securities 16,546 3,527 4,557 2,283 106,999 Nontaxable investment securities 300 837 206 120 27,486 Loans 109,126 25,968 37,299 59,405 239,925 ---------- ---------- ---------- ---------- ---------- Total $ 132,381 $ 30,332 $ 42,062 $ 61,808 $ 374,410 ---------- ---------- ---------- ---------- ---------- Interest bearing liabilities: Savings and N.O.W. accounts 97,480 654 1,091 3,747 78,164 Money market accounts 28,429 533 799 1,515 25,961 Other time deposits 33,265 38,697 56,985 63,689 45,106 Other borrowings 29,364 - - 12,559 - Long-term debt - - - - 31,100 ---------- ---------- ---------- ---------- ---------- Total $ 188,744 $ 39,884 $ 58,875 $ 81,510 $180,331 ---------- ---------- ---------- ---------- ---------- Periodic GAP $ (56,363) $ (9,552) $(16,813) $ (19,702) $194,079 ---------- ---------- ---------- ---------- ---------- Cumulative GAP $ (56,363) $(65,915) $(82,728) $(102,430) $ 91,649 ========== ========== ========== ========== ========== GAP as a % of interest earning assets: Periodic (8.8%) (1.5%) (2.6%) (3.1%) 30.3% Cumulative (8.8%) (10.3%) (12.9%) (16.0%) 14.3% ========== ========== ========== ========== ========== </TABLE> At March 31, 2002, 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 that 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 March 31, 2002, the Company's stockholders' equity had increased $2,127,000 or 3.3% to $66,052,000 from $63,925,000 as of December 31, 2001. During the first three months of 2002, net income contributed $1,965,000 to equity before the payment of dividends to common stockholders. The change in net unrealized gain/loss on available-for-sale investment securities decreased stockholders' equity by $52,000, net of tax.
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Financial holding companies and bank holding companies follow minimum regulatory requirements established by the Federal Reserve Board, and First Mid Bank follows similar minimum regulatory requirements established for national banks by the Office of the Comptroller of the Currency. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Quantitative measures established by each regulatory agency to ensure capital adequacy require the reporting institutions to maintain a minimum total risk-based capital ratio of 8% and a minimum leverage ratio of 3% for the most highly rated banks that do not expect significant growth. All other institutions are required to maintain a minimum leverage ratio of 4%. Management believes that, as of March 31, 2002 and December 31, 2001, the Company and First Mid Bank have met all capital adequacy requirements. As of March 31, 2002, 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 the Bank's category. <TABLE> <CAPTION> To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------ ------------------- -------------------- Amount Ratio Amount Ratio Amount Ratio ---------- ------- ---------- -------- ---------- --------- <S> <C> <C> <C> <C> <C> <C> March 31, 2002 Total Capital (to risk-weighted assets) Company $56,924 11.72% $38,861 > 8.00% N/A N/A - First Mid Bank 55,485 11.49% 38,618 > 8.00% $48,272 > 10.00% - - Tier 1 Capital (to risk-weighted assets) Company 53,173 10.95% 19,430 > 4.00% N/A N/A - First Mid Bank 51,734 10.72% 19,309 > 4.00% 28,963 > 6.00% - - Tier 1 Capital (to average assets) Company 53,173 7.74% 27,493 > 4.00% N/A N/A - First Mid Bank 51,734 7.61% 27,190 > 4.00% 33,988 > 5.00% - - December 31, 2001 Total Capital (to risk-weighted assets) Company $54,498 11.23% $38,810 > 8.00% N/A N/A - First Mid Bank 54,139 11.24% 38,521 > 8.00% $48,152 > 10.00% - - Tier 1 Capital (to risk-weighted assets) Company 50,796 10.47% 19,405 > 4.00% N/A N/A - First Mid Bank 50,437 10.47% 19,261 > 4.00% 28,891 > 6.00% - - Tier 1 Capital (to average assets) Company 50,796 7.34% 27,669 > 4.00% N/A N/A - First Mid Bank 50,437 7.36% 27,427 > 4.00% 34,284 > 5.00% - - </TABLE>
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 2001 Form 10-K. On August 5, 1998, the Company announced a stock repurchase program of up to 3% of its common stock. In March 2000, the Board approved the repurchase of an additional 5% of the Company's common stock. In September 2001, the Board authorized the repurchase of $3 million additional shares of the authorized common stock, bringing the aggregate total to 8% of the Company's common stock plus $3 million additional shares. During the period ending March 31, 2002, the Company repurchased 21,195 shares (.6%) at a total price of $524,000. Since inception, the Company has repurchased 195,412 shares (5.8%) at a total price of $5,780,000. As of March 31, 2002, the Company was authorized per all repurchase programs to purchase an additional 193,989 shares. Treasury stock is further affected by activity in the Deferred Compensation Plan. Liquidity Liquidity represents the ability of the Company and its subsidiaries to meet all present and future financial obligations arising in the daily operations of the business. Financial obligations consist of the need for funds to meet extensions of credit, deposit withdrawals and debt servicing. The Company's liquidity management focuses on the ability to obtain funds economically through assets that may be converted into cash at minimal costs or through other sources. The Company's other sources for cash include overnight Federal Fund lines, Federal Home Loan Bank advances, deposits of the State of Illinois, the ability to borrow at the Federal Reserve