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 September 30, 2005 Commission file number: 0-13368 FIRST MID-ILLINOIS BANCSHARES, INC. (Exact name of Registrant as specified in its charter) Delaware 37-1103704 (State of incorporation)(I.R.S. employer identification no.) 1515 Charleston Avenue, Mattoon, Illinois 61938 (Address and zip code of principal executive offices) (217) 234-7454 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES. [ ] NO [X] As of November 7, 2005, 4,403,275 common shares, $4.00 par value, were outstanding.
PART I ITEM 1. FINANCIAL STATEMENTS <TABLE> <CAPTION> Consolidated Balance Sheets September 30, 2005 December 31, 2004 (In thousands, except share data) (Unaudited) ------------------- ----------------- <S> <C> <C> Assets Cash and due from banks: Non-interest bearing $ 16,895 $ 19,119 Interest bearing 752 1,985 Federal funds sold 4,440 2,450 ------------------- ----------------- Cash and cash equivalents 22,087 23,554 Investment securities: Available-for-sale, at fair value 150,212 168,821 Held-to-maturity, at amortized cost (estimated fair value of $1,467 and $1,598 at September 30, 2005 and December 31, 2004, respectively) 1,432 1,552 Loans 631,840 597,849 Less allowance for loan losses (4,674) (4,621) ------------------- ----------------- Net loans 627,166 593,228 Premises and equipment, net 15,182 15,227 Accrued interest receivable 6,120 5,405 Goodwill, net 9,034 9,034 Intangible assets, net 2,916 3,346 Other assets 6,737 6,561 ------------------- ----------------- Total assets $840,886 $ 826,728 =================== ================= Liabilities and Stockholders' Equity Deposits: Non-interest bearing $ 94,699 $ 85,524 Interest bearing 573,050 564,716 ------------------- ----------------- Total deposits 667,749 650,240 Accrued interest payable 1,754 1,506 Securities sold under agreements to repurchase 52,164 59,835 Junior subordinated debentures 10,310 10,310 Other borrowings 33,000 29,900 Other liabilities 3,934 5,783 ------------------- ----------------- Total liabilities 768,911 757,574 ------------------- ----------------- Stockholders' equity: Common stock, $4 par value; authorized 18,000,000 shares; issued 5,631,181 shares in 2005 and 5,578,897 shares in 2004 22,525 22,316 Additional paid-in capital 19,355 17,845 Retained earnings 59,445 53,259 Deferred compensation 2,401 2,204 Accumulated other comprehensive income (loss) (122) 623 Less treasury stock at cost, 1,227,906 shares in 2005 and 1,121,546 shares in 2004 (31,629) (27,093) ------------------- ----------------- Total stockholders' equity 71,975 69,154 ------------------- ----------------- Total liabilities and stockholders' equity $840,886 $826,728 =================== ================= </TABLE> See accompanying notes to unaudited consolidated financial statements.
<TABLE> <CAPTION> Consolidated Statements of Income (unaudited) (In thousands, except per share data) Three months ended September 30, Nine months ended September 30, 2005 2004 2005 2004 ------------------ --------------- ----------------- --------------- <S> <C> <C> <C> <C> Interest income: Interest and fees on loans $ 9,822 $ 8,570 $27,894 $ 24,941 Interest on investment securities 1,495 1,514 4,618 4,574 Interest on federal funds sold 99 14 183 62 Interest on deposits with other financial institutions 17 1 35 10 ------------------ --------------- ----------------- --------------- Total interest income 11,433 10,099 32,730 29,587 Interest expense: Interest on deposits 3,167 2,340 8,318 6,634 Interest on securities sold under agreements to repurchase 378 111 997 245 Interest on subordinated debentures 168 115 461 255 Interest on other borrowings 471 420 1,408 1,266 ------------------ --------------- ----------------- --------------- Total interest expense 4,184 2,986 11,184 8,400 ------------------ --------------- ----------------- --------------- Net interest income 7,249 7,113 21,546 21,187 Provision for loan losses 213 62 550 437 ------------------ --------------- ----------------- --------------- Net interest income after provision for loan losses 7,036 7,051 20,996 20,750 Other income: Trust revenues 548 514 1,756 1,676 Brokerage commissions 72 71 284 298 Insurance commissions 352 336 1,264 1,112 Service charges 1,233 1,255 3,420 3,572 Securities gains, net 61 - 315 92 Mortgage banking revenue 284 138 605 384 Other 587 562 1,737 1,583 ------------------ --------------- ----------------- --------------- Total other income 3,137 2,876 9,381 8,717 Other expense: Salaries and employee benefits 3,343 3,378 10,223 10,087 Net occupancy and equipment expense 1,119 1,078 3,199 3,237 Amortization of other intangible assets 143 149 430 472 Stationery and supplies 114 124 378 380 Legal and professional 342 309 1,200 861 Marketing and promotion 198 134 549 530 Other 1,134 1,080 3,214 3,089 ------------------ --------------- ----------------- --------------- Total other expense 6,393 6,252 19,193 18,656 ------------------ --------------- ----------------- --------------- Income before income taxes 3,780 3,675 11,184 10,811 Income taxes 1,335 1,246 3,942 3,630 ------------------ --------------- ----------------- --------------- Net income $ 2,445 $ 2,429 $ 7,242 $ 7,181 ================== =============== ================= =============== Per share data: Basic earnings per share $ 0.55 $ 0.54 $ 1.63 $ 1.59 Diluted earnings per share $ 0.54 $ 0.53 $ 1.59 $ 1.56 ================== =============== ================= =============== </TABLE> See accompanying notes to unaudited consolidated financial statements.
<TABLE> <CAPTION> Consolidated Statements of Cash Flows (unaudited) Nine months ended (In thousands) September 30, 2005 2004 ---------------- ---------------- <S> <C> <C> Cash flows from operating activities: Net income $ 7,242 $ 7,181 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 550 437 Depreciation, amortization and accretion, net 1,096 1,924 Gain on sale of securities, net (315) (92) Loss on sale of other real property owned, net 204 29 Gain on sale of mortgage loans held for sale, net (686) (342) Origination of loans held for sale (49,587) (26,360) Proceeds from sale of loans held for sale 51,481 25,787 Increase in other assets (1,136) (140) Decrease in other liabilities (528) (286) ---------------- ---------------- Net cash provided by operating activities 8,321 8,138 ---------------- ---------------- Cash flows from investing activities: Purchases of premises and equipment (1,044) (744) Net increase in loans (35,696) (43,970) Proceeds from sales of other real property owned 658 155 Proceeds from sales of securities available-for-sale 40,761 5,137 Proceeds from maturities of securities available-for-sale 74,246 60,076 Proceeds from maturities of securities held-to-maturity 120 110 Purchases of securities available-for-sale (96,668) (57,903) Purchases of securities held-to-maturity (212) - ---------------- ---------------- Net cash used in investing activities (17,835) (37,139) ---------------- ---------------- Cash flows from financing activities: Net increase in deposits 17,509 33,358 Decrease in repurchase agreements (7,671) (6,722) Proceeds from FHLB advances 19,000 2,500 Repayment of FHLB advances (16,300) (5,000) Issuance of junior subordinated debentures - 10,000 Proceeds from short-term debt 3,500 6,675 Repayment of short-term debt (3,100) (9,200) Proceeds from issuance of common stock 844 524 Purchase of treasury stock (4,304) (9,479) Dividends paid on common stock (1,431) (954) ---------------- ---------------- Net cash provided by financing activities 8,047 21,702 ---------------- ---------------- Decrease in cash and cash equivalents (1,467) (7,299) Cash and cash equivalents at beginning of period 23,554 24,949 ---------------- ---------------- Cash and cash equivalents at end of period $22,087 $17,650 ================ ================ Supplemental disclosures of cash flow information Cash paid during the period for: Interest $10,936 $8,187 Income taxes 3,971 3,365 Supplemental disclosures of noncash investing and financing activities Loans transferred to real estate owned 286 982 Dividends reinvested in common stock 699 1,252 Net tax benefit related to option and deferred compensation plans 140 62 </TABLE> See accompanying notes to unaudited consolidated financial statements.
