Attached files
UNITED
STATES
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SECURITIES
AND EXCHANGE COMMISSION
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WASHINGTON,
D.C. 20549
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FORM
10-K
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[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the fiscal year ended December 31, 2009
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or
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[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from _____________ to
______________
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Commission
file number: 0-13368
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FIRST
MID-ILLINOIS BANCSHARES, INC.
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(Exact
name of Registrant as specified in its charter)
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Delaware
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37-1103704
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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1515
Charleston Avenue, Mattoon, Illinois
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61938
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(217)
234-7454
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(Registrant's
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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NONE
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Securities
registered pursuant to Section 12(g) of the Act:
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Common stock, par value $4.00
per share,
and
related Common Stock Purchase Rights
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(Title
of class)
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Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. [ ]
Yes [X ] No
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. [ ]
Yes [X] No
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer [ ]
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Accelerated
filer [X]
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Non-accelerated
filer [ ]
(Do
not check if a smaller reporting company)
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Smaller
reporting company [ ]
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). [ ] Yes [X] No
The
aggregate market value of the outstanding common stock, other than shares held
by persons who may be deemed affiliates of the Registrant, as of the last
business day of the Registrant’s most recently completed second fiscal quarter
was approximately $73,743,000. Determination of stock ownership by
non-affiliates was made solely for the purpose of responding to this requirement
and the Registrant is not bound by this determination for any other
purpose.
As of
March 3, 2010, 6,102,360 shares of the Registrant’s common stock, $4.00 par
value, were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Document
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Into Form 10-K
Part:
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Portions
of the Proxy Statement for 2010 Annual
Meeting
of Shareholders to be held on April 28,
2010 III
First
Mid-Illinois Bancshares, Inc.
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Form
10-K Table of Contents
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Page
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Part
I
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Item
1
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Business
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3
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Item
1A
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Risk
Factors
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11
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Item
1B
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Unresolved
Staff Comments
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13
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Item
2
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Properties
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14
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Item
3
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Legal
Proceedings
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16
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Part
II
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Item
4
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Reserved
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16
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Item
5
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Market
for Company’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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17
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Item
6
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Selected
Financial Data
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19
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Item
7
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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20
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Item
7A
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Quantitative
and Qualitative Disclosures About Market Risk
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46
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Item
8
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Financial
Statements and Supplementary Data
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48
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Item
9
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Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure
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84
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Item
9A
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Controls
and Procedures
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84
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Item
9B
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Other
Information
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86
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Part
III
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Item
10
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Directors
and Executive Officers of the Company
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86
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Item
11
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Executive
Compensation
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86
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Item
12
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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87
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Item
13
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Certain
Relationships and Related Transactions
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87
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Item
14
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Principal
Accountant Fees and Services
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87
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Part
IV
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Item
15
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Exhibit
and Financial Statement Schedules
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88
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Signatures
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89
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Exhibit
Index
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90
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PART
I
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ITEM
1.BUSINESS
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Company
and Subsidiaries
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First
Mid-Illinois Bancshares, Inc. (the “Company”) is a financial holding
company. The Company is engaged in the business of banking through
its wholly owned subsidiary, First Mid-Illinois Bank & Trust, N.A. (“First
Mid Bank”). The Company provides data processing services to
affiliates through another wholly owned subsidiary, Mid-Illinois Data Services,
Inc. (“MIDS”). The Company offers insurance products and services to
customers through its wholly owned subsidiary, The Checkley Agency, Inc.
(“Checkley”). The Company also wholly owns two statutory business
trusts, First Mid-Illinois Statutory Trust I (“Trust I”), and First Mid-Illinois
Statutory Trust II (“Trust II”), both unconsolidated subsidiaries of the
Company.
The
Company, a Delaware corporation, was incorporated on September 8, 1981, and
pursuant to the approval of the Board of Governors of the Federal Reserve System
(the “Federal Reserve Board”) became the holding company owning all of the
outstanding stock of First National Bank, Mattoon (“First National”) on June 1,
1982. First National changed its name to First Mid-Illinois Bank
& Trust, N.A. in 1992. The Company acquired all of the outstanding stock of
a number of community banks or thrift institutions on the following dates, and
subsequently combined their operations with those of the Company:
·
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Mattoon
Bank, Mattoon on April 2, 1984
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·
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State
Bank of Sullivan on April 1, 1985
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·
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Cumberland
County National Bank in Neoga on December 31,
1985
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·
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First
National Bank and Trust Company of Douglas County on December 31,
1986
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Charleston
Community Bank on December 30, 1987
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·
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Heartland
Federal Savings and Loan Association on July 1,
1992
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·
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Downstate
Bancshares, Inc. on October 4, 1994
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American
Bank of Illinois on April 20, 2001
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In 1997,
First Mid Bank acquired the Charleston, Illinois branch location and the
customer base of First of America Bank and in 1999 acquired the Monticello,
Taylorville and DeLand branch offices and deposit base of Bank One Illinois,
N.A.
First Mid
Bank also opened a de
novo branch in Decatur, Illinois and a banking center in the Student
Union of Eastern Illinois University in Charleston, Illinois (2000); de novo branches in
Champaign, Illinois and Maryville, Illinois (2002), and a de novo branch in Highland,
Illinois (2005).
In 2002,
the Company acquired all of the outstanding stock of Checkley, an insurance
agency located in Mattoon.
On May 1,
2006, the Company acquired Mansfield Bancorp, Inc. (“Mansfield”), and its wholly
owned subsidiary, Peoples State Bank of Mansfield (“Peoples”) with locations in
Mansfield, Mahomet and Weldon, Illinois. On September 8, 2006, Peoples merged
with and into First Mid Bank with First Mid Bank being the surviving
entity.
In 2009,
the Company opened de
novo branches in Decatur and Champaign.
Employees
The
Company, MIDS, Checkley and First Mid Bank, collectively, employed 347 people on
a full-time equivalent basis as of December 31, 2009. The Company
places a high priority on staff development, which involves extensive training,
including customer service training. New employees are selected on
the basis of both technical skills and customer service
capabilities. None of the employees are covered by a collective
bargaining agreement with the Company. The Company offers a variety of employee
benefits.
Business
Lines
The
Company has chosen to operate in three primary lines of business—community
banking and wealth management through First Mid Bank and insurance brokerage
through Checkley. Of these, the community banking line contributes
approximately 90% of the Company’s total revenues and profits. Within
the community banking line, the Company serves commercial, retail and
agricultural customers with a broad array of deposit and loan related
products. The wealth management line provides estate planning,
investment and farm management services for individuals and employee benefit
services for business enterprises. The insurance brokerage line
provides commercial lines insurance to businesses as well as homeowner,
automobile and other types of personal lines insurance to
individuals.
All three
lines emphasize a “hands on” approach to service so that products and services
can be tailored to fit the specific needs of existing and potential
customers. Management believes that by emphasizing this personalized
approach, the Company can, to a degree, diminish the trend towards homogeneous
financial services, thereby differentiating the Company from competitors and
allowing for slightly higher operating margins in each of the three
lines.
Business
Strategies
Strategy
for Operations and Risk Management
Operationally,
the Company centralizes as many administrative and clerical tasks as possible
within its home office location in Mattoon, Illinois. This allows
branches to maintain customer focus, helps assure compliance with banking
regulations, keeps fixed administrative costs at as low a level as is
practicable, and better manages the various forms of risk inherent in this
business. This approach also allows for the best possible use of
technology in day-to-day banking activities thereby reducing the potential for
human error. While the Company does not employ every new technology that is
introduced, it does attempt to be near the leading edge with respect to
operational technology.
The
Company has a comprehensive set of operational policies and procedures that have
been developed over time to address risk. These policies are intended
to be as close as possible to “best practices” of the financial services
industry and are subjected to continual review by management and the Board of
Directors. The Company’s internal audit function incorporates
procedures to determine compliance with these policies.
In the
business of banking, credit risk is the single most important risk as losses
from uncollectible loans can significantly diminish capital,
earnings and shareholder value. In
order to address this risk, the lending function of First Mid Bank receives
significant attention from executive management and the Board of
Directors. An important element of credit risk management is the
quality, experience and training of the loan officers of First Mid Bank. The
Company has invested, and will continue to invest, significant resources to
ensure the quality, experience and training of First Mid Bank’s loan officers in
order to keep credit losses at a minimum. In addition to the human element of
credit risk management, the Company’s loan policies address the additional
aspects of credit risk. Most lending personnel have signature
authority that allows them to lend up to a certain amount based on their own
judgment as to the creditworthiness of a borrower. The amount of the signature
authority is based on the lending officers’ experience and
training. The Senior Loan Committee, consisting of the most
experienced lenders within the organization, must approve all underwriting
decisions in excess of $1.5 million. The Board of Directors must approve all
underwriting decisions in excess of $2 million.
While the
underlying nature of lending will result in some amount of loan losses, First
Mid Bank’s loan loss experience has been good with average net charge offs
amounting to $1.3 million (.19% of average loans) over the past five years.
Nonperforming loans were $12.7 million (1.82% of total loans) at December 31,
2009. These percentages have historically compared well with peer
financial institutions and continue to do so today.
Interest
rate and liquidity risk are two other forms of risk embedded in the business of
financial intermediation. The Company’s Asset Liability Management Committee,
consisting of experienced individuals who monitor all aspects of interest rates
and maturities of interest earning assets and interest paying liabilities,
manages these risks. The underlying objectives of interest rate and
liquidity risk management are to shelter the Company’s net interest margin from
changes in interest rates while maintaining adequate liquidity reserves to meet
unanticipated funding demands. The Company uses financial modeling
technology as a tool, employing a variety of “what if” scenarios to properly
plan its activities. Despite the tools and methods used to monitor
this risk, a sustained unfavorable interest rate environment will lead to some
amount of compression in the net interest margin. During 2009, the
Company’s net interest margin decreased to 3.40% from 3.73% in 2008. This was
the result of a greater decrease in interest-earning asset rates compared to the
decrease in borrowing and deposit rates.
Strategy
for Growth
The
Company believes that growth of its revenue stream and of its customer base is
vital to the goal of increasing the value of its shareholders’ investment.
Management attempts to grow in two primary ways:
· by
organic growth through adding new customers and selling more products and
services to existing customers; and
· by
acquisitions.
Virtually
all of the Company’s customer-contact personnel, in each of its business lines,
are engaged in organic growth efforts to one degree or another. These personnel
are trained to engage in needs-based selling whereby they make an attempt to
match its products and services with the particular financial needs of
individual customers and prospective customers. Most senior officers
of the organization are required to attend monthly sales meetings where they
report on their business development efforts and results. Executive
management uses these meetings as an educational and risk management opportunity
as well. Cross-selling opportunities are encouraged between the
business lines.
Within
the community banking line, the Company has focused on growing business
operating and real estate loans. Total commercial real estate loans
have increased modestly from $187 million at December 31, 2005 to $226 million
at December 31, 2009. Approximately 66% of the Company’s total
revenues are derived from lending activities. The Company has also focused on
growing the commercial and retail deposit base through growth in checking, money
markets and customer repurchase agreement balances. The wealth management line
has focused its growth efforts on estate planning, investment and farm
management services for individuals and employee benefit services for
businesses. The insurance brokerage line has focused on increasing
property and casualty insurance for businesses and personal lines insurance to
individuals.
Growth
through a series of small acquisitions has been an integral part of the
Company’s strategy for an extended period of time. When reviewing
acquisition possibilities, the Company focuses on those organizations where
there is a cultural fit with its existing operations and where there is a strong
likelihood of adding to shareholder value. Most past acquisitions
have been cash-based transactions. While the Company expects to continue this
trend in the future, it would consider a stock-based acquisition if the
strategic and financial metrics were compelling. The emphasis on smaller
acquisitions is due to the inherent risks accompanying acquisitions and the
preference for cash financing rather than use of the Company’s common
stock.
This
overall growth strategy has been to grow the customer base without significantly
increasing the shareholder base. This requires a certain amount of
financial leverage and the Company monitors its capital base carefully to
satisfy all regulatory requirements while maintaining
flexibility. The Company has maintained a Dividend Reinvestment Plan
as well as various forms of equity compensation for directors and key managers.
It has also maintained an ongoing share buy back program both as a service to
shareholders and a means of maintaining optimal levels of capital. In
2009, the Company issued and sold Series B Preferred Stock to certain investors.
The Company also uses various forms of long-term debt to augment its capital
when appropriate.
Markets
and Competition
The
Company has active competition in all areas in which First Mid Bank presently
does business. First Mid Bank competes for commercial and individual
deposits, loans, and trust business with many east central Illinois banks,
savings and loan associations, and credit unions. The principal
methods of competition in the banking and financial services industry are
quality of services to customers, ease of access to facilities, and pricing of
services, including interest rates paid on deposits, interest rates charged on
loans, and fees charged for fiduciary and other banking services.
First Mid
Bank operates facilities in the Illinois counties of Bond, Champaign, Christian,
Coles, Cumberland, Dewitt, Douglas, Effingham, Macon, Madison, Moultrie, and
Piatt. Each facility primarily serves the community in which it is
located. First Mid Bank serves nineteen different communities with
twenty-six separate locations in the towns of Altamont, Arcola, Champaign,
Charleston, Decatur, Effingham, Highland, Mansfield, Mahomet, Maryville,
Mattoon, Monticello, Neoga, Pocahontas, Sullivan, Taylorville, Tuscola, Urbana,
and Weldon Illinois. Within the areas of service, there are numerous
competing financial institutions and financial services companies.
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.
SUPERVISION
AND REGULATION
General
Financial
institutions, financial services companies, and their holding companies are
extensively regulated under federal and state law. As a result, the
growth and earnings performance of the Company can be affected not only by
management decisions and general economic conditions, but also by the
requirements of applicable state and federal statutes and regulations and the
policies of various governmental regulatory authorities including, but not
limited to, the Office of the Comptroller of the Currency (the “OCC”), the
Federal Reserve Board, the Federal Deposit Insurance Corporation (the “FDIC”),
the Internal Revenue Service and state taxing authorities. Any change
in applicable laws, regulations or regulatory policies may have material effects
on the business, operations and prospects of the Company and First Mid
Bank. The Company is unable to predict the nature or extent of the
effects that fiscal or monetary policies, economic controls or new federal or
state legislation may have on its business and earnings in the
future.
Federal
and state laws and regulations generally applicable to financial institutions
and financial services companies, such as the Company and its subsidiaries,
regulate, among other things, the scope of business, investments, reserves
against deposits, capital levels relative to operations, the nature and amount
of collateral for loans, the establishment of branches, mergers, consolidations
and dividends. The system of supervision and regulation applicable to the
Company and its subsidiaries establishes a comprehensive framework for their
respective operations and is intended primarily for the protection of the FDIC’s
deposit insurance fund and the depositors, rather than the stockholders, of
financial institutions.
The
following references to material statutes and regulations affecting the Company
and its subsidiaries are brief summaries thereof and do not purport to be
complete, and are qualified in their entirety by reference to such statutes and
regulations. Any change in applicable law or regulations may have a
material effect on the business of the Company and its
subsidiaries.
Financial
Modernization Legislation
The 1999
Gramm-Leach-Bliley Act (the “GLB Act”) significantly changed financial services
regulation by expanding permissible non-banking activities of bank holding
companies and removing certain barriers to affiliations among banks, insurance
companies, securities firms and other financial services
entities. These activities and affiliations can be structured through
a holding company structure or, in the case of many of the activities, through a
financial subsidiary of a bank. The GLB Act also established a system
of federal and state regulation based on functional regulation, meaning that
primary regulatory oversight for a particular activity generally resides with
the federal or state regulator having the greatest expertise in the
area. Banking is supervised by banking regulators, insurance by state
insurance regulators and securities activities by the SEC and state securities
regulators. The GLB Act also requires the disclosure of agreements
reached with community groups that relate to the Community Reinvestment Act, and
contains various other provisions designed to improve the delivery of financial
services to consumers while maintaining an appropriate level of safety in the
financial services industry.
The GLB
Act repeals the anti-affiliation provisions of the Glass-Steagall Act and
revises the Bank Holding Company Act of 1956 (the “BHCA”) to permit qualifying
holding companies, called “financial holding companies,” to engage in, or to
affiliate with companies engaged in, a full range of financial activities,
including banking, insurance activities (including insurance portfolio
investing), securities activities, merchant banking and additional activities
that are “financial in nature,” incidental to financial activities or, in
certain circumstances, complementary to financial activities. A bank
holding company’s subsidiary banks must be “well-capitalized” and “well-managed”
and have at least a “satisfactory” Community Reinvestment Act rating for the
bank holding company to elect and maintain its status as a financial holding
company.
A
significant component of the GLB Act’s focus on functional regulation relates to
the application of federal securities laws and SEC oversight of some bank
securities activities previously exempt from broker-dealer
registration. Among other things, the GLB Act amends the definitions
of “broker” and “dealer” under the Securities Exchange Act of 1934 to remove the
blanket exemption for banks. Under the GLB Act, banks may conduct
securities activities without broker-dealer registration only if the activities
fall within a set of activity-based exemptions designed to allow banks to
conduct only those activities traditionally considered to be primarily banking
or trust activities. Securities activities outside these exemptions,
as a practical matter, need to be conducted by registered broker-dealer
affiliate. By several orders, the SEC extended the blanket exemption
for banks from the definition of “broker” and “dealer” while it considered
implementing rules. In 2003, the SEC adopted amendments to its rules relating to
the “dealer” exemption for banks. In September 2007, the SEC and the Federal
Reserve Board adopted a regulation to implement the broker activities exemption
of the GLB Act that became effective for First Mid Bank beginning January 1,
2009. The GLB Act also amends the Investment Advisers Act of 1940 to
require the registration of banks that act as investment advisers for mutual
funds. The Company believes that it has taken the necessary actions to comply
with these requirements of the GLB Act and the regulations adopted under
them.
Anti-Terrorism
Legislation
The USA
PATRIOT Act of 2001 included the International Money Laundering Abatement and
Anti-Terrorist Financing Act of 2001 (the “IMLAFA”). The IMLAFA contains
anti-money laundering measures affecting insured depository institutions,
broker-dealers, and certain other financial institutions. The IMLAFA requires
U.S. financial institutions to adopt policies and procedures to combat money
laundering and grants the Secretary of the Treasury broad authority to establish
regulations and to impose requirements and restrictions on financial
institutions’ operations. The Company has established policies and procedures
for compliance with the IMLAFA and the related regulations. The Company has
designated an officer solely responsible for ensuring compliance with existing
regulations and monitoring changes to the regulations as they
occur.
Emergency
Economic Stabilization Act of 2008
In
response to recent unprecedented financial market turmoil, the Emergency
Economic Stabilization Act of 2008 ("EESA") was enacted on October 3, 2008. EESA
authorizes the U.S. Treasury Department to provide up to $700 billion in funding
for the financial services industry. Pursuant to the EESA, the Treasury was
initially authorized to use $350 billion for the Troubled Asset Relief Program
(TARP). Of this amount, Treasury allocated $250 billion to the TARP Capital
Purchase Program. On January 15, 2009, the second $350 billion of TARP monies
was released to the Treasury. The Secretary's authority under TARP expires
October 3, 2010. The Company decided to not participate in the TARP Capital
Purchase Program.
Before
and after EESA, there have been numerous actions by Congress, the Federal
Reserve Board, the Treasury, the FDIC, the SEC and others to further the
economic and banking industry stabilization efforts, including the American
Recovery and Reinvestment Ac enacted February 17, 2009.
On
October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program
(TLGP). The final rule was adopted on November 21, 2008. The FDIC stated that
the purpose of these actions is to strengthen confidence and encourage liquidity
in the banking system by guaranteeing newly issued senior unsecured debt of 31
days or greater, of banks, thrifts, and certain holding companies, and by
providing full FDIC insurance coverage for all non-interest bearing transaction
accounts, regardless of dollar amount. Inclusion in the program was voluntary.
Institutions participating in the senior unsecured debt portion of the program
are assessed fees based on a sliding scale, depending on length of maturity.
Shorter-term debt has a lower fee structure and longer-term debt has a higher
fee. The range is from 50 basis points on debt of 180 days or less, to a maximum
of 100 basis points for debt with maturities of one year or longer, on an
annualized basis. A 10-basis point surcharge is added to a participating
institution's current insurance assessment in exchange for final coverage for
all transaction accounts.
First Mid
Bank elected to participate in both parts of the TLGP, the Transaction Account
Guarantee Program and the Debt Guarantee Program. The FDIC’s
Transaction Account Guarantee Program, provides, without charge to depositors, a
full guarantee on all non-interest bearing transaction accounts held by any
depositor, regardless of dollar amount, through June 30,
2010. Participation in the Transaction Account Guarantee Program cost
the Company 10 basis points annually on the amount of the
deposits. The FDIC’s Debt Guarantee Program, which expired in October
2009, provided for the guarantee of eligible newly issued senior unsecured debt
of participating entities, but the Company and the Bank did not issue any debt
under this program.
The
Company
General. As
a registered bank holding company under the BHCA that has elected to become a
financial holding company under the GLB Act, the Company is subject to
regulation by the Federal Reserve Board. In accordance with Federal
Reserve Board policy, the Company is expected to act as a source of financial
strength to First Mid Bank and to commit resources to support First Mid Bank in
circumstances where the Company might not do so absent such
policy. The Company is subject to inspection, examination, and
supervision by the Federal Reserve Board.
Activities. As
a financial holding company, the Company may affiliate with securities firms and
insurance companies and engage in other activities that are financial in nature
or incidental or complementary to activities that are financial in
nature. A bank holding company that is not also a financial holding
company is limited to engaging in banking and such other activities as
determined by the Federal Reserve Board to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
No
Federal Reserve Board approval is required for the Company to acquire a company
(other than a bank holding company, bank, or savings association) engaged in
activities that are financial in nature or incidental to activities that are
financial in nature, as determined by the Federal Reserve
Board. However, the Company generally must give the Federal Reserve
Board after-the-fact notice of these activities. Prior Federal
Reserve Board approval is required before the Company may acquire beneficial
ownership or control of more than 5% of the voting shares or substantially all
of the assets of a bank holding company, bank, or savings
association.
If any
subsidiary bank of the Company ceases to be “well-capitalized” or “well-managed”
under applicable regulatory standards, the Federal Reserve Board may, among
other actions, order the Company to divest its depository
institution. Alternatively, the Company may elect to conform its
activities to those permissible for a bank holding company that is not also a
financial holding company.
If any
subsidiary bank of the Company receives a rating under the Community
Reinvestment Act of less than “satisfactory”, the Company will be prohibited,
until the rating is raised to “satisfactory” or better, from engaging in new
activities or acquiring companies other than bank holding companies, banks, or
savings associations.
Capital
Requirements. Bank holding companies are required to maintain
minimum levels of capital in accordance with Federal Reserve Board capital
adequacy guidelines. The Federal Reserve Board’s capital guidelines
establish the following minimum regulatory capital requirements for bank holding
companies: a risk-based requirement expressed as a percentage of
total risk-weighted assets, and a leverage requirement expressed as a percentage
of total assets. The risk-based requirement consists of a minimum
ratio of total capital to total risk-weighted assets of 8%, at least one-half of
which must be Tier 1 capital. The leverage requirement consists of a
minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated
companies, with minimum requirements of at least 4% for all
others. For purposes of these capital standards, Tier 1 capital
consists primarily of permanent stockholders’ equity, which includes the Series
B 9% Non-Cumulative Perpetual Convertible Preferred Stock issued by the Company
in 2009, less intangible assets (other than certain mortgage servicing rights
and purchased credit card relationships), and total capital means Tier 1 capital
plus certain other debt and equity instruments which do not qualify as Tier 1
capital, limited amounts of unrealized gains on equity securities and a portion
of the Company’s allowance for loan and lease losses.
The
risk-based and leverage standards described above are minimum requirements, and
higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For example,
the Federal Reserve Board’s capital guidelines contemplate that additional
capital may be required to take adequate account of, among other things,
interest rate risk, or the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. Further,
any banking organization experiencing or anticipating significant growth would
be expected to maintain capital ratios, including tangible capital positions
(i.e., Tier 1 capital less all intangible assets), well above the minimum
levels.
In
December 2007, the U.S. bank regulatory agencies adopted final rules that
require large, internationally active financial services organizations to use
the most sophisticated and complex methodology for calculating capital
requirements reflected in the New Basel Capital Accord, developed by the Basel
Committee on Banking Supervision. These rules became operational in
April 2008, but are mandatory only for “core banks,” i.e., banks with
consolidated total assets of $250 billion or more. In July 2008,
the U.S. bank regulatory agencies also published a notice of proposed
rule-making that would provide all non-core banking organizations with the
option to adopt a standardized approach under these rules, which reflects a
simpler methodology than the advanced approaches required of core banks.
As of
December 31, 2009, the Company had regulatory capital, calculated on a
consolidated basis, in excess of the Federal Reserve Board’s minimum
requirements, and its capital ratios exceeded those required for categorization
as well-capitalized under the capital adequacy guidelines established by bank
regulatory agencies with a total risk-based capital ratio of 15.76%, a Tier 1
risk-based ratio of 14.57% and a leverage ratio of 10.63%.
Control
Acquisitions. The Change in Bank Control Act prohibits a
person or group of person from acquiring “control” of a bank holding company
unless the Federal Reserve Board has been notified and has not objected to the
transaction. Under a rebuttable presumption established by the
Federal Reserve Board, the acquisition of 10% or more of a class of voting stock
of a bank holding company with a class of securities registered under Section 12
of the Exchange Act, such as the Company, would, under the circumstances set
forth in the presumption, constitute acquisition of control of the
Company.
In
addition, any company is required to obtain the approval of the Federal Reserve
Board under the BHCA before acquiring 25% (5% in the case of an acquirer that is
a bank holding company) or more of the outstanding common of the Company, or
otherwise obtaining control of a “controlling influence” over the Company or
First Mid Bank.
Interstate
Banking and Branching. The Riegle-Neal Act enacted in 1994 permits an
adequately capitalized and adequately managed bank holding company, with Federal
Reserve Board approval, to acquire banking institutions located in states other
than the bank holding company’s home state without regard to whether the
transaction is prohibited under state law. In addition, national
banks and state banks with different home states are permitted to merge across
state lines, with the approval of the appropriate federal banking agency, unless
the home state of a participating banking institution has passed legislation
prior to that date that expressly prohibits interstate mergers. De
novo interstate branching is permitted if the laws of the host state so
authorize. Moreover, national banks, such as First Mid Bank, may
provide trust services in any state to the same extent as a trust company
chartered by that state.
Privacy and
Security. The GLB Act establishes a minimum federal standard
of financial privacy by, among other provisions, requiring banks to adopt and
disclose privacy policies with respect to consumer information and setting forth
certain rules with respect to the disclosure to third parties of consumer
information. The Company has adopted and disseminated its privacy
policies pursuant to the GLB Act. Regulations adopted under the GLB
Act set standards for protecting the security, confidentiality and integrity of
customer information, and require notice to regulators, and in some cases, to
customers, in the event of security breaches. A number of states have
adopted their own statutes requiring notification of security breaches. In
addition, the GLB Act requires the disclosure of agreements reached with
community groups that relate to the CRA, and contains various other provisions
designed to improve the delivery of financial services to consumers while
maintaining an appropriate level of safety in the financial services
industry.
First Mid
Bank
General. First
Mid Bank is a national bank, chartered under the National Bank
Act. The FDIC insures the deposit accounts of First Mid
Bank. As a national bank, First Mid Bank is a member of the Federal
Reserve System and is subject to the examination, supervision, reporting and
enforcement requirements of the OCC, as the primary federal regulator of
national banks, and the FDIC, as administrator of the deposit insurance
fund.
Deposit
Insurance. As an FDIC-insured institution, First Mid Bank is required to
pay deposit insurance premium assessments to the FDIC.
On
October 3, 2008, the FDIC temporarily increased the standard maximum deposit
insurance amount (SMDIA) from $100,000 to $250,000 per depositor. On
May 20, 2009, the Helping Families Save Their Homes Act extended the temporary
increase in the SMDIA through December 31, 2013. This extension of the temporary
$250,000 coverage limit became effective immediately upon the President’s
signature. The legislation provides that the SMDIA will return to $100,000 on
January 1, 2014. The additional cost of the increase to the SMDIA,
assessed on a quarterly basis, is a 10 basis point annualized surcharge (2.5
basis points quarterly) on balances in non-interest bearing transaction accounts
that exceed $250,000. The Company has expensed $49,000 for this program in
2009.
On
February 27, 2009, the FDIC adopted a final rule modifying the risk-based
assessment system and setting initial base assessment rates beginning April 1,
2009, at 12 to 45 basis points and, due to extraordinary circumstances, extended
the period of the restoration plan to increase the deposit insurance fund to
seven years. Also on February 27, 2009, the FDIC issued final rules on changes
to the risk-based assessment system. The final rules both increase base
assessment rates and incorporate additional assessments for excess reliance on
brokered deposits and FHLB advances. The new rates would increase annual
assessment rates from 5 to 7 basis points to 7 to 24 basis points. This new
assessment took effect April 1, 2009. The Company has expensed $1,260,000 for
this assessment in 2009.