Bank, and the Company's operating line of credit with The Northern Trust Company. Details for the sources include: < First Mid Bank has $17 million available in overnight Federal Fund lines including $10 million from Harris Trust and Savings Bank of Chicago and $7 million from The Northern Trust Company. Availability of the funds is subject to the First Mid Bank's meeting minimum regulatory capital requirements for total capital to risk-weighted assets and tier 1 capital to total assets. As of March 31, 2002, the First Mid Bank's ratios of total capital to risk-weighted assets of 11.49% and tier 1 capital to total assets of 7.61% 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. A March 31, 2002, the excess collateral at the Federal Home Loan Bank will support approximately $39 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 $10 million with The Northern Trust Company. The Company has an outstanding balance of $4,325,000 as of March 31, 2002, and $5,675,000 in available funds. The credit agreement matures on November 19, 2002. The agreement contains requirements for the Company and First Mid Bank to maintain various operating and capital ratios and also contains requirements for the Company and First Mid Bank to maintain various operating and capital ratios and also contains requirements for prior lender approval for certain sales of assets, merger activity, the acquisition or issuance of debt, and the acquisition of treasury stock. The Company and First Mid Bank were in compliance with the existing covenants at March 31, 2002. Management monitors its expected liquidity requirements carefully, focusing primarily on cash flows from: < lending activities, including loan commitments, letters of credit and mortgage prepayment assumptions. < deposit activities, including seasonal demand of private and public funds. < investing activities, including prepayments of mortgage-backed securities and call provisions on U.S. Government Treasuries and agency securities. < operating activities, including scheduled debt repayments and dividends to shareholders. The following table summarizes significant contractual obligations and other commitments at March 31, 2002 (in thousands): Time Operating Deposits Borrowings* Leases Total ----------- ------------ --------- ---------- 2002 $195,667 $54,428 $155 $250,250 2003 29,551 5,200 130 34,881 2004 7,099 5,200 130 12,429 2005 6,471 200 78 6,749 2006 2,443 5,200 52 7,695 Thereafter 139 3,000 3 3,142 ----------- ------------ --------- ---------- Total $241,370 $73,228 $548 $315,146 =========== ============ ========= ========== Commitments to extend credit $ 86,494 *Borrowings included at earlier of call date or maturity For the three month-period ended March 31, 2002, net cash of $6.2 million was provided from operating activities, while investing activities and financing activities used net cash of $2.6 million and $12.3 million, respectively. Thus, cash and cash equivalents decreased by $8.7 million since year-end 2001. Generally, during 2002, the decreases in deposits and customer repurchase agreements due to seasonal outflow reduced cash balances. Also, declines in residential real estate loan balances due to the low rate environment were greater than the growth in commercial loans and securities since year-end 2001.
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 affected 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, 2001. 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, 2001.
PART II ITEM 1. LEGAL PROCEEDINGS Since First Mid Bank acts a depository of funds, it is named from time to time as a defendant in lawsuits (such as garnishment proceedings) involving claims to the ownership of funds in particular accounts. Management believes that all such litigation as well as other pending legal proceedings in which the Company is involved constitute ordinary, routine litigation incidental to the business of the Company and that such litigation will not materially adversely affect the Company's consolidated financial condition. In addition to the normal proceedings referred to above, Heartland Savings Bank ("Heartland"), a subsidiary of the Company that merged with First Mid Bank during 1997, filed a complaint on December 5, 1995, against the U.S. Government which is now pending in the U.S. Court of Federal Claims in Washington D.C. This complaint relates to Heartland's interest as successor to Mattoon Federal Savings and Loan Association which incurred a significant amount of supervisory goodwill when it acquired Urbana Federal Savings and Loan in 1982. The complaint alleges that the U.S. Government breached its contractual obligations when, in 1989, it issued new rules which eliminated supervisory goodwill from inclusion in regulatory capital. On August 6, 1998, First Mid Bank filed a motion with the U.S. Court of Federal Claims to grant summary judgment on liability for breach of contract in this matter. On August 13, 1998, the U.S. Government filed a motion to stay such proceedings. On March 26, 2002, the Company's Board of Directors voted to withdraw the complaint based on advice of legal counsel. 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: Form 8-Ks were filed on January 10, 2002 and February 4, 2002 regarding the acquisition of the Checkley Agency, Inc.
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: May 15, 2002 -----------------------
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 7)