Notes to Consolidated Financial Statements (unaudited) Basis of Accounting and Consolidation The unaudited consolidated financial statements include the accounts of First Mid-Illinois Bancshares, Inc. ("Company") and its wholly-owned subsidiaries: Mid-Illinois Data Services, Inc. ("MIDS"), The Checkley Agency, Inc. ("Checkley") and First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank"). All significant intercompany balances and transactions have been eliminated in consolidation. The financial information reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods ended September 30, 2005 and 2004, and all such adjustments are of a normal recurring nature. Certain amounts in the prior year's consolidated financial statements have been reclassified to conform to the September 30, 2005 presentation and there was no impact on net income or stockholders' equity. The results of the interim period ended September 30, 2005 are not necessarily indicative of the results expected for the year ending December 31, 2005. The Company operates as a one-segment entity for financial reporting purposes. The 2004 year-end consolidated balance sheet data was derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles. 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 U.S. generally accepted accounting principles for complete financial statements and related footnote disclosures although the Company believes that the disclosures made are adequate to make the information not misleading. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2004 Annual Report on Form 10-K. Website The Company maintains a website at www.firstmid.com. All periodic and current reports of the Company and amendments to these reports filed with the Securities and Exchange Commission ("SEC") can be accessed, free of charge, through this website as soon as reasonably practicable after these materials are filed with the SEC. Recent Accounting Pronouncements In March 2004, the Financial Accounting Standards Board ("FASB") reached a consensus on Emerging Issues Task Force Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("EITF 03-1"). EITF 03-1 provides guidance for determining when an investment is impaired and whether the impairment is other than temporary. EITF 03-1 also incorporates into its consensus the required disclosures about unrealized losses on investments announced by the EITF in late 2003 and adds new disclosure requirements relating to cost-method investments. The new disclosure requirements were effective for annual reporting periods ending September 15, 2004 and the new impairment accounting guidance was to become effective for reporting periods beginning after September 15, 2004. In September 2004, the FASB delayed the effective date of EITF 03-1 for measurement and recognition of impairment losses until implementation guidance is issued. In June 2005, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, but directed the FASB staff to issue a FASB Staff Position ("FSP") which will be re-titled FSP FAS 115-1, "The Meaning of Other-Than-Temporary Impairment and Its Applications to Certain Investments ("FSP FAS 115-1"). FSP FAS 115-1 will supercede EITF 03-1 and EITF Topic No. D-44, "Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value." FSP FAS 115-1 will replace guidance in EITF 03-1 on loss recognition with references to existing other-than-temporary impairment guidance, such as FASB Statement No. 115, Accounting For Certain Investments in Debt and Equity Securities ("SFAS 115"). FSP FAS 115-1 will be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. The Company has consistently followed the loss recognition guidance in SFAS 115, so the adoption of FSP FAS 115-1 is not expected to have a significant impact on the Company's financial condition or results of operations. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, "Accounting for Nonmonetary Assets" ("SFAS 153"). SFAS 153 amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. The provisions of SFAS 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after September 15, 2005. The Company does not expect the requirements of SFAS 153 to have a material impact on its financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised), "Accounting for Stock-Based Compensation" ("SFAS 123R"). SFAS 123R establishes accounting requirements for share-based compensation to employees and carries forward prior guidance on accounting for awards to non-employees. SFAS 123R requires an entity to recognize compensation expense based on an estimate of the number of awards expected to actually vest, exclusive of awards expected to be forfeited. The provisions of SFAS 123R will become effective January 1, 2006 for all equity awards granted after the effective date, as well as the unvested portion of all existing awards. The Company is evaluating the impact of SFAS 123R on its financial position and results of operations. In September 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3," ("SFAS 154"). SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principles and also applies to all voluntary changes in accounting principles. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Comprehensive Income The Company's comprehensive income for the three and nine-month periods ended September 30, 2005 and 2004 was as follows (in thousands): <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, ----------------------- -------------------------- 2005 2004 2005 2004 ---------- ------------ ------------ ------------- <S> <C> <C> <C> <C> Net income $2,445 $2,429 $7,242 $7,181 Other comprehensive income: Unrealized gain (loss) during the period (272) 1,691 (906) (709) Less realized gain during the period (61) - (315) (92) Tax effect 129 (659) 476 312 ---------- ------------ ------------ ------------- Comprehensive income $2,241 $3,461 $6,497 $6,692 ========== ============ ============ ============= </TABLE> Earnings Per Share Basic earnings per share ("EPS") is calculated as net income divided by the weighted average number of common shares outstanding. Diluted EPS is computed using the weighted average number of common shares outstanding, increased by the assumed conversion of the Company's stock options, unless anti-dilutive. The components of basic and diluted earnings per common share for the three and nine-month periods ended September 30, 2005 and 2004 were as follows: <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, ------------------------------ ------------------------------ 2005 2004 2005 2004 --------------- -------------- -------------- --------------- <S> <C> <C> <C> <C> Basic Earnings per Share: Net income $2,445,000 $2,429,000 $7,242,000 $7,181,000 Weighted average common shares outstanding 4,411,723 4,469,444 4,431,175 4,510,660 =============== ============== ============== =============== Basic earnings per common share $ .55 $ .54 $1.63 $ 1.59 =============== ============== ============== =============== Diluted Earnings per Share: Weighted average common shares outstanding 4,411,723 4,469,444 4,431,175 4,510,660 Assumed conversion of stock options 126,819 97,771 125,064 86,668 --------------- -------------- -------------- --------------- Diluted weighted average common shares outstanding 4,538,542 4,567,215 4,556,239 4,597,328 =============== ============== ============== =============== Diluted earnings per common share $ .54 $ .53 $1.59 $ 1.56 =============== ============== ============== =============== </TABLE>
Goodwill and Intangible Assets The Company has goodwill from business combinations, intangible assets from branch acquisitions, identifiable intangible assets assigned to core deposit relationships and customer lists of Checkley, and intangible assets arising from the rights to service mortgage loans for others. The following table presents gross carrying value and accumulated amortization by major intangible asset class as of September 30, 2005 and December 31, 2004 (in thousands): <TABLE> <CAPTION> September 30, 2005 December 31, 2004 ---------------------------------- --------------------------------- Gross Gross Carrying Accumulated Carrying Accumulated Value Amortization Value Amortization ------------- -------------------- -------------- ------------------ <S> <C> <C> <C> <C> Goodwill not subject to amortization (effective 1/1/02) $12,794 $3,760 $12,794 $3,760 Intangibles from branch acquisition 3,015 1,709 3,015 1,559 Core deposit intangibles 2,805 2,401 2,805 2,279 Mortgage servicing rights 608 608 608 593 Customer list intangibles 1,904 698 1,904 555 ------------- -------------------- -------------- ------------------ $21,126 $9,176 $21,126 $8,746 ============= ==================== ============== ================== </TABLE> Total amortization expense for the nine months ended September 30, 2005 and 2004 was as follows (in thousands): September 30, 2005 2004 -------------- ------------- Intangibles from branch acquisition $151 $151 Core deposit intangibles 121 150 Mortgage servicing rights 15 28 Customer list intangibles 143 143 -------------- ------------- $430 $472 ============== ============= Aggregate amortization expense for the current year and estimated amortization expense for each of the five succeeding years is shown in the table below (in thousands): Aggregate amortization expense: For period ended 9/30/05 $430 Estimated amortization expense: For period 10/1/05-12/31/05 $138 For year ended 12/31/06 $579 For year ended 12/31/07 $515 For year ended 12/31/08 $454 For year ended 12/31/09 $417 For year ended 12/31/10 $391 In accordance with the provisions of SFAS 142, the Company performed testing of goodwill for impairment as of September 30, 2005, and determined that, as of that date, goodwill was not impaired. Management also concluded that the remaining amounts and amortization periods were appropriate for all intangible assets.
Stock Incentive Plan The Company accounts for its Stock Incentive Plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting For Stock Issued to Employees," and related interpretations. Accordingly, as the intrinsic value was zero, compensation cost based on fair value at grant date has not been recognized for stock options in the consolidated financial statements. As required by SFAS 123, "Accounting for Stock-Based Compensation" as amended by SFAS 148, "Accounting for Stock-Based Compensation--Transition and Disclosure," the Company provides pro forma net income and pro forma earnings per share disclosures for employee stock option grants. The following table illustrates the effect on net income if the fair value based method had been applied (in thousands, except per share data). <TABLE> <CAPTION> Three months ended September 30, Nine months ended September 30, 2005 2004 2005 2004 ----------------- ---------------- ----------------- -------------- <S> <C> <C> <C> <C> Net income, as reported $2,445 $2,429 $7,242 $7,181 Stock based compensation expense determined under fair value based method, net of related tax effect (68) (43) (249) (127) ----------------- ---------------- ----------------- -------------- Pro forma net income $2,377 $2,386 $6,993 $7,054 ================= ================ ================= ============== Basic Earnings Per Share: As reported $.55 $.54 $ 1.63 $ 1.59 Pro forma .54 .53 1.58 1.56 Diluted Earnings Per Share: As reported $.54 $.53 $ 1.59 $ 1.56 Pro forma .52 .52 1.53 1.53 </TABLE>