Also on
February 27, 2009, the FDIC adopted an interim rule to impose a 20 basis point
emergency special assessment payable September 30, 2009 based on the second
quarter 2009 assessment base, to help shore up the Deposit Insurance Fund
(“DIF”). This assessment equates to a one-time cost of $200,000 per $100 million
in assessment base. The interim rule also allows the Board to impose possible
additional special assessments of up to 10 basis points thereafter to maintain
public confidence in the DIF. Subsequently, the FDIC’s Treasury borrowing
authority increased from $30 billion to $100 billion, allowing the agency to cut
the planned special assessment from 20 to 10 basis points. On May 22, 2009, the
FDIC adopted a final rule which established a special assessment of five basis
points on each FDIC-insured depository institutions assets, minus it Tier 1
capital, as of September 30, 2009. The assessment was capped at 10 basis points
of an institution’s domestic deposits so that no institution would pay an amount
higher than they would have under the interim rule. This special assessment was
collected September 30, 2009. The Company expensed $522,000 as of June 30, 2009
for this special assessment.
In
addition to its insurance assessment, each insured bank was subject, in 2009, to
quarterly debt service assessments in connection with bonds issued by a
government corporation that financed the federal savings and loan
bailout. The Company expensed $112,000 during 2009 for this
assessment.
On
September 29, 2009, the FDIC Board proposed a Deposit Insurance Fund restoration
plan that required banks to prepay, on December 30, 2009, their estimated
quarterly risk-based assessments for the fourth quarter of 2009 and for all of
2010, 2011 and 2012. Under the plan—which applies to all banks except those with
liquidity problems—banks were assessed through 2010 according to the risk-based
premium schedule adopted earlier this year. Beginning January 1, 2011, the base
rate increase by 3 basis points. The Company recorded a prepaid expense asset of
$4,855,000 as of December 31, 2009 as a result of this plan. This asset will be
amortized to non-interest expense over the next three years.
OCC
Assessments. All national banks are required to pay
supervisory fees to the OCC to fund the operations of the OCC. The
amount of such supervisory fees is based upon each institution’s total assets,
including consolidated subsidiaries, as reported to the OCC. During
the year ended December 31, 2009, First Mid Bank paid supervisory fees to the
OCC totaling $240,000.
Capital
Requirements. The OCC has established the following minimum
capital standards for national banks, such as First Mid Bank: a
leverage requirement consisting of a minimum ratio of Tier 1 capital to total
assets of 3% for the most highly-rated banks with minimum requirements of at
least 4% for all others, and a risk-based capital requirement consisting of a
minimum ratio of total capital to total risk-weighted assets of 8%, at least
one-half of which must be Tier 1 capital. For purposes of these
capital standards, Tier 1 capital and total capital consists of substantially
the same components as Tier 1 capital and total capital under the Federal
Reserve Board’s capital guidelines for bank holding companies (See “The
Company—Capital Requirements”).
The
capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, the
regulations of the OCC provide that additional capital may be required to take
adequate account of, among other things, interest rate risk or the risks posed
by concentrations of credit, nontraditional activities or securities trading
activities.
During
the year ended December 31, 2009, First Mid Bank was not required by the OCC to
increase its capital to an amount in excess of the minimum regulatory
requirements, and its capital ratios exceeded those required for categorization
as well-capitalized under the capital adequacy guidelines established by bank
regulatory agencies with a total risk-based capital ratio of 14.50%, a Tier 1
risk-based ratio of 13.31% and a leverage ratio of 9.67%.
Prompt Corrective
Action. Federal law provides the federal banking regulators with broad
power to take prompt corrective action to resolve the problems of
undercapitalized institutions. The extent of the regulators’ powers
depends on whether the institution in question
is “well-capitalized,” “adequately-capitalized,”
“undercapitalized,” “significantly undercapitalized” or “critically
undercapitalized.” Depending upon the capital category to which an institution
is assigned, the regulators’ corrective powers include: requiring the
submission of a capital restoration plan; placing limits on asset growth and
restrictions on activities; requiring the institution to issue additional
capital stock (including additional voting stock) or to be acquired; restricting
transactions with affiliates; restricting the interest rate the institution may
pay on deposits; ordering a new election of directors of the institution;
requiring that senior executive officers or directors be dismissed; prohibiting
the institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of principal
or interest on subordinated debt; and in the most severe cases, appointing a
conservator or receiver for the institution.
Dividends. The
National Bank Act imposes limitations on the amount of dividends that may be
paid by a national bank, such as First Mid Bank. Generally, a
national bank may pay dividends out of its undivided profits, in such amounts
and at such times as the bank’s board of directors deems
prudent. Without prior OCC approval, however, a national bank may not
pay dividends in any calendar year which, in the aggregate, exceed the bank’s
year-to-date net income plus the bank’s adjusted retained net income for the two
preceding years.
The
payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and a financial institution
generally is prohibited from paying any dividends if, following payment thereof,
the institution would be undercapitalized. As described above, First
Mid Bank exceeded its minimum capital requirements under applicable guidelines
as of December 31, 2009. As of December 31, 2009, approximately $18.6
million was available to be paid as dividends to the Company by First Mid
Bank. Notwithstanding the availability of funds for dividends,
however, the OCC may prohibit the payment of any dividends by First Mid Bank if
the OCC determines that such payment would constitute an unsafe or unsound
practice.
Affiliate and
Insider Transactions. First Mid Bank is subject to certain
restrictions under federal law, including Regulation W of the Federal Reserve
Board, on extensions of credit to the Company and its subsidiaries, on
investments in the stock or other securities of the Company and its subsidiaries
and the acceptance of the stock or other securities of the Company or its
subsidiaries as collateral for loans. Certain limitations and
reporting requirements are also placed on extensions of credit by First Mid Bank
to its directors and officers, to directors and officers of the Company and its
subsidiaries, to principal stockholders of the Company, and to “related
interests” of such directors, officers and principal stockholders.
First Mid
Bank is subject to restrictions under federal law that limits certain
transactions with the Company, including loans, other extensions of credit,
investments or asset purchases. Such transactions by a banking
subsidiary with any one affiliate are limited in amount to 10 percent of the
bank’s capital and surplus and, with all affiliates together, to an aggregate of
20 percent of the bank’s capital and surplus. Furthermore, such loans
and extensions of credit, as well as certain other transactions, are required to
be secured in specified amounts. These and certain other transactions, including
any payment of money to the Company, must be on terms and conditions that are or
in good faith would be offered to nonaffiliated companies.
In
addition, federal law and regulations may affect the terms upon which any person
becoming a director or officer of the Company or one of its subsidiaries or a
principal stockholder of the Company may obtain credit from banks with which
First Mid Bank maintains a correspondent relationship.
Safety and
Soundness Standards. The federal banking agencies have adopted
guidelines that establish operational and managerial standards to promote the
safety and soundness of federally insured depository
institutions. The guidelines set forth standards for internal
controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation, fees
and benefits, asset quality and earnings. In general, the guidelines
prescribe the goals to be achieved in each area, and each institution is
responsible for establishing its own procedures to achieve those
goals. If an institution fails to comply with any of the standards
set forth in the guidelines, the institution’s primary federal regulator may
require the institution to submit a plan for achieving and maintaining
compliance. The preamble to the guidelines states that the agencies
expect to require a compliance plan from an institution whose failure to meet
one or more of the guidelines are of such severity that it could threaten the
safety and soundness of the institution. Failure to submit an
acceptable plan, or failure to comply with a plan that has been accepted by the
appropriate federal regulator, would constitute grounds for further enforcement
action.
Community
Reinvestment Act. First Mid Bank is subject to the Community
Reinvestment Act (CRA). The CRA and the regulations issued thereunder
are intended to encourage banks to help meet the credit needs of their service
areas, including low and moderate income neighborhoods, consistent with the safe
and sound operations of the banks. These regulations also provide for
regulatory assessment of a bank’s record in meeting the needs of its service
area when considering applications to establish branches, merger applications
and applications to acquire the assets and assume the liabilities of another
bank. The Financial Institutions Reform, Recovery and Enforcement Act
of 1989 requires federal banking agencies to make public a rating of a bank’s
performance under the CRA. In the case of a bank holding company, the
CRA performance record of its bank subsidiaries is reviewed by federal banking
agencies in connection with the filing of an application to acquire ownership or
control of shares or assets of a bank or thrift or to merge with any other bank
holding company. An unsatisfactory record can substantially delay or
block the transaction. First Mid Bank received a satisfactory CRA
rating from its regulator in its most recent CRA examination.
Consumer Laws and
Regulations. In addition to the laws and regulations discussed
above, First Mid Bank is also subject to certain consumer laws and regulations
that are designed to protect consumers in transactions with
banks. While the list set forth herein is not exhaustive, these laws
and regulations include the Truth in Lending Act, the Truth in Savings Act, the
Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting
Act, the Fair and Accurate Credit Transactions Act and the Real Estate
Settlement Procedures Act, among others. These laws and regulations
mandate certain disclosure requirements and regulate the manner in which
financial institutions must deal with customers when taking deposits, making
loans to or marketing to or engaging in other types of transactions with such
customers. Failure to comply with these laws and regulations could
lead to substantial penalties, operating restrictions and reputational damage to
the financial institution.
Supplemental
Item – Executive Officers of the Registrant
The
executive officers of the Company are elected annually by the Company’s board of
directors and are identified below.
Name
(Age)
|
Position
With Company
|
William
S. Rowland (63)
|
Chairman
of the Board of Directors, President and Chief Executive
Officer
|
Michael
L. Taylor (41)
|
Executive
Vice President and Chief Financial Officer
|
John
W. Hedges (62)
|
Executive
Vice President
|
Laurel
G. Allenbaugh (49)
|
Executive
Vice President
|
Kelly
A. Downs (42)
|
Senior
Vice President
|
Christopher
L. Slabach (47)
|
Senior
Vice President
|
Eric
S. McRae (44)
|
Vice
President
|
Charles
A. LeFebvre (40)
|
Vice
President
|
William
S. Rowland, age 63, has been Chairman of the Board of Directors, President and
Chief Executive Officer of the Company since May 1999. He served as
Executive Vice President of the Company from 1997 to 1999 and as Treasurer and
Chief Financial Officer from 1989 to 1999. He also serves as Chairman
of the Board of Directors and Chief Executive Officer of First Mid
Bank.
Michael
L. Taylor, age 41, has been the Executive Vice President and Chief Financial
Officer of the Company since May 2007. He served as Vice President and Chief
Financial Officer from May 2000 to May 2007. He was with AMCORE Bank in
Rockford, Illinois from 1996 to 2000.
John W.
Hedges, age 62, has been Executive Vice President of the Company and the
President of First Mid Bank since September 1999. He was with
National City Bank in Decatur, Illinois from 1976 to 1999.
Laurel G.
Allenbaugh, age 49, has been Executive Vice President of Operations since April
2008. She served as Vice President of Operations from February 2000 to April
2008. She served as Controller of the Company and First Mid Bank from
1990 to February 2000 and has been President of MIDS since 1998.
Kelly A.
Downs, age 42, has been Senior Vice President of Human Resources since April
2008, has served as Vice President of Human Resources from 2001 to April 2008,
and has been with the Company since 1991.
Christopher
L. Slabach, age 47, has been Senior Vice President of the Company since 2007 and
Senior Vice President, Risk Management of First Mid Bank since 2008. He served
as Vice President, Audit from 1998-2007.
Eric S.
McRae, age 44, has been Vice President of the Company and Executive Vice
President, Chief Credit Officer of First Mid Bank since December 2008. He served
as President of the Decatur region from 2001 to December 2008.
Charles
A. LeFebvre, age 40, has been Vice President of the Company and Executive Vice
President of the Trust and Wealth Management Division of First Mid Bank since
2007. He was an attorney with the law firm of Thomas, Mamer & Haughey from
2001 to 2007.
ITEM
1A. RISK FACTORS
Various
risks and uncertainties, some of which are difficult to predict and beyond the
Company’s control, could negatively impact the Company. As a financial
institution, the Company is exposed to interest rate risk, liquidity risk,
credit risk, operational risk, risks from economic or market conditions, and
general business risks among others. Adverse experience with these or other
risks could have a material impact on the Company’s financial condition and
results of operations, as well as the value of its common stock.
Difficult
economic conditions and market disruption have adversely impacted the banking
industry and financial markets generally and may significantly affect the
business, financial condition, or results of operations of the Company.
The Company’s success depends, to a certain extent, upon economic and
political conditions, local and national, as well as governmental monetary
policies. Conditions such as inflation, recession, unemployment, changes in
interest rates, money supply and other factors beyond the Company’s control may
adversely affect its asset quality, deposit levels and loan demand and,
therefore, its earnings.
Dramatic
declines in the housing market beginning in the latter half of 2007, with
falling home prices and increasing foreclosures, unemployment and
underemployment, have negatively impacted the credit performance of mortgage
loans and resulted in significant write-downs of asset values by some financial
institutions. The resulting write-downs to assets of financial institutions have
caused many financial institutions to merge with other institutions and, in some
cases, to seek government assistance or bankruptcy protection.
The
capital and credit markets, including the fixed income markets, have been
experiencing volatility and disruption for over a year. In some cases, the
markets have produced downward pressure on stock prices and credit capacity for
certain issuers without regard to those issuers’ financial
strength.
Many
lenders and institutional investors have reduced and, in some cases, ceased to
provide funding to borrowers, including to other financial institutions because
of concern about the stability of the financial markets and the strength of
counterparties. It is difficult to predict how long these economic conditions
will exist, and which of our markets, products or other businesses will
ultimately be affected. Accordingly, the resulting lack of available credit,
lack of confidence in the financial sector, decreased consumer confidence,
increased volatility in the financial markets and reduced business activity
could materially and adversely affect the Company’s business, financial
condition and results of operations.
As a
result of the challenges presented by economic conditions, the Company has faced
the following risks in connection with these events:
·
|
Inability
of borrowers to make timely repayments of their loans, or decreases in
value of real estate collateral securing the payment of such loans
resulting in significant credit losses, which results in increased
delinquencies, foreclosures and customer bankruptcies, any of which could
have a material adverse effect on the Company’s operating
results.
|
·
|
Increased
regulation of the banking industry, including heightened legal standards
and regulatory requirements. Compliance with such regulation increases
costs and may limit the Company’s ability to pursue business
opportunities.
|
·
|
Further
disruptions in the capital markets or other events, including actions by
rating agencies and deteriorating investor expectations, may result in an
inability to borrow on favorable terms or at all from other financial
institutions.
|
The Company’s
profitability depends significantly on economic conditions in the geographic
region in which it operates. A large percentage of the Company’s loans
are to individuals and businesses in Illinois, consequently, any decline in the
economy of this market area could have a materially adverse effect on the
Company’s financial condition and results of operations.
The strength and
stability of other financial institutions may adversely affect the Company’s
business. The actions and commercial soundness of other financial
institutions could affect the Company’s ability to engage in routine funding
transactions. Financial services to institutions are interrelated as a result of
clearing, counterparty or other relationships. The Company has exposure to
different industries and counterparties, and executes transactions with various
counterparties in the financial industry. Recent defaults by financial services
institutions, and even rumors or questions about one or more financial services
institution or the financial services industry in general, have led to
market-wide liquidity problems and could lead to losses or defaults by the
Company or by other institutions. Many of these transactions expose the Company
to credit risk in the event of default of its counterparty or client. Any such
losses could materially and adversely affect the Company’s results of
operations.
Changes in
interest rates may negatively affect our earnings. Changes in market
interest rates and prices may adversely affect the Company’s financial condition
or results of operations. The Company’s net interest income, its largest source
of revenue, is highly dependent on achieving a positive spread between the
interest earned on loans and investments and the interest paid on deposits and
borrowings. Changes in interest rates could negatively impact the Company’s
ability to attract deposits, make loans, and achieve a positive spread resulting
in compression of the net interest margin.
The Company may
not have sufficient cash or access to cash to satisfy current and future
financial obligations, including demands for loans and deposit withdrawals,
funding operating costs, payment of preferred stock dividends and for other
corporate purposes. This type of liquidity risk arises whenever the
maturities of financial instruments included in assets and liabilities differ.
The Company’s liquidity can be affected by a variety of factors, including
general economic conditions, market disruption, operational problems affecting
third parties or the Company, unfavorable pricing, competition, the Company’s
credit rating and regulatory restrictions. (See “Liquidity” herein for
management’s actions to mitigate this risk.)
If the Company
were unable to borrow funds through access to capital markets, it may not be
able to meet the cash flow requirements of its depositors, creditors, and
borrowers, or the operating cash needed to fund corporate expansion and other
corporate activities. Liquidity policies and limits are established by
the board of directors, with operating limits set based upon the ratio of loans
to deposits and percentage of assets funded with non-core or wholesale funding.
The Company regularly monitors the overall liquidity position of First Mid Bank
and the parent company to ensure that various alternative strategies exist to
cover unanticipated events that could affect liquidity. The Company also
establishes policies and monitors guidelines to diversify First Mid Bank’s
wholesale funding sources to avoid concentrations in any one market source.
Wholesale funding sources include Federal funds purchased, securities sold under
repurchase agreements, non-core deposits, and debt. First Mid Bank is also a
member of the Federal Home Loan Bank of Chicago (FHLB), which provides funding
through advances to members that are collateralized with mortgage-related
assets.
First Mid
Bank maintains a portfolio of securities that can be used as a secondary source
of liquidity. There are other sources of liquidity available to the Company
should they be needed. These sources include the sale or securitization of
loans, the ability to acquire additional national market, non-core deposits,
issuance of additional collateralized borrowings such as FHLB advances, the
issuance of debt securities, and the issuance of preferred or common securities
in public or private transactions. The Bank also can borrow from the Federal
Reserve’s discount window.
Starting
in the middle of 2007, there has been significant turmoil and volatility in
worldwide financial markets which, although there has been some improvement, is
still ongoing. These conditions have resulted in a disruption in the liquidity
of financial markets, and could directly impact the Company to the extent it
needs to access capital markets to raise funds to support its business and
overall liquidity position. This situation could affect the cost of such funds
or the Company’s ability to raise such funds. If the Company were unable to
access any of these funding sources when needed, it might be unable to meet
customers’ needs, which could adversely impact its financial condition, results
of operations, cash flows, and level of regulatory-qualifying capital. The
Company may, from time to time, consider opportunistically retiring its
outstanding securities, including its trust preferred securities and common
shares in privately negotiated or open market transactions for cash. For further
discussion, see the “Liquidity” section.
Loan customers or
other counter-parties may not be able to perform their contractual obligations
resulting in a negative impact on the Company’s earnings. Overall
economic conditions affecting businesses and consumers, including the current
difficult economic conditions and market disruptions, could impact the Company’s
credit losses. In addition, real estate valuations could also impact the
Company’s credit losses as the Company maintains $517 million in loans secured
by commercial, agricultural, and residential real estate. A significant decline
in real estate values could have a negative effect on the Company’s financial
condition and results of operations. In addition, the Company’s total loan
balances by industry exceeded 25% of total risk-based capital for each of four
industries as of December 31, 2009. A listing of these industries is contained
in under “Item 6. Management’s Discussion and Analysis of Financial Condition
and Results of Operations -- Loans” herein. A significant change in one of these
industries such as a significant decline in agricultural crop prices, could
adversely impact the Company’s credit losses.
Continued
deterioration in the real estate market could lead to additional losses, which
could have a material adverse effect on the business, financial condition and
results of operations or the Company. Commercial and commercial real
estate loans generally involve higher credit risks than residential real estate
and consumer loans. Because payments on loans secured by commercial real estate
or equipment are often dependent upon the successful operation and management of
the underlying assets, repayment of such loans may be influenced to a great
extent by conditions in the market or the economy. Continued increases in
commercial and consumer delinquency levels or continued declines in real estate
market values would require increased net charge-offs and increases in the
allowance for loan and lease losses, which could have a material adverse effect
on our business, financial condition and results of operations and
prospects.
The allowance for
loan losses may prove inadequate or be negatively affected by credit risk
exposures. The Company’s business depends on the creditworthiness of its
customers. Management periodically reviews the allowance for loan and lease
losses for adequacy considering economic conditions and trends, collateral
values and credit quality indicators, including past charge-off experience and
levels of past due loans and nonperforming assets. There is no certainty that
the allowance for loan losses will be adequate over time to cover credit losses
in the portfolio because of unanticipated adverse changes in the economy, market
conditions or events adversely affecting specific customers, industries or
markets. If the credit quality of the customer base materially decreases, if the
risk profile of a market, industry or group of customers changes materially, or
if the allowance for loan losses is not adequate, the Company’s business,
financial condition, liquidity, capital, and results of operations could be
materially adversely affected.
Declines in the
value of securities held in the investment portfolio may negatively affect the
Company’s earnings. The value of an
investment in the portfolio could decrease due to changes in market factors. The
market value of certain investment securities is volatile and future declines or
other-than-temporary impairments could materially adversely affect the Company’s
future earnings and regulatory capital. Continued volatility in the market value
of certain of the investment securities, whether caused by changes in market
perceptions of credit risk, as reflected in the expected market yield of the
security, or actual defaults in the portfolio could result in significant
fluctuations in the value of the securities. This could have a material adverse
impact on the Company’s accumulated other comprehensive loss and shareholders’
equity depending upon the direction of the fluctuations.
Furthermore,
future downgrades or defaults in these securities could result in future
classifications as other-than-temporarily impaired. The Company has invested in
trust preferred securities issued by financial institutions and insurance
companies, corporate securities of financial institutions, and stock in the
Federal Home Loan Bank of Chicago and Federal Reserve Bank of Chicago.
Deterioration of the financial stability of the underlying financial
institutions for these investments could result in other-than-temporary
impairment charges to the Company and could have a material impact on future
earnings. For further discussion of the Company’s investments, see Note 4 –
“Investment Securities.”
If the Company’s
stock price declines from levels at December 31, 2009, management will evaluate
the goodwill balances for impairment, and if the values of the businesses have
declined, the Company could recognize an impairment charge for its
goodwill. Management performed an annual goodwill impairment
assessment as of September 30, 2009. Based on these analyses, management
concluded that the fair value of the Company’s reporting units exceeded the fair
value of its assets and liabilities and, therefore, goodwill was not considered
impaired. It is possible that management’s assumptions and conclusions regarding
the valuation of the Company’s lines of business could change adversely, which
could result in the recognition of impairment for goodwill, which could have a
material effect on the Company’s financial position and future results of
operations.
The Series B
preferred stock impacts net income available to common stockholders and earnings
per share. As long as shares of the Series B preferred stock
are outstanding, no dividends may be paid on the Company’s common stock unless
all dividends on the Series B preferred stock have been paid in full. The
dividends declared on the Series B preferred stock reduce the net income
available to common stockholders and earnings per share.
Holders of the
Series B preferred stock have rights that are senior to those of common
stockholders. The Series B preferred stock is senior to the shares of
common stock and holders of the Series B preferred stock have certain rights and
preferences that are senior to holders of common stock. The Series B preferred
stock will rank senior to the common stock and all other equity securities
designated as ranking junior to the Series B preferred stock. So long as any
shares of the Series B preferred stock remain outstanding, unless all accrued
and unpaid dividends for all prior dividend periods have been paid or are
contemporaneously declared and paid in full, no dividend shall be paid or
declared on common stock or other junior stock, other than a dividend payable
solely in common stock. The Company also may not purchase, redeem or otherwise
acquire for consideration any shares of its common stock or other junior stock
unless it has paid in full all accrued dividends on the Series B preferred stock
for all prior dividend periods. The Series B preferred stock is entitled to a
liquidation preference over shares of common stock in the event of the Company’s
liquidation, dissolution or winding up.
The Company may
issue additional common stock or other equity securities in the future which
could dilute the ownership interest of existing stockholders. In order to maintain capital
at desired or regulatory-required levels or to replace existing capital, the
Company may be required to issue additional shares of common stock, or
securities convertible into, exchangeable for or representing rights to acquire
shares of common stock. The Company may sell these shares at prices below the
current market price of shares, and the sale of these shares may significantly
dilute stockholder ownership. The Company could also issue additional shares in
connection with acquisitions of other financial institutions.
Human error,
inadequate or failed internal processes and systems, and external events may
have adverse effects on the Company. Operational risk includes compliance
or legal risk, which is the risk of loss from violations of, or noncompliance
with, laws, rules, regulations, prescribed practices, or ethical standards.
Operational risk also encompasses transaction risk, which includes losses from
fraud, error, the inability to deliver products or services, and loss or theft
of information. Losses resulting from operational risk could take the form of
explicit charges, increased operational costs, harm to the Company’s reputation
or forgone opportunities. Any of these could potentially have a material adverse
effect on the Company’s financial condition and results of
operations.
The Company is
exposed to various business risks that could have a negative effect on the
financial performance of the Company. These risks include: changes in
customer behavior, changes in competition, new litigation or changes to existing
litigation, claims and assessments, environmental liabilities, real or
threatened acts of war or terrorist activity, adverse weather, changes in
accounting standards, legislative or regulatory changes, taxing authority
interpretations, and an inability on the Company’s part to retain and attract
skilled employees.
In
addition to these risks identified by the Company, investments in the Company’s
common stock involve risk. The market price of the Company’s common stock may
fluctuate significantly in response to a number of factors including: volatility
of stock market prices and volumes, rumors or erroneous information, changes in
market valuations of similar companies, changes in securities analysts’
estimates of financial performance, and variations in quarterly or annual
operating results.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
The
Company or First Mid Bank own all of the following properties except those
specifically identified as being leased.
First
Mid Bank
Mattoon.
First Mid Bank’s main office is located at 1515 Charleston Avenue,
Mattoon, Illinois. The office building consists of a one-story
structure with occupied basement, which was opened in 1965 with approximately
36,000 square feet of office space, four walk-up teller stations, and four
sit-down teller stations. Adjacent to this building is a parking lot with
parking for approximately seventy cars. A drive-up facility with nine
drive-up lanes and a drive-up automated teller machine (“ATM”) is located across
the street from First Mid Bank’s main office.
First Mid
Bank has a facility at 333 Broadway Avenue East, Mattoon,
Illinois. The one-story office building contains approximately 7,600
square feet of office space. The main floor provides space for five
teller windows, two private offices, a safe deposit vault and four drive-up
lanes. There is adequate parking located adjacent to the
building. A drive-up ATM is located adjacent to the
building.
First Mid
Bank leases a facility at 1504-A Lakeland Boulevard, Mattoon, Illinois that
provides space for three tellers, two drive-up lanes and a drive-up
ATM.
First Mid
Bank owns a facility located at 1520 Charleston Avenue, Mattoon, Illinois, which
is used as the corporate headquarters of the Company and is used by MIDS for its
data processing and back room operations for the Company and First Mid
Bank. The office building consists of a two-story structure with an
occupied basement that has approximately 20,000 square feet of office
space.
The
Company owns a facility at 1500 Wabash Avenue, Mattoon, Illinois, which is used
by the loan and deposit services departments of First Mid Bank. The office
building consists of a two-story structure with a basement that has
approximately 11,200 square feet of office space.
First Mid
Bank leases a facility located at 14th and
Charleston, Mattoon, Illinois which is used by the trust and investment services
departments of First Mid Bank. The office space, comprised of
approximately 2,100 square feet, contains five offices, one conference rooms, a
file room and a waiting/reception area. Adequate parking is available
to serve customers.
There are
four additional ATMs located in Mattoon. They are located in the Administration
building of Lake Land College, in the main lobby of Sarah Bush Lincoln Health
Center, at R.R. Donnelley & Sons Co. on North Route 45 and County Market at
2000 Western Avenue.
Sullivan. First
Mid Bank operates one location in Sullivan, Illinois. The main office
is located at 200 South Hamilton Street, Sullivan, Illinois. Its
office building is a one-story structure containing approximately 11,400 square
feet of office space with five teller windows, six private offices and four
drive-up lanes. Adequate customer parking is available on two sides
of the main office building. There is also a walk-up ATM located in the Sullivan
Citgo Station at 105 West Jackson.
Neoga.
First Mid Bank’s office in Neoga, Illinois, is located at 102 East Sixth
Street, Neoga, Illinois. The building consists of a one-story
structure containing approximately 4,000 square feet of office
space. The main office building provides space for four tellers in
the lobby of the building, two drive-up tellers, four private offices, two night
depositories, and an ATM. Adequate customer parking is
available on three sides of the main office building.
Tuscola.
First Mid Bank operates an office in Tuscola, Illinois, which is located
at 410 South Main Street. The all brick building consists of a
one-story structure with approximately 4,000 square feet of office
space. This main office building provides for four lobby tellers, two
drive-up tellers, four private offices, a conference room, four drive-through
lanes, including one with a drive-up ATM and one with a drive-up night
depository. Adequate customer parking is available outside the main
entrance.
Charleston.
The main office, acquired in March 1997, is located at 500 West Lincoln
Avenue, Charleston, Illinois. This one-story facility contains
approximately 8,400 square feet with five teller stations, eight private offices
and four drive-up lanes.
A second
facility is located at 701 Sixth Street, Charleston,
Illinois. It is a one-story facility with an attached two-bay
drive-up structure and consists of approximately 5,500 square feet of office
space. Adequate parking is available to serve its
customers. The office space is comprised of three teller stations,
three private offices, storage area, and a night
depository. Approximately 2,200 square feet of this building is
rented out to non-affiliated companies.
The third
facility consists of approximately 400 square feet of leased space at the Martin
Luther King Student Union on the Eastern Illinois University
campus. The facility has two walk-up teller stations and two sit-down
teller/CSR stations.
Seven
ATMs are located in Charleston. One drive-up ATM is located in the
parking lot of the facility at 500 West Lincoln Avenue, one in the parking lot
of Save-A-Lot at 1400 East Lincoln Avenue, and one drive-up ATM is located in
the parking lot of the Sixth Street facility. The fourth is an
off-site walk-up ATM located in the Student Union at Eastern Illinois University
and the fifth is a walk-up ATM located in Lantz Arena at Eastern Illinois
University. The sixth ATM is a drive-up unit located on the Eastern Illinois
University campus in a parking lot at the corner of Ninth Street and Roosevelt
and the seventh is a drive-up unit located on the Eastern Illinois University
campus in a parking lot at the corner of Fourth Street and
Roosevelt.
Champaign. First
Mid Bank leases a facility at 2229 South Neil Street, Champaign,
Illinois. The office space, comprised of approximately 3,496 square
feet, contains six lobby teller windows, two drive-up lanes, one drive-up ATM, a
night depository, four private offices, and a conference room. Adequate customer
parking is available to serve customers.
First Mid
Bank also leases a facility at 913A West Marketview, Champaign, Illinois,
located in the Rural King Store. The office space is approximately 1,276 square
feet, contains three teller stations, two private offices, a walk-up ATM, a
night depository and a conference room.
Urbana.
First Mid Bank owns a facility located at 601 South Vine Street, Urbana,
Illinois. Its office building consists of a one-story structure and
contains approximately 3,600 square feet. The office building
provides space for three tellers, two private offices and two drive-up
lanes. An ATM machine is located in front of the
building. An adequate customer parking lot is located on the south
side of the building.
Effingham.
First Mid Bank operates a facility at 902 North Keller Drive, Effingham,
Illinois. The building is a two-story structure with approximately
4,000 square feet of office space. This office space consists of four
teller stations, three drive-up teller lanes, five private offices and a night
depository. Adequate parking is available to customers in front of the
facility.
First Mid
Bank also owns property at 900 North Keller Drive, Effingham, Illinois that
provides additional customer parking along with a drive-up ATM.
Altamont.
First Mid Bank has a banking facility located at 101 West Washington
Street, Altamont, Illinois. This building is a one-story structure
that has approximately 4,300 square feet of office space. The office
space consists of nine teller windows, three drive-up teller lanes (one of which
facilitates an ATM), seven private offices, one conference room and a night
depository. Adequate parking is available on three sides of the
building.
Arcola.
First Mid Bank owns a facility at 249 West Springfield Road, Arcola,
Illinois. This building is a one-story structure with approximately
2,800 square feet of office space. This office space consists of
three lobby teller stations, three drive-up teller lanes, three private offices,
a conference room, safe deposit vault and a night depository. A
drive-up ATM lane is available adjacent to the teller lanes. Adequate
parking is available to customers in front of the facility. There are also two
additional ATMs located at the Arcola Citgo Station on Route 133 at Interstate
Five and the Arthur Citgo Station at 209 North Vine.
Monticello.
First Mid Bank has two offices in Monticello. The main
facility is located on the northeast corner of the historic town square at 100
West Washington Street. This building is a two-story structure that
has 8,000 square feet of office space consisting of five teller stations, seven
private offices, and a night depository. The second floor is furnished and the
basement is used for storage. Adequate parking is available to
customers in back of the facility.
A second
facility is located at 219 West Center Street, Monticello,
Illinois. It is a one-story facility with two lobby teller stations
and an attached two-bay drive-up structure with a drive-up ATM and a night
depository. Adequate parking is available to serve its customers.
Taylorville.
First Mid Bank has a banking facility located at 200 North Main Street,
Taylorville, Illinois. This one-story building has approximately
3,700 square feet with five teller stations, three private offices, one drive-up
lane, and a finished basement. A drive-up ATM is located in the
parking lot and adequate customer parking is available adjacent to the
building.
Decatur.
First Mid Bank leases a facility at 111 E. Main Street, Decatur,
Illinois. The office space comprised of 4,340 square feet contains three lobby
teller windows, two drive-up lanes, a night depository, three private offices,
safe deposit and loan vaults, and a conference room. Customer parking is
available adjacent to the building.
First Mid
Bank also leases a facility at 3101 North Water Street, Decatur, Illinois. This
one-story facility has approximately 768 square feet of office space. This
office space consists of two lobby teller windows, four drive-up teller lanes
and a drive-up ATM.
Highland.
First Mid Bank owns a facility located at 12616 State Route 143,
Highland, Illinois. The building is a two-story structure with
approximately 6,720 square feet of office space, a portion of which is leased to
an unaffiliated business. This office space consists of a customer
service area and teller windows, three drive-up teller lanes, an ATM and four
private offices. Adequate parking is available to serve customers.
First Mid
Bank leases a facility located at 1301 Broadway, Highland, Illinois. The office
space, comprised of 1300 square feet, contains three lobby teller windows, two
drive-up lanes and one drive-up ATM, a night depository, two private offices,
safe deposit and loan vaults and a conference room. Adequate parking
is available to serve customers.
St.
Jacob. First Mid Bank rents property at 705 N. Douglas Street,
St. Jacob, Illinois where a drive-up ATM is located.
Pocahontas.
First Mid Bank owns a facility located at 103 Park Street, Pocahontas,
Illinois. The building is a one-story brick structure with
approximately 3,360 square feet of office space. This office space
consists of a customer processing room, three private offices and three bank
vaults. Adequate parking is available to serve customers.
First Mid
Bank also has an ATM at 4 O’Fallon Street in Powhaten Restaurant.
Maryville.
First Mid leases a facility located at 2930 North Center Street,
Maryville, Illinois. The office space, comprised of approximately
6,684 square feet, contains four lobby teller windows, including one sit-down
teller, two drive-up lanes, one drive-up ATM, a night depository, three private
offices, a vault, and a conference room. Adequate customer parking is available
to serve customers.
Mansfield.
First Mid Bank owns a facility at 1 Jefferson, Mansfield,
Illinois. The building is a one-story structure with approximately
3,695 square feet of office space which contains a lobby with teller windows,
one drive-up lane, three private offices, a vault, a conference room and a
basement used for storage. Customer parking is available adjacent to the
building.
Mahomet.
First Mid Bank owns a facility located at 504 E. Oak Street, Mahomet,
Illinois. The building is a one-story structure with approximately 3,045 square
feet of office space which contains a lobby with teller windows, a drive-up
lane, an ATM, two private offices, a vault, a conference room and a basement
used for storage. Adequate customer parking is available to serve
customers.
Weldon.
First Mid Bank owns a facility located at Oak and Maple, Weldon,
Illinois. The building is a two-story structure with approximately
5,964 square feet of office space which contains a lobby with teller windows, a
drive-up lane, four private offices, two vaults, a conference room and a
basement used for storage. Offices on the second floor have been leased to a
separate entity. Adequate customer parking is available to serve
customers.
Checkley
Mattoon.
Checkley leases a facility located at 100 Lerna South, Mattoon,
Illinois. The office space, comprised of approximately 8,829 square
feet, contains ten offices, two conference rooms, a file room and an open work
area that can accommodate nine workstations. Adequate parking is
available to serve customers.
ITEM
3. 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 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 or results of
operations.
ITEM
4. [RESERVED]
PART
II
|
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER
MATTERS AND ISSUER OF PURCHASES OF EQUITY
SECURITIES
|
The
Company’s common stock was held by approximately 609 shareholders of record as
of December 31, 2009 and is included for quotation on the over-the-counter
electronic bulletin board.
The
following table shows the high and low bid prices per share of the Company’s
common stock for the indicated periods. These quotations represent inter-dealer
prices without retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions.
Quarter
|
High
|
Low
|
2009
|
||
4th
|
$19.90
|
$16.55
|
3rd
|
$19.90
|
$17.10
|
2nd
|
$20.00
|
$16.00
|
1st
|
$22.20
|
$18.00
|
2008
|
||
4th
|
$26.00
|
$13.00
|
3rd
|
$28.50
|
$24.45
|
2nd
|
$27.75
|
$24.90
|
1st
|
$26.15
|
$23.40
|
The
following table sets forth the cash dividends per share on the Company’s common
stock for the last two years.
Dividend
|
|||
Date
Declared
|
Date
Paid
|
Per
Share
|
|
12-15-2009
|
1-07-2010
|
$.190
|
|
4-29-2009
|
6-08-2009
|
$.190
|
|
12-16-2008
|
1-05-2009
|
$.190
|
|
4-30-2008
|
6-16-2008
|
$.190
|
On June
29, 2007, the Company effected a three-for-two stock split in the form of a 50%
stock dividend. Par value remained at $4 per share. All
share and per share amounts have been restated for years prior to 2007 to give
retroactive recognition to the stock split.
The
Company’s shareholders are entitled to receive such dividends as are declared by
the Board of Directors, which considers payment of dividends
semi-annually. The ability of the Company to pay dividends, as well
as fund its operations, is dependent upon receipt of dividends from First Mid
Bank. Regulatory authorities limit the amount of dividends that can
be paid by First Mid Bank without prior approval from such
authorities. For further discussion of First Mid Bank’s dividend
restrictions, see Item1 – “Business” – “First Mid Bank” – “Dividends” and Note
17 – “Dividend Restrictions” herein. The Board of Directors of the
Company declared cash dividends semi-annually during the two years ended
December 31, 2009.
The
following table summarizes share repurchase activity for the fourth quarter of
2009:
ISSUER
PURCHASES OF EQUITY SECURITIES
|
||||
Period
|
(a)
Total Number of Shares Purchased
|
(b)
Average Price Paid per Share
|
(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
(d)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the
Plans or Programs at End of Period
|
October
1, 2009 – October 31, 2009
|
0
|
$0.00
|
0
|
$4,860,000
|
November
1, 2009 – November 30, 2009
|
41,756
|
$18.61
|
41,756
|
$4,083,000
|
December
1, 2009 – December 31, 2009
|
35,215
|
$18.91
|
35,215
|
$3,417,000
|
Total
|
76,971
|
$18.75
|
76,971
|
$3,417,000
|
Since
August 5, 1998, the Board of Directors has approved repurchase programs pursuant
to which the Company may repurchase a total of approximately $56.7 million of
the Company’s common stock. The repurchase programs approved by the
Board of Directors are as follows:
·
|
On
August 5, 1998, repurchases of up to 3%, or $2 million, of the Company’s
common stock.
|
·
|
In
March 2000, repurchases up to an additional 5%, or $4.2 million of the
Company’s common stock.
|
·
|
In
September 2001, repurchases of $3 million of additional shares of the
Company’s common stock.
|
·
|
In
August 2002, repurchases of $5 million of additional shares of the
Company’s common stock.
|
·
|
In
September 2003, repurchases of $10 million of additional shares of the
Company’s common stock.
|
·
|
On
April 27, 2004, repurchases of $5 million of additional shares of the
Company’s common stock.
|
·
|
On
August 23, 2005, repurchases of $5 million of additional shares of the
Company’s common stock.
|
·
|
On
August 22, 2006, repurchases of $5 million of additional shares of the
Company’s common stock.
|
·
|
On
February 27, 2007, repurchases of $5 million of additional shares of the
Company’s common stock.
|
·
|
On
November 13, 2007, repurchases of $5 million of additional shares of the
Company’s common stock.
|
·
|
On
December 16, 2008, repurchases of $2.5 million of additional shares of the
Company’s common stock.
|
·
|
On
May 26, 2009, repurchases of $5 million of additional shares of the
Company’s common stock.
|
ITEM
6. SELECTED
FINANCIAL DATA
The
following sets forth a five-year comparison of selected financial data (dollars
in thousands, except per share data).
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Summary
of Operations
|
||||||||||||||||||||
Interest
income
|
$ | 51,409 | $ | 57,066 | $ | 59,931 | $ | 55,556 | $ | 44,580 | ||||||||||
Interest
expense
|
15,837 | 21,344 | 28,429 | 24,712 | 15,687 | |||||||||||||||
Net
interest income
|
35,572 | 35,722 | 31,502 | 30,844 | 28,893 | |||||||||||||||
Provision
for loan losses
|
3,594 | 3,559 | 862 | 760 | 1,091 | |||||||||||||||
Other
income
|
13,455 | 15,264 | 14,661 | 13,380 | 12,518 | |||||||||||||||
Other
expense
|
33,212 | 31,460 | 30,055 | 28,423 | 25,385 | |||||||||||||||
Income
before income taxes
|
12,221 | 15,967 | 15,246 | 15,041 | 14,935 | |||||||||||||||
Income
tax expense
|
4,007 | 5,443 | 5,087 | 5,032 | 5,128 | |||||||||||||||
Net
income
|
8,214 | 10,524 | 10,159 | 10,009 | 9,807 | |||||||||||||||
Dividends
on preferred shares
|
1,821 | - | - | - | - | |||||||||||||||
Net
income available to common stockholders
|
$ | 6,393 | $ | 10,524 | $ | 10,159 | $ | 10,009 | $ | 9,807 | ||||||||||
Per
Common Share Data (1)
|
||||||||||||||||||||
Basic
earnings per share
|
$ | 1.04 | $ | 1.69 | $ | 1.60 | $ | 1.54 | $ | 1.48 | ||||||||||
Diluted
earnings per share
|
1.04 | 1.67 | 1.57 | 1.51 | 1.44 | |||||||||||||||
Dividends
per share
|
.38 | .38 | .38 | .35 | .33 | |||||||||||||||
Book
value per share
|
14.23 | 13.50 | 12.82 | 11.78 | 10.98 | |||||||||||||||
Capital
Ratios
|
||||||||||||||||||||
Total
capital to risk-weighted assets
|
15.76 | % | 11.99 | % | 11.13 | % | 10.91 | % | 11.87 | % | ||||||||||
Tier
1 capital to risk-weighted assets
|
14.57 | % | 11.02 | % | 10.32 | % | 10.10 | % | 11.14 | % | ||||||||||
Tier
1 capital to average assets
|
10.63 | % | 8.41 | % | 7.89 | % | 7.56 | % | 8.55 | % | ||||||||||
Financial
Ratios
|
||||||||||||||||||||
Net
interest margin
|
3.40 | % | 3.73 | % | 3.43 | % | 3.51 | % | 3.70 | % | ||||||||||
Return
on average assets
|
.74 | % | 1.03 | % | 1.03 | % | 1.07 | % | 1.18 | % | ||||||||||
Return
on average common equity
|
9.56 | % | 12.87 | % | 13.06 | % | 13.31 | % | 13.64 | % | ||||||||||
Dividend
on common shares payout ratio
|
36.54 | % | 22.49 | % | 23.75 | % | 22.51 | % | 22.55 | % | ||||||||||
Average
equity to average assets
|
9.59 | % | 8.00 | % | 7.90 | % | 8.01 | % | 8.64 | % | ||||||||||
Allowance
for loan losses as a percent of total loans
|
1.35 | % | 1.02 | % | 0.82 | % | 0.81 | % | 0.73 | % | ||||||||||
Year
End Balances
|
||||||||||||||||||||
Total
assets
|
$ | 1,095,155 | $ | 1,049,700 | $ | 1,016,338 | $ | 980,559 | $ | 850,573 | ||||||||||
Net
loans
|
691,288 | 734,351 | 742,043 | 717,692 | 631,707 | |||||||||||||||
Total
deposits
|
840,410 | 806,354 | 770,583 | 770,595 | 649,069 | |||||||||||||||
Total
equity
|
111,221 | 82,778 | 80,452 | 75,786 | 72,326 | |||||||||||||||
Average
Balances
|
||||||||||||||||||||
Total
assets
|
$ | 1,108,669 | $ | 1,022,734 | $ | 985,230 | $ | 938,784 | $ | 832,752 | ||||||||||
Net
loans
|
692,961 | 733,681 | 722,672 | 686,069 | 606,064 | |||||||||||||||
Total
deposits
|
744,043 | 795,786 | 771,561 | 737,344 | 650,116 | |||||||||||||||
Total
equity
|
106,295 | 81,793 | 77,787 | 75,174 | 71,911 |
(1)
|
All
share and per share data have been restated to reflect the 3-for-2 stock
split effective June 29, 2007.
|
|
ITEM
7. 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 for the years ended December 31, 2009, 2008 and
2007. 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 and those in the Company’s market area,
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 and the
valuation of the investment portfolio, 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 Item 1A of this Annual Report on Form 10-K captioned “Risk Factors”
and elsewhere in the filing and the Company’s other filings with the SEC.
Furthermore, forward-looking statements speak only as of the date they are
made. Except as required under the federal securities laws or the
rules and regulations of the SEC, we do not undertake any obligation to update
or review any forward-looking information, whether as a result of new
information, future events or otherwise.
For
the Years Ended December 31, 2009, 2008 and 2007
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 $8.21 million, $10.52 million, and $10.16 million and diluted
earnings per share were $1.04, $1.67, and $1.57 for the years ended December 31,
2009, 2008, and 2007, respectively. The decrease in net income in 2009 was
primarily the result of an increase in FDIC insurance assessment charges and
other-than-temporary impairment losses on securities for the year. The decrease
in earnings per share in 2009 was primarily the result of lower net income for
the year. The following table shows the Company’s annualized
performance ratios for the years ended December 31, 2009, 2008 and
2007:
2009
|
2008
|
2007
|
||||||||||
Return
on average assets
|
.74 | % | 1.03 | % | 1.03 | % | ||||||
Return
on average common equity
|
9.56 | % | 12.87 | % | 13.06 | % | ||||||
Average
common equity to average assets
|
9.59 | % | 8.00 | % | 7.90 | % |
Total
assets at December 31, 2009, 2008, and 2007 were $1,095.2 million, $1,049.7
million, and $1,016.3 million, respectively. The increase in net assets during
2009 was primarily due to an increase in federal funds sold by the Company and
increases in available-for-sale securities, offset by decreases in net loans.
Net loan balances decreased to $691.1 million at December 31, 2009, from $733.8
million at December 31, 2008 and compared to $740.1 million at December 31,
2007. The decrease in 2009 of $42.7 million or 5.8% was due to
reduced loan demand as a result of the sluggish economy. Total deposit balances
increased to $840.4 million at December 31, 2009 from $806.4 million at December
31, 2008 and from $770.6 million at December 31, 2007. The increase in 2009 was
primarily due to increased balances in money market deposits and savings
accounts.
Net
interest margin, defined as net interest income divided by average
interest-earning assets, was 3.40% for 2009, 3.73% for 2008 and 3.43% for 2007.
The decrease in interest margin during 2009 was the result of a greater decrease
in interest-earning asset rates compared to the decrease in borrowing and
deposit rates and a greater level of liquidity maintained by the Company during
2009. The decrease in interest margin during 2008 was the result of greater
decrease in borrowing and deposit rates compared to the decrease in
interest-earning asset rates.
Net
interest income decreased slightly to $35.6 million in 2009 from $35.7 million
in 2008 and $31.5 million in 2007. The ability of the Company to
continue to grow net interest income is largely dependent on management’s
ability to succeed in its overall business development
efforts. Management expects these efforts to continue but does not
intend to compromise credit quality and prudent management of the maturities of
interest-earning assets and interest-paying liabilities in order to achieve
growth.
Non-interest
income decreased to $13.5 million in 2009 compared to $15.3 million in 2008 and
$14.7 million in 2007. The primary reasons for the decrease of $1.8 million or
11.9% from 2008 to 2009 were decreases in trust revenues and brokerage
commissions and other-than-temporary impairment charges on investment securities
offset by a $1 million gain on the sale of the Bank’s merchant card servicing
portfolio. The primary reasons for the increase of $.6 million or 4.1% from 2007
to 2008 were increases in ATM and debit card transaction fees during 2008
compared to 2007, and approximately $291,000 in proceeds on life insurance the
Company maintained on former executive and director, Daniel E. Marvin, Jr., who
died in April of 2008.
Non-interest
expenses increased $1.7 million, to $33.2 million in 2009 compared to $31.5
million in 2008 and $30.1 million in 2007. The primary factor for the
increase during 2009 was an increase in FDIC insurance assessments. The primary
factors in the increase during 2008 were additional salaries and benefits
expense as a result of merit increases for continuing employees, increases in
loan collection expenses and the write down of the DeLand property of $132,000
during the first quarter of 2008.
Following
is a summary of the factors that contributed to the changes in net income (in
thousands):
2009
vs 2008
|
2008
vs 2007
|
|||||||
Net
interest income
|
$ | (150 | ) | $ | 4,220 | |||
Provision
for loan losses
|
(35 | ) | (2,697 | ) | ||||
Other
income, including securities transactions
|
(1,809 | ) | 603 | |||||
Other
expenses
|
(1,752 | ) | (1,405 | ) | ||||
Income
taxes
|
1,436 | (356 | ) | |||||
Increase
(decrease) in net income
|
$ | (2,310 | ) | $ | 365 |
Credit
quality is an area of importance to the Company. Year-end total nonperforming
loans were $12.7 million at December 31, 2009 compared to $7.3 million at
December 31, 2008 and $7.5 million at December 31, 2007. The increase
in 2009 occurred as a result of loans that became nonperforming during the year
due to continued deterioration in economic conditions including increased
unemployment, reduction in cash flow from increased vacancies in commercial
properties, and declines in property values. Other real estate owned balances
totaled $2.9 million at December 31, 2009 compared to $2.4 million at December
31, 2008. The Company’s provision for loan losses was $3,594,000 for 2009
compared to $3,559,000 for 2008. At December 31, 2009, the
composition of the loan portfolio remained similar to 2008. Loans
secured by both commercial and residential real estate comprised 74% of the loan
portfolio as of December 31, 2009 and 2008.
The
Company also held investments in four trust preferred securities with a fair
value of $3.2 million and unrealized losses of $4.6 million at December 31, 2009
compared to a fair value of $5.4 million and unrealized losses of $4 million at
December 31, 2008. During 2009, the Company recorded $1.8 million of
other-than-temporary impairment charges for the credit portion of the unrealized
losses of these securities. The loss established a new, lower amortized cost
basis for these securities and reduced non-interest income. See Note 4 –
“Investment Securities” for additional details regarding these
investments.
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 ratio to risk weighted assets ratio at December 31,
2009, 2008, and 2007 was 14.57%, 11.02%, and 10.32%, respectively. The Company’s
total capital to risk weighted assets ratio at December 31, 2009, 2008, and 2007
was 15.76%, 11.99%, and 11.13%, respectively. The increase in 2009 was primarily
the result of an increase in retained earnings due to the Company’s net income
and the issuance of $24,635,000 of Series B 9% Non-Cumulative Perpetual
Convertible Preferred Stock. (See “Preferred Stock” in Note 1 to consolidated
financial statements for more detailed information.) The increase in 2008 was
primarily the result of an increase in retained earnings due to the Company’s
increase in net income and changes in federal banking and thrift regulatory
agencies rules that permit banking organizations to reduce the amount of
goodwill that must be deducted from tier 1 capital by any associated deferred
tax liability.
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 “Liquidity” herein for
a full listing of its 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
December 31, 2009, 2008 and 2007 were $132.9 million, $152.9 million and $152.7
million, respectively. See Note 18 – “Commitments and Contingent
Liabilities” herein for further information.
Critical
Accounting Policies and Use of Significant Estimates
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.
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.
Allowance for
Loan Losses. 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. An
estimate of potential losses inherent in the loan portfolio are determined and
an allowance for those losses is established by considering factors including
historical loss rates, expected cash flows and estimated collateral values. In
assessing these factors, the Company use organizational history and experience
with credit decisions and related outcomes. The allowance for loan losses
represents the best estimate of losses inherent in the existing loan portfolio.
The allowance for loan losses is increased by the provision for loan losses
charged to expense and reduced by loans charged off, net of recoveries. The
Company evaluates the allowance for loan losses quarterly. If the underlying
assumptions later prove to be inaccurate based on subsequent loss evaluations,
the allowance for loan losses is adjusted.
The
Company estimates the appropriate level of allowance for loan losses by
separately evaluating impaired and nonimpaired loans. A specific allowance is
assigned to an impaired loan when expected cash flows or collateral do not
justify the carrying amount of the loan. The methodology used to assign an
allowance to a nonimpaired loan is more subjective. Generally, the allowance
assigned to nonimpaired loans is determined by applying historical loss rates to
existing loans with similar risk characteristics, adjusted for qualitative
factors including the volume and severity of identified classified loans,
changes in economic conditions, changes in credit policies or underwriting
standards, and changes in the level of credit risk associated with specific
industries and markets. Because the economic and business climate in any given
industry or market, and its impact on any given borrower, can change rapidly,
the risk profile of the loan portfolio is continually assessed and adjusted when
appropriate. Notwithstanding these procedures, there still exists the
possibility that the assessment could prove to be significantly incorrect and
that an immediate adjustment to the allowance for loan losses would be
required.
Other Real Estate
Owned. Other real estate owned acquired through loan foreclosure are
initially recorded at fair value less costs to sell when acquired, establishing
a new cost basis. The adjustment at the time of foreclosure is recorded through
the allowance for loan losses. Due to the subjective nature of establishing the
fair value when the asset is acquired, the actual fair value of the other real
estate owned or foreclosed asset could differ from the original estimate. If it
is determined that fair value temporarily declines subsequent to foreclosure, a
valuation allowance is recorded through noninterest expense. Operating costs
associated with the assets after acquisition are also recorded as noninterest
expense. Gains and losses on the disposition of other real estate owned and
foreclosed assets are netted and posted to other noninterest
expense.
Investment in
Debt and Equity Securities. The Company classifies its investments in
debt and equity securities as either held-to-maturity or available-for-sale in
accordance with Statement of Financial Accounting Standards (SFAS)
No. 115, “Accounting for
Certain Investments in Debt and Equity Securities,” which was codified
into ASC 320. Securities classified as held-to-maturity are recorded at cost or
amortized cost. Available-for-sale securities are carried at fair value. Fair
value calculations are based on quoted market prices when such prices are
available. If quoted market prices are not available, estimates of fair value
are computed using a variety of techniques, including extrapolation from the
quoted prices of similar instruments or recent trades for thinly traded
securities, fundamental analysis, or through obtaining purchase quotes. Due to
the subjective nature of the valuation process, it is possible that the actual
fair values of these investments could differ from the estimated amounts,
thereby affecting the financial position, results of operations and cash flows
of the Company. If the estimated value of investments is less than the cost or
amortized cost, the Company evaluates whether an event or change in
circumstances has occurred that may have a significant adverse effect on the
fair value of the investment. If such an event or change has occurred and the
Company determines that the impairment is other-than-temporary, a further
determination is made as to the portion of impairment that is related to credit
loss. The impairment of the investment that is related to the credit loss is
expensed in the period in which the event or change occurred. The remainder of
the impairment is recorded in other comprehensive income.
Deferred Income
Tax Assets/Liabilities. The Company’s net deferred income tax asset
arises from differences in the dates that items of income and expense enter into
our reported income and taxable income. Deferred tax assets and liabilities are
established for these items as they arise. From an accounting standpoint,
deferred tax assets are reviewed to determine if they are realizable based on
the historical level of taxable income, estimates of future taxable income and
the reversals of deferred tax liabilities. In most cases, the realization of the
deferred tax asset is based on future profitability. If the Company were to
experience net operating losses for tax purposes in a future period, the
realization of deferred tax assets would be evaluated for a potential valuation
reserve.
Additionally,
the Company reviews its uncertain tax positions annually under FASB
Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in Income
Taxes,” codified within ASC 740. An uncertain tax position is recognized
as a benefit only if it is "more likely than not" that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount actually recognized is the largest amount of tax benefit that is
greater than 50% likely to be recognized on examination. For tax positions not
meeting the "more likely than not" test, no tax benefit is recorded. A
significant amount of judgment is applied to determine both whether the tax
position meets the "more likely than not" test as well as to determine the
largest amount of tax benefit that is greater than 50% likely to be recognized.
Differences between the position taken by management and that of taxing
authorities could result in a reduction of a tax benefit or increase to tax
liability, which could adversely affect future income tax expense.
Impairment of
Goodwill and Intangible Assets. Core deposit and customer relationships,
which are intangible assets with a finite life, are recorded on the Company’s
balance sheets. These intangible assets were capitalized as a result of past
acquisitions and are being amortized over their estimated useful lives of up to
15 years. Core deposit intangible assets, with finite lives will be tested for
impairment when changes in events or circumstances indicate that its carrying
amount may not be recoverable. Core deposit intangible assets were tested for
impairment during 2009 as part of the goodwill impairment test and no impairment
was deemed necessary.
As a
result of the Company’s acquisition activity, goodwill, an intangible asset with
an indefinite life, was reflected on the balance sheets in prior periods.
Goodwill is evaluated for impairment annually, unless there are factors present
that indicate a potential impairment, in which case, the goodwill impairment
test is performed more frequently than annually.
Fair Value
Measurements. The fair value of a financial instrument is defined as the
amount at which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale. The Company
estimates the fair value of a financial instrument using a variety of valuation
methods. Where financial instruments are actively traded and have quoted market
prices, quoted market prices are used for fair value. When the financial
instruments are not actively traded, other observable market inputs, such as
quoted prices of securities with similar characteristics, may be used, if
available, to determine fair value. When observable market prices do not exist,
the Company estimates fair value. The Company’s valuation methods consider
factors such as liquidity and concentration concerns. Other factors such as
model assumptions, market dislocations, and unexpected correlations can affect
estimates of fair value. Imprecision in estimating these factors can impact the
amount of revenue or loss recorded.