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, 2005 and 2004. This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes and selected financial data appearing elsewhere in this report. Forward-Looking Statements This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, such as discussions of the Company's pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses and planned schedules. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are identified by use of the words "believe", "expect", "intend", "anticipate", "estimate", "project", or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many uncertainties including: changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. Overview This overview of management's discussion and analysis highlights selected information in this document and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources, and critical accounting estimates, you should carefully read this entire document. These have an impact on the Company's financial condition and results of operations. Net income was $7,242,000 and $7,181,000 and diluted earnings per share was $1.59 and $1.56 for the nine months ended September 30, 2005 and 2004, respectively. The increase in net income was primarily the result of higher net interest income and greater non-interest income during the first nine months of 2005 than the same period in 2004. The increase in earnings per share was the result of improved net income and a decrease in the number of shares outstanding due to share repurchases made through our stock buy-back program. During the first nine months of 2005, the Company acquired 106,360 shares at a total cost of $4,304,000. The following table shows the Company's annualized performance ratios for the nine months ended September 30, 2005 and 2004, compared to the performance ratios for the year ended December 31, 2004: Nine months ended Year ended September 30, September 30, December 31, 2005 2004 2004 -------------- --------------- --------------- Return on average assets 1.17% 1.20% 1.20% Return on average equity 13.59% 14.17% 14.24% Average equity to average assets 8.58% 8.44% 8.44% Total assets at September 30, 2005 and December 31, 2004 were $840.9 million and $826.7 million, respectively. The increase in net assets was primarily the result of an increase in net loan balances offset by a decrease in available-for-sale securities that matured during the second quarter of 2005 and were not replaced. Net loan balances were $627.2 million at September 30, 2005, an increase of $34 million, or 5.7%, from $593.2 million at December 31, 2004, primarily due to an increase in commercial real estate loans. Total deposit balances increased to $667.7 million at September 30, 2005 from $650.2 million at December 31, 2004 primarily due to a CD promotion during the third quarter of 2005. Net interest margin, defined as net interest income divided by average interest-earning assets, was 3.69% for the nine months ended September 30, 2005, down from 3.78% for the same period in 2004. The decrease in the net interest margin is attributable to a greater increase in borrowing and deposit rates compared to the increase in interest-earning asset rates. Net interest income before the provision for loan losses was $21.5 million for the nine months ended September 30, 2005 compared to $21.2 million for the same period in 2004. Noninterest income increased $664,000, or 7.6%, to $9.4 million for the nine months ended September 30, 2005 compared to $8.7 million for the nine months ended September 30, 2004. The primary reasons for this increase were $315,000 in gains on the sale of securities during the first nine months of 2005 as market conditions and investment portfolio liquidity were conducive to the sale compared to $92,000 in gains during the second quarter of 2004 and an increase in income on mortgage loans originated and sold due to lower long-term interest rates. In addition, there were increases in ATM and bankcard service fees, check printing income and insurance commissions during the first nine months of 2005 compared to the same period in 2004. Noninterest expense increased 2.9% or $537,000, to $19.2 million for the nine months ended September 30, 2005 compared to $18.7 million during the same period in 2004. The primary factor in the expense increase was increased salaries and benefits expense that resulted from additional employees for a new branch location in Highland, and increases in accounting and legal professional fees. Following is a summary of the factors that contributed to the changes in net income (in thousands): <TABLE> <CAPTION> 2005 versus 2004 --------------------------------------- Three months ended Nine months ended September 30 September 30 -------------------- ------------------ <S> <C> <C> Net interest income $ 136 $ 359 Provision for loan losses (151) (113) Other income, including securities transactions 261 664 Other expenses (141) (537) Income taxes (89) (312) -------------------- ------------------ Increase (decrease) in net income $16 $61 ==================== ================== </TABLE> Credit quality is an area of importance to the Company. Total nonperforming loans were $3.3 million at September 30, 2005, compared to $3.6 million at September 30, 2004 and $3.1 million at December 31, 2004. The increase since December 31, 2004 included a decline in credit quality of one commercial real estate loan for a restaurant property. The Company's provision for loan loss for the nine months ended September 30, 2005 and 2004 was $550,000 and $437,000, respectively. At September 30, 2005, the composition of the loan portfolio remained similar to the same period last year. During the nine months ended September 30, 2005, net charge-offs were 0.11% of average loans compared to .07% for the same period in 2004. Loans secured by both commercial and residential real estate comprised 72% of the loan portfolio as of September 30, 2005 and 2004. The Company's capital position remains strong and the Company has consistently maintained regulatory capital ratios above the "well-capitalized" standards. The Company's Tier 1 capital to risk weighted assets ratio calculated under the regulatory risk-based capital requirements at September 30, 2005 and 2004 was 11.07% and 10.78%, respectively. The Company's total capital to risk weighted assets ratio calculated under the regulatory risk-based capital requirements at September 30, 2005 and 2004 was 11.81% and 11.54%, respectively. The Company's liquidity position remains sufficient to fund operations and meet the requirements of borrowers, depositors, and creditors. The Company maintains various sources of liquidity to fund its cash needs. See discussion under the heading "Liquidity" for a full listing of sources and anticipated significant contractual obligations. The Company enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, letters of credit and other commitments to extend credit. The total outstanding commitments at September 30, 2005 and 2004 were $117.2 million and $92.6 million, respectively. This increase is primarily attributable to an increase in lines of credit to commercial customers and an increase in overdraft protection amounts for consumer customers. Critical Accounting Policies The Company has established various accounting policies that govern the application of U.S. generally accepted accounting principles in the preparation of the Company's financial statements. The significant accounting policies of the Company are described in the footnotes to the consolidated financial statements included in the Company's 2004 Annual Report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and assumptions, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company. The Company believes the allowance for loan losses is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of its consolidated financial statements. In estimating the allowance for loan losses, management utilizes historical experience, as well as other factors, including the effect of changes in the local real estate market on collateral values, the effect on the loan portfolio of current economic indicators and their probable impact on borrowers, and increases or decreases in nonperforming and impaired loans. Changes in these factors may cause management's estimate of the allowance for loan losses to increase or decrease and result in adjustments to the Company's provision for loan losses. See heading "Loan Quality and Allowance for Loan Losses" for a more detailed description of the Company's estimation process and methodology related to the allowance for loan losses. Results of Operations Net Interest Income The largest source of revenue for the Company is net interest income. Net interest income represents the difference between total interest income earned on earning assets and total interest expense paid on interest-bearing liabilities. The amount of interest income is dependent upon many factors, including the volume and mix of earning assets, the general level of interest rates and the dynamics of changes in interest rates. The cost of funds necessary to support earning assets varies with the volume and mix of interest-bearing liabilities and the rates paid to attract and retain such funds. The Company's average balances, interest income and expense and rates earned or paid for major balance sheet categories are set forth in the following table (dollars in thousands): <TABLE> <CAPTION> Nine months ended Nine months ended September 30, 2005 September 30, 2004 ------------------------------------------------------------------------ Average Average Average Average Balance Interest Rate Balance Interest Rate ------------------------------------------------------------------------ ASSETS <S> <C> <C> <C> <C> <C> <C> Interest-bearing deposits $1,594 $ 35 2.90% $1,486 $ 10 0.90% Federal funds sold 8,725 183 2.80% 8,748 62 0.95% Investment securities Taxable 141,758 3,942 3.71% 143,482 3,685 3.42% Tax-exempt 20,166 676 4.47% 26,951 889 4.40% Loans (1) 605,347 27,894 6.16% 566,007 24,941 5.88% ------------------------------------------------------------------------ Total earning assets 777,590 32,730 5.63% 746,674 29,587 5.28% ------------------------------------------------------------------------ Cash and due from banks 18,139 18,921 Premises and equipment 15,112 15,815 Other assets 22,499 24,254 Allowance for loan losses (4,733) (4,543) ------------ --------------- Total assets $828,607 $801,121 ============ =============== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits Demand deposits $229,537 $ 2,036 1.19% $226,753 $ 1,076 .63% Savings deposits 60,714 181 .40% 59,822 177 .39% Time deposits 267,215 6,101 3.05% 259,154 5,381 2.77% Securities sold under agreements to repurchase 57,537 997 2.32% 53,786 245 .61% FHLB advances 32,511 1,202 4.94% 27,727 1,121 5.39% Federal funds purchased 708 18 3.40% 290 3 1.38% Junior subordinated debt 10,310 461 5.98% 8,165 255 4.16% Other debt 5,817 188 4.32% 7,327 142 2.58% ------------------------------------------------------------------------ Total interest-bearing liabilities 664,349 11,184 2.25% 643,024 8,400 1.74% ------------------------------------------------------------------------ Non interest-bearing demand deposits 88,525 84,857 Other liabilities 4,662 5,647 Stockholders' equity 71,071 67,593 ------------ --------------- Total liabilities & equity $828,607 $801,121 ============ =============== Net interest income $21,546 $21,187 ============ =========== Net interest spread 3.38% 3.54% Impact of non-interest bearing funds .31% .24% ------------ ------------ Net yield on interest- earning assets 3.69% 3.78% ============ ============ </TABLE> (1) Nonaccrual loans are not material and have been included in the average balances.
Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income for the nine months ended September 30, 2005, compared to the same period in 2004 (in thousands): <TABLE> <CAPTION> For the nine months ended September 30, 2005 compared to 2004 Increase / (Decrease) Total Change Volume (1) Rate (1) ------------------------------------------- <S> <C> <C> <C> Earning Assets: Interest-bearing deposits $ 25 $ 1 $ 24 Federal funds sold 121 - 121 Investment securities: Taxable 257 (42) 299 Tax-exempt (213) (227) 14 Loans (2) 2,953 1,779 1,174 ------------------------------------------- Total interest income 3,143 1,511 1,632 ------------------------------------------- Interest-Bearing Liabilities: Interest-bearing deposits Demand deposits 960 13 947 Savings deposits 4 (2) 6 Time deposits 720 211 509 Securities sold under agreements to repurchase 752 18 734 FHLB advances 81 161 (80) Federal funds purchased 15 8 7 Junior subordinated debt 206 77 129 Other debt 46 (20) 66 ------------------------------------------- Total interest expense 2,784 466 2,318 ------------------------------------------- Net interest income $359 $1,043 $ (684) =========================================== </TABLE> (1) Changes attributable to the combined impact of volume and rate have been allocated proportionately to the change due to volume and the change due to rate. (2) Nonaccrual loans are not material and have been included in the average balances. Net interest income increased $359,000, or 1.7% to $21.5 million for the nine months ended September 30, 2005, from $21.2 million for the same period in 2004. The increase in net interest income was due to growth in earning assets primarily composed of loan growth that was largely offset by an increase in the cost of interest-bearing liabilities. For the nine months ended September 30, 2005, average earning assets increased by $30.9 million, or 4.1%, and average interest-bearing liabilities increased $21.3 million, or 3.3%, compared with average balances for the same period in 2004. The changes in average balances for these periods are shown below: > Average loans increased by $39.3 million or 6.9%. > Average securities decreased by $8.5 million or 5.0%. > Average interest-bearing deposits increased by $11.7 million or 2.1%. > Average securities sold under agreements to repurchase increased by $3.8 million or 7.1%. > Average borrowings and other debt increased by $5.8 million or 16.4%. > Net interest margin decreased to 3.69% for the first nine months of 2005 from 3.78% for the first nine months of 2004. To compare the tax-exempt yields on interest-earning assets to taxable yields, the Company also computes non-GAAP net interest income on a tax equivalent basis (TE) where the interest earned on tax-exempt securities is adjusted to an amount comparable to interest subject to normal income taxes assuming a federal tax rate of 34% (referred to as the tax equivalent adjustment). The net yield on interest-earning assets (TE) was 3.75% for the first nine months of 2005 and 3.87% for the first nine months of 2004. The TE adjustments to net interest income for September 30, 2005 and 2004 were $348,000 and $463,000, respectively.