SFAS No.
157, “Fair Value
Measurements”, which was codified into ASC 820, establishes a framework
for measuring the fair value of financial instruments that considers the
attributes specific to particular assets or liabilities and establishes a
three-level hierarchy for determining fair value based on the transparency of
inputs to each valuation as of the fair value measurement date. The three levels
are defined as follows:
·
|
Level
1 — quoted prices (unadjusted) for identical assets or liabilities in
active markets.
|
·
|
Level
2 — inputs include quoted prices for similar assets and liabilities in
active markets, quoted prices of identical or similar assets or
liabilities in markets that are not active, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
·
|
Level
3 — inputs that are unobservable and significant to the fair value
measurement.
|
At the
end of each quarter, the Company assesses the valuation hierarchy for each asset
or liability measured. From time to time, assets or liabilities may be
transferred within hierarchy levels due to changes in availability of observable
market inputs to measure fair value at the measurement date. Transfers into or
out of hierarchy levels are based upon the fair value at the beginning of the
reporting period. A more detailed description of the fair values measured at
each level of the fair value hierarchy can be found in Note 12 – “Disclosures of
Fair Values of Financial Instruments.”
Properties
On
September 29, 2007, the Company closed its facilities located at 435 South
Hamilton, Sullivan, Illinois in the IGA and at 220 North Highway Avenue, DeLand,
Illinois. The customers and operations of both of these facilities were moved to
other facilities in Sullivan and Monticello, Illinois. These actions did not
have a material impact on the Company’s consolidated financial
statements.
During
the first quarter of 2008, the Company obtained an independent appraisal of the
DeLand property in anticipation of possibly donating or selling this
property. Subsequently, the Company adjusted its carrying value of
the property to the appraised value which resulted in a loss of $132,000 in the
consolidated financial statements. The property was sold during the first
quarter of 2009 for its appraised value of $50,000.
Temporary
Liquidity Guarantee Program
On
October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program
(TLGP). The final rule was adopted on November 21, 2008. The FDIC stated that
the purpose of these actions is to strengthen confidence and encourage liquidity
in the banking system by guaranteeing newly issued senior unsecured debt of 31
days or greater, of banks, thrifts, and certain holding companies, and by
providing full FDIC insurance coverage for all non-interest bearing transaction
accounts, regardless of dollar amount. Inclusion in the program was voluntary.
Institutions participating in the senior unsecured debt portion of the program
are assessed fees based on a sliding scale, depending on length of maturity.
Shorter-term debt has a lower fee structure and longer-term debt has a higher
fee. The range is from 50 basis points on debt of 180 days or less, to a maximum
of 100 basis points for debt with maturities of one year or longer, on an
annualized basis. A 10-basis point surcharge is added to a participating
institution's current insurance assessment in exchange for final coverage for
all transaction accounts.
First Mid
Bank elected to participate in both parts of the TLGP, the Transaction Account
Guarantee Program and the Debt Guarantee Program. The FDIC’s
Transaction Account Guarantee Program, provides, without charge to depositors, a
full guarantee on all non-interest bearing transaction accounts held by any
depositor, regardless of dollar amount, through June 30,
2010. Participation in the Transaction Account Guarantee Program cost
the Company 10 basis points annually on the amount of the
deposits. The FDIC’s Debt Guarantee Program, which expired in October
2009, provided for the guarantee of eligible newly issued senior unsecured debt
of participating entities, but the Company and the Bank did not issue any debt
under this program.
Federal
Deposit Insurance Corporation Insurance Coverage
As an
FDIC-insured institution, First Mid Bank is required to pay deposit insurance
premium assessments to the FDIC.
On
October 3, 2008, the FDIC temporarily increased the standard maximum deposit
insurance amount (SMDIA) from $100,000 to $250,000 per depositor. On
May 20, 2009, the Helping Families Save Their Homes Act extended the temporary
increase in the SMDIA through December 31, 2013. This extension of the temporary
$250,000 coverage limit became effective immediately upon the President’s
signature. The legislation provides that the SMDIA will return to $100,000 on
January 1, 2014. The additional cost of the increase to the SMDIA,
assessed on a quarterly basis, is a 10 basis point annualized surcharge (2.5
basis points quarterly) on balances in non-interest bearing transaction accounts
that exceed $250,000. The Company has expensed $49,000 for this program in
2009.
On
February 27, 2009, the FDIC adopted a final rule modifying the risk-based
assessment system and setting initial base assessment rates beginning April 1,
2009, at 12 to 45 basis points and, due to extraordinary circumstances, extended
the period of the restoration plan to increase the deposit insurance fund to
seven years. Also on February 27, 2009, the FDIC issued final rules on changes
to the risk-based assessment system. The final rules both increase base
assessment rates and incorporate additional assessments for excess reliance on
brokered deposits and FHLB advances. The new rates would increase annual
assessment rates from 5 to 7 basis points to 7 to 24 basis points. This new
assessment took effect April 1, 2009. The Company has expensed $1,260,000 for
this assessment in 2009.
Also on
February 27, 2009, the FDIC adopted an interim rule to impose a 20 basis point
emergency special assessment payable September 30, 2009 based on the second
quarter 2009 assessment base, to help shore up the Deposit Insurance Fund
(“DIF”). This assessment equates to a one-time cost of $200,000 per $100 million
in assessment base. The interim rule also allows the Board to impose possible
additional special assessments of up to 10 basis points thereafter to maintain
public confidence in the DIF. Subsequently, the FDIC’s Treasury borrowing
authority increased from $30 billion to $100 billion, allowing the agency to cut
the planned special assessment from 20 to 10 basis points. On May 22, 2009, the
FDIC adopted a final rule which established a special assessment of five basis
points on each FDIC-insured depository institutions assets, minus it Tier 1
capital, as of September 30, 2009. The assessment was capped at 10 basis points
of an institution’s domestic deposits so that no institution would pay an amount
higher than they would have under the interim rule. This special assessment was
collected September 30, 2009. The Company expensed $522,000 as of June 30, 2009
for this special assessment.
In
addition to its insurance assessment, each insured bank was subject, in 2009, to
quarterly debt service assessments in connection with bonds issued by a
government corporation that financed the federal savings and loan
bailout. The Company expensed $112,000 during 2009 for this
assessment.
On
September 29, 2009, the FDIC Board proposed a Deposit Insurance Fund restoration
plan that required banks to prepay, on December 30, 2009, their estimated
quarterly risk-based assessments for the fourth quarter of 2009 and for all of
2010, 2011 and 2012. Under the plan—which applies to all banks except those with
liquidity problems—banks were assessed through 2010 according to the risk-based
premium schedule adopted earlier this year. Beginning January 1, 2011, the base
rate increases by 3 basis points. The Company recorded a prepaid expense asset
of $4,855,000 as of December 31, 2009 as a result of this plan. This asset will
be amortized to non-interest expense over the next three years.
Results
of Operations
Net
Interest Income
The
largest source of operating revenue for the Company is net interest
income. Net interest income represents the difference between total
interest income earned on earning assets and total interest expense paid on
interest-bearing liabilities. The amount of interest income is
dependent upon many factors, including the volume and mix of earning assets, the
general level of interest rates and the dynamics of changes in interest
rates. The cost of funds necessary to support earning assets varies
with the volume and mix of interest-bearing liabilities and the rates paid to
attract and retain such funds.
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):
Year
Ended
|
Year
Ended
|
Year
Ended
|
|||||||
December
31, 2009
|
December
31, 2008
|
December
31, 2007
|
|||||||
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
||||
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
|
ASSETS
|
|||||||||
Interest-bearing
deposits
|
$
59,597
|
$ 161
|
0.27%
|
$
26,697
|
$ 423
|
1.59%
|
$ 265
|
$ 13
|
5.02%
|
Federal
funds sold
|
54,630
|
66
|
0.12%
|
19,266
|
336
|
1.75%
|
4,012
|
201
|
5.00%
|
Investment
securities
|
|||||||||
Taxable
|
207,025
|
8,073
|
3.90%
|
151,752
|
7,725
|
5.09%
|
169,425
|
8,448
|
4.99%
|
Tax-exempt
(1)
|
23,384
|
963
|
4.12%
|
20,312
|
834
|
4.11%
|
17,242
|
712
|
4.13%
|
Loans
(2) (3)
|
701,521
|
42,146
|
6.01%
|
740,083
|
47,748
|
6.45%
|
728,790
|
50,557
|
6.94%
|
Total
earning assets
|
1,046,157
|
51,409
|
4.91%
|
958,110
|
57,066
|
5.96%
|
919,734
|
59,931
|
6.52%
|
Cash
and due from banks
|
18,634
|
19,433
|
19,361
|
||||||
Premises
and equipment
|
15,333
|
15,160
|
15,888
|
||||||
Other
assets
|
37,105
|
36,433
|
36,365
|
||||||
Allowance
for loan losses
|
(8,560)
|
(6,402)
|
(6,118)
|
||||||
Total
assets
|
$1,108,669
|
$1,022,734
|
$985,230
|
||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||||
Deposits:
|
|||||||||
Demand
deposits, interest-bearing
|
$332,751
|
2,843
|
0.85%
|
$288,057
|
3,635
|
1.26%
|
$271,117
|
6,459
|
2.38%
|
Savings
deposits
|
109,305
|
938
|
0.86%
|
74,236
|
680
|
0.92%
|
60,654
|
349
|
0.58%
|
Time
deposits
|
301,987
|
9,189
|
3.04%
|
313,729
|
12,277
|
3.91%
|
325,397
|
14,783
|
4.54%
|
Securities
sold under
|
|||||||||
agreements
to repurchase
|
72,589
|
129
|
0.18%
|
61,108
|
872
|
1.43%
|
54,962
|
2,419
|
4.40%
|
FHLB
advances
|
36,175
|
1,612
|
4.46%
|
41,370
|
1,991
|
4.81%
|
34,912
|
1,728
|
4.95%
|
Federal
funds purchased
|
3
|
-
|
.47%
|
-
|
-
|
-%
|
3,907
|
206
|
5.27%
|
Subordinated
debentures
|
20,620
|
1,104
|
5.36%
|
20,620
|
1,396
|
6.77%
|
20,620
|
1,570
|
7.61%
|
Other
debt
|
1,498
|
22
|
1.48%
|
15,113
|
493
|
3.26%
|
14,345
|
915
|
6.39%
|
Total
interest-bearing liabilities
|
874,928
|
15,837
|
1.81%
|
814,233
|
21,344
|
2.62%
|
785,914
|
28,429
|
3.62%
|
Demand
deposits
|
119,537
|
119,764
|
114,393
|
||||||
Other
liabilities
|
7,909
|
6,944
|
7,136
|
||||||
Stockholders’
equity
|
106,295
|
81,793
|
77,787
|
||||||
Total
liabilities & equity
|
$1,108,669
|
$1,022,734
|
$985,230
|
||||||
Net
interest income
|
$35,572
|
$35,722
|
$31,502
|
||||||
Net
interest spread
|
3.10%
|
3.34%
|
2.90%
|
||||||
Impact
of non-interest bearing funds
|
.30%
|
.39%
|
.53%
|
||||||
Net
yield on interest-earning assets
|
3.40%
|
3.73%
|
3.43%
|
||||||
(1)
The tax-exempt income is not recorded on a tax equivalent
basis.
|
|||||||||
(2)
Nonaccrual loans have been included in the average
balances.
|
|||||||||
(3)
Includes loans held for sale.
|
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 past two
years (in thousands):
2009
Compared to 2008
|
2008
Compared to 2007
|
|||||||||||||||||||||||
Increase
– (Decrease)
|
Increase
– (Decrease)
|
|||||||||||||||||||||||
Total
|
Total
|
|||||||||||||||||||||||
Change
|
Volume
(1)
|
Rate
(1)
|
Change
|
Volume
(1)
|
Rate
(1)
|
|||||||||||||||||||
Earning
Assets:
|
||||||||||||||||||||||||
Interest-bearing
deposits
|
$ | (262 | ) | $ | 264 | $ | (526 | ) | $ | 410 | $ | 425 | $ | (15 | ) | |||||||||
Federal
funds sold
|
(270 | ) | 238 | (508 | ) | 135 | 337 | (202 | ) | |||||||||||||||
Investment
securities:
|
||||||||||||||||||||||||
Taxable
|
348 | 2,412 | (2,064 | ) | (723 | ) | (890 | ) | 167 | |||||||||||||||
Tax-exempt
(2)
|
129 | 127 | 2 | 122 | 126 | (4 | ) | |||||||||||||||||
Loans
(3)
|
(5,602 | ) | (2,426 | ) | (3,176 | ) | (2,809 | ) | 780 | (3,589 | ) | |||||||||||||
Total
interest income
|
(5,657 | ) | 615 | (6,272 | ) | (2,865 | ) | 778 | (3,643 | ) | ||||||||||||||
Interest-Bearing
Liabilities:
|
||||||||||||||||||||||||
Deposits:
|
||||||||||||||||||||||||
Demand
deposits, interest-bearing
|
(792 | ) | 507 | (1,299 | ) | (2,824 | ) | 381 | (3,205 | ) | ||||||||||||||
Savings
deposits
|
258 | 305 | (47 | ) | 331 | 92 | 239 | |||||||||||||||||
Time
deposits
|
(3,088 | ) | (445 | ) | (2,643 | ) | (2,506 | ) | (515 | ) | (1,991 | ) | ||||||||||||
Securities
sold under
|
||||||||||||||||||||||||
agreements
to repurchase
|
(743 | ) | 139 | (882 | ) | (1,547 | ) | 244 | (1,791 | ) | ||||||||||||||
FHLB
advances
|
(379 | ) | (240 | ) | (139 | ) | 263 | 313 | (50 | ) | ||||||||||||||
Federal
funds purchased
|
- | - | - | (206 | ) | (206 | ) | - | ||||||||||||||||
Subordinated
debentures
|
(292 | ) | - | (292 | ) | (174 | ) | - | (174 | ) | ||||||||||||||
Other
debt
|
(471 | ) | (293 | ) | (178 | ) | (422 | ) | 48 | (470 | ) | |||||||||||||
Total
interest expense
|
(5,507 | ) | (27 | ) | (5,480 | ) | (7,085 | ) | 357 | (7,442 | ) | |||||||||||||
Net
interest income
|
$ | (150 | ) | $ | 642 | $ | (792 | ) | $ | 4,220 | $ | 421 | $ | 3,799 | ||||||||||
(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)
The tax-exempt income is not recorded on a tax equivalent
basis.
|
||||||||||||||||||||||||
(3)
Nonaccrual loans are not material and have been included in the average
balances.
|
Net
interest income decreased $150,000, or .4% in 2009, compared to an increase of
$4,220,000, or 13.4% in 2008. The decrease in net interest income in
2009 was primarily due to a greater decline in rates on interest-bearing assets
than the decline in rates on interest-bearing liabilities and the Company
maintained a greater amount of liquidity at a reduced margin. The increase in
net interest income in 2008 was primarily due to a greater decline in rates on
interest-bearing liabilities then the decline in rates on interest-bearing
assets.
In 2009,
average earning assets increased by $88.0 million, or 9.2%, and average
interest-bearing liabilities increased $60.7 million or 7.5% compared with 2008.
In 2008, average earning assets increased by $38.4 million, or 4.2%, and average
interest-bearing liabilities increased $28.3 million or 3.6% compared with
2007. Changes in average balances are shown below:
·
|
Average
interest-bearing deposits held by the Company increased $32.9 million or
123.2% in 2009 compared to 2008. In 2008, average interest-bearing
deposits held by the Company increased $26.4 million or 9962.3% compared
to 2007.
|
·
|
Average
federal funds sold increased $35.4 million or 183.7% in 2009 compared to
2008. In 2008, average federal funds sold increased $15.3 million or
381.4% compared to 2007.
|
·
|
Average
loans decreased by $38.6 million or 5.2% in 2009 compared to
2008. In 2008, average loans increased by $11.3 million or 1.6%
compared to 2007.
|
·
|
Average
securities increased by $58.3 million or 33.9% in 2009 compared to
2008. In 2008, average securities decreased by $14.6 million or
7.8% compared to 2007.
|
·
|
Average
deposits increased by $68.0 million or 10.1% in 2009 compared to 2008. In
2008, average deposits increased by $18.9 million or 2.9% compared to
2007.
|
·
|
Average
securities sold under agreements to repurchase increased by $11.5 million
or 18.8% in 2009 compared to 2008. In 2008, average securities
sold under agreements to repurchase increased by $6.1 million or 11.1%
compared to 2007.
|
·
|
Average
borrowings and other debt decreased by $18.8 million or 24.4% in 2009
compared to 2008. In 2008, average borrowings and other debt
increased by $3.3 million or 4.5% compared to
2007.
|
·
|
The
federal funds rate remained at a range of 0-.25% at December 31, 2009 and
2008. The federal funds rate was 4.25% at December 31,
2007.
|
·
|
Net
interest margin decreased to 3.40% compared to 3.73% in 2008 and 3.43% in
2007. Asset yields decreased by 105 basis points in 2009, while
interest-bearing liabilities decreased by 81 basis
points.
|
To
compare the tax-exempt yields on interest-earning assets to taxable yields, the
Company also computes non-GAAP net interest income on a tax equivalent basis
(TE) where the interest earned on tax-exempt securities is adjusted to an amount
comparable to interest subject to normal income taxes, assuming a federal tax
rate of 34% (referred to as the tax equivalent adjustment). The TE adjustments
to net interest income for 2009, 2008 and 2007 were $497,000, $430,000 and
$366,000, respectively. The net yield on interest-earning assets (TE) was 3.46%
in 2009, 3.79% in 2008 and 3.48% in 2007.
Provision
for Loan Losses
The
provision for loan losses in 2009 was $3,594,000 compared to $3,559,000 in 2008
and $862,000 in 2007. Nonperforming loans increased to $12,720,000 at December
31, 2009 from $7,285,000 at December 31, 2008 and compared to $7,481,000 at
December 31, 2007. The increase in 2009 occurred as a result of loans
that became nonperforming during the year due to continued deterioration in
economic conditions including increased unemployment, reduction in cash flow
from increased vacancies in commercial properties and declines in property
values. Net charge-offs were $1,719,000 during 2009, $2,090,000 during 2008, and
$620,000 during 2007. For information on loan loss experience and
nonperforming loans, see “Nonperforming Loans and Repossessed Assets” and “Loan
Quality and Allowance for Loan Losses” herein.
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 last
three years (in thousands):
$
Change From Prior Year
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2009
|
2008
|
||||||||||||||||
Trust
|
$ | 2,229 | $ | 2,666 | $ | 2,607 | $ | (437 | ) | $ | 59 | |||||||||
Brokerage
|
424 | 574 | 528 | (150 | ) | 46 | ||||||||||||||
Insurance
commissions
|
1,912 | 1,978 | 1,950 | (66 | ) | 28 | ||||||||||||||
Service
charges
|
4,952 | 5,571 | 5,621 | (619 | ) | (50 | ) | |||||||||||||
Securities
gains
|
637 | 293 | 256 | 344 | 37 | |||||||||||||||
Impairment
losses on securities
|
(1,812 | ) | - | - | (1,812 | ) | - | |||||||||||||
Gain
on sale of merchant banking portfolio
|
1,000 | - | - | 1,000 | - | |||||||||||||||
Mortgage
banking
|
664 | 437 | 482 | 227 | (45 | ) | ||||||||||||||
Other
|
3,449 | 3,745 | 3,217 | (296 | ) | 528 | ||||||||||||||
Total
other income
|
$ | 13,455 | $ | 15,264 | $ | 14,661 | $ | (1,809 | ) | $ | 603 |
Total
non-interest income decreased to $13,455,000 in 2009 compared to $15,264,000 in
2008 and $14,661,000 in 2007. The primary reasons for the more
significant year-to-year changes in other income components are as
follows:
·
|
Trust
revenues decreased $437,000 or 16.4% to $2,229,000 in 2009 from $2,666,000
in 2008, compared to $2,607,000 in 2007. The decrease from 2008 to 2009 in
trust revenues was due to a decrease in revenues from employee benefits
accounts and the overall decline in equity prices for most of 2009. Trust
assets were $459.1 million at December 31, 2009 compared to $413.8 million
and $453.9 million at December 31, 2008 and 2007,
respectively.
|
·
|
Revenue
from brokerage annuity sales decreased $150,000 or 26.1% to $424,000 in
2009 from $574,000 in 2008, compared to $528,000 in 2007. The
decrease from 2008 to 2009 was due a reduction in commissions received
from the sale of annuities.
|
·
|
Insurance
commissions decreased $66,000 or 3.3% to $1,912,000 in 2009 from
$1,978,000 in 2008, compared to $1,950,000 in 2007. The
decrease from 2008 to 2009 was due to a decrease in commissions received
on sales of business property and casualty
insurance.
|
·
|
Fees
from service charges decreased $619,000 or 11.1% to $4,952,000 in 2009
from $5,571,000 in 2008, compared to $5,621,000 in 2007. This
decrease from 2008 to 2009 was primarily the result of a decrease in the
number of overdrafts.
|
·
|
Net
securities gains in 2009 were $637,000 compared to net securities gains of
$293,000 in 2008, and $256,000 in 2007. Several securities in
the investment portfolio were sold to improve the overall portfolio mix
and the margin in 2009, 2008 and
2007.
|
·
|
During
2009, the Company recorded other-than-temporary impairment charges
amounting to $1,812,000 for its investments in four trust preferred
securities. See Note 4 - “Investment Securities” for a more detailed
description of these charges.
|
·
|
During
the first quarter of 2009, the Company had a $1 million gain on the sale
of First Mid Bank’s merchant card servicing portfolio. There were no gains
on sales of other assets during 2008 or
2007.
|
·
|
Mortgage
banking income increased $227,000 or 51.9% to $664,000 in 2009 from
$437,000 in 2008, compared to $482,000 in 2007. This increase
from 2008 to 2009 was due to a increase in the volume of fixed rate loans
originated and sold by First Mid Bank. Loans sold balances are
as follows:
|
·
|
$63
million (representing 552 loans) in
2009
|
·
|
$46
million (representing 381 loans) in
2008
|
·
|
$48
million (representing 421 loans) in
2007
|
·
|
Other
income decreased $296,000 or 7.9% to $3,449,000 in 2009 from $3,745,000 in
2008, compared to $3,217,000 in 2007. This decrease from 2008
to 2009 was primarily due to proceeds from a life insurance policy
received in 2008 that was not received in 2009 and decreased merchant card
income due to sale of First Mid Bank’s merchant card servicing portfolio
during the first quarter of 2009.
|
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 last three years (in thousands):
$
Change From Prior Year
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2009
|
2008
|
||||||||||||||||
Salaries
and benefits
|
$ | 16,830 | $ | 16,876 | $ | 16,408 | $ | (46 | ) | $ | 468 | |||||||||
Occupancy
and equipment
|
4,989 | 4,959 | 4,831 | 30 | 128 | |||||||||||||||
Amortization
of other intangibles
|
730 | 766 | 821 | (36 | ) | (55 | ) | |||||||||||||
Other
real estate owned, net
|
470 | 234 | 82 | 236 | 152 | |||||||||||||||
FDIC
insurance assessment expense
|
1,943 | 158 | 91 | 1,785 | 67 | |||||||||||||||
Stationery
and supplies
|
563 | 557 | 547 | 6 | 10 | |||||||||||||||
Legal
and professional fees
|
2,021 | 1,820 | 1,641 | 201 | 179 | |||||||||||||||
Marketing
and promotion
|
963 | 847 | 911 | 116 | (64 | ) | ||||||||||||||
Other
|
4,703 | 5,243 | 4,723 | (540 | ) | 520 | ||||||||||||||
Total
other expense
|
$ | 33,212 | $ | 31,460 | $ | 30,055 | $ | 1,752 | $ | 1,405 |
Total
non-interest expense increased to $33,212,000 in 2009 from $31,460,000 in 2008
and $30,055,000 in 2007. The primary reasons for the more significant
year-to-year changes in other expense components are as follows:
·
|
Salaries
and employee benefits, the largest component of other expense, decreased
$46,000 or .3% to $16,830,000 in 2009 from $16,876,000 in 2008, compared
to $16,408,000 in 2007. The decrease in 2009 was as primarily due to a
reduction in incentive compensation expense as a result of not achieving
desired objectives in 2009 compared to during the year 2008. There were
347 full-time equivalent employees at December 31, 2009 compared to 343 at
December 31, 2008 and 346 at December 31,
2007.
|
·
|
Occupancy
and equipment expense increased $30,000 or .6% to $4,989,000 in 2009 from
$4,959,000 in 2008, compared to $4,831,000 in 2007. The increase in 2009
was primarily due to the addition of two new leased facilities in Decatur
and Champaign added during the fourth quarter of 2009. In 2008,
this increase primarily due to increases in rent and building expenses for
new brokerage offices and expenses for computer software and software
maintenance during the first quarter of
2009.
|
·
|
Amortization
of other intangibles expense decreased $36,000 in 2009 due to complete
amortization of one core deposit intangible in the second quarter of
2009.
|
·
|
Net
other real estate owned expense increased $236,000 or 100.9% to $470,000
in 2009 from $234,000 in 2008, compared to $82,000 in 2007. The increase
in 2009 is primarily due to increased losses on sales of these properties
due to further economic deterioration during the
year.
|
·
|
FDIC
insurance expense increased $1,785,000 or 1129.7% to $1,943,000 in 2009
from $158,000 in 2008, compared to $91,000 in 2007. The increase in 2009
was due to increases in FDIC assessment rates during 2009 as well as a
special assessment during the second quarter of 2009 which amounted to
approximately $522,000.
|
·
|
Other
operating expenses decreased $540,000 or 10.3% to 4,703,000 in 2009 from
$5,243,000 in 2008, compared to $4,723,000 in 2007. In 2008, this increase
was due to the write down of property in DeLand, Illinois to its appraised
value during the second quarter of 2008 and decreases in various other
expenses during 2009.
|
·
|
On
a net basis, all other categories of operating expenses increased $323,000
or 10.0% to $3,547,000 in 2009 from $3,224,000 in 2008, compared to
$3,099,000 in 2007. In 2009, the increase was primarily due to
increases in legal and other professional expenses associated with loan
collections and marketing and promotion
expenses.
|
Income
Taxes
Income
tax expense amounted to $4,007,000 in 2009 compared to $5,443,000 in 2008 and
$5,087,000 in 2007. Effective tax rates were 32.8%, 34.1% and 33.4%,
respectively, for 2009, 2008 and 2007.
The
Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income
Taxes,” which was codified within ASC 740, on January 1,
2007. The implementation of FIN 48 did not impact the Company’s
financial statements. The Company files U.S. federal and state of Illinois
income tax returns. The Company is no longer subject to U.S. federal
or state income tax examinations by tax authorities for years before
2006.
Analysis
of Balance Sheets
Loans
The loan
portfolio (net of unearned discount) is the largest category of the Company’s
earning assets. The following table summarizes the composition of the
loan portfolio for the last five years (in thousands):
2009
|
%
Outstanding
Loans
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||
Construction
and land development
|
$ | 28,041 | 4.0 | % | $ | 40,362 | $ | 55,581 | $ | 47,309 | $ | 36,712 | ||||||||||||
Farm
loans
|
62,330 | 8.9 | % | 65,647 | 61,898 | 59,420 | 51,023 | |||||||||||||||||
1-4
Family residential properties
|
180,415 | 25.7 | % | 200,204 | 193,065 | 189,068 | 156,762 | |||||||||||||||||
Multifamily
residential properties
|
19,467 | 2.8 | % | 23,833 | 30,795 | 29,847 | 33,005 | |||||||||||||||||
Commercial
real estate
|
226,400 | 32.3 | % | 217,307 | 203,282 | 205,932 | 187,452 | |||||||||||||||||
Loans
secured by real estate
|
516,653 | 73.7 | % | 547,353 | 544,621 | 531,576 | 464,954 | |||||||||||||||||
Agricultural
loans
|
54,144 | 7.7 | % | 54,098 | 51,793 | 50,526 | 41,048 | |||||||||||||||||
Commercial
and industrial loans
|
105,351 | 15.0 | % | 109,324 | 116,176 | 105,799 | 104,981 | |||||||||||||||||
Consumer
loans
|
20,815 | 3.0 | % | 25,806 | 29,903 | 29,765 | 23,562 | |||||||||||||||||
All
other loans
|
3,787 | .6 | % | 5,357 | 5,668 | 5,902 | 3,588 | |||||||||||||||||
Total
loans
|
$ | 700,750 | 100.0 | % | $ | 741,938 | $ | 748,161 | $ | 723,568 | $ | 638,133 |
Loan balances decreased by $41.2
million or 5.6% from December 31, 2008 to December 31, 2009 due to a decrease in
most loan type balances. Balances of loans sold into the secondary
market were $63 million in 2009, compared to $46 million in 2008. The balance of
real estate loans held for sale, included in the balances shown above, amounted
to $149,000 and $537,000 as of December 31, 2009 and 2008, respectively.
Commercial
and commercial real estate loans generally involve higher credit risks than
residential real estate and consumer loans. Because payments on loans secured by
commercial real estate or equipment are often dependent upon the successful
operation and management of the underlying assets, repayment of such loans may
be influenced to a great extent by conditions in the market or the economy. The
Company does not have any sub-prime mortgages or credit card loans outstanding
which are also generally considered to be higher credit risk.
The
following table summarizes the loan portfolio geographically by branch region as
of December 31, 2009 and 2008 (dollars in thousands):
2009
|
2008
|
|||||||||||||||
Principal
|
%
Outstanding
|
Principal
|
%
Outstanding
|
|||||||||||||
balance
|
loans
|
balance
|
loans
|
|||||||||||||
Mattoon
region
|
$ | 144,521 | 20.6 | % | $ | 152,897 | 20.6 | % | ||||||||
Charleston
region
|
58,890 | 8.4 | % | 59,227 | 8.0 | % | ||||||||||
Sullivan
region
|
68,802 | 9.8 | % | 76,181 | 10.3 | % | ||||||||||
Effingham
region
|
89,141 | 12.7 | % | 93,940 | 12.7 | % | ||||||||||
Decatur
region
|
212,908 | 30.4 | % | 222,895 | 30.0 | % | ||||||||||
Highland
region
|
126,488 | 18.1 | % | 136,798 | 18.4 | % | ||||||||||
Total
all regions
|
$ | 700,750 | 100.0 | % | $ | 741,938 | 100.0 | % |
Loans are
geographically dispersed among these regions located in central and southwestern
Illinois. While these regions have experienced some economic stress during 2009,
the Company does not consider these locations high risk areas since these
regions have not experienced the significant declines in real estate values seen
in other areas in the United States.
The
Company does not have a concentration, as defined by the regulatory agencies, in
construction and land development loans or commercial real estate loans as a
percentage of total risk-based capital for the periods shown above. At December
31, 2009, the Company did have industry loan concentrations in excess of 25% of
total risk-based capital in the following industries as of December 31, 2009 and
2008 (dollars in thousands):
2009
|
2008
|
|||||||||||||||
Principal
|
%
Outstanding
|
Principal
|
%
Outstanding
|
|||||||||||||
balance
|
loans
|
balance
|
Loans
|
|||||||||||||
Other
grain farming
|
$ | 102,515 | 14.63 | % | $ | 97,082 | 13.08 | % | ||||||||
Lessors
of non-residential buildings
|
72,016 | 10.28 | % | 68,987 | 9.30 | % | ||||||||||
Lessors
of residential buildings & dwellings
|
44,232 | 6.31 | % | 48,648 | 6.56 | % | ||||||||||
Hotels
and motels
|
50,788 | 7.25 | % | 45,518 | 6.14 | % |
The
Company had no further industry loan concentrations in excess of 25% of total
risk-based capital.
The
following table presents the balance of loans outstanding as of December 31,
2009, by contractual maturities (in thousands):
Maturity
(1)
|
||||||||||||||||
One
year
|
Over
1
|
Over
|
||||||||||||||
or
less(2)
|
through
5 years
|
5
years
|
Total
|
|||||||||||||
Construction
and land development
|
$ | 25,986 | $ | 1,962 | $ | 93 | $ | 28,041 | ||||||||
Farm
loans
|
10,727 | 41,235 | 10,368 | 62,330 | ||||||||||||
1-4
Family residential properties
|
26,374 | 101,033 | 53,008 | 180,415 | ||||||||||||
Multifamily
residential properties
|
2,122 | 10,250 | 7,095 | 19,467 | ||||||||||||
Commercial
real estate
|
24,758 | 164,181 | 37,461 | 226,400 | ||||||||||||
Loans
secured by real estate
|
89,967 | 318,661 | 108,025 | 516,653 | ||||||||||||
Agricultural
loans
|
39,264 | 14,401 | 479 | 54,144 | ||||||||||||
Commercial
and industrial loans
|
62,267 | 38,350 | 4,734 | 105,351 | ||||||||||||
Consumer
loans
|
4,584 | 15,402 | 829 | 20,815 | ||||||||||||
All
other loans
|
598 | 1,491 | 1,698 | 3,787 | ||||||||||||
Total
loans
|
$ | 196,680 | $ | 388,305 | $ | 115,765 | $ | 700,750 | ||||||||
(1)
Based upon remaining contractual maturity.
|
||||||||||||||||
(2)
Includes demand loans, past due loans and overdrafts.
|
As of
December 31, 2009, loans with maturities over one year consisted of $477 million
in fixed rate loans and $27 million in variable rate loans. The loan
maturities noted above are based on the contractual provisions of the individual
loans. The Company has no general policy regarding renewals and
borrower requests, which are handled on a case-by-case basis.
Nonperforming
Loans and Repossessed Assets
Nonperforming
loans include: (a) loans accounted for on a nonaccrual basis; (b) accruing loans
contractually past due ninety days or more as to interest or principal payments;
and (c) loans not included in (a) and (b) above which are defined as
“restructured loans”. Repossessed assets include primarily repossessed real
estate and automobiles.
The
Company’s policy is to discontinue the accrual of interest income on any loan
for which principal or interest is ninety days past due. The accrual
of interest is discontinued earlier when, in the opinion of management, there is
reasonable doubt as to the timely collection of interest or
principal. Once interest accruals are discontinued, accrued but
uncollected interest is charged to current year income. Subsequent receipts on
non-accrual loans are recorded as a reduction of principal, and interest income
is recorded only after principal recovery is reasonably assured. 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.
Restructured
loans are loans on which, due to deterioration in the borrower’s financial
condition, the original terms have been modified in favor of the borrower or
either principal or interest has been forgiven.
Repossessed
assets represent property acquired as the result of borrower defaults on loans.
These assets are recorded at estimated fair value, less estimated selling costs,
at the time of foreclosure or repossession. Write-downs occurring at
foreclosure are charged against the allowance for loan losses. On an ongoing
basis, properties are appraised as required by market indications and applicable
regulations. Write-downs for subsequent declines in value are recorded in
non-interest expense in other real estate owned along with other expenses
related to maintaining the properties.
The
following table presents information concerning the aggregate amount of
nonperforming loans and repossessed assets (in thousands):
December
31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Nonaccrual
loans
|
$ | 12,720 | $ | 7,285 | $ | 7,460 | $ | 3,639 | $ | 3,458 | ||||||||||
Restructured
loans which are performing in accordance
|
||||||||||||||||||||
with
revised terms
|
- | - | 21 | 29 | - | |||||||||||||||
Total
nonperforming loans
|
12,720 | 7,285 | 7,481 | 3,668 | 3,458 | |||||||||||||||
Repossessed
assets
|
2,896 | 2,400 | 524 | 1,396 | 420 | |||||||||||||||
Total
nonperforming loans and repossessed assets
|
$ | 15,616 | $ | 9,685 | $ | 8,005 | $ | 5,064 | $ | 3,878 | ||||||||||
Nonperforming
loans to loans, before allowance for loan losses
|
1.82 | % | .98 | % | 1.00 | % | .51 | % | .54 | % | ||||||||||
Nonperforming
loans and repossessed assets to loans,
|
||||||||||||||||||||
before
allowance for loan losses
|
2.23 | % | 1.31 | % | 1.07 | % | .70 | % | .61 | % |
The
$5,435,000 increase in nonaccrual loans during 2009 resulted from the net of
$8,297,000 of loans put on nonaccrual status, offset by $1,620,000 of loans
transferred to other real estate owned, $323,000 of loans charged off and
$919,000 of loans becoming current or paid-off. The primary increase in
nonaccrual loans was in commercial real estate which increased $4,917,000 during
2009 due to insufficient cash flow of various borrowers. The following table
summarizes the composition of nonaccrual loans (in thousands):
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
Balance
|
%
of Total
|
Balance
|
%
of Total
|
|||||||||||||
Construction
and land development
|
$ | 2,064 | 16.2 | % | $ | 2,889 | 39.7 | % | ||||||||
Farm
loans
|
1,355 | 10.6 | % | 1,355 | 18.6 | % | ||||||||||
1-4
Family residential properties
|
1,968 | 15.5 | % | 1,105 | 15.2 | % | ||||||||||
Multifamily
residential properties
|
487 | 3.8 | % | 220 | 3.0 | % | ||||||||||
Commercial
real estate
|
6,063 | 47.7 | % | 1,146 | 15.7 | % | ||||||||||
Loans
secured by real estate
|
11,937 | 93.8 | % | 6,715 | 92.2 | % | ||||||||||
Agricultural
loans
|
- | - | 177 | 2.4 | % | |||||||||||
Commercial
and industrial loans
|
783 | 6.2 | % | 345 | 4.7 | % | ||||||||||
Consumer
loans
|
- | - | 48 | 0.7 | % | |||||||||||
Total
loans
|
$ | 12,720 | 100.0 | % | $ | 7,285 | 100.0 | % |
Interest
income that would have been reported if nonaccrual and restructured loans had
been performing totaled $672,000, $274,000 and $426,000 for the years ended
December 31, 2009, 2008 and 2007, respectively.
The
$496,000 increase in repossessed assets during 2009 resulted from the net of
$2,930,000 of additional assets repossessed, $165,000 of further write-downs of
repossessed assets to current market value and $2,269,000 of repossessed assets
sold. The following table summarizes the composition of repossessed assets (in
thousands):
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
Balance
|
%
of Total
|
Balance
|
%
of Total
|
|||||||||||||
Construction
and land development
|
$ | 1,252 | 16.2 | % | $ | 1,873 | 39.7 | % | ||||||||
1-4
Family residential properties
|
945 | 15.5 | % | 351 | 15.2 | % | ||||||||||
Commercial
real estate
|
665 | 47.7 | % | 164 | 15.7 | % | ||||||||||
Total
real estate
|
2,862 | 93.8 | % | 2,388 | 92.2 | % | ||||||||||
Other
collateral
|
34 | - | 12 | 0.7 | % | |||||||||||
Total
repossessed collateral
|
$ | 2,896 | 100.0 | % | $ | 2,400 | 100.0 | % |
Repossessed
assets sold during 2009 resulted in a net loss of $225,000, of which $221,000
was related to real estate asset sales and $4,000 was related to other
repossessed asset sales. Repossessed assets sold during 2008 resulted in a net
loss of $69,000, of which $55,000 was related to real estate asset sales and
$14,000 was related to other repossessed asset sales. Repossessed assets sold
during 2007 resulted in a net gain of $37,000, of which $29,000 was related to
real estate asset sales and $8,000 was related to other repossessed asset
sales.
Loan
Quality and Allowance for Loan Losses
The
allowance for loan losses represents management’s estimate of the reserve
necessary to adequately account for the estimate of potential losses inherent in
the current portfolio. The provision for loan losses is the charge against
current earnings that is determined by management as the amount needed to
maintain an adequate allowance for loan losses. In determining the
adequacy of the allowance for loan losses, and therefore the provision to be
charged to current earnings, management relies predominantly on a disciplined
credit review and approval process that extends to the full range of the
Company’s credit exposure. The review process is directed by overall
lending policy and is intended to identify, at the earliest possible stage,
borrowers who might be facing financial difficulty. Once identified,
the magnitude of exposure to individual borrowers is quantified in the form of
specific allocations of the allowance for loan losses. Management
considers collateral values and guarantees in the determination of such specific
allocations. Additional factors considered by management in
evaluating the overall adequacy of the allowance include historical net loan
losses, the level and composition of nonaccrual, past due and renegotiated
loans, trends in volumes and terms of loans, effects of changes in risk
selection and underwriting standards or lending practices, lending staff
changes, concentrations of credit, industry conditions and the current economic
conditions in the region where the Company operates.
Given the
current state of the economy, management did assess the impact of the recession
on each category of loans and adjusted historical loss factors for more recent
economic trends. Management utilizes a five-year loss history as one component
in assessing the probability of inherent future losses. Given the decline in
economic conditions, management also increased its allocation to various loan
categories for economic factors during 2008 and 2009. Some of the economic
factors include the potential for reduced cash flow for commercial operating
loans from reduction in sales or increased operating costs, decreased occupancy
rates for commercial buildings, reduced levels of home sales for commercial land
developments, the decline in and uncertainty regarding grain prices and
increased operating costs for farmers, and increased levels of unemployment and
bankruptcy impacting consumer’s ability to pay. Each of these economic
uncertainties was taken into consideration in developing the level of the
reserve. Management considers the allowance for loan losses a critical
accounting policy.
Management
recognizes 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 December 31, 2009, the Company’s loan portfolio included
$116.5 million of loans to borrowers whose businesses are directly related to
agriculture. Of this amount, $102.5 million was concentrated in other grain
farming. Total loans to borrowers whose businesses are directly related to
agriculture decreased $3.2 million from $119.7 million at December 31, 2008
while loans concentrated in other grain farming increased $6 million from $113.7
million at December 31, 2008. 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.
In
addition, the Company has $50.8 million of loans to motels and
hotels. 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 $72.0 million of loans to
lessors of non-residential buildings and $44.2 million of loans to lessors of
residential buildings and dwellings.
Analysis
of the allowance for loan losses for the past five years and of changes in the
allowance for these periods is summarized as follows (dollars in
thousands):
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Average
loans outstanding, net of unearned income
|
$ | 701,521 | $ | 740,083 | $ | 728,790 | $ | 691,726 | $ | 610,781 | ||||||||||
Allowance-beginning
of year
|
$ | 7,587 | $ | 6,118 | $ | 5,876 | $ | 4,648 | $ | 4,621 | ||||||||||
Balance
added through acquisitions
|
- | - | - | 1,405 | - | |||||||||||||||
Charge-offs:
|
||||||||||||||||||||
Real
estate-mortgage
|
1,240 | 1,640 | 368 | 231 | 122 | |||||||||||||||
Commercial,
financial and agricultural
|
287 | 479 | 180 | 595 | 757 | |||||||||||||||
Installment
|
176 | 119 | 100 | 142 | 278 | |||||||||||||||
Other
|
176 | 184 | 215 | 188 | 130 | |||||||||||||||
Total
charge-offs
|
1,879 | 2,422 | 863 | 1,156 | 1,287 | |||||||||||||||
Recoveries:
|
||||||||||||||||||||
Real
estate-mortgage
|
6 | 75 | 9 | 8 | 63 | |||||||||||||||
Commercial,
financial and agricultural
|
27 | 98 | 48 | 30 | 75 | |||||||||||||||
Installment
|
31 | 38 | 33 | 49 | 42 | |||||||||||||||
Other
|
96 | 121 | 153 | 132 | 43 | |||||||||||||||
Total
recoveries
|
160 | 332 | 243 | 219 | 223 | |||||||||||||||
Net
charge-offs
|
1,719 | 2,090 | 620 | 937 | 1,064 | |||||||||||||||
Provision
for loan losses
|
3,594 | 3,559 | 862 | 760 | 1,091 | |||||||||||||||
Allowance-end
of year
|
$ | 9,462 | $ | 7,587 | $ | 6,118 | $ | 5,876 | $ | 4,648 | ||||||||||
Ratio
of net charge-offs to average loans
|
.25 | % | .28 | % | .09 | % | .14 | % | .17 | % | ||||||||||
Ratio
of allowance for loan losses to loans outstanding (at end of
year)
|
1.35 | % | 1.02 | % | .82 | % | .81 | % | .73 | % | ||||||||||
Ratio
of allowance for loan losses to nonperforming loans
|
74.4 | % | 104.1 | % | 81.8 | % | 160.2 | % | 134.4 | % |
The ratio
of the allowance for loan losses to non-performing loans is 74.4% as of December
31, 2009 compared to 104.1% as of December 31, 2008. While the
balance of non-performing loans reflects the total loan balance, the allowance
for loan losses reflects only the portion of the loan balance that is an
estimated potential loss. Therefore the increase in non-performing loans, which
was greater than the increase in the allowance for loan losses required to
account for probable losses, led to the decline of this ratio. The
increase in 2009 occurred as a result of loans that became nonperforming during
the year due to continued deterioration in economic conditions including
increased unemployment, reduction in cash flow from increased vacancies in
commercial properties and declines in property values. The current economic
environment and the increase in estimated probable losses in the loan portfolio
resulted in the increased allowance balance.
The
Company minimizes credit risk by adhering to sound underwriting and credit
review policies. These policies are reviewed at least annually, and
the Board of Directors approves all changes. Senior management is
actively involved in business development efforts and the maintenance and
monitoring of credit underwriting and approval. The loan review
system and controls are designed to identify, monitor and address asset quality
problems in an accurate and timely manner. At least quarterly, the
Board of Directors reviews the status of problem loans. In addition
to internal policies and controls, regulatory authorities periodically review
asset quality and the overall adequacy of the allowance for loan
losses.
During
2009, the Company had net charge-offs of $1,719,000 compared to $2,090,000 in
2008 and $620,000 in 2007. During 2009, the Company’s significant charge-offs
included $173,000 on commercial loans of two borrowers, $107,000 of real estate
mortgage loans of one borrower and $902,000 of commercial real estate mortgage
loans of four borrowers. During 2008, the Company’s significant charge-offs
included $204,000 on commercial loans of one borrower, $200,000 of real estate
mortgage loans of one borrower and $1,181,000 of commercial real estate mortgage
loans of three borrowers. During 2007, the Company’s significant charge-offs
included $165,000 on commercial loans of three borrowers, $66,000 of real estate
mortgage loans of one borrower and $250,000 of commercial real estate mortgage
loans of two borrowers.
At
December 31, 2009, the allowance for loan losses amounted to $9,462,000, or
1.35% of total loans, and 74.4% of nonperforming loans. At December
31, 2008, the allowance for loan losses amounted to $7,587,000, or 1.02% of
total loans, and 104.1% of nonperforming loans. Given the increase in
non-performing loans and the current state of the economy, management’s estimate
of probable losses in the loan portfolio has increased and resulted in an
increase in the ratio of the allowance for loan losses to total
loans.
The
allowance is allocated to the individual loan categories by a specific
allocation for all classified loans plus a percentage of loans not classified
based on historical losses and other factors. The allowance for loan
losses, in management’s judgment, is allocated as follows to cover probable loan
losses (dollars in thousands):
December
31, 2009
|
December
31, 2008
|
December
31, 2007
|
||||||||||||||||||||||
Allowance
|
%
of
|
Allowance
|
%
of
|
Allowance
|
%
of
|
|||||||||||||||||||
for
|
loans
|
for
|
loans
|
for
|
loans
|
|||||||||||||||||||
loan
|
to
total
|
loan
|
to
total
|
loan
|
to
total
|
|||||||||||||||||||
losses
|
loans
|
losses
|
loans
|
losses
|
loans
|
|||||||||||||||||||
Residential
real estate
|
$ | 488 | 28.5 | % | $ | 510 | 30.2 | % | $ | 214 | 29.9 | % | ||||||||||||
Commercial
/ Commercial real estate
|
7,429 | 51.3 | % | 5,345 | 49.5 | % | 3,828 | 50.1 | % | |||||||||||||||
Agricultural
/ Agricultural real estate
|
315 | 16.6 | % | 223 | 16.1 | % | 531 | 15.2 | % | |||||||||||||||
Consumer
|
312 | 3.0 | % | 358 | 3.5 | % | 404 | 4.0 | % | |||||||||||||||
Other
|
97 | .5 | % | 78 | .7 | % | 22 | .8 | % | |||||||||||||||
Total
allocated
|
8,641 | 6,514 | 4,999 | |||||||||||||||||||||
Unallocated
|
821 | N/A | 1,073 | N/A | 1,119 | N/A | ||||||||||||||||||
Allowance
at end of year
|
$ | 9,462 | 100.0 | % | $ | 7,587 | 100.0 | % | $ | 6,118 | 100.0 | % |
December
31, 2006
|
December
31, 2005
|
|||||||||||||||
Allowance
|
%
of
|
Allowance
|
%
of
|
|||||||||||||
for
|
loans
|
for
|
loans
|
|||||||||||||
loan
|
to
total
|
loan
|
to
total
|
|||||||||||||
losses
|
loans
|
losses
|
loans
|
|||||||||||||
Residential
real estate
|
$ | 215 | 30.3 | % | $ | 134 | 29.7 | % | ||||||||
Commercial
/ Commercial real estate
|
3,395 | 49.6 | % | 2,519 | 51.6 | % | ||||||||||
Agricultural
/ Agricultural real estate
|
607 | 15.2 | % | 730 | 14.4 | % | ||||||||||
Consumer
|
382 | 4.1 | % | 319 | 3.7 | % | ||||||||||
Other
|
26 | .8 | % | 18 | .6 | % | ||||||||||
Total
allocated
|
4,625 | 3,720 | ||||||||||||||
Unallocated
|
1,251 | N/A | 928 | N/A | ||||||||||||
Allowance
at end of year
|
$ | 5,876 | 100.0 | % | $ | 4,648 | 100.0 | % |
The
allowance allocated to commercial and commercial real estate loans increased
$2.1 million from 2008 during 2009 and $1.5 million from 2007 during 2008. This
resulted from an increase in the balance of impaired and classified loans and an
increase in the allocation percent for this loan category. These increases were
due to the ongoing poor economy which has led to increased vacancies in
commercial real estate and deficient cash flows from business
operations.
The
unallocated allowance represents an estimate of the probable, inherent, but yet
undetected, losses in the loan portfolio. It is based on factors that
cannot necessarily be associated with a specific credit or loan category and
represents management’s estimate to ensure that the overall allowance of loan
losses appropriately reflects a margin for the imprecision necessarily inherent
in the estimates of expected credit losses. Fluctuations in the
unallocated portion of the allowance result from qualitative factors such as
economic conditions, expansionary activities, and portfolio composition that
influence the level of risk in the portfolio but are not specifically
quantified.
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 year-end amortized cost of the Company’s
securities for the last three years (dollars in thousands):
December
31,
|
||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
Average
|
Average
|
Average
|
||||||||||||||||||||||
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
|||||||||||||||||||
U.S.
Treasury securities
|
||||||||||||||||||||||||
and
obligations of U.S. government
|
||||||||||||||||||||||||
corporations
and agencies
|
$ | 89,640 | 3.27 | % | $ | 72,074 | 4.72 | % | $ | 106,175 | 4.82 | % | ||||||||||||
Obligations
of states and
|
||||||||||||||||||||||||
political
subdivisions
|
23,530 | 4.13 | % | 22,042 | 4.10 | % | 17,820 | 4.15 | % | |||||||||||||||
Mortgage-backed
securities
|
111,301 | 4.36 | % | 61,102 | 5.66 | % | 49,798 | 5.33 | % | |||||||||||||||
Trust
preferred securities
|
7,758 | 4.22 | % | 9,328 | 6.23 | % | 9,587 | 6.30 | % | |||||||||||||||
Other
securities
|
6,166 | 4.56 | % | 6,210 | 4.56 | % | 35 | - | % | |||||||||||||||
Total
securities
|
$ | 238,395 | 3.93 | % | $ | 170,756 | 5.05 | % | $ | 183,415 | 4.96 | % |
At
December 31, 2009, the Company’s investment portfolio showed an increase of
$67.6 million from December 31, 2008 primarily due to the purchase of several
U.S. Treasury securities and obligations of U.S. government corporations and
agencies securities as well as several mortgage-backed
securities. When purchasing investment securities, the Company
considers its overall liquidity and interest rate risk profile, as well as the
adequacy of expected returns relative to the risks assumed.
The table
below presents the credit ratings as of December 31, 2009, for all investment
securities:
Amortized
|
Estimated
|
Average
Credit Rating of Fair Value at December 31, 2009 (1)
|
||||||||||||||||||||||||||||||
Cost
|
Fair
Value
|
AAA
|
AA
+/-
|
A | +/- |
BBB
+/-
|
<
BBB -
|
Not
rated
|
||||||||||||||||||||||||
U.S.
Treasury securities and obligations of U.S.
|
||||||||||||||||||||||||||||||||
government
corporations and agencies
|
$ | 89,640 | $ | 90,974 | $ | 90,974 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
Obligations
of state and political subdivisions
|
23,530 | 24,185 | 1,686 | 13,362 | 2,393 | 2,850 | - | 3,894 | ||||||||||||||||||||||||
Mortgage-backed
securities (2)
|
111,301 | 114,519 | - | - | - | - | - | 114,519 | ||||||||||||||||||||||||
Trust
preferred securities
|
7,758 | 3,155 | - | - | - | - | 3,155 | - | ||||||||||||||||||||||||
Other
securities
|
6,166 | 6,333 | - | - | 3,216 | 3,102 | - | 15 | ||||||||||||||||||||||||
Total
investments
|
$ | 238,395 | $ | 239,166 | $ | 92,660 | $ | 13,362 | $ | 5,609 | $ | 5,952 | $ | 3,155 | $ | 118,428 |
(1)
Credit ratings reflect the lowest current rating assigned by a nationally
recognized credit rating agency.
(2)
Mortgage-backed securities include mortgage-backed securities (MBS) and
collateralized mortgage obligation (CMO) issues from the following government
sponsored enterprises: FHLMC, FNMA, GNMA and FHLB. While MBS and CMOs are no
longer explicitly rated by credit rating agencies, the industry recognizes that
they are backed by agencies which have an implied government
guarantee.
The trust
preferred securities are four trust preferred pooled securities issued by FTN
Financial Securities Corp. (“FTN”). The following table contains information
regarding these securities as of December 31, 2009:
Deal
name
|
PreTSL
I
|
PreTSL
II
|
PreTSL
VI
|
PreTSL
XXVIII
|
Class
|
Mezzanine
|
Mezzanine
|
Mezzanine
|
C-1
|
Book
value
|
$1,229,829
|
$1,547,376
|
$280,837
|
$4,699,801
|
Fair
value
|
$948,496
|
$1,087,828
|
$188,287
|
$930,223
|
Unrealized
gains/(losses)
|
$(281,333)
|
$(459,548)
|
$(92,550)
|
$(3,769,578)
|
Other-than-temporary
impairment recorded in earnings
|
$220,000
|
$1,531,531
|
$44,146
|
$16,303
|
Lowest
credit rating assigned
|
Caa1
|
Ca
|
Caa1
|
Ca
|
Number
of performing banks
|
26
|
24
|
3
|
34
|
Number
of issuers in default
|
3
|
4
|
-
|
4
|
Number
of issuers in deferral
|
3
|
7
|
2
|
7
|
Defaults
& deferrals as a % of performing collateral
|
24.9%
|
32.7%
|
68.7%
|
16.1%
|
Discount
margin
|
9.740%
|
9.685%
|
1.800%
|
1.289%
|
Recovery
assumption (1)
|
15%
|
15%
|
15%
|
15%
|
Prepayment
assumption
|
0%
|
0%
|
0%
|
0%
|
(1)
With 2 year lag
|
Other-than-temporary
Impairment of Securities
Declines
in the fair value, or unrealized losses, of all available for sale investment
securities, are reviewed to determine whether the losses are either a temporary
impairment or an other-than-temporary impairment (OTTI). Temporary adjustments
are recorded when the fair value of a security fluctuates from its historical
cost. Temporary adjustments are recorded in accumulated other comprehensive
income, and impact the Company’s equity position. Temporary adjustments do not
impact net income. A recovery of available for sale security prices also is
recorded as an adjustment to other comprehensive income for securities that are
temporarily impaired, and results in a positive impact to the Company’s equity
position.
OTTI is
recorded when the fair value of an available for sale security is less than
historical cost, and it is probable that all contractual cash flows will not be
collected. Investment securities are evaluated for OTTI on at least a quarterly
basis. In conducting this assessment, the Company evaluates a number of factors
including, but not limited to:
·
|
how
much fair value has declined below amortized
cost;
|
·
|
how
long the decline in fair value has
existed;
|
·
|
the
financial condition of the issuers;
|
·
|
contractual
or estimated cash flows of the
security;
|
·
|
underlying
supporting collateral;
|
·
|
past
events, current conditions and
forecasts;
|
·
|
significant
rating agency changes on the issuer;
and
|
·
|
the
Company’s intent and ability to hold the security for a period of time
sufficient to allow for any anticipated recovery in fair
value.
|
If the
Company intends to sell the security or if it is more likely than not the
Company will be required to sell the security before recovery of its amortized
cost basis, the entire amount of OTTI is recorded to noninterest income, and
therefore, results in a negative impact to net income. Because the available for
sale securities portfolio is recorded at fair value, the conclusion as to
whether an investment decline is other-than-temporarily impaired, does not
significantly impact the Company’s equity position, as the amount of the
temporary adjustment has already been reflected in accumulated other
comprehensive income/loss.
If the
Company does not intend to sell the security and it is not more-likely-than-not
it will be required to sell the security before recovery of its amortized cost
basis only the amount related to credit loss is recognized in
earnings. In determining the portion of OTTI that is related to
credit loss, the Company compares the present value of cash flows expected to be
collected from the security with the amortized cost basis of the security. The
remaining portion of OTTI, related to other factors, is recognized in other
comprehensive earnings, net of applicable taxes. The Company recognized $1.8
million of OTTI in earnings during 2009. There was no OTTI recorded during 2008
or 2007.
The term
“other-than-temporary” is not intended to indicate that the decline is
permanent, but indicates that the prospects for a near-term recovery of value
are not necessarily favorable, or that there is a general lack of evidence to
support a realizable value equal to or greater than the carrying value of the
investment. See Note 4- “Investment Securities” to the Financial Statements for
a discussion of the Company’s evaluation and subsequent charges for
OTTI.