Provision for Loan Losses The provision for loan losses for the nine months ended September 30, 2005 and 2004 was $550,000 and $437,000, respectively. Nonperforming loans decreased from $3,606,000 as of September 30, 2004 to $3,338,000 as of September 30, 2005. Net charge-offs were $497,000 for the nine months ended September 30, 2005 compared to $303,000 during the same period in 2004. For information on loan loss experience and nonperforming loans, see discussion under the "Nonperforming Loans" and "Loan Quality and Allowance for Loan Losses" sections below. Other Income An important source of the Company's revenue is derived from other income. The following table sets forth the major components of other income for the nine months ended September 30, 2005 and 2004 (in thousands): <TABLE> <CAPTION> Three months ended September 30, Nine months ended September 30, 2005 2004 $ Change 2005 2004 $ Change ------------- ------------- ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> <C> <C> Trust $548 $514 $ 34 $1,756 $1,676 $ 80 Brokerage 72 71 1 284 298 (14) Insurance commissions 352 336 16 1,264 1,112 152 Service charges 1,233 1,255 (22) 3,420 3,572 (152) Security gains 61 - 61 315 92 223 Mortgage banking 284 138 146 605 384 221 Other 587 562 25 1,737 1,583 154 ------------- ------------- ------------- ------------- ------------- ------------- Total other income $3,137 $2,876 $ 261 $9,381 $8,717 $ 664 ============= ============= ============= ============= ============= ============= </TABLE> Following are explanations for the three months ended September 30, 2005 compared to the same period in 2004: > Trust revenues increased $34,000 or 6.6% to $548,000 from $514,000. Trust assets, at market value, were $392 million at September 30, 2005 compared to $354 million at September 30, 2004. The increase in trust revenues was the result of new business and an increase in equity prices. > Revenues from brokerage increased $1,000 or 1.4% to $72,000 from $71,000. > Insurance commissions increased $16,000 or 4.8% to $352,000 from $336,000 due to an increase in commissions received on sales of business property and casualty insurance. > Fees from service charges decreased $22,000 or 1.8% to $1,233,000 from $1,255,000. This was primarily the result of decreases in transaction account service charges due to increased balances in free-checking products. > The sale of securities during the three months ended September 30, 2005 resulted in net securities gains of $61,000. There were no securities sold during the same period of 2004. > Mortgage banking income increased $146,000 or 105.8% to $284,000 from $138,000. This increase was due to the increased volume of fixed rate loans originated and sold by First Mid Bank. Loans sold balances were as follows: > $23.4 million (representing 204 loans) for the third quarter of 2005. > $10.3 million (representing 105 loans) for the third quarter of 2004. First Mid Bank generally releases the servicing rights on loans sold into the secondary market. > Other income increased $25,000 or 4.4% to $587,000 from $562,000. This increase was primarily due to increased ATM and bankcard service fees and increased check printing income. Following are explanations for the nine months ended September 30, 2005 compared to the same period in 2004: > Trust revenues increased $80,000 or 4.8% to $1,756,000 from $1,676,000. Trust assets, at market value, were $392 million at September 30, 2005 compared to $354 million at September 30, 2004. The increase in trust revenues was the result of new business and an increase in equity prices. > Revenues from brokerage decreased $14,000 or 4.7% to $284,000 from $298,000 as a result of a decrease in the number of stock transactions.
> Insurance commissions increased $152,000 or 13.7% to $1,264,000 from $1,112,000 due to an increase in commissions received on sales of business property and casualty insurance and contingency fees received in the first nine months of 2005. > Fees from service charges decreased $152,000 or 4.3% to $3,420,000 from $3,572,000. This was primarily the result of decreases in overdraft fees due to a decline in the number of overdraft items and decreases in transaction account service charges due to increased balances in free-checking products. > The sale of securities during the nine months ended September 30, 2005 resulted in net securities gains of $315,000 compared to $92,000 during the same period of 2004. > Mortgage banking income increased $221,000 or 57.6% to $605,000 from $384,000. This increase was due to the increased volume of fixed rate loans originated and sold by First Mid Bank. Loans sold balances were as follows: > $50.8 million (representing 472 loans) for the first nine months of 2005. > $32.9 million (representing 348 loans) for the first nine months of 2004. First Mid Bank generally releases the servicing rights on loans sold into the secondary market. > Other income increased $154,000 or 9.7% to $1,737,000 from $1,583,000. This increase was primarily due to increased ATM and bankcard service fees and increased check printing income. 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 nine months ended September 30, 2005 and 2004 (in thousands): <TABLE> <CAPTION> Three months ended September 30, Nine months ended September 30, 2005 2004 $ Change 2005 2004 $ Change ------------ ------------- ------------- ----------- ------------ ------------- <S> <C> <C> <C> <C> <C> <C> Salaries and benefits $ 3,343 $ 3,378 $ (35) $10,223 $10,087 $136 Occupancy and equipment 1,119 1,078 41 3,199 3,237 (38) Amortization of intangibles 143 149 (6) 430 472 (42) Stationery and supplies 114 124 (10) 378 380 (2) Legal and professional fees 342 309 33 1,200 861 339 Marketing and promotion 198 134 64 549 530 19 Other operating expenses 1,134 1,080 54 3,214 3,089 125 ------------ ------------- ------------- ----------- ------------ ------------- Total other expense $ 6,393 $ 6,252 $ 141 $19,193 $18,656 $ 537 ============ ============= ============= =========== ============ ============= </TABLE> Following are explanations for the three months ended September 30, 2005 compared to the same period in 2004: > Salaries and employee benefits, the largest component of other expense, decreased $35,000 or 1.0% to $3,343,000 from $3,378,000. This decrease is due to a deferral of salary and benefit expenses related to the cost of loan originations offset by merit increases for continuing employees and additional employees hired due to the addition of a branch in Highland. There were 314 full-time equivalent employees at September 30, 2005 compared to 312 at September 30, 2004. > Occupancy and equipment expense increased $41,000 or 3.8% to $1,119,000 from $1,078,000 due to an increase in rent expense for Checkley offices offset by a decrease in depreciation expense for computer equipment fully depreciated in 2004. > Expense for amortization of intangible assets decreased $6,000 or 4.0% to $143,000 from $149,000. > Other operating expenses increased $54,000 or 5.0% to $1,134,000 in 2005 from $1,080,000 in 2004 due to an increase in expenses associated with other real estate owned. > All other categories of operating expenses increased a net of $87,000 or 15.3% to $654,000 from $567,000. The increase was primarily due to increases in various professional fees. Following are explanations for the nine months ended September 30, 2005 compared to the same period in 2004: > Salaries and employee benefits, the largest component of other expense, increased $136,000 or 1.3% to $10,223,000 from $10,087,000. This increase is primarily due to merit increases for continuing employees and additional employees hired due to the addition of a branch in Highland. There were 314 full-time equivalent employees at September 30, 2005 compared to 312 at September 30, 2004. > Occupancy and equipment expense decreased $38,000 or 1.2% to $3,199,000 from $3,237,000 due to a decrease in depreciation expense for computer equipment fully depreciated in 2004. > Expense for amortization of intangible assets decreased $42,000 or 8.9% to $430,000 from $472,000 due to an intangible asset that was fully amortized in 2004. > Other operating expenses increased $125,000 or 4.0% to $3,214,000 in 2005 from $3,089,000 in 2004 due to an increase in expenses associated with other real estate owned. > All other categories of operating expenses increased a net of $356,000 or 20.1% to $2,127,000 from $1,771,000. The increase was primarily due to increases in various professional fees. Income Taxes Total income tax expense amounted to $3,942,000 (35.2% effective tax rate) for the nine months ended September 30, 2005, compared to $3,630,000 (33.6% effective tax rate) for the same period in 2004. The change in the effective tax rate in 2005 is due to a reduction in the tax expense accrual in 2004 to more accurately reflect the estimated tax liability and deferred tax position. There was no similar reduction made in 2005. Analysis of Balance Sheets Loans The loan portfolio (net of unearned interest) is the largest category of the Company's earning assets. The following table summarizes the composition of the loan portfolio as of September 30, 2005 and December 31, 2004 (in thousands): September 30, December 31, 2005 2004 ------------------ ----------------- Real estate - residential $117,153 $121,567 Real estate - agricultural 51,244 50,215 Real estate - commercial 283,214 255,372 ------------------ ----------------- Total real estate - mortgage $451,611 $427,154 Commercial and agricultural 142,847 137,733 Installment 34,616 30,587 Other 2,766 2,375 ------------------ ----------------- Total loans $631,840 $597,849 ================== ================= Overall loans increased $34.0 million, or 5.7% primarily as a result of an increase in commercial real estate loans. Total real estate mortgage loans have averaged approximately 72% of the Company's total loan portfolio for the past several years. This is the result of the Company's focus on commercial real estate lending and long-term commitment to residential real estate lending. The balance of real estate loans held for sale amounted to $1,481,000 and $2,689,000 as of September 30, 2005 and December 31, 2004, respectively. At September 30, 2005, the Company had loan concentrations in agricultural industries of $91.9 million, or 14.6%, of outstanding loans and $91.5 million, or 15.3%, at December 31, 2004. In addition, the Company had loan concentrations in the following industries as of September 30, 2005 compared to December 31, 2004 (dollars in thousands): <TABLE> <CAPTION> September 30, 2005 December 31, 2004 Principal % Outstanding Principal % Outstanding balance loans Balance loans ---------------- --------------- ----------------- --------------- <S> <C> <C> <C> <C> Operators of non-residential buildings $25,086 3.97% $18,864 3.16% Apartment building owners 42,161 6.67% 23,111 3.87% Motels, hotels & tourist courts 28,345 4.49% 25,756 4.31% Subdividers & developers (1) 18,579 2.94% 14,302 2.39% </TABLE> (1) At December 31, 2004, this industry was not a concentration for the Company. The December 31, 2004 balance for this industry is included for comparative purposes only. The Company had no further loan concentrations in excess of 25% of total risk-based capital.