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 2009, 2008 and 2007 (dollars in
thousands):
2009
|
2008
|
2007
|
||||||||||||||||||||||
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||
Balance
|
Rate
|
Balance
|
Rate
|
Balance
|
Rate
|
|||||||||||||||||||
Demand
deposits:
|
||||||||||||||||||||||||
Non-interest
bearing
|
$ | 119,537 | - | $ | 119,764 | - | $ | 114,393 | - | |||||||||||||||
Interest
bearing
|
332,751 | 1.26 | % | 288,057 | 1.26 | % | 271,117 | 1.98 | % | |||||||||||||||
Savings
|
109,305 | .92 | % | 74,236 | .92 | % | 60,654 | .58 | % | |||||||||||||||
Time
deposits
|
301,987 | 3.91 | % | 313,729 | 3.91 | % | 325,397 | 4.54 | % | |||||||||||||||
Total
average deposits
|
$ | 863,580 | 2.08 | % | $ | 795,786 | 2.08 | % | $ | 771,561 | 2.66 | % |
December
31,
|
||||||||||||
(dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
High
month-end balances of total deposits
|
$ | 906,853 | $ | 810,756 | $ | 784,597 | ||||||
Low
month-end balances of total deposits
|
831,157 | 777,337 | 756,222 |
In 2009,
the average balance of deposits increased by $67.8 million from 2008. The
increase was primarily attributable to increases in money market and savings
account balances. Average non-interest bearing deposits decreased by $.2
million, average money market account balances increased by $35.3 million, and
NOW account balances increased by $4.4 million offset by a decline in consumer
CD balances. In 2008, the average balance of deposits increased by $24.2 million
from 2007. The increase was primarily attributable to increases in savings
account balances. Average non-interest bearing deposits increased by $5.4
million, average money market account balances increased by $4.7 million, and
NOW account balances increased by $12.2 million offset by a decline in consumer
CD balances.
In 2009,
the Company’s significant deposits included brokered CDs and deposit
relationships with various public entities. As of December 31, 2009, the Company
had three brokered CDs which totaled $15 million. Five public
entities had total balances of $25.3 million in various checking accounts and
time deposits as of December 31, 2009. These balances are subject to change
depending upon the cash flow needs of the public entity.
The
following table sets forth the maturity of time deposits of $100,000 or more (in
thousands):
December
31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
3
months or less
|
$ | 24,951 | $ | 24,922 | $ | 17,883 | ||||||
Over
3 through 6 months
|
8,622 | 18,189 | 25,339 | |||||||||
Over
6 through 12 months
|
29,852 | 61,421 | 47,160 | |||||||||
Over
12 months
|
18,267 | 24,865 | 7,670 | |||||||||
Total
|
$ | 81,692 | $ | 129,397 | $ | 98,052 |
The
balance of time deposits of $100,000 or more decreased $47.7 million from
December 31, 2008 to December 31, 2009. The decrease in balances was primarily
attributable to a decrease in time deposits. The balance of time deposits of
$100,000 or more increased $38.2 million from December 31, 2007 to December 31,
2008. The increase in balances was primarily attributable to an increase in
brokered CD balances.
Balances
of time deposits of $100,000 or more includes brokered CDs, time deposits
maintained for public entities, and consumer time deposits. The balance of
brokered CDs was $15 million as of December 31, 2009 and 2008. The Company also
maintains time deposits for the State of Illinois with balances of $41,000, $4.4
million and $3 million as of December 31, 2009, 2008 and 2007,
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, junior subordinated debentures and
loans (short-term or long-term debt) that the Company has
outstanding.
Information
relating to securities sold under agreements to repurchase and other borrowings
for the last three years is presented below (dollars in thousands):
2009
|
2008
|
2007
|
||||||||||
At
December 31:
|
||||||||||||
Securities
sold under agreements to repurchase
|
$ | 80,386 | $ | 80,708 | $ | 68,300 | ||||||
Federal
Home Loan Bank advances:
|
||||||||||||
Fixed
term – due in one year or less
|
10,000 | 5,000 | 15,000 | |||||||||
Fixed
term – due after one year
|
22,750 | 32,750 | 37,750 | |||||||||
Junior
subordinated debentures
|
20,620 | 20,620 | 20,620 | |||||||||
Debt
due after one year
|
- | 13,000 | 14,500 | |||||||||
Total
|
$ | 133,756 | $ | 152,078 | $ | 156,170 | ||||||
Average
interest rate at year end
|
2.10 | % | 3.16 | % | 3.96 | % | ||||||
Maximum
Outstanding at Any Month-end
|
||||||||||||
Federal
funds purchased
|
$ | - | $ | - | $ | 14,100 | ||||||
Securities
sold under agreements to repurchase
|
83,826 | 80,708 | 68,300 | |||||||||
Federal
Home Loan Bank advances:
|
||||||||||||
Overnight
|
- | - | 7,000 | |||||||||
Fixed
term – due in one year or less
|
15,000 | 5,000 | 20,000 | |||||||||
Fixed
term – due after one year
|
32,750 | 37,750 | 37,750 | |||||||||
Junior
subordinated debentures
|
20,620 | 20,620 | 20,620 | |||||||||
Debt
due after one year
|
13,000 | 16,500 | 16,500 | |||||||||
Averages
for the Year
|
||||||||||||
Federal
funds purchased
|
3 | - | 3,907 | |||||||||
Securities
sold under agreements to repurchase
|
72,589 | 61,108 | 54,962 | |||||||||
Federal
Home Loan Bank advances:
|
||||||||||||
Overnight
|
- | - | 58 | |||||||||
Fixed
term – due in one year or less
|
10,041 | 5,098 | 8,905 | |||||||||
Fixed
term – due after one year
|
26,134 | 36,275 | 25,950 | |||||||||
Junior
subordinated debentures
|
20,620 | 20,620 | 20,620 | |||||||||
Debt
due after one year
|
1,498 | 15,111 | 14,345 | |||||||||
Total
|
$ | 130,885 | $ | 138,212 | $ | 128,747 | ||||||
Average
interest rate during the year
|
2.19 | % | 3.64 | % | 5.31 | % |
FHLB
advances represent borrowings by First Mid Bank to economically fund loan
demand. The fixed term advances consist of $32.75 million as
follows:
·
|
$5
million advance at 4.58% with a 5-year maturity, due March 22,
2010
|
·
|
$2.5
million advance at 5.46% with a 3-year maturity, due June 12,
2010
|
·
|
$2.5
million advance at 5.12% with a 3-year maturity, due June 12, 2010, one
year lockout, callable quarterly
|
·
|
$3
million advance at 5.98% with a 10-year maturity, due March 1,
2011
|
·
|
$5
million advance at 4.82% with a 5-year maturity, due January 19, 2012, two
year lockout, callable quarterly
|
·
|
$5
million advance at 4.69% with a 5-year maturity, due February 23, 2012,
two year lockout, callable
quarterly
|
·
|
$4.75
million advance at 1.60% with a 5-year maturity, due December 24,
2012
|
·
|
$5
million advance at 4.58% with a 10-year maturity, due July 14, 2016, one
year lockout, callable quarterly
|
At
December 31, 2009 and 2008, outstanding loan balances included $0 and $13
million, respectively, on a revolving credit agreement with The Northern Trust
Company. This loan was renegotiated on April 24, 2009. The revolving credit
agreement has a maximum available balance of $20 million with a term of one year
from the date of closing. The interest rate (2.3% at December 31, 2009) is
floating at 2.25% over the federal funds rate. The loan is unsecured and subject
to a borrowing agreement containing requirements for the Company and First Mid
Bank to maintain various operating and capital ratios. The Company was in
compliance with all of the existing covenants at December 31, 2009 except the
Company’s return on assets ratio was .74% as of December 31, 2009 which was
below the covenant ratio required of .75%. The Company has received a waiver
from Northern Trust Company for this covenant as of December 31, 2009. The
Company and First Mid Bank were in compliance with the existing covenants at
December 31, 2008 and 2007.
On
February 27, 2004, the Company completed the issuance and sale of $10 million of
floating rate trust preferred securities through Trust I, a statutory business
trust and wholly-owned unconsolidated subsidiary of the Company, as part of a
pooled offering. The Company established Trust I for the purpose of
issuing the trust preferred securities. 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 Trust I 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. At December 31, 2009 and 2008 the rate was
3.10% and 6.56%, respectively. The Company used the proceeds of the offering for
general corporate purposes.
On April
26, 2006, the Company completed the issuance and sale of $10 million of
fixed/floating rate trust preferred securities through Trust II, a statutory
business trust and wholly-owned unconsolidated subsidiary of the Company, as
part of a pooled offering. The Company established Trust II for the
purpose of issuing the trust preferred securities. The $10 million in proceeds
from the trust preferred issuance and an additional $310,000 for the Company’s
investment in common equity of Trust II, 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 Trust II mature in 2036, bear
interest at a fixed rate of 6.98% (three-month LIBOR plus 160 basis points) paid
quarterly and convert to floating rate (LIBOR plus 160 basis points) after June
15, 2011. The net proceeds to the Company were used for general corporate
purposes, including the Company’s acquisition of Mansfield.
The trust
preferred securities issued by Trust I and Trust II 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 provided a five-year
transition period, ending September 30, 2009, for application of the revised
quantitative limits. On March 17, 2009, the Federal Reserve Board adopted an
additional final rule that delayed the effective date of the new limits on
inclusion of trust preferred securities in the calculation of Tier 1 capital
until September 30, 2011. The Company does not expect the application of the
revised quantitative limits to have a significant 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 assets differ significantly
from the maturity or repricing characteristics of liabilities.
The
Company monitors its interest rate sensitivity position to maintain a balance
between rate-sensitive assets and rate-sensitive liabilities. This
balance serves to limit the adverse effects of changes in interest
rates. The Company’s asset/liability management committee (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 gaps for
selected maturity periods at December 31, 2009 (dollars in
thousands):
Rate
Sensitive Within
|
||||||||||||||||||||||||||||||||
1
year
|
1-2
years
|
2-3
years
|
3-4
years
|
4-5
years
|
Thereafter
|
Total
|
Fair
Value
|
|||||||||||||||||||||||||
Interest-earning
assets:
|
||||||||||||||||||||||||||||||||
Federal
funds sold
and
other interest-bearing deposits
|
$ | 79,512 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 79,512 | $ | 79,544 | ||||||||||||||||
Taxable
investment securities
|
15,319 | 10,295 | 11,366 | 1,070 | 10,275 | 166,657 | 214,982 | 214,982 | ||||||||||||||||||||||||
Nontaxable
investment securities
|
1,298 | 658 | 539 | 830 | 822 | 20,027 | 24,174 | 24,184 | ||||||||||||||||||||||||
Loans
|
341,473 | 115,288 | 99,471 | 113,003 | 15,685 | 15,830 | 700,750 | 708,409 | ||||||||||||||||||||||||
Total
|
$ | 437,602 | $ | 126,241 | $ | 111,376 | $ | 114,903 | $ | 26,782 | $ | 202,514 | $ | 1,019,418 | $ | 1,027,119 | ||||||||||||||||
Interest-bearing
liabilities:
|
||||||||||||||||||||||||||||||||
Savings
and N.O.W. accounts
|
$ | 64,862 | $ | 16,846 | $ | 17,507 | $ | 24,783 | $ | 25,541 | $ | 151,882 | $ | 301,421 | $ | 301,421 | ||||||||||||||||
Money
market accounts
|
169,908 | 1,201 | 1,235 | 1,602 | 1,635 | 8,643 | 184,224 | 184,224 | ||||||||||||||||||||||||
Other
time deposits
|
185,553 | 17,513 | 9,813 | 8,704 | 4,221 | 235 | 226,039 | 227,366 | ||||||||||||||||||||||||
Short-term
borrowings/debt
|
80,386 | - | - | - | - | - | 80,386 | 80,389 | ||||||||||||||||||||||||
Long-term
borrowings/debt
|
20,310 | 3,000 | 25,060 | - | - | 5,000 | 53,370 | 55,068 | ||||||||||||||||||||||||
Total
|
$ | 521,019 | $ | 38,560 | $ | 53,615 | $ | 35,089 | $ | 31,397 | $ | 165,760 | $ | 845,440 | $ | 848,468 | ||||||||||||||||
Rate
sensitive assets –
rate
sensitive liabilities
|
$ | (83,417 | ) | $ | 87,681 | $ | 57,761 | $ | 79,814 | $ | (4,615 | ) | $ | 36,754 | $ | 173,978 | ||||||||||||||||
Cumulative
GAP
|
$ | (83,417 | ) | $ | 4,264 | $ | 62,025 | $ | 141,839 | $ | 137,224 | $ | 173,978 | |||||||||||||||||||
Cumulative
amounts as % of total
rate
sensitive assets
|
-8.2 | % | 8.6 | % | 5.7 | % | 7.8 | % | -0.5 | % | 3.6 | % | ||||||||||||||||||||
Cumulative
Ratio
|
-8.2 | % | 0.4 | % | 6.1 | % | 13.9 | % | 13.5 | % | 17.1 | % |
The
static GAP analysis shows that at December 31, 2009, the Company was liability
sensitive, on a cumulative basis, through the twelve-month time horizon. This
indicates that future increases in interest rates, if any, could have an adverse
effect on net interest income. Conversely, future decreases in
interest rates could have a positive effect on net interest
income. There are several ways the Company measures and
manages the exposure to interest rate sensitivity, static GAP analysis being
one. The Company’s 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
December 31, 2009, stockholders’ equity increased $28.4 million or 34.4% to
$111,221,000 from $82,778,000 as of December 31, 2008. During 2009,
the Company sold to certain accredited investors including directors, executive
officers, and certain major customers and holders of the Company’s common stock,
$24,635,000, in the aggregate, of a newly authorized series of its preferred
stock designated as Series B 9% Non-Cumulative Perpetual Convertible
Preferred Stock. See “Preferred Stock” in Note 1 to consolidated
financial statements for more detailed information.
Additionally,
during 2009 net income contributed $8,214,000 to equity before the payment of
dividends to stockholders. The change in the market value of
available-for-sale investment securities increased stockholders’ equity by
$880,000, net of tax. Additional purchases of treasury stock (160,803
shares at an average cost of $19.42 per share) decreased stockholders’ equity by
$3,122,000.
Stock
Plans
On June
29, 2007, the Company effected a three-for-two stock split in the form of a 50%
stock dividend. All share and per share information has been restated
to reflect the split.
Deferred
Compensation Plan
The
Company follows the provisions of the Emerging Issues Task Force Issue No.
97-14, “Accounting for
Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi
Trust and Invested” (“EITF 97-14”), which was codified into ASC 710, for
purposes of the First Mid-Illinois Bancshares, Inc. Deferred Compensation Plan
(“DCP”). At December 31, 2009, the Company classified the cost basis
of its common stock issued and held in trust in connection with the DCP of
approximately $2,894,000 as treasury stock. The Company also
classified the cost basis of its related deferred compensation obligation of
approximately $2,894,000 as an equity instrument (deferred
compensation).
The DCP
was effective as of June 1984. The purpose of the DCP is to enable directors,
advisory directors, and key employees the opportunity to defer a portion of the
fees and cash compensation paid by the Company as a means of maximizing the
effectiveness and flexibility of compensation arrangements. The
Company invests all participants’ deferrals in shares of common stock. Dividends
paid on the shares are credited to participants’ DCP accounts and invested in
additional shares. The Company issued, pursuant to DCP:
·
|
9,916
common shares during 2009
|
·
|
7,600
common shares during 2008
|
·
|
10,651
common shares during 2007.
|
First
Retirement and Savings Plan
The First
Retirement and Savings Plan (“401(k) plan”) was effective beginning in
1985. Employees are eligible to participate in the 401(k) plan after
six months of service with the Company. The Company offers common
stock as an investment option for participants of the 401(k)
plan. The Company issued, pursuant to the 401(k) plan:
·
|
19,000
common shares during 2009
|
·
|
7,161
common shares during 2008
|
·
|
3,087
common shares during 2007.
|
Dividend
Reinvestment Plan
The
Dividend Reinvestment Plan (“DRIP”) was effective as of October 1994. The
purpose of the DRIP is to provide participating stockholders with a simple and
convenient method of investing cash dividends paid by the Company on its common
and preferred shares into newly issued common shares of the
Company. All holders of record of the Company’s common or preferred
stock are eligible to voluntarily participate in the DRIP. The DRIP
is administered by Computershare Investor Services, LLC and offers a way to
increase one’s investment in the Company. Of the $2,329,000 in common
stock dividends paid during 2009, $807,000 or 34.7% was reinvested into shares
of common stock of the Company through the DRIP. Of the $1,822,000 in preferred
stock dividends paid during 2009, $48,000 or 2.6% was reinvested into shares of
common stock through the DRIP. Events that resulted in common shares being
reinvested in the DRIP:
·
|
During
2009, 42,044 common shares were issued from common stock dividends and
2,617 common shares were issued from preferred stock
dividends
|
·
|
During
2008, 31,684 common shares were issued from common stock
dividends
|
·
|
During
2007, 28,788 common shares were issued from common stock
dividends.
|
Stock
Incentive Plan
At the
Annual Meeting of Stockholders held May 23, 2007, the stockholders approved the
First Mid-Illinois Bancshares, Inc. 2007 Stock Incentive Plan (“SI
Plan”). The SI Plan was implemented to succeed the Company’s 1997
Stock Incentive Plan, which had a ten-year term that expired October 21, 2007.
The SI Plan is intended to provide a means whereby directors, employees,
consultants and advisors of the Company and its Subsidiaries may sustain a sense
of proprietorship and personal involvement in the continued development and
financial success of the Company and its Subsidiaries, thereby advancing the
interests of the Company and its stockholders. Accordingly, directors
and selected employees, consultants and advisors may be provided the opportunity
to acquire shares of Common Stock of the Company on the terms and conditions
established herein in the SI Plan. This SI Plan is more fully
described in Note 15- “Stock Option Plan.”
A maximum
of 300,000 shares are authorized under the SI Plan. Options to
acquire shares are awarded at an exercise price equal to the fair market value
of the shares on the date of grant and have a 10-year term. Options
granted to employees vest over a four-year period and options granted to
directors vest at the time they are issued.
The
Company has awarded the following stock options:
·
|
The
Company awarded no options during the year ended December 31,
2009
|
·
|
In
December 2008, the Company awarded 27,500 options at an option price of
$23.00
|
·
|
In
December 2007, the Company awarded 32,000 options at an option price of
$26.10.
|
Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS No. 123R, Accounting for
Stock-Based Compensation,” which was codified into ASC 718, using the
modified prospective application method. Accordingly, after January 1, 2006, the
Company began expensing the fair value of stock options granted, modified,
repurchased or cancelled. Additionally, compensation cost for a
portion of the awards for which requisite services had not yet been rendered
that were outstanding as of January 1, 2006 are being recognized as the
requisite service is rendered. As a result of this adoption, the
Company’s income before income taxes and net income for the year ended December
31, 2009 includes stock option compensation cost of $53,000 and $51,000,
respectively, which represents $.01 impact on basic and diluted earnings per
share for the year. The Company’s income before income taxes and net income for
the year ended December 31, 2008 includes stock option compensation cost of
$58,000 and $57,000, respectively, which represents $.01 impact on basic and
diluted earnings per share for the year.
Stock
Repurchase Program
Since
August 5, 1998, the Board of Directors has approved repurchase programs pursuant
to which the Company may repurchase a total of approximately $56.7 million of
the Company’s common stock. The repurchase programs approved by the
Board of Directors are as follows:
·
|
On
August 5, 1998, repurchases of up to 3%, or $2 million, of the Company’s
common stock.
|
·
|
In
March 2000, repurchases up to an additional 5%, or $4.2 million of the
Company’s common stock.
|
·
|
In
September 2001, repurchases of $3 million of additional shares of the
Company’s common stock.
|
·
|
In
August 2002, repurchases of $5 million of additional shares of the
Company’s common stock.
|
·
|
In
September 2003, repurchases of $10 million of additional shares of the
Company’s common stock.
|
·
|
On
April 27, 2004, repurchases of $5 million of additional shares of the
Company’s common stock.
|
·
|
On
August 23, 2005, repurchases of $5 million of additional shares of the
Company’s common stock.
|
·
|
On
August 22, 2006, repurchases of $5 million of additional shares of the
Company’s common stock.
|
·
|
On
February 27, 2007, repurchases of $5 million of additional shares of the
Company’s common stock.
|
·
|
On
November 13, 2007, repurchases of $5 million of additional shares of the
Company’s common stock.
|
·
|
On
December 16, 2008, repurchases of $2.5 million of additional shares of the
Company’s common stock.
|
·
|
On
May 26, 2009, repurchases of $5 million of additional shares of the
Company’s common stock.
|
During
2009, the Company repurchased 160,803 shares (2.6% of common shares) at a total
price of $3,122,000. During 2008, the Company repurchased 262,877 shares (4.3%
of common shares) at a total price of $6,784,000. As of December 31, 2009,
approximately $3,417,000 remains available for purchase under the repurchase
programs. Treasury stock is further affected by activity in the
DCP.
Capital
Ratios
Minimum
regulatory requirements for highly-rated banks that do not expect significant
growth is 8% for the Total Capital to Risk-Weighted Assets ratio and 3% for the
Tier 1 Capital to Average Assets ratio. Other institutions, not
considered highly-rated, are required to maintain a ratio of Tier 1 Capital to
Risk-Weighted Assets of 4% to 5% depending on their particular circumstances and
risk profiles. The Company and First Mid Bank have capital ratios
above the minimum regulatory capital requirements and, as of December 31, 2009,
the Company and First Mid Bank had capital ratios above the levels required for
categorization as well-capitalized under the capital adequacy guidelines
established by the bank regulatory agencies.
A
tabulation of the Company and First Mid Bank’s capital ratios as of December 31,
2009 follows:
Total
Capital
|
Tier
One Capital
|
Tier
One Capital
|
|
to
Risk-Weighted
|
to
Risk-Weighted
|
to
Average
|
|
Assets
|
Assets
|
Assets
|
|
First
Mid-Illinois Bancshares, Inc. (Consolidated)
|
15.76%
|
14.57%
|
10.63%
|
First
Mid-Illinois Bank & Trust, N.A.
|
14.50%
|
13.31%
|
9.67%
|
Liquidity
Liquidity
represents the ability of the Company and its subsidiaries to meet all present
and future financial obligations arising in the daily operations of the
business. Financial obligations consist of the need for funds to meet extensions
of credit, deposit withdrawals and debt servicing. The Company’s liquidity
management focuses on the ability to obtain funds economically through assets
that may be converted into cash at minimal costs or through other sources. The
Company’s other sources for cash include overnight federal fund lines, FHLB
advances, deposits of the State of Illinois, the ability to borrow at the
Federal Reserve Bank, and the Company’s operating line of credit with The
Northern Trust Company. Details for the sources include:
·
|
First
Mid Bank has $25 million available in overnight federal fund lines,
including $10 million from U.S. Bank, N.A. and $15 million from The
Northern Trust Company. Availability of the funds is subject to the First
Mid Bank’s meeting minimum regulatory capital requirements for total
capital to risk-weighted assets and Tier 1 capital to total assets. As of
December 31, 2009, First Mid Bank met these regulatory
requirements.
|
·
|
In
addition, the Company has a revolving credit agreement in the amount of
$20 million with The Northern Trust Company. The Company had an
outstanding balance of $0 with $20 million in available funds as of
December 31, 2009. This loan was renegotiated on April 24, 2009. The
revolving credit agreement has a maximum available balance of $20 million
with a term of one year from the date of closing. The interest rate (2.3%
at December 31, 2009) is floating at 2.25% over the federal funds rate.
The loan is unsecured and subject to a borrowing agreement containing
requirements for the Company and First Mid Bank to maintain various
operating and capital ratios. The Company was in compliance with all of
the existing covenants at December 31, 2009 except the Company’s return on
assets ratio was .74% as of December 31, 2009 which was below the covenant
ratio required of .75%. The Company received a waiver from Northern Trust
Company for this covenant as of December 31,
2009.
|
·
|
First
Mid Bank can also borrow from the FHLB as a source of liquidity.
Availability of the funds is subject to the pledging of collateral to the
FHLB. Collateral that can be pledged includes one-to-four family
residential real estate loans and securities. At December 31, 2009, the
excess collateral at the FHLB could support approximately $60.4 million of
additional advances.
|
·
|
First
Mid Bank is also a member of the Federal Reserve System and can borrow
funds provided sufficient collateral is
pledged.
|
·
|
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.
|
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
assumptions on U.S. Treasuries and agencies;
and
|
·
|
operating
activities, including scheduled debt repayments and dividends to
stockholders.
|
The
following table summarizes significant contractual obligations and other
commitments at December 31, 2009 (in thousands):
Less
than
|
More
than
|
|||||||||||||||||||
Total
|
1
year
|
1-3
years
|
3-5
years
|
5
years
|
||||||||||||||||
Time
deposits
|
$ | 226,039 | $ | 179,548 | $ | 29,100 | $ | 17,155 | $ | 236 | ||||||||||
Debt
|
20,620 | - | - | - | 20,620 | |||||||||||||||
Other
borrowings
|
113,137 | 105,387 | 7,750 | - | - | |||||||||||||||
Operating
leases
|
2,963 | 531 | 978 | 779 | 675 | |||||||||||||||
Supplemental
retirement liability
|
903 | 50 | 200 | 200 | 453 | |||||||||||||||
$ | 363,662 | $ | 285,516 | $ | 38,028 | $ | 18,134 | $ | 21,984 |
For the
year ended December 31, 2009, net cash of $8.3 million and $35.4 million was
provided from operating activities and financing activities, respectively and
$30.6 million was used in investing activities. In total, cash and cash
equivalents increased by $13.1 million since year-end 2008. Generally, during
2009, the increase in cash balances was due to an increase in interest-bearing
deposits held by the Company and federal funds sold.
For the
year ended December 31, 2008, net cash was provided from operating activities,
investing activities and financing activities ($15.2 million, $15.8 million and
$24.5 million, respectively). Thus, cash and cash equivalents increased by $55.5
million since year-end 2007. Generally, during 2008, the increase in cash
balances was due to an increase in interest-bearing deposits held by the Company
and federal funds sold.
For the
years ended December 31, 2009 and 2008, the Company also had issued $10 million
of floating rate trust preferred securities through each of Trust I and Trust
II. See heading “Repurchase Agreements and Other Borrowings” for a
more detailed description.
Effects
of Inflation
Unlike
industrial companies, virtually all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a more
significant impact on the Company’s performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the
same direction or experience the same magnitude of changes as goods and
services, since such prices are affected by inflation. In the current
economic environment, liquidity and interest rate adjustments are features of
the Company’s assets and liabilities that are important to the maintenance of
acceptable performance levels. The Company attempts to maintain a
balance between monetary assets and monetary liabilities, over time, to offset
these potential effects.
Adoption
of New Accounting Guidance
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally
Accepted Accounting Principles—a replacement of FASB Statement No. 162.”
Effective for financial statements issued for interim and annual periods ending
after September 15, 2009, the FASB Accounting Standards CodificationTM
(“ASC”) is now the source of authoritative U.S. GAAP recognized by the FASB to
be applied by nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (“SEC”) under the authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. The
ASC superseded all then-existing non-SEC accounting and reporting standards. All
other non-grandfathered non-SEC accounting literature not included in the ASC
became non-authoritative. Following this Statement, the FASB will no longer
issue new standards in the form of Statements, FASB Staff Positions (“FSP”) or
Emerging Issues Task Force Abstracts. Instead, it will issue Accounting
Standards Updates. The FASB will not consider Accounting Standards Updates as
authoritative in their own right. Accounting Standards Updates will serve only
to update the ASC, provide background information about the guidance, and
provide the bases for conclusions on the change(s) in the ASC. This SFAS was
codified within ASC 105.
In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly,” which was
codified into ASC 820. This FSP provides additional guidance for estimating fair
value in accordance with SFAS No. 157, “Fair Value Measurements,”
when the volume and level of activity for the asset or liability have
significantly decreased. This FSP also includes guidance on identifying
circumstances that indicate a transaction is not orderly.
In April
2009, the FASB issued FSP FAS 115-2 and FSP FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments,” which were codified into ASC 320. This
FSP amends the other-than-temporary-impairment (“OTTI”) guidance in U.S. GAAP
for debt securities to make the guidance more operational and to improve the
presentation and disclosure of OTTI on debt and equity securities in the
financial statements. This FSP does not amend existing recognition and
measurement guidance related to OTTI of equity securities. FSP FAS 115-2 and
124-2 was effective for interim and annual periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15, 2009 if FSP FAS
157-4 was adopted early as well. The Company elected to adopt FSP FAS 115-2 and
124-2 and FSP FAS 157-4 as of March 31, 2009. See discussion in Note 4 -
“Investment Securities” for more detailed information.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value
of Financial Instruments,” which were codified into ASC 825. This FSP
amends SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments,” to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends Accounting
Principles Board (“APB”) Opinion No. 28, “Interim Financial
Reporting,” to require those disclosures in summarized financial
information at interim reporting periods. FSP FAS 107-1 and APB 28-1 was
effective for interim and annual periods ending after June 15, 2009. The
implementation of FSP FAS 107-1 and APB-28-1 did not have a material impact on
the Company’s consolidated financial statements.
In April
2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies” which was codified into ASC 805. This FSP amends and
clarifies SFAS No. 141(R), “Business Combinations,” to
address application issues raised by preparers, auditors, and members of the
legal profession on initial recognition and measurement, subsequent measurement
and accounting, and disclosure of assets and liabilities arising from
contingencies in a business combination. This FSP was effective for assets or
liabilities arising from contingencies in business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. There has been no impact during
2009 from adoption of FSP FAS 141(R)-1 on January 1, 2009.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140” which was
codified into ASC 860. SFAS No. 166 seeks to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. SFAS No. 166 addresses (1) practices that have
developed since the issuance of SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,” that
are not consistent with the original intent and key requirements of that
Statement and (2) concerns of financial statement users that many of the
financial assets (and related obligations) that have been derecognized should
continue to be reported in the financial statements of transferors. This
Statement must be applied as of the beginning of each reporting entity’s first
annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period and for interim and annual reporting
periods thereafter. Earlier application is prohibited. This Statement must be
applied to transfers occurring on or after the effective date. The impact of
adoption is not expected to be material.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)” which was codified into ASC 810. SFAS No. 167 seeks to improve
financial reporting by enterprises involved with variable interest entities by
addressing (1) the effects on certain provisions of FASB Interpretation No. 46
(revised December 2003), “Consolidation of Variable Interest
Entities,” as a result of the elimination of the qualifying
special-purpose entity concept in SFAS No. 166, and (2) constituent concerns
about the application of certain key provisions of Interpretation 46(R),
including those in which the accounting and disclosures under the Interpretation
do not always provide timely and useful information about an enterprise’s
involvement in a variable interest entity. This Statement shall be effective as
of the beginning of each reporting entity’s first annual reporting period that
begins after November 15, 2009, for interim periods within that first annual
reporting period, and for interim and annual reporting periods thereafter.
Earlier application is prohibited. The impact of adoption is not expected to be
material.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
Company’s market risk arises primarily from interest rate risk inherent in its
lending, investing and deposit taking activities, which are restricted to First
Mid Bank. The Company does not currently use derivatives to manage
market or interest rate risks. For a discussion of how management of
the Company addresses and evaluates interest rate risk see also “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Interest Rate Sensitivity.”
Based on
the financial analysis performed as of December 31, 2009, which takes into
account how the specific interest rate scenario would be expected to impact each
interest-earning asset and each interest-bearing liability, the Company
estimates that changes in the prime interest rate would impact First Mid Bank’s
performance as follows:
Increase
(Decrease) In
|
||||||||||||
Net
Interest
|
Net
Interest
|
Return
On
|
||||||||||
December
31, 2009
|
Income
|
Income
|
Average
Equity
|
|||||||||
Prime
rate is 3.25%
|
$ | (000 | ) |
(%)
|
2009=8.47%
|
|||||||
Prime
rate increase of:
|
||||||||||||
200
basis points to 5.25%
|
$ | (1,406 | ) | (5.5 | ) % | (1.13 | )% | |||||
100
basis points to 4.25%
|
(764 | ) | (3.0 | ) % | (.61 | )% | ||||||
Prime
rate decrease of:
|
||||||||||||
200
basis points to 2.25%
|
(1,191 | ) | (4.6 | )% | (.96 | )% | ||||||
100
basis points to 1.25%
|
(242 | ) | (.9 | )% | (.19 | )% |
The
following table shows the same analysis performed as of December 31,
2008:
Increase
(Decrease) In
|
||||||||||||
Net
Interest
|
Net
Interest
|
Return
On
|
||||||||||
December
31, 2008
|
Income
|
Income
|
Average
Equity
|
|||||||||
Prime
rate is 3.25%
|
$ | (000 | ) |
(%)
|
2008=10.97%
|
|||||||
Prime
rate increase of:
|
||||||||||||
200
basis points to 5.25%
|
$ | (446 | ) | (1.8 | ) % | (.37 | )% | |||||
100
basis points to 4.25%
|
(492 | ) | (2.0 | ) % | (.41 | )% | ||||||
Prime
rate decrease of:
|
||||||||||||
200
basis points to 2.25%
|
872 | 3.6 | % | .71 | % | |||||||
100 basis points to 1.25%
|
446 | 1.8 | % | .36 | % |
First Mid
Bank’s Board of Directors has adopted an interest rate risk policy that
establishes maximum decreases in the percentage change in net interest margin of
5% in a 100 basis point rate shift and 10% in a 200 basis point rate
shift.
No
assurance can be given that the actual net interest income would increase or
decrease by such amounts in response to a 100 or 200 basis point increase or
decrease in the prime rate because it is also affected by many other factors.
The results above are based on one-time “shock” moves and do not take into
account any management response or mitigating action.
Interest
rate sensitivity analysis is also used to measure the Company’s interest risk by
computing estimated changes in the Economic Value of Equity (EVE) of First Mid
Bank under various interest rate shocks. EVE is determined by
calculating the net present value of each asset and liability category by rate
shock. The net differential between assets and liabilities is the
Economic Value of Equity. EVE is an expression of the long-term
interest rate risk in the balance sheet as a whole.
The
following table presents First Mid Bank’s projected change in EVE for the
various rate shock levels at December 31, 2009 and 2008 (in thousands). All
market risk sensitive instruments presented in the tables are held-to-maturity
or available-for-sale. First Mid Bank has no trading
securities.
Change
in
|
||||||||||||
Changes
In
|
Economic
Value of Equity
|
|||||||||||
Interest
Rates
|
Amount
of
|
Percent
|
||||||||||
(basis
points)
|
Change
($000)
|
of
Change
|
||||||||||
December
31, 2009
|
+200 | bp | $ | 3,670 | 1.7 | % | ||||||
+100 | bp | 3,530 | 1.7 | % | ||||||||
-200 | bp | (24,633 | ) | (11.7 | )% | |||||||
-100 | bp | (11,941 | ) | (5.7 | )% | |||||||
December
31, 2008
|
+200 | bp | $ | 10,065 | 6.5 | % | ||||||
+100 | bp | 9,835 | 6.4 | % | ||||||||
-200 | bp | (15,396 | ) | (10.0 | )% | |||||||
-100 | bp | (3,121 | ) | (2.0 | )% |
As
indicated above, at December 31, 2009, in the event of a sudden and sustained
increase in prevailing market interest rates, First Mid Bank’s EVE would be
expected to increase, and in the event of a sudden and sustained decrease in
prevailing market interest rates, First Mid Bank’s EVE would be expected to
decrease. At December 31, 2009, First Mid Bank’s estimated changes in
EVE were within the First Mid Bank’s policy guidelines that normally allow for a
change in capital of +/-10% from the base case scenario under a 100 basis point
shock and +/- 20% from the base case scenario under a 200 basis point
shock.
Computation
of prospective effects of hypothetical interest rate changes are based on
numerous assumptions, including relative levels of market interest rates, loan
prepayments and declines in deposit balances, and should not be relied upon as
indicative of actual results. Further, the computations do not
contemplate any actions First Mid Bank may undertake in response to changes in
interest rates.
Certain
shortcomings are inherent in the method of analysis presented in the computation
of EVE. Actual values may differ from those projections set forth in
the table, should market conditions vary from assumptions used in the
preparation of the table. Certain assets, such as adjustable-rate
loans, have features that restrict changes in interest rates on a short-term
basis and over the life of the asset. In addition, the proportion of
adjustable-rate loans in First Mid Bank’s portfolio change in future periods as
market rates change. Further, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in the table. Finally, the ability of many
borrowers to repay their adjustable-rate debt may decrease in the event of an
interest rate increase.
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Consolidated
Balance Sheets
|
||||||||
December
31, 2009 and 2008
|
||||||||
(In
thousands, except share data)
|
2009
|
2008
|
||||||
Assets
|
||||||||
Cash
and due from banks
|
||||||||
Non-interest
bearing
|
$ | 20,243 | $ | 17,077 | ||||
Interest
bearing
|
19,512 | 31,266 | ||||||
Federal
funds sold
|
60,000 | 38,300 | ||||||
Cash
and cash equivalents
|
99,755 | 86,643 | ||||||
Investment
securities:
|
||||||||
Available-for-sale,
at fair value
|
238,697 | 169,476 | ||||||
Held-to-maturity,
at amortized cost (estimated fair value of
|
||||||||
$469
and $610 at December 31, 2009 and 2008, respectively)
|
459 | 599 | ||||||
Loans
held for sale
|
149 | 537 | ||||||
Loans
|
700,601 | 741,401 | ||||||
Less
allowance for loan losses
|
(9,462 | ) | (7,587 | ) | ||||
Net
loans
|
691,139 | 733,814 | ||||||
Interest
receivable
|
6,871 | 7,161 | ||||||
Other
real estate owned
|
2,862 | 2,388 | ||||||
Premises
and equipment, net
|
15,487 | 14,985 | ||||||
Goodwill,
net
|
17,363 | 17,363 | ||||||
Intangible
assets, net
|
2,832 | 3,562 | ||||||
Other
assets
|
19,541 | 13,172 | ||||||
Total
assets
|
$ | 1,095,155 | $ | 1,049,700 | ||||
Liabilities
and Stockholders’ Equity
|
||||||||
Deposits:
|
||||||||
Non-interest
bearing
|
$ | 128,726 | $ | 119,986 | ||||
Interest
bearing
|
711,684 | 686,368 | ||||||
Total
deposits
|
840,410 | 806,354 | ||||||
Securities
sold under agreements to repurchase
|
80,386 | 80,708 | ||||||
Interest
payable
|
861 | 1,616 | ||||||
FHLB
borrowings
|
32,750 | 37,750 | ||||||
Other
borrowings
|
- | 13,000 | ||||||
Junior
subordinated debentures
|
20,620 | 20,620 | ||||||
Other
liabilities
|
8,907 | 6,874 | ||||||
Total
liabilities
|
983,934 | 966,922 | ||||||
Stockholders’
Equity
|
||||||||
Preferred
stock, no par value, authorized 1,000,000 shares; issued 4,927 shares in
2009
|
24,635 | - | ||||||
Common
stock, $4 par value; authorized 18,000,000 shares;
|
||||||||
issued
7,364,959 shares in 2009 and 7,254,117 shares in 2008
|
29,460 | 29,017 | ||||||
Additional
paid-in capital
|
26,811 | 25,289 | ||||||
Retained
earnings
|
62,144 | 58,059 | ||||||
Deferred
compensation
|
2,894 | 2,787 | ||||||
Accumulated
other comprehensive income (loss)
|
464 | (416 | ) | |||||
Less
treasury stock at cost, 1,282,076 shares in 2009 and 1,121,273 shares in
2008
|
(35,187 | ) | (31,958 | ) | ||||
Total
stockholders’ equity
|
111,221 | 82,778 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 1,095,155 | $ | 1,049,700 | ||||
See accompanying notes to consolidated financial statements. |
Consolidated
Statements of Income
|
||||||||||||
For
the years ended December 31, 2009, 2008 and 2007
|
||||||||||||
(In
thousands, except per share data)
|
2009
|
2008
|
2007
|
|||||||||
Interest
income:
|
||||||||||||
Interest
and fees on loans
|
$ | 42,146 | $ | 47,748 | $ | 50,557 | ||||||
Interest
on investment securities:
|
||||||||||||
Taxable
|
8,073 | 7,725 | 8,448 | |||||||||
Exempt
from federal income tax
|
963 | 834 | 712 | |||||||||
Interest
on federal funds sold
|
66 | 336 | 201 | |||||||||
Interest
on deposits with other financial institutions
|
161 | 423 | 13 | |||||||||
Total
interest income
|
51,409 | 57,066 | 59,931 | |||||||||
Interest
expense:
|
||||||||||||
Interest
on deposits
|
12,970 | 16,592 | 21,591 | |||||||||
Interest
on securities sold under agreements to repurchase
|
129 | 872 | 2,419 | |||||||||
Interest
on FHLB advances
|
1,612 | 1,991 | 1,729 | |||||||||
Interest
on federal funds purchased
|
- | - | 206 | |||||||||
Interest
on other borrowings
|
22 | 493 | 914 | |||||||||
Interest
on subordinated debt
|
1,104 | 1,396 | 1,570 | |||||||||
Total
interest expense
|
15,837 | 21,344 | 28,429 | |||||||||
Net
interest income
|
35,572 | 35,722 | 31,502 | |||||||||
Provision
for loan losses
|
3,594 | 3,559 | 862 | |||||||||
Net
interest income after provision for loan losses
|
31,978 | 32,163 | 30,640 | |||||||||
Other
income:
|
||||||||||||
Trust
revenues
|
2,229 | 2,666 | 2,607 | |||||||||
Brokerage
commissions
|
424 | 574 | 528 | |||||||||
Insurance
commissions
|
1,912 | 1,978 | 1,950 | |||||||||
Service
charges
|
4,952 | 5,571 | 5,621 | |||||||||
Securities
gains, net
|
637 | 293 | 256 | |||||||||
Total
other-than-temporary impairment losses on securities
|
(2,465 | ) | - | - | ||||||||
Portion
of loss recognized in other comprehensive loss (before
taxes)
|
653 | - | - | |||||||||
Other-than-temporary
impairment losses recognized in earnings
|
(1,812 | ) | - | - | ||||||||
Gain
on sale of merchant banking portfolio
|
1,000 | - | - | |||||||||
Mortgage
banking revenue, net
|
664 | 437 | 482 | |||||||||
Other
|
3,449 | 3,745 | 3,217 | |||||||||
Total
other income
|
13,455 | 15,264 | 14,661 | |||||||||
Other
expense:
|
||||||||||||
Salaries
and employee benefits
|
16,830 | 16,876 | 16,408 | |||||||||
Net
occupancy and equipment expense
|
4,989 | 4,959 | 4,831 | |||||||||
Net
other real estate owned expense
|
470 | 234 | 82 | |||||||||
FDIC
insurance expense
|
1,943 | 158 | 91 | |||||||||
Amortization
of other intangible assets
|
730 | 766 | 821 | |||||||||
Stationery
and supplies
|
563 | 557 | 547 | |||||||||
Legal
and professional
|
2,021 | 1,820 | 1,641 | |||||||||
Marketing
and promotion
|
963 | 847 | 911 | |||||||||
Other
|
4,703 | 5,243 | 4,723 | |||||||||
Total
other expense
|
33,212 | 31,460 | 30,055 | |||||||||
Income
before income taxes
|
12,221 | 15,967 | 15,246 | |||||||||
Income
taxes
|
4,007 | 5,443 | 5,087 | |||||||||
Net
income
|
$ | 8,214 | $ | 10,524 | $ | 10,159 | ||||||
Dividends
on preferred shares
|
1,821 | - | - | |||||||||
Net
income available to common stockholders
|
$ | 6,393 | $ | 10,524 | $ | 10,159 | ||||||
Per
common share data:
|
||||||||||||
Basic
earnings per share
|
$ | 1.04 | $ | 1.69 | $ | 1.60 | ||||||
Diluted
earnings per share
|
1.04 | 1.67 | 1.57 | |||||||||
Cash
dividends per share
|
.38 | .38 | .38 | |||||||||
See
accompanying notes to consolidated financial statements.
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
||||||||
For
the years ended December 31, 2009, 2008 and 2007
|
Accumulated
|
|||||||
(In
thousands, except share and per share data)
|
Additional
|
Other
|
||||||
Preferred
|
Common
|
Paid-In-
|
Retained
|
Deferred
|
Comprehensive
|
Treasury
|
||
Stock
|
Stock
|
Capital
|
Earnings
|
Compensation
|
Income
(Loss)
|
Stock
|
Total
|
|
December
31, 2006
|
$ -
|
$
22,808
|
$21,261
|
$68,625
|
$2,629
|
$19
|
$(39,556)
|
$75,786
|
Comprehensive
income:
|
||||||||
Net
income
|
-
|
-
|
-
|
10,159
|
-
|
-
|
-
|
10,159
|
Net
unrealized change in available-for-sale investment
securities
|
-
|
-
|
-
|
-
|
-
|
1,077
|
-
|
1,077
|
Total
Comprehensive Income
|
11,236
|
|||||||
Cash
dividends on common stock ($.38 per share)
|
-
|
-
|
-
|
(2,375)
|
-
|
-
|
-
|
(2,375)
|
Issuance
of 28,778 common shares pursuant to the Dividend Reinvestment
Plan
|
-
|
77
|
713
|
-
|
-
|
-
|
-
|
790
|
Issuance
of 10,651 common shares pursuant to the Deferred Compensation
Plan
|
-
|
32
|
254
|
-
|
-
|
-
|
-
|
286
|
Issuance
of 3,087 common shares pursuant to the First Retirement & Savings
Plan
|
-
|
11
|
71
|
-
|
-
|
-
|
-
|
82
|
Purchase
of 237,128 treasury shares
|
-
|
-
|
-
|
-
|
-
|
-
|
(6,481)
|
(6,481)
|
Deferred
compensation
|
-
|
-
|
-
|
-
|
(61)
|
-
|
61
|
-
|
Tax
benefit related to deferred compensation distributions
|
-
|
-
|
409
|
-
|
-
|
-
|
-
|
409
|
Issuance
of 39,801 common shares pursuant to the exercise of stock
options
|
-
|
119
|
322
|
-
|
-
|
-
|
-
|
441
|
Tax
benefit related to exercise of incentive stock options
|
-
|
-
|
153
|
-
|
-
|
-
|
-
|
153
|
Tax
benefit related to exercise of non-qualified stock options
|
-
|
-
|
64
|
-
|
-
|
-
|
-
|
64
|
Vested
stock options compensation expense
|
-
|
-
|
61
|
-
|
-
|
-
|
-
|
61
|
Retirement
of 1,500,000 treasury shares
|
-
|
(4,000)
|
-
|
(17,021)
|
-
|
-
|
21,021
|
-
|
3-for-2
stock split in the form of 50% stock dividend
|
-
|
9,493
|
-
|
(9,493)
|
-
|
-
|
-
|
-
|
December
31, 2007
|
$ -
|
$
28,540
|
$23,308
|
$49,895
|
$2,568
|
$1,096
|
$(24,955)
|
$80,452
|
Comprehensive
income:
|
||||||||
Net
income
|
-
|
-
|
-
|
10,524
|
-
|
-
|
-
|
10,524
|
Net
unrealized change in available-for-sale investment
securities
|
-
|
-
|
-
|
-
|
-
|
(1,512)
|
-
|
(1,512)
|
Total
Comprehensive Income
|
-
|
9,012
|
||||||
Cash
dividends on common stock ($.38 per share)
|
-
|
-
|
-
|
(2,360)
|
-
|
-
|
-
|
(2360)
|
Issuance
of 31,684 common shares pursuant to the Dividend Reinvestment
Plan
|
-
|
127
|
697
|
-
|
-
|
-
|
-
|
824
|
Issuance
of 7,600 common shares pursuant to the Deferred Compensation
Plan
|
-
|
31
|
158
|
-
|
-
|
-
|
-
|
189
|
Issuance
of 7,161 common shares pursuant to the First Retirement & Savings
Plan
|
-
|
29
|
145
|
-
|
-
|
-
|
-
|
174
|
Purchase
of 262,877 treasury shares
|
-
|
-
|
-
|
-
|
-
|
-
|
(6,784)
|
(6,784)
|
Deferred
compensation
|
-
|
-
|
-
|
-
|
219
|
-
|
(219)
|
-
|
Tax
benefit related to deferred compensation distributions
|
-
|
-
|
34
|
-
|
-
|
-
|
-
|
34
|
Issuance
of 72,559 common shares pursuant to the exercise of stock
options
|
-
|
290
|
483
|
-
|
-
|
-
|
-
|
773
|
Tax
benefit related to exercise of incentive stock options
|
-
|
-
|
263
|
-
|
-
|
-
|
-
|
263
|
Tax
benefit related to exercise of non-qualified stock options
|
-
|
-
|
143
|
-
|
-
|
-
|
-
|
143
|
Vested
stock options compensation expense
|
-
|
-
|
58
|
-
|
-
|
-
|
-
|
58
|
December
31, 2008
|
$ -
|
$
29,017
|
$25,289
|
$58,059
|
$2,787
|
$(416)
|
$(31,958)
|
$82,778
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
||||||||
For
the years ended December 31, 2009, 2008 and 2007
|
Accumulated
|
|||||||
(In
thousands, except share and per share data)
|
Additional
|
Other
|
||||||
Preferred
|
Common
|
Paid-In-
|
Retained
|
Deferred
|
Comprehensive
|
Treasury
|
||
Stock
|
Stock
|
Capital
|
Earnings
|
Compensation
|
Income
(Loss)
|
Stock
|
Total
|
|
December
31, 2008
|
$ -
|
$
29,017
|
$25,289
|
$58,059
|
$2,787
|
$(416)
|
$(31,958)
|
$82,778
|
Comprehensive
income:
|
||||||||
Net
income
|
-
|
-
|
-
|
8,214
|
-
|
-
|
-
|
8,214
|
Net
unrealized change in available-for-sale investment
securities
|
-
|
-
|
-
|
-
|
-
|
880
|
-
|
880
|
Total
Comprehensive Income
|
|
9,094
|
||||||
Cash
dividends on preferred stock ($370 per share)
|
-
|
-
|
-
|
(1,821)
|
-
|
-
|
-
|
(1,821)
|
Cash
dividends on common stock ($.38 per share)
|
-
|
-
|
-
|
(2,308)
|
-
|
-
|
-
|
(2,308)
|
Issuance
of 4,927 shares of preferred stock
|
24,635
|
-
|
-
|
-
|
-
|
-
|
-
|
24,635
|
Issuance
of 44,661 common shares pursuant to the Dividend Reinvestment
Plan
|
-
|
179
|
674
|
-
|
-
|
-
|
-
|
853
|
Issuance
of 9,916 common shares pursuant to the Deferred Compensation
Plan
|
-
|
40
|
136
|
-
|
-
|
-
|
-
|
176
|
Issuance
of 19,000 common shares pursuant to the First Retirement & Savings
Plan
|
-
|
75
|
255
|
-
|
-
|
-
|
-
|
330
|
Purchase
of 160,803 treasury shares
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,122)
|
(3,122)
|
Deferred
compensation
|
-
|
-
|
-
|
-
|
107
|
-
|
(107)
|
-
|
Tax
benefit related to deferred compensation distributions
|
-
|
-
|
67
|
-
|
-
|
-
|
-
|
67
|
Issuance
of 37,266 common shares pursuant to the exercise of stock
options
|
-
|
149
|
239
|
-
|
-
|
-
|
-
|
388
|
Tax
benefit related to exercise of incentive stock options
|
-
|
-
|
19
|
-
|
-
|
-
|
-
|
19
|
Tax
benefit related to exercise of non-qualified stock options
|
-
|
-
|
79
|
-
|
-
|
-
|
-
|
79
|
Vested
stock options compensation expense
|
-
|
-
|
53
|
-
|
-
|
-
|
-
|
53
|
December
31, 2009
|
$
24,635
|
$
29,460
|
$26,811
|
$62,144
|
$2,894
|
$464
|
$(35,187)
|
$111,221
|
See
accompanying notes to consolidated financial
statements.
|
Consolidated
Statements of Cash Flows
|
||||||||||||
For
the years ended December 31, 2009, 2008 and 2007
|
||||||||||||
(In
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income
|
$ | 8,214 | $ | 10,524 | $ | 10,159 | ||||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
Provision
for loan losses
|
3,594 | 3,559 | 862 | |||||||||
Depreciation,
amortization and accretion, net
|
3,070 | 2,234 | 1,845 | |||||||||
Compensation
expense for vested stock options
|
53 | 58 | 61 | |||||||||
Gain
on investment securities, net
|
(637 | ) | (293 | ) | (256 | ) | ||||||
Other-than-temporary
impairment losses on securities recognized in earnings
|
1,812 | - | - | |||||||||
Loss
on sales of other real property owned, net
|
353 | 153 | 7 | |||||||||
Loss
on write own of fixed assets
|
80 | 132 | - | |||||||||
Gain
on sale of merchant banking portfolio
|
(1,000 | ) | - | - | ||||||||
Gain
on sales of loans held for sale, net
|
(727 | ) | (520 | ) | (560 | ) | ||||||
Deferred
income taxes
|
(1,515 | ) | (631 | ) | (218 | ) | ||||||
Decrease
in accrued interest receivable
|
290 | 1,148 | 108 | |||||||||
Decrease
in accrued interest payable
|
(755 | ) | (648 | ) | (181 | ) | ||||||
Origination
of loans held for sale
|
(62,904 | ) | (44,103 | ) | (47,714 | ) | ||||||
Proceeds
from sales of loans held for sale
|
64,019 | 46,060 | 48,534 | |||||||||
Increase
in other assets
|
(7,145 | ) | (2,467 | ) | (188 | ) | ||||||
Increase
in other liabilities
|
1,522 | 24 | 176 | |||||||||
Net
cash provided by operating activities
|
8,324 | 15,230 | 12,635 | |||||||||
Cash
flows from investing activities:
|
||||||||||||
Proceeds
from sales of securities available-for-sale
|
38,275 | 2,322 | 14,007 | |||||||||
Proceeds
from maturities of securities available-for-sale
|
63,321 | 90,439 | 64,172 | |||||||||
Proceeds
from maturities of securities held-to-maturity
|
140 | 580 | 145 | |||||||||
Purchases
of securities available-for-sale
|
(171,440 | ) | (80,243 | ) | (80,478 | ) | ||||||
Net
decrease (increase) in loans
|
39,081 | 2,696 | (25,473 | ) | ||||||||
Purchases
of premises and equipment
|
(1,954 | ) | (1,082 | ) | (856 | ) | ||||||
Proceeds
from sales of other real property owned
|
1,987 | 1,100 | 1,274 | |||||||||
Net
cash provided by (used in) investing activities
|
(30,590 | ) | 15,812 | (27,209 | ) | |||||||
Cash
flows from financing activities:
|
||||||||||||
Net
increase (decrease) in deposits
|
34,056 | 35,771 | (12 | ) | ||||||||
Decrease
in federal funds purchased
|
- | - | (6,800 | ) | ||||||||
Increase
(decrease)in repurchase agreements
|
(322 | ) | 12,408 | 1,607 | ||||||||
Proceeds
from short-term FHLB advances
|
- | - | 69,000 | |||||||||
Repayment
of short-term FHLB advances
|
- | (10,000 | ) | (61,000 | ) | |||||||
Proceeds
from long-term FHLB advances
|
- | - | 24,750 | |||||||||
Repayment
of long-term FHLB advances
|
(5,000 | ) | (5,000 | ) | - | |||||||
Proceeds
from long-term debt
|
- | 5,000 | 9,000 | |||||||||
Repayment
of long-term debt
|
(13,000 | ) | (6,500 | ) | (5,500 | ) | ||||||
Proceeds
from issuance of common stock
|
894 | 1,136 | 809 | |||||||||
Proceeds
from issuance of preferred stock
|
24,635 | - | - | |||||||||
Purchase
of treasury stock
|
(3,122 | ) | (6,784 | ) | (6,481 | ) | ||||||
Dividends
paid on preferred stock
|
(1,242 | ) | - | - | ||||||||
Dividends
paid on common stock
|
(1,521 | ) | (1,553 | ) | (1,512 | ) | ||||||
Net
cash provided by financing activities
|
35,378 | 24,478 | 23,861 | |||||||||
Increase
in cash and cash equivalents
|
13,112 | 55,520 | 9,287 | |||||||||
Cash
and cash equivalents at beginning of year
|
86,643 | 31,123 | 21,836 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 99,755 | $ | 86,643 | $ | 31,123 | ||||||
2009 | 2008 | 2007 | ||||||||||
Supplemental
disclosures of cash flow information
|
||||||||||||
Cash
paid during the year for:
|
||||||||||||
Interest
|
$ | 16,592 | $ | 21,992 | $ | 28,610 | ||||||
Income
taxes
|
4,596 | 6,086 | 4,306 | |||||||||
Supplemental
disclosure of noncash investing and financing activities:
|
||||||||||||
Loans
transferred to real estate owned
|
$ | 2,847 | $ | 2,900 | $ | 625 | ||||||
Dividends
reinvested in common shares
|
853 | 824 | 790 | |||||||||
Net
tax benefit related to option and deferred compensation
plans
|
165 | 440 | 626 | |||||||||
See
accompanying notes to consolidated financial statements.
|
Notes
To Consolidated Financial Statements
December
31, 2009, 2008 and 2007
(Table
dollar amounts in thousands, except share data)
Note
1 – Summary of Significant Accounting Policies
Basis
of Accounting and Consolidation
The
accompanying consolidated financial statements include the accounts of First
Mid-Illinois Bancshares, Inc. (“Company”) and its wholly-owned
subsidiaries: Mid-Illinois Data Services, Inc. (“MIDS”), First
Mid-Illinois Bank & Trust, N.A. (“First Mid Bank”) and The Checkley Agency,
Inc. (“Checkley”). All significant intercompany balances and
transactions have been eliminated in consolidation. Certain amounts
in the prior years’ consolidated financial statements have been reclassified to
conform to the 2009 presentation and there was no impact on net income or
stockholders’ equity from these reclassifications. The Company
operates as a one-segment entity for financial reporting
purposes. The accounting and reporting policies of the Company
conform to accounting principles generally accepted in the United States of
America. Following is a description of the more significant of these
policies.
Current
Economic Conditions
The
current protracted economic decline continues to present financial institutions
with circumstances and challenges, which in some cases have resulted in large
and unanticipated declines in the fair values of investments and other assets,
constraints on liquidity and capital and significant credit quality problems,
including severe volatility in the valuation of real estate and other collateral
supporting loans.