The following table presents the balance of loans outstanding as of September 30, 2005, by maturities (in thousands): <TABLE> <CAPTION> Maturity (1) Over 1 One year through Over or less (2) 5 years 5 years Total ---------------------------------------------------------------- <S> <C> <C> <C> <C> Real estate - residential $ 52,725 $ 56,504 $7,924 $117,153 Real estate - agricultural 9,406 34,688 7,150 51,244 Real estate - commercial 71,032 185,645 26,537 283,214 ---------------------------------------------------------------- Total real estate - mortgage $133,163 $276,837 $ 41,611 $451,611 Commercial and agricultural 97,927 41,618 3,302 142,847 Installment 17,357 16,965 294 34,616 Other 780 1,590 396 2,766 ---------------------------------------------------------------- Total loans $249,227 $337,010 $ 45,603 $631,840 ================================================================ </TABLE> (1) Based on scheduled principal repayments. (2) Includes demand loans, past due loans and overdrafts. As of September 30, 2005, loans with maturities over one year consisted of approximately $288.0 million fixed rate loans and $94.6 million in variable rate loans. The loan maturities noted above are based on the contractual provisions of the individual loans. Rollovers and borrower requests are handled on a case-by-case basis. Nonperforming Loans Nonperforming loans are defined as: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due ninety days or more as to interest or principal payments; and (c) loans not included in (a) and (b) above which are defined as "renegotiated loans". The Company's policy is to cease accrual of interest on all loans that become ninety days past due as to principal or interest. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The following table presents information concerning the aggregate amount of nonperforming loans at September 30, 2005 and December 31, 2004 (in thousands): September 30, December 31, 2005 2004 ----------------------------------- Nonaccrual loans $3,338 $3,106 Renegotiated loans which are performing in accordance with revised terms - - ----------------------------------- Total nonperforming loans $3,338 $3,106 =================================== The $232,000 increase in nonaccrual loans during the nine months ended September 30, 2005 resulted from the net of $763,000 of loans put on nonaccrual status, $274,000 of loans brought current or paid-off, $114,000 of loans transferred to other real estate owned and $143,000 of loans charged-off. Interest income that would have been reported if nonaccrual and renegotiated loans had been performing totaled $5,000 and $69,000 for the quarters ended September 30, 2005 and 2004 and $65,000 and $148,000 for the nine months ended September 30, 2005 and 2004, respectively. Loan Quality and Allowance for Loan Losses The allowance for loan losses represents management's best estimate of the 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 the 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 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. The portion of the allowance tied to nonclassified loans is determined primarily by historical losses. Additional factors considered by management include variable rainfall, low commodity prices and increased operating costs of agricultural borrowers, predicted high energy costs related to natural gas which will affect both businesses and consumers during the coming winter months and the expected increase in bankruptcy filings as the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 become effective. Other factors considered by management in evaluating the overall adequacy of the allowance for loan losses include historical net loan losses, the level and composition of nonaccrual, past due and renegotiated loans and the current economic conditions in the region where the Company operates. Management considers the allowance for loan losses to be a critical accounting policy. Management recognizes that there are risk factors that are inherent in the Company's loan portfolio. All financial institutions face risk factors in their loan portfolios because risk exposure is a function of the business. The Company's operations (and therefore its loans) are concentrated in east central Illinois, an area where agriculture is the dominant industry. Accordingly, lending and other business relationships with agriculture-based businesses are critical to the Company's success. At September 30, 2005, the Company's loan portfolio included $91.9 million of loans to borrowers whose businesses are directly related to agriculture. The balance increased by $.4 million from $91.5 million at December 31, 2004. While the Company adheres to sound underwriting practices, including collateralization of loans, any extended period of low commodity prices, significantly reduced yields on crops and/or reduced levels of government assistance to the agricultural industry could result in an increase in the level of problem agriculture loans and potentially result in loan losses within the agricultural portfolio. The Company has $28.3 million of loans to motels, hotels and tourist courts. The performance of these loans is dependent on borrower-specific issues as well as the general level of business and personal travel within the region. While the Company adheres to sound underwriting standards, a prolonged period of reduced business or personal travel could result in an increase in nonperforming loans to this business segment and potentially in loan losses. The Company also has $25.1 million of loans to operators of non-residential buildings, $42.2 million of loans to apartment building owners and $18.6 million of loans to subdividers and developers. Analysis of the allowance for loan losses as of September 30, 2005 and 2004, and of changes in the allowance for the three and nine-month periods ended September 30, 2005 and 2004, is as follows (dollars in thousands): <TABLE> <CAPTION> Three months ended September 30, Nine months ended September 30, 2005 2004 2005 2004 -------------------------------- ------------------------------ <S> <C> <C> <C> <C> Average loans outstanding, net of unearned income $621,864 $585,667 $605,347 $566,007 Allowance-beginning of period $ 4,687 $ 4,505 $ 4,621 $ 4,426 Charge-offs: Real estate-mortgage 54 53 116 204 Commercial, financial & agricultural 162 38 348 178 Installment 15 18 104 68 Other 43 - 66 - -------------------------------- ------------------------------ Total charge-offs 274 109 634 450 Recoveries: Real estate-mortgage 2 - 57 12 Commercial, financial & agricultural 22 95 33 107 Installment 7 7 27 28 Other 17 - 20 - -------------------------------- ------------------------------ Total recoveries 48 102 137 147 -------------------------------- ------------------------------ Net charge-offs (recoveries) 226 7 497 303 Provision for loan losses 213 62 550 437 -------------------------------- ------------------------------ Allowance-end of period $ 4,674 $ 4,560 $ 4,674 $ 4,560 ================================ ============================== Ratio of annualized net charge-offs to average loans .15% .01% .11% .07% ================================ ============================== Ratio of allowance for loan losses to loans outstanding (less unearned interest at end of period) .74% .76% .74% .76% ================================ ============================== Ratio of allowance for loan losses to nonperforming loans 140.0% 126.5% 140.0% 126.5% ================================ ============================== </TABLE> During the first nine months of 2005, the Company had charge-offs of $53,000 on two agricultural loans of a single borrower and charge-offs of $234,000 on commercial loans of four borrowers. The Company also recovered $56,000 on a commercial real estate loan that had been charged-off in a prior period. During the first nine months of 2004, the Company had charge-offs of $118,000 on two commercial loans of a single borrower and charge-offs of $124,000 on two commercial real estate loans of a single borrower. The Company also recovered $85,000 in interest on an agricultural real estate loan that had been charged-off in a prior period and $68,500 on two commercial loans that were previously charged-off.
The Company minimizes credit risk by adhering to sound underwriting and credit review policies. Management and the board of directors of the Company review these policies at least annually. Senior management is actively involved in business development efforts and the maintenance and monitoring of credit underwriting and approval. The loan review system and controls are designed to identify, monitor and address asset quality problems in an accurate and timely manner. On a quarterly basis, the board of directors and management review the status of problem loans and determine a best estimate of the allowance. In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for loan losses. Securities The Company's overall investment objectives are to insulate the investment portfolio from undue credit risk, maintain adequate liquidity, insulate capital against changes in market value and control excessive changes in earnings while optimizing investment performance. The types and maturities of securities purchased are primarily based on the Company's current and projected liquidity and interest rate sensitivity positions. The following table sets forth the amortized cost of the securities as of September 30, 2005 and December 31, 2004 (dollars in thousands): <TABLE> <CAPTION> September 30, 2005 December 31, 2004 ----------------------------- --------------------------- Weighted Weighted Amortized Average Amortized Average Cost Yield Cost Yield -------------- -------------- ------------- ------------- <S> <C> <C> <C> <C> U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 94,694 3.33% $ 92,369 2.81% Obligations of states and political subdivisions 17,597 4.63% 25,133 4.54% Mortgage-backed securities 21,523 4.24% 34,032 3.82% Other securities 18,030 6.76% 17,817 6.02% -------------- -------------- ------------- ------------- Total securities $151,844 4.02% $169,351 3.61% ============== ============== ============= ============= </TABLE> At September 30, 2005, the Company's investment portfolio showed a decrease in mortgage-backed securities and obligations of states and political subdivisions securities and an increase in U.S. Treasury securities and obligations of U.S. government corporations and agencies. There was a slight increase in other securities. The amortized cost, gross unrealized gains and losses and estimated fair values for available-for-sale and held-to-maturity securities by major security type at September 30, 2005 and December 31, 2004 were as follows (in thousands): <TABLE> <CAPTION> Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value --------------- --------------- ---------------- -------------- <S> <C> <C> <C> <C> September 30, 2005 Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations & agencies $ 94,694 $ 16 $(971) $ 93,739 Obligations of states and political subdivisions 16,165 349 (1) 16,513 Mortgage-backed securities 21,523 34 (210) 21,347 Federal Home Loan Bank stock 5,505 - - 5,505 Other securities 12,525 583 - 13,108 --------------- --------------- ---------------- -------------- Total available-for-sale $150,412 $ 982 $(1,182) $150,212 =============== =============== ================ ============== Held-to-maturity: Obligations of states and political subdivisions $ 1,432 $ 35 $ - $1,467 =============== =============== ================ ============== December 31, 2004 Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations & agencies $92,369 $ 35 $(507) $91,897 Obligations of states and political subdivisions 23,581 755 (2) 24,334 Mortgage-backed securities 34,032 220 (54) 34,198 Federal Home Loan Bank stock 5,293 - - 5,293 Other securities 12,524 575 - 13,099 --------------- --------------- ---------------- -------------- Total available-for-sale $167,799 $ 1,585 $(563) $168,821 =============== =============== ================ ============== Held-to-maturity: Obligations of states and political subdivisions $ 1,552 $ 48 $ (2) $ 1,598 =============== =============== ================ ============== </TABLE>
At September 30, 2005, there was one mortgage-backed security with a fair value of $2,089,000 and an unrealized loss of $19,000, and five obligations of U.S. government agencies with a fair value of $21,394,000 and an unrealized loss of $250,000, in a continuous unrealized loss position for twelve months or more. This position is due to short-term and intermediate rates increasing since the purchase of these securities resulting in the market value of the security being lower than book value. Management does not believe any individual unrealized loss as of September 30, 2005 represents an other than temporary impairment. 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, 2005 and the weighted average yield for each range of maturities. Mortgage-backed securities are included based on their weighted average life. All other securities are shown at their contractual maturity (dollars in thousands). <TABLE> <CAPTION> One year After 1 through After 5 through After ten 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 $29,796 $ 51,414 $ 8,493 $ 4,991 $94,694 Obligations of state and political subdivisions 1,456 7,512 5,925 1,272 16,165 Mortgage-backed securities 2,166 19,357 - - 21,523 Federal Home Loan Bank stock - - - 5,505 5,505 Other securities - - - 12,525 12,525 -------------------------------------------------------------------------------- Total investments $33,418 $78,283 $14,418 $24,293 $150,412 ================================================================================ Weighted average yield 2.41% 3.83% 4.49% 5.90% 4.00% Full tax-equivalent yield 2.50% 4.02% 5.32% 6.00% 4.21% ================================================================================ Held-to-maturity: Obligations of state and political subdivisions $ 140 $ 650 $ 140 $ 502 $ 1,432 ================================================================================ Weighted average yield 4.26% 4.64% 4.74% 4.50% 4.63% Full tax-equivalent yield 6.23% 6.64% 6.78% 6.54% 6.64% ================================================================================ </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. 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, 2005. Investment securities carried at approximately $130,272,000 and $143,560,000 at September 30, 2005 and December 31, 2004, 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 nine months ended September 30, 2005 and for the year ended December 31, 2004 (dollars in thousands): <TABLE> <CAPTION> September 30, 2005 December 31, 2004 -------------------------------------------------------------- Weighted Weighted Average Average Amount Rate Amount Rate -------------------------------------------------------------- <S> <C> <C> <C> <C> Demand deposits: Non-interest-bearing $ 88,525 - $ 85,437 - Interest-bearing 229,537 1.19% 230,300 .68% Savings 60,714 .40% 61,144 .39% Time deposits 267,215 3.05% 261,564 2.80% -------------------------------------------------------------- Total average deposits $645,991 1.72% $638,445 1.43% ============================================================== </TABLE>
The following table sets forth the maturity of time deposits of $100,000 or more at September 30, 2005 and December 31, 2004 (in thousands): September 30, December 31, 2005 2004 -------------------------------------- 3 months or less $28,595 $ 26,916 Over 3 through 6 months 11,298 17,560 Over 6 through 12 months 41,094 22,826 Over 12 months 40,732 48,031 -------------------------------------- Total $121,719 $115,333 ====================================== During the first nine months of 2005, the balance of time deposits of $100,000 or more increased by $6.4 million. The increase in balances was primarily attributable to an increase in CD balances due to a promotion run in the third quarter of 2005. Balances of time deposits of $100,000 or more include brokered CDs, time deposits maintained for public fund entities, and consumer time deposits. The balance of brokered CDs was $41.4 million and $42.1 million as of September 30, 2005 and December 31, 2004, respectively. The Company also maintained time deposits for the State of Illinois with balances of $3.4 million and $4.4 million as of September 30, 2005 and December 31, 2004, respectively. The State of Illinois deposits are subject to bid annually and could increase or decrease in any given year. Repurchase Agreements and Other Borrowings Securities sold under agreements to repurchase are short-term obligations of First Mid Bank. First Mid Bank collateralizes these obligations with certain government securities that are direct obligations of the United States or one of its agencies. First Mid Bank offers these retail repurchase agreements as a cash management service to its corporate customers. Other borrowings consist of Federal Home Loan Bank ("FHLB") advances, federal funds purchased and loans (short-term or long-term debt) that the Company has outstanding and junior subordinated debentures. Information relating to securities sold under agreements to repurchase and other borrowings as of September 30, 2005 and December 31, 2004 is presented below (dollars in thousands): September 30, December 31, 2005 2004 --------------- -------------- Securities sold under agreements to repurchase $52,164 $ 59 835 Federal Home Loan Bank advances: Overnight - - Fixed term - due in one year or less 8,000 17,300 Fixed term - due after one year 20,000 8,000 Debt: Loans due in one year or less 5,000 4,200 Loans due after one year - 400 Junior subordinated debentures 10,310 10,310 --------------- -------------- Total $ 95,474 $ 100,045 =============== ============== Average interest rate at end of period 3.57% 2.59% Maximum outstanding at any month-end Securities sold under agreements to repurchase $65,715 $63,517 Federal Home Loan Bank advances: Overnight 12,014 7,000 Fixed term - due in one year or less 20,000 17,300 Fixed term - due after one year 20,000 25,300 Federal funds purchased 2,000 - Debt: Loans due in one year or less 6,200 9,025 Loans due after one year 200 400 Junior subordinated debentures 10,310 10,310 Averages for the period (YTD) Securities sold under agreements to repurchase $57,537 $55,645 Federal Home Loan Bank advances: Overnight 2,713 997 Fixed term - due in one year or less 13,656 8,200 Fixed term - due after one year 16,142 17,920 Federal funds purchased 708 218 Debt: Loans due in one year or less 5,678 6,746 Loans due after one year 139 415 Junior subordinated debentures 10,310 8,704 --------------- -------------- Total $ 106,883 $98,845 =============== ============== Average interest rate during the period 3.92% 2.63%
FHLB advances represent borrowings by First Mid Bank to economically fund loan demand. The fixed term advances consist of $28 million as follows: > $5 million advance at 5.34% with a 5-year maturity, due December 14, 2005, callable quarterly > $3 million advance at 3.73% with a 1-year maturity, due March 21, 2006 > $7 million advance at 4.00% with a 2-year maturity, due April 15, 2007 > $5 million advance at 4.58% with a 5-year maturity, due March 22, 2010 > $3 million advance at 5.98% with a 10-year maturity, due March 1, 2011, callable quarterly > $5 million advance at 4.33% with a 10-year maturity, due November 23, 2011, five year lockout, one time call 11/23/06 At September 30, 2005, outstanding debt balances include $5,000,000 on a revolving credit agreement with The Northern Trust Company with a floating interest rate of 1.25% over the federal funds rate (4.98% as of September 30, 2005) that matured on October 22, 2005. This loan was renewed under the same terms and conditions on October 22, 2005 and is set to mature on October 21, 2006 with a maximum available balance of $15 million. The borrowing agreement 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 September 30, 2005 and 2004 and December 31, 2004. On February 27, 2004, the Company completed the issuance and sale of $10 million of floating rate trust preferred securities through First Mid-Illinois Statutory Trust I (the "Trust"), a statutory business trust and wholly-owned subsidiary of the Company, as part of a pooled offering. The Company established the Trust for the purpose of issuing the trust preferred securities. Upon adoption of FIN 46R, the Company was required to de-consolidate its investment in the Trust. The $10 million in proceeds from the trust preferred issuance and an additional $310,000 for the Company's investment in common equity of the Trust, a total of $10,310 000, was invested in junior subordinated debentures of the Company. The underlying junior subordinated debentures issued by the Company to the Trust mature in 2034, bear interest at nine-month London Interbank Offered Rate ("LIBOR") plus 280 basis points, reset quarterly, and are callable, at the option of the Company, at par on or after April 7, 2009. The Company intends to use the proceeds of the offering for general corporate purposes. The trust preferred securities issued by the Trust are included as Tier 1 capital of the Company for regulatory capital purposes. On March 1, 2005, the Federal Reserve Board adopted a final rule that allows the continued limited inclusion of trust preferred securities in the calculation of Tier 1 capital for regulatory purposes. The final rule provides a five-year transition period, ending March 31, 2009, for application of the quantitative limits. The Company does not expect the application of the quantitative limits to have an impact on its calculation of Tier 1 capital for regulatory purposes or its classification as well-capitalized. Interest Rate Sensitivity The Company seeks to maximize its net interest margin while maintaining an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to changes in the interest rate environment, a variable over which management has no control. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of interest-bearing assets differ significantly from the maturity or repricing characteristics of interest-bearing liabilities. The Company monitors its interest rate sensitivity position to maintain a balance between rate sensitive assets and rate sensitive liabilities. This balance serves to limit the adverse effects of changes in interest rates. The Company's asset liability management committee (ALCO) oversees the interest rate sensitivity position and directs the overall allocation of funds. In the banking industry, a traditional way to measure potential net interest income exposure to changes in interest rates is through a technique known as "static GAP" analysis which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. By comparing the volumes of interest-bearing assets and liabilities that have contractual maturities and repricing points at various times in the future, management can gain insight into the amount of interest rate risk embedded in the balance sheet.
The following table sets forth the Company's interest rate repricing GAP for selected maturity periods at September 30, 2005 (dollars in thousands): <TABLE> <CAPTION> Rate Sensitive Within 1 year 1-2 years 2-3 years 3-4 years 4-5 years Thereafter Total ----------- ------------- ----------- ----------- ------------ ------------ ----------- <S> <C> <C> <C> <C> <C> <C> <C> Interest-earning assets: Federal funds sold and other interest-bearing deposits $ 5,192 $ - $ - $ - $ - $ - $ 5,192 Taxable investment securities 33,475 24,824 20,814 27,294 - 27,489 133,896 Nontaxable investment securities 8,184 1,709 1,467 1,034 1,509 3,845 17,748 Loans 316,131 80,119 100,267 64,755 56,421 14,147 631,840 ----------- ------------- ----------- ----------- ------------ ------------ ----------- Total $362,982 $106,652 $122,548 $93,083 $57,930 $45,481 $788,676 =========== ============= =========== =========== ============ ============ =========== Interest-bearing liabilities: Savings and N.O.W. accounts $ 40,061 $ 10,065 $ 10,509 $ 15,399 $ 15,926 $ 95,441 $187,401 Money market accounts 59,747 2,234 2,296 2,978 3,040 16,070 86.365 Other time deposits 185,889 64,388 35,777 4,517 8,639 74 299,284 Short-term borrowings/debt 65,164 - - - - - 65,164 Long-term borrowings/debt - 7,000 - - 15,310 8,000 30,310 ----------- ------------- ----------- ----------- ------------ ------------ ----------- Total $350,861 $ 83,687 $48,582 $22,894 $ 42,915 $ 119,585 $668,524 =========== ============= =========== =========== ============ ============ =========== Rate sensitive assets - rate sensitive liabilities $ 12,121 $ 22,965 $73,966 $70,189 $15,015 $(74,104) $120,152 Cumulative GAP $ 12,121 $ 35,086 $109,052 $179,241 $194,256 $120,152 Cumulative amounts as % of total rate sensitive assets 1.5% 2.9% 9.4% 8.9% 1.9% -9.4% Cumulative Ratio 1.5% 4.4% 13.8% 22.7% 24.6% 15.2% </TABLE> The static GAP analysis shows that at September 30, 2005, the Company was asset sensitive, on a cumulative basis, through the twelve-month time horizon. This indicates that future increases in interest rates, if any, could have a positive effect on net interest income. Conversely, future decreases in interest rates could have an adverse effect on net interest income. There are several ways the Company measures and manages the exposure to interest rate sensitivity, including static GAP analysis. The Company's ALCO also uses other financial models to project interest income under various rate scenarios and prepayment/extension assumptions consistent with First Mid Bank's historical experience and with known industry trends. ALCO meets at least monthly to review the Company's exposure to interest rate changes as indicated by the various techniques and to make necessary changes in the composition terms and/or rates of the assets and liabilities. Based on all information available, management does not believe that changes in interest rates, which might reasonably be expected to occur in the next twelve months, will have a material adverse effect on the Company's net interest income. Capital Resources At September 30, 2005, the Company's stockholders' equity had increased $2,821,000 or 4.0% to $71,975,000 from $69,154,000 as of December 31, 2004. During the first nine months of 2005, net income contributed $7,242,000 to equity before the payment of dividends to common stockholders. The change in market value of available-for-sale investment securities decreased stockholders' equity by $745,000, net of tax. Additional purchases of treasury stock (106,360 shares at an average cost of $40.46 per share) decreased stockholders' equity by $4,304,000. The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Bank holding companies follow minimum regulatory requirements established by the Board of Governors of the Federal Reserve System ("Federal Reserve System"), and First Mid Bank follows similar minimum regulatory requirements established for national banks by the Office of the Comptroller of the Currency ("OCC"). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Quantitative measures established by each regulatory agency to ensure capital adequacy require the reporting institutions to maintain a minimum total risk-based capital ratio of 8% and a minimum leverage ratio of 3% for the most highly rated banks that do not expect significant growth. All other institutions are required to maintain a minimum leverage ratio of 4%. Management believes that, as of September 30, 2005 and December 31, 2004, the Company and First Mid Bank met all capital adequacy requirements. The trust preferred securities issued by First Mid-Illinois Statutory Trust I are included as Tier 1 capital of the Company for regulatory capital purposes. On March 1, 2005, the Federal Reserve Board adopted a final rule that allows the continued limited inclusion of trust preferred securities in the calculation of Tier 1 capital for regulatory purposes. The final rule provides a five-year transition period, ending March 31, 2009, for application of the quantitative limits. The Company does not expect the application of the quantitative limits to have an impact on its calculation of Tier 1 capital for regulatory purposes or its classification as well-capitalized. As of September 30, 2005, the most recent notification from the OCC categorized First Mid Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios must be maintained as set forth in the following table (dollars in thousands). There are no conditions or events since that notification that management believes have changed this categorization. <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> September 30, 2005 Total Capital (to risk-weighted assets) Company $74,821 11.81% $50,671 > 8.00% N/A N/A - First Mid Bank 73,716 11.74% 50,248 > 8.00% $62,810 >10.00% - - Tier 1 Capital (to risk-weighted assets) Company 70,147 11.07% 25,336 > 4.00% N/A N/A - First Mid Bank 69,042 10.99% 25,124 > 4.00% 37,686 > 6.00% - - Tier 1 Capital (to average assets) Company 70,147 8.48% 33,093 > 4.00% N/A N/A - First Mid Bank 69,042 8.39% 32,921 > 4.00% 41,151 > 5.00% - - December 31, 2004 Total Capital (to risk-weighted assets) Company $70,787 11.71% $48,371 > 8.00% N/A N/A - First Mid Bank 71,233 11.88% 47,988 > 8.00% $59,986 >10.00% - - Tier 1 Capital (to risk-weighted assets) Company 66,166 10.94% 24,185 > 4.00% N/A N/A - First Mid Bank 66,612 11.10% 23,994 > 4.00% 35,991 > 6.00% - - Tier 1 Capital (to average assets) Company 66,166 7.99% 33,132 > 4.00% N/A N/A - First Mid Bank 66,612 8.08% 32,961 > 4.00% 41,201 > 5.00% - - </TABLE> Banks and financial 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 2004 Annual Report on Form 10-K. On August 5, 1998, the Company announced a stock repurchase program for up to 3% of its common stock. In March 2000, the Board approved the repurchase of an additional 5% of the Company's common stock. In September 2001, the Board approved the repurchase of $3 million of additional shares of the Company's common stock and in August 2002, the Board approved the repurchase of $5 million of additional shares of the Company's common stock. In September 2003, the Board approved the repurchase of $10 million of additional shares of the Company's common stock. On April 27, 2004, the Board approved the repurchase of an additional $5 million shares of the Company's common stock. On August 23, 2005 the Board approved the repurchase of an additional $5 million shares of the Company's common stock, bringing the aggregate total on September 30, 2005 to 8% of the Company's common stock plus $28 million of additional shares. During the nine-month period ending September 30, 2005, the Company repurchased 106,360 shares at a total cost of $4,304,000. Since 1998, the Company has repurchased a total of 1,223,406 shares at a total price of $29,204,000. As of September 30, 2005, the Company was authorized per all repurchase programs to purchase $5,003,000 in additional shares.
Liquidity Liquidity represents the ability of the Company and its subsidiaries to meet all present and future financial obligations arising in the daily operations of the business. Financial obligations consist of the need for funds to meet extensions of credit, deposit withdrawals and debt servicing. The Company's liquidity management focuses on the ability to obtain funds economically through assets that may be converted into cash at minimal costs or through other sources. The Company's other sources of cash include overnight federal fund lines, Federal Home Loan Bank advances, deposits of the State of Illinois, the ability to borrow at the Federal Reserve Bank of Chicago, and the Company's operating line of credit with The Northern Trust Company. Details for the sources include: > First Mid Bank has $22.5 million available in overnight federal fund lines, including $10 million from Harris Trust and Savings Bank of Chicago and $12.5 million from The Northern Trust Company. Availability of the funds is subject to First Mid Bank meeting minimum regulatory capital requirements for total capital to risk-weighted assets and Tier 1 capital to total average assets. As of September 30, 2005, First Mid Bank's ratios of total capital to risk-weighted assets of 11.74% and Tier 1 capital to total average assets of 8.39% exceeded minimum regulatory requirements. > First Mid Bank can also borrow from the Federal Home Loan Bank as a source of liquidity. Availability of the funds is subject to the pledging of collateral to the Federal Home Loan Bank. Collateral that can be pledged includes one-to-four family residential real estate loans and securities. At September 30, 2005, the excess collateral at the Federal Home Loan Bank will support approximately $58.4 million of additional advances. > First Mid Bank also receives deposits from the State of Illinois. The receipt of these funds is subject to competitive bid and requires collateral to be pledged at the time of placement. > First Mid Bank is also a member of the Federal Reserve System and can borrow funds provided that sufficient collateral is pledged. > In addition, the Company has a revolving credit agreement in the amount of $15 million with The Northern Trust Company. The Company has an outstanding balance of $5,000,000 as of September 30, 2005, and $10,000,000 in available funds. On October 22, 2005, the Company entered into an agreement with The Northern Trust Company to renew this loan for one year with a maturity date of October 21, 2006, under the same terms and conditions. The agreement contains requirements for the Company and First Mid Bank to maintain various operating and capital ratios and for prior lender approval for certain sales of assets, merger activity, the acquisition or issuance of debt, and the acquisition of treasury stock. The Company and First Mid Bank were in compliance with the existing covenants at September 30, 2005. Management monitors its expected liquidity requirements carefully, focusing primarily on cash flows from: > lending activities, including loan commitments, letters of credit and mortgage prepayment assumptions; > deposit activities, including seasonal demand of private and public funds; > investing activities, including prepayments of mortgage-backed securities and call provisions on U.S. government treasuries and agency securities; and > operating activities, including scheduled debt repayments and dividends to stockholders. The following table summarizes significant contractual obligations and other commitments at September 30, 2005 (in thousands): <TABLE> <CAPTION> Less than More than Total 1 year 1-3 years 3-5 years 5 years -------------- --------------- --------------- --------------- -------------- <S> <C> <C> <C> <C> <C> Time deposits $299,284 $185,581 $100,474 $13,156 $ 73 Debt 15,310 5,000 - - 10,310 Other borrowings 80,164 60,164 7,000 5,000 8,000 Operating leases 4,243 434 880 878 2,051 Supplemental retirement 761 50 100 100 511 -------------- --------------- --------------- --------------- -------------- $399,762 $251,229 $108,454 $19,134 $20,945 ============== =============== =============== =============== ============== </TABLE> For the nine-month period ended September 30, 2005, net cash of $8.3 million and $8.0 million was provided from operating activities and financing activities, respectively, while investing activities used net cash of $17.8 million. In total, cash and cash equivalents decreased by $1.5 million since year-end 2004. On February 27, 2004, the Company completed the issuance and sale of $10 million of floating rate trust preferred securities through First Mid-Illinois Statutory Trust I (the "Trust"), a statutory business trust and wholly-owned subsidiary of the Company, as part of a pooled offering. The Company established the Trust for the purpose of issuing the trust preferred securities. Upon adoption of FIN 46R, the Company was required to de-consolidate its investment in the Trust. The $10 million in proceeds from the trust preferred issuance and an additional $310,000 for the Company's investment in common equity of the Trust, a total of $10,310 000, was invested in junior subordinated debentures of the Company. The underlying junior subordinated debentures issued by the Company to the Trust mature in 2034, bear interest at three-month London Interbank Offered Rate ("LIBOR") plus 280 basis points, reset quarterly, and are callable, at the option of the Company, at par on or after April 7, 2009. The Company has used the proceeds of the offering for general corporate purposes. The trust preferred securities issued by the Trust are included as Tier 1 capital of the Company for regulatory capital purposes. Management believes it has adequate sources of liquidity. First Mid Bank enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, letters of credit and other commitments to extend credit. Each of these instruments involves, to varying degrees, elements of credit, interest rate and liquidity risk in excess of the amounts recognized in the consolidated balance sheets. The Company uses the same credit policies and requires similar collateral in approving lines of credit and commitments and issuing letters of credit as it does in making loans. The exposure to credit losses on financial instruments is represented by the contractual amount of these instruments. However, the Company does not anticipate any losses from these instruments. The off-balance sheet financial instruments whose contract amounts represent credit risk at September 30, 2005 and December 31, 2004 were as follows (in thousands): <TABLE> <CAPTION> September 30, December 31, 2005 2004 --------------------- -------------------- <S> <C> <C> Unused commitments, including lines of credit: Commercial real estate $ 27,555 $ 25,837 Commercial operating 50,817 35,986 Home equity 16,183 16,002 Other 18,925 13,577 --------------------- -------------------- Total $113,480 $ 91,402 ===================== ==================== Standby letters of credit $ 3,747 $ 2,840 ===================== ==================== </TABLE> Commitments to originate credit represent approved commercial, residential real estate and home equity loans that generally are expected to be funded within ninety days. Lines of credit are agreements by which the Company agrees to provide a borrowing accommodation up to a stated amount as long as there is no violation of any condition established in the loan agreement. Both commitments to originate credit and lines of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the lines and some commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by the Company to guarantee the financial performance of customers to third parties. Standby letters of credit are primarily issued to facilitate trade or support borrowing arrangements and generally expire in one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit facilities to customers. The maximum amount of credit that would be extended under letters of credit is equal to the total off-balance sheet contract amount of such instrument. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the market risk faced by the Company since December 31, 2004. 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, 2004. ITEM 4. CONTROLS AND PROCEDURES The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's "disclosure controls and procedures" (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the period covered by this report. Based on such evaluation, such officers have concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings under the Exchange Act. Further, there have been no changes in the Company's internal control over financial reporting during the last fiscal quarter that have materially affected or that are reasonably likely to affect materially the Company's internal control over financial reporting.
PART II ITEM 1. LEGAL PROCEEDINGS Since First Mid Bank acts as a depository of funds, it is named from time to time as a defendant in lawsuits (such as garnishment proceedings) involving claims as to the ownership of funds in particular accounts. Management believes that all such litigation as well as other pending legal proceedings in which the Company is involved constitute ordinary, routine litigation incidental to the business of the Company and that such litigation will not materially adversely affect the Company's consolidated financial condition. <TABLE> <CAPTION> ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS ISSUER PURCHASES OF EQUITY SECURITIES - --------------------------------------------------------------------------------------------------------------------------- Period (d) Approximate Dollar (c) Total Number of Shares Value of Shares that Purchased as Part of May Yet Be Purchased (a) Total Number of (b) Average Price Publicly Announced Plans Under the Plans or Shares Purchased Paid per Share or Programs Programs - ---------------------- --------------------- ----------------------- ---------------------------- ------------------------- <S> <C> <C> <C> <C> July 1, 2005 - July 30, 2005 - - - $1,003,000 August 1, 2005 - August 31, 2005 20,108 $40.94 20,108 $5,180,000 September 1, 2005 - September 30, 2005 4,304 $40.66 4,304 $5,003,000 --------------------- ----------------------- ---------------------------- ------------------------- Total 24,412 $40.98 24,412 $5,003,000 ===================== ======================= ============================ ========================= </TABLE> On August 5, 1998, the Company announced a stock repurchase program for up to 3% of its common stock. In March 2000, the Board approved the repurchase of an additional 5% of the Company's common stock. In September 2001, the Board approved the repurchase of $3 million of additional shares of the Company's common stock and in August 2002, the Board approved the repurchase of $5 million of additional shares of the Company's common stock. In September 2003, the Board approved the repurchase of $10 million of additional shares of the Company's common stock. On April 27, 2004, the Board approved the repurchase of an additional $5 million shares of the Company's common stock. On August 23, 2005 the Board approved the repurchase of an additional $5 million shares of the Company's common stock, bringing the aggregate total on September 30, 2005 to 8% of the Company's common stock plus $28 million of additional shares. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit Index that follows the Signature Page and that immediately precedes the exhibits filed.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST MID-ILLINOIS BANCSHARES, INC. (Registrant) Date: November 8, 2005 /s/ William S. Rowland William S. Rowland President and Chief Executive Officer /s/ Michael L. Taylor Michael L. Taylor Chief Financial Officer
Exhibit Index to Quarterly Report on Form 10-Q - -------------------------------------------------------------------------------- Exhibit Number Description and Filing or Incorporation Reference - -------------------------------------------------------------------------------- 11.1 Statement re: Computation of Earnings Per Share (Filed herewith on page 6) 31.1 Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1 Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 I, William S. Rowland, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Mid-Illinois Bancshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 8, 2005 By: /s/ William S. Rowland William S. Rowland, President and Chief Executive Officer
Exhibit 31.2 Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 I, Michael L. Taylor, certify that: 1. I have reviewed this report on Form 10-Q of First Mid-Illinois Bancshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 8, 2005 By: /s/ Michael L. Taylor Michael L. Taylor, Chief Financial Officer
Exhibit 32.1 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of First Mid-Illinois Bancshares, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William S. Rowland, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 8, 2005 /s/ William S. Rowland William S. Rowland President and Chief Executive Officer
Exhibit 32.2 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of First Mid-Illinois Bancshares, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael L. Taylor, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 8, 2005 /s/ Michael L. Taylor Michael L. Taylor Chief Financial Officer