The
accompanying financial statements have been prepared using values and
information currently available to the Company.
Given the
volatility of current economic conditions, the values of assets and liabilities
recorded in the financial statements could change rapidly, resulting in material
future adjustments in asset values, the allowance for loan losses and capital
that could negatively impact the Company’s ability to meet regulatory capital
requirements and maintain sufficient liquidity.
At
December 31, 2009, the Company held $226.4 million in commercial real estate
loans and $28 million in construction and land development loans. Due to
national, state and local economic conditions, values for commercial and
development real estate have declined, and the market for these properties is
depressed.
At
December 31, 2009, the Company held $54 million in agricultural production loans
and $62 million in agricultural real estate loans. Values of agricultural real
estate in the current market have declined due to locally depressed markets
which has significantly affected the repayment ability for some agricultural
loan customers.
In
addition, the Company has $50.8 million of loans in the hospitality (motels and
hotels) industry. Due to national, state and local economic conditions, values
for commercial real estate and, specifically hotel properties, have declined and
the market for these properties is depressed. The performance of
these loans is also dependent on borrower specific issues as well as the general
level of business and personal travel within the region.
The
Company also has $72.0 million of loans to lessors of non-residential buildings
and $44.2 million of loans to lessors of residential buildings and dwellings.
Due to national, state and local economic conditions, values for commercial real
estate have declined and the market for these properties is also
depressed.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. The Company uses
estimates and employs the judgments of management in determining the amount of
its allowance for loan losses and income tax accruals and deferrals, in its fair
value measurements of investment securities, and in the evaluation of impairment
of loans, goodwill, investment securities, and fixed assets. As with any
estimate, actual results could differ from these estimates. Material estimates
that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses. In connection with
the determination of the allowance for loan losses, management obtains
independent appraisals for significant properties.
Fair
Value Measurements
The fair
value of a financial instrument is defined as the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. The Company estimates the fair value of a
financial instrument using a variety of valuation methods. Where financial
instruments are actively traded and have quoted market prices, quoted market
prices are used for fair value. When the financial instruments are not actively
traded, other observable market inputs, such as quoted prices of securities with
similar characteristics, may be used, if available, to determine fair value.
When observable market prices do not exist, the Company estimates fair value.
The Company’s valuation methods consider factors such as liquidity and
concentration concerns. Other factors such as model assumptions, market
dislocations, and unexpected correlations can affect estimates of fair value.
Imprecision in estimating these factors can impact the amount of revenue or loss
recorded.
SFAS No.
157, Fair Value
Measurements, which was codified into ASC 820, establishes a framework
for measuring the fair value of financial instruments that considers the
attributes specific to particular assets or liabilities and establishes a
three-level hierarchy for determining fair value based on the transparency of
inputs to each valuation as of the fair value measurement date. The three levels
are defined as follows:
·
|
Level
1 — quoted prices (unadjusted) for identical assets or liabilities in
active markets.
|
·
|
Level
2 — inputs include quoted prices for similar assets and liabilities in
active markets, quoted prices of identical or similar assets or
liabilities in markets that are not active, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
·
|
Level
3 — inputs that are unobservable and significant to the fair value
measurement.
|
At the
end of each quarter, the Company assesses the valuation hierarchy for each asset
or liability measured. From time to time, assets or liabilities may be
transferred within hierarchy levels due to changes in availability of observable
market inputs to measure fair value at the measurement date. Transfers into or
out of hierarchy levels are based upon the fair value at the beginning of the
reporting period. A more detailed description of the fair values measured at
each level of the fair value hierarchy can be found in Note 12 – “Disclosures of
Fair Values of Financial Instruments.”
Cash
and Cash Equivalents
For
purposes of reporting cash flows, cash equivalents include non-interest bearing
and interest bearing cash and due from banks and federal funds sold. Generally,
federal funds are sold for one-day periods.
Investment
Securities
The
Company classifies its debt securities into one or more of three categories:
held-to-maturity, available-for-sale, or trading. Held-to-maturity
securities are those which management has the positive intent and ability to
hold to maturity. Available-for-sale securities are those securities
which management may sell prior to maturity as a result of changes in interest
rates, prepayment factors, or as part of the Company’s overall asset and
liability strategy. Trading securities are those securities bought
and held principally for the purpose of selling them in the near
term. The Company had no securities designated as trading during
2009, 2008 or 2007.
Held-to-maturity
securities are recorded at cost adjusted for amortization of premiums and
accretion of discounts to the earlier of the call date or maturity date using
the interest method. Available-for-sale securities are recorded at fair
value. Unrealized holding gains and losses, net of the related income
tax effect, are excluded from income and reported as a separate component of
stockholders’ equity. If a decrease in the fair value of a security
is expected to be other than temporary, then the security is written down to its
fair value through a charge to income and a new cost basis is established for
the security.
Realized
gains and losses on the sale of investment securities are recorded using the
specific identification method.
Effective
April 2009, the Company adopted new accounting guidance (ASC 320-10) related to
recognition and presentation of other-than-temporary impairment (“OTTI”). When
the Company does not intend to sell a debt security, and it is more likely than
not, the Company will not have to sell the security before recovery of its cost
basis, it recognizes the credit component of an OTTI of a debt security in
earnings and the remaining portion in other comprehensive income. For
held-to-maturity debt securities, the amount of an OTTI recorded in other
comprehensive income for the noncredit portion of a previous OTTI is amortized
prospectively over the remaining life of the security on the basis of the timing
of future estimated cash flows of the security.
As a
result of this guidance, the Company’s consolidated statement of income as of
December 31, 2009, reflects the full impairment (that is, the difference between
the security’s amortized cost basis and fair value) on debt securities that the
Company intends to sell or would more likely than not be required to sell before
the expected recovery of the amortized cost basis. For available-for-sale and
held-to-maturity debt securities that management has no intent to sell and
believes that it more likely than not will not be required to sell prior to
recovery, only the credit loss component of the impairment is recognized in
earnings, while the noncredit loss is recognized in accumulated other
comprehensive income. The credit loss component recognized in earnings is
identified as the amount of principal cash flows not expected to be received
over the remaining term of the security as projected based on cash flow
projections.
Prior to
the adoption of the recent accounting guidance in April 2009, management
considered, in determining whether OTTI exists, (1) the length of time and the
extent to which fair value has been less than cost, (2) the financial condition
and near-term prospects of the issuer(s) and (3) the intent and ability of the
Company to retain its investment in the security for a period sufficient to
allow for any anticipated recovery in fair value.
Loans
Loans are
stated at the principal amount outstanding net of unearned discounts, unearned
income and the allowance for loan losses. Unearned income includes
deferred loan origination fees reduced by loan origination costs and is
amortized to interest income over the life of the related loan using methods
that approximate the effective interest rate method. Interest on substantially
all loans is credited to income based on the principal amount
outstanding.
The
Company’s policy is to discontinue the accrual of interest income on any loan
that becomes ninety days past due as to principal or interest or earlier when,
in the opinion of management there is reasonable doubt as to the timely
collection of 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
collectibility of interest or principal.
Loans
expected to be sold are classified as held for sale in the consolidated
financial statements and are recorded at the lower of aggregate cost or market
value, taking into consideration future commitments to sell the
loans.
Allowance
for Loan Losses
The
allowance for loan losses is maintained at a level deemed appropriate by
management to provide for probable losses inherent in the loan
portfolio. The allowance is based on a continuing review of the loan
portfolio, the underlying value of the collateral securing the loans, current
economic conditions and past loan loss experience. Loans that are
deemed to be uncollectible are charged off to the allowance. The
provision for loan losses and recoveries are credited to the
allowance.
Management,
considering current information and events regarding the borrowers’ ability to
repay their obligations, considers a loan to be impaired when it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the note agreement, including principal and
interest. The amount of the impairment is measured based on the fair
value of the collateral, if the loan is collateral dependent, or alternatively,
at the present value of expected future cash flows discounted at the loan’s
effective interest rate. Certain homogeneous loans such as
residential real estate mortgage and installment loans are excluded from the
impaired loan provisions. Interest income on impaired loans is
recorded when cash is received and only if principal is considered to be fully
collectible.
Premises
and Equipment
Premises
and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization is charged to expense and determined principally
by the straight-line method over the estimated useful lives of the
assets.
The
estimated useful lives for each major depreciable classification of premises and
equipment are as follows:
Buildings
and improvements
|
20
- 40 years
|
Leasehold
improvements
|
5-15
years
|
Furniture
and equipment
|
3-7
years
|
Goodwill
and Intangible Assets
The
Company has goodwill from business combinations, identifiable intangible assets
assigned to core deposit relationships and customer lists acquired, and
intangible assets arising from the rights to service mortgage loans for
others.
Identifiable
intangible assets generally arise from branches acquired that the Company
accounted for as purchases. Such assets consist of the excess of the
purchase price over the fair value of net assets acquired, with specific amounts
assigned to core deposit relationships and customer lists primarily related to
insurance agency. Intangible assets are amortized by the
straight-line method over various periods up to fifteen
years. Management reviews intangible assets for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
In
accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible
Assets,” codified into ASC 350, the Company performed testing of goodwill
for impairment as of September 30, 2009 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.
Other
Real Estate Owned
Other
real estate owned acquired through loan foreclosure are initially recorded at
fair value less costs to sell when acquired, establishing a new cost basis. The
adjustment at the time of foreclosure is recorded through the allowance for loan
losses. Due to the subjective nature of establishing the fair value when the
asset is acquired, the actual fair value of the other real estate owned or
foreclosed asset could differ from the original estimate. If it is determined
that fair value temporarily declines subsequent to foreclosure, a valuation
allowance is recorded through noninterest expense. Operating costs associated
with the assets after acquisition are also recorded as noninterest expense.
Gains and losses on the disposition of other real estate owned and foreclosed
assets are netted and posted to other noninterest expense.
Federal
Home Loan Bank Stock
Federal
Home Loan Bank stock is a required investment for institutions that are members
of the Federal Home Loan Bank system. The required investment in the
common stock is based on a predetermined formula.
The
Company owns approximately $3.7 million of Federal Home Loan Bank of Chicago
(FHLB) stock included in other assets as of December 31, 2009 and 2008. During
the third quarter of 2007, the FHLB received a Cease and Desist Order from its
regulator, the Federal Housing Finance Board. The FHLB will continue to provide
liquidity and funding through advances; however, the order prohibited capital
stock repurchases and redemptions until a time to be determined by the Federal
Housing Finance Board and requires Federal Housing Finance Board approval for
dividends. On July 24, 2008, the Federal Housing Finance Board amended the order
to allow the FHLB to repurchase or redeem any capital stock issued to
support new advances after the repayment of those new advances if certain
conditions are met. The amended order, however, provides that the
Director of the Office of Supervision of the Federal Housing Finance Board may
direct the FHLB to halt the repurchase of redemption of capital stock if, in his
sole discretion, the continuation of such transactions would be inconsistent
with maintaining the capital adequacy of the FHLB and its safe and sound
operations. With regard to dividends, the FHLB continues to assess its dividend
capacity each quarter and make appropriate request for approval. There were no
dividends paid by the FHLB during 2009 or 2008. The Company evaluated its cost
investment in FHLB stock and deemed it was ultimately recoverable.
Temporary
Liquidity Guarantee Program
On
October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program
(TLGP). The final rule was adopted on November 21, 2008. The FDIC stated that
the purpose of these actions is to strengthen confidence and encourage liquidity
in the banking system by guaranteeing newly issued senior unsecured debt of 31
days or greater, of banks, thrifts, and certain holding companies, and by
providing full FDIC insurance coverage for all non-interest bearing transaction
accounts, regardless of dollar amount. Inclusion in the program was voluntary.
Institutions participating in the senior unsecured debt portion of the program
are assessed fees based on a sliding scale, depending on length of maturity.
Shorter-term debt has a lower fee structure and longer-term debt has a higher
fee. The range is from 50 basis points on debt of 180 days or less, to a maximum
of 100 basis points for debt with maturities of one year or longer, on an
annualized basis. A 10-basis point surcharge is added to a participating
institution's current insurance assessment in exchange for final coverage for
all transaction accounts.
First Mid
Bank elected to participate in both parts of the TLGP, the Transaction Account
Guarantee Program and the Debt Guarantee Program. The FDIC’s
Transaction Account Guarantee Program, provides, without charge to depositors, a
full guarantee on all non-interest bearing transaction accounts held by any
depositor, regardless of dollar amount, through June 30,
2010. Participation in the Transaction Account Guarantee Program cost
the Company 10 basis points annually on the amount of the
deposits. The FDIC’s Debt Guarantee Program, which expired in October
2009, provided for the guarantee of eligible newly issued senior unsecured debt
of participating entities, but the Company and the Bank did not issue any debt
under this program.
Federal
Deposit Insurance Corporation Insurance Coverage
As an
FDIC-insured institution, First Mid Bank is required to pay deposit insurance
premium assessments to the FDIC. On October 3, 2008, the FDIC
temporarily increased the standard maximum deposit insurance amount (SMDIA) from
$100,000 to $250,000 per depositor. On May 20, 2009, the Helping
Families Save Their Homes Act extended the temporary increase in the SMDIA
through December 31, 2013. This extension of the temporary $250,000 coverage
limit became effective immediately upon the President’s signature. The
legislation provides that the SMDIA will return to $100,000 on January 1,
2014. The additional cost of the increase to the SMDIA, assessed on a
quarterly basis, is a 10 basis point annualized surcharge (2.5 basis points
quarterly) on balances in non-interest bearing transaction accounts that exceed
$250,000. The Company has expensed $49,000 for this program in
2009.
On
February 27, 2009, the FDIC adopted a final rule modifying the risk-based
assessment system and setting initial base assessment rates beginning April 1,
2009, at 12 to 45 basis points and, due to extraordinary circumstances, extended
the period of the restoration plan to increase the deposit insurance fund to
seven years. Also on February 27, 2009, the FDIC issued final rules on changes
to the risk-based assessment system. The final rules both increase base
assessment rates and incorporate additional assessments for excess reliance on
brokered deposits and FHLB advances. The new rates would increase annual
assessment rates from 5 to 7 basis points to 7 to 24 basis points. This new
assessment took effect April 1, 2009. First Mid Bank’s assessment rate at
December 31, 2009 was 13.27 basis points. The Company has expensed $1,260,000
for this assessment in 2009.
Also on
February 27, 2009, the FDIC adopted an interim rule to impose a 20 basis point
emergency special assessment payable September 30, 2009 based on the second
quarter 2009 assessment base, to help shore up the Deposit Insurance Fund
(“DIF”). This assessment equates to a one-time cost of $200,000 per $100 million
in assessment base. The interim rule also allows the Board to impose possible
additional special assessments of up to 10 basis points thereafter to maintain
public confidence in the DIF. Subsequently, the FDIC’s Treasury borrowing
authority increased from $30 billion to $100 billion, allowing the agency to cut
the planned special assessment from 20 to 10 basis points. On May 22, 2009, the
FDIC adopted a final rule which established a special assessment of five basis
points on each FDIC-insured depository institutions assets, minus it Tier 1
capital, as of September 30, 2009. The assessment was capped at 10 basis points
of an institution’s domestic deposits so that no institution would pay an amount
higher than they would have under the interim rule. This special assessment was
collected September 30, 2009. The Company expensed $522,000 as of June 30, 2009
for this special assessment.
In
addition to its insurance assessment, each insured bank was subject, in 2009, to
quarterly debt service assessments in connection with bonds issued by a
government corporation that financed the federal savings and loan
bailout. The Company expensed $112,000 during 2009 for this
assessment.
On
September 29, 2009, the FDIC Board proposed a Deposit Insurance Fund restoration
plan that required banks to prepay, on December 30, 2009, their estimated
quarterly risk-based assessments for the fourth quarter of 2009 and for all of
2010, 2011 and 2012. Under the plan—which applies to all banks except those with
liquidity problems—banks were assessed through 2010 according to the risk-based
premium schedule adopted earlier this year. Beginning January 1, 2011, the base
rate increase by 3 basis points. The Company recorded a prepaid expense asset of
$4,855,000 as of December 31, 2009 as a result of this plan. This asset will be
amortized to non-interest expense over the next three years.
Income
Taxes
The
Company and its subsidiaries file consolidated federal and state income tax
returns with each organization computing its taxes on a separate company
basis. Amounts provided for income tax expense are based on income
reported for financial statement purposes rather than amounts currently payable
under tax laws.
Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to the temporary differences existing between the financial
statement carrying amounts of assets and liabilities and their respective tax
basis, as well as operating loss and tax credit carry forwards. To
the extent that current available evidence about the future raises doubt about
the realization of a deferred tax asset, a valuation allowance is
established. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized as an increase or decrease in income tax
expense in the period in which such change is enacted.
Additionally,
the Company reviews its uncertain tax positions annually under FASB
Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in Income
Taxes,” codified within ASC 740. An uncertain tax position is recognized
as a benefit only if it is "more likely than not" that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount actually recognized is the largest amount of tax benefit that is
greater than 50% likely to be recognized on examination. For tax positions not
meeting the "more likely than not" test, no tax benefit is recorded. A
significant amount of judgment is applied to determine both whether the tax
position meets the "more likely than not" test as well as to determine the
largest amount of tax benefit that is greater than 50% likely to be recognized.
Differences between the position taken by management and that of taxing
authorities could result in a reduction of a tax benefit or increase to tax
liability, which could adversely affect future income tax expense.
Trust
Department Assets
Assets
held in fiduciary or agency capacities are not included in the consolidated
balance sheets since such items are not assets of the Company or its
subsidiaries. Fees from trust activities are recorded on an cash
basis over the period in which the service is provided. Fees are a
function of the market value of assets managed and administered, the volume of
transactions, and fees for other services rendered, as set forth in the
underlying client agreement with the Trust & Wealth Management Division of
First Mid Bank. This revenue recognition involves the use of
estimates and assumptions, including components that are calculated based on
asset valuations and transaction volumes. Any out of pocket expenses
or services not typically covered by the fee schedule for trust activities are
charged directly to the trust account on a gross basis as trust revenue is
incurred. At December 31, 2009, the Company managed or administered
1,117 accounts with assets totaling approximately $459,149,000. At December 31,
2008, the Company managed or administered 1,115 accounts with assets totaling
approximately $413,754,000.
Preferred
Stock
During
2009, the Company sold to certain accredited investors including directors,
executive officers, and certain major customers and holders of the Company’s
common stock, $24,635,000, in the aggregate, of a newly authorized series of its
preferred stock designated as Series B 9% Non-Cumulative Perpetual Convertible
Preferred Stock. The Series B Preferred Stock had an issue price of $5,000 per
share and no par value per share. The Series B Preferred Stock was
issued in a private placement exempt from registration pursuant to Regulation D
of the Securities Act of 1933, as amended.
The
Series B Preferred Stock pays non-cumulative dividends semiannually in arrears,
when, as and if authorized by the Board of Directors of the Company, at a rate
of 9% per year. Holders of the Series B Preferred Stock will have no
voting rights, except with respect to certain fundamental changes in the terms
of the Series B Preferred Stock and certain other matters. In
addition, if dividends on the Series B Preferred Stock are not paid in full for
four dividend periods, whether consecutive or not, the holders of the Series B
Preferred Stock, acting as a class with any other of the Company’s securities
having similar voting rights, will have the right to elect two directors to the
Company’s Board of Directors. The terms of office of these directors
will end when the Company has paid or set aside for payment full semi-annually
dividends for four consecutive dividend periods.
Each
share of the Series B Preferred Stock may be converted at any time at the option
of the holder into shares of the Company’s common stock. The number
of shares of common stock into which each share of the Series B Preferred Stock
is convertible is the $5,000 liquidation preference per share divided by the
Conversion Price of $21.94. The Conversion Price is subject to
adjustment from time to time pursuant to the terms of the Certificate of
Designations. If at the time of conversion, there are any authorized,
declared and unpaid dividends with respect to a converted share of Series B
Preferred Stock, the holder will receive cash in lieu of the dividends, and a
holder will receive cash in lieu of fractional shares of common stock following
conversion.
After
five years, the Company may, at its option but subject to the Company’s receipt
of any required prior approvals from the Board of Governors of the Federal
Reserve System or any other regulatory authority, redeem the Series B Preferred
Stock. Any redemption will be in exchange for cash in the amount of
$5,000 per share, plus any authorized, declared and unpaid dividends, without
accumulation of any undeclared dividends.
The
Company also has the right at any time on or after the fifth anniversary of the
original issuance date of the Series B Preferred Stock to require the conversion
of all (but not less than all) of the Series B Preferred Stock into shares of
common stock if, on the date notice of mandatory conversion is given to holders,
the book value of the Company’s common stock equals or exceeds 115% of the book
value of the Company’s common stock at September 30, 2008. “Book value of the
Company’s common stock” at any date means the result of dividing the Company’s
total common stockholders’ equity at that date, determined in accordance with
U.S. generally accepted accounting principles, by the number of shares of common
stock then outstanding, net of any shares held in the treasury. The
book value of the Company’s common stock at September 30, 2008 was $13.03, and
115% of this amount is approximately $14.98. The book value of the Company’s
common stock at December 31, 2009 was $14.23.
Stock
Split
On June
29, 2007, the Company effected a three-for-two stock split in the form of a 50%
stock dividend. Accordingly, an entry was made for $9,493,000 to
increase the common stock account and decrease the retained earnings account.
Par value remained at $4 per share. The stock split increased the
Company’s outstanding common shares from 4,249,056 to 6,373,495
shares. All share and per share amounts have been restated for years
prior to 2007 to give retroactive recognition to the stock split.
Treasury
Stock
Treasury
stock is stated at cost. Cost is determined by the first-in,
first-out method.
Stock
Options
Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS No. 123R, Accounting for
Stock-Based Compensation,” which was codified into ASC 718, using the
modified prospective application method. Accordingly, after January 1, 2006, the
Company began expensing the fair value of stock options granted, modified,
repurchased or cancelled. Additionally, compensation cost for a
portion of the awards for which requisite services had not yet been rendered
that were outstanding as of January 1, 2006 are being recognized as the
requisite service is rendered. As a result of this adoption, the
Company’s income before income taxes and net income for the year ended December
31, 2009 includes stock option compensation cost of $53,000 and $51,000,
respectively, which represents $.01 impact on basic and diluted earnings per
share for the year. The Company’s income before income taxes and net income for
the year ended December 31, 2008 includes stock option compensation cost of
$58,000 and $57,000, respectively, which represents $.01 impact on basic and
diluted earnings per share for the year.
Comprehensive
Income
Comprehensive
income consists of net income and other comprehensive income, net of applicable
income taxes. Other comprehensive income includes unrealized appreciation
(depreciation) on available-for-sale securities and unrealized appreciation
(depreciation) on available-for-sale securities for which a portion of an
other-than-temporary impairment has been recognized in income.
The
Company’s comprehensive income for the years ended December 31, 2009, 2008 and
2007 is as follows:
2009
|
2008
|
2007
|
||||||||||
Net
income
|
$ | 8,214 | $ | 10,524 | $ | 10,159 | ||||||
Other
comprehensive income (loss):
|
||||||||||||
Unrealized
gains (losses) on securities available-for-sale
|
2,732 | (2,184 | ) | 2,020 | ||||||||
Unrealized
losses on securities available-for-sale for which a portion of
an other-than-temporary impairment has been recognized in
income
|
(2,465 | ) | - | - | ||||||||
Other-than-temporary
impairment losses recognized in earnings
|
1,812 | - | - | |||||||||
Reclassification
adjustment for realized gains included in income
|
(637 | ) | (293 | ) | (256 | ) | ||||||
Other
comprehensive income (loss) before taxes
|
1,442 | (2,477 | ) | 1,764 | ||||||||
Tax
benefit (expense)
|
(562 | ) | 965 | (687 | ) | |||||||
Total
other comprehensive income (loss)
|
880 | (1,512 | ) | 1,077 | ||||||||
Comprehensive
income
|
$ | 9,094 | $ | 9,012 | $ | 11,236 |
The
components of accumulated other comprehensive income (loss) included in
stockholders’ equity are as follows:
Unrealized
|
Other-Than-
|
|||||||||||
Gain
(Loss) on
|
Temporary
|
|||||||||||
Available
for Sale
|
Impairment
|
|||||||||||
December
31, 2009
|
Securities
|
Losses
|
Total
|
|||||||||
Net
unrealized gains on securities available-for-sale
|
$ | 5,364 | $ | - | $ | 5,364 | ||||||
Other-than-temporary
impairment losses on securities
|
- | (4,603 | ) | (4,603 | ) | |||||||
Tax
benefit (expense)
|
(2,091 | ) | 1,794 | (297 | ) | |||||||
Balance
at December 31, 2009
|
$ | 3,273 | $ | (2,809 | ) | $ | 464 |
Unrealized
|
Other-Than-
|
|||||||||||
Gain
(Loss) on
|
Temporary
|
|||||||||||
Available
for Sale
|
Impairment
|
|||||||||||
December
31, 2008
|
Securities
|
Losses
|
Total
|
|||||||||
Net
unrealized gains (losses) on securities available-for-sale
|
$ | (681 | ) | $ | - | $ | (681 | ) | ||||
Tax
benefit (expense)
|
265 | - | 265 | |||||||||
Balance
at December 31, 2008
|
$ | (416 | ) | $ | - | $ | (416 | ) |
See Note
4 – “Investment Securities” for more detailed information regarding unrealized
losses on available-for-sale securities.
Note
2 – Earnings Per Share
A
three-for-two stock split was effected on June 29, 2007, in the form of a 50%
stock dividend for the stockholders of record at the close of business on June
18, 2007. Accordingly, information with respect to shares of common
stock and earnings per share has been restated for current and prior periods
presented to fully reflect the stock split. 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 years ended
December 31, 2009, 2008 and 2007 are as follows:
2009
|
2008
|
2007
|
||||||||||
Basic
Earnings per Common Share:
|
||||||||||||
Net
income
|
$ | 8,214,000 | $ | 10,524,000 | $ | 10,159,000 | ||||||
Preferred
stock dividends
|
(1,821,000 | ) | - | - | ||||||||
Net
income available to common stockholders
|
$ | 6,393,000 | $ | 10,524,000 | $ | 10,159,000 | ||||||
Weighted
average common shares outstanding
|
6,131,314 | 6,231,438 | 6,356,772 | |||||||||
Basic
earnings per common share
|
$ | 1.04 | $ | 1.69 | $ | 1.60 | ||||||
Diluted
Earnings per Common Share:
|
||||||||||||
Net
income available to common stockholders
|
$ | 6,393,000 | $ | 10,524,000 | $ | 10,159,000 | ||||||
Effect
of assumed preferred stock conversion
|
- | - | - | |||||||||
Net
income applicable to diluted earnings per share
|
$ | 6,393,000 | $ | 10,524,000 | $ | 10,159,000 | ||||||
Weighted
average common shares outstanding
|
6,131,314 | 6,231,438 | 6,356,772 | |||||||||
Dilutive
potential common shares:
|
||||||||||||
Assumed
conversion of stock options
|
35,879 | 75,976 | 125,521 | |||||||||
Assumed
conversion of preferred stock
|
- | - | - | |||||||||
Diluted
weighted average common shares outstanding
|
6,167,193 | 6,307,414 | 6,482,293 | |||||||||
Diluted
earnings per common share
|
$ | 1.04 | $ | 1.67 | $ | 1.57 |
The
following shares were not considered in computing diluted earnings per share for
the years ended December 31, 2009, 2008 and 2007 because they were
anti-dilutive:
2009
|
2008
|
2007
|
||||||||||
Stock
options to purchase shares of common stock
|
202,970 | 124,813 | 124,813 | |||||||||
Average
dilutive potential common shares associated with convertible preferred
stock
|
1,031,982 | -- | -- |
Note
3 – Cash and Due from Banks
Aggregate
cash and due from bank balances of $686,000, $808,000 and $392,000 were
maintained in satisfaction of statutory reserve requirements of the Federal
Reserve Bank at December 31, 2009, 2008 and 2007, respectively.
Note
4 – Investment Securities
The
amortized cost, gross unrealized gains and losses and estimated fair values of
available-for-sale and held-to-maturity securities by major security type at
December 31, 2009 and 2008 were as follows:
Gross
|
Gross
|
Estimated
|
||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
2009
|
||||||||||||||||
Available-for-sale:
|
||||||||||||||||
U.S.
Treasury securities and obligations of U.S.
|
||||||||||||||||
government
corporations and Agencies
|
$ | 89,640 | $ | 1,386 | $ | (52 | ) | $ | 90,974 | |||||||
Obligations
of states and political subdivisions
|
23,071 | 742 | (97 | ) | 23,716 | |||||||||||
Mortgage-backed
securities
|
111,301 | 3,343 | (125 | ) | 114,519 | |||||||||||
Trust
preferred securities
|
7,758 | - | (4,603 | ) | 3,155 | |||||||||||
Other
securities
|
6,166 | 187 | (20 | ) | 6,333 | |||||||||||
Total
available-for-sale
|
$ | 237,936 | $ | 5,658 | $ | (4,897 | ) | $ | 238,697 | |||||||
Held-to-maturity:
|
||||||||||||||||
Obligations
of states and political subdivisions
|
$ | 459 | $ | 10 | $ | - | $ | 469 | ||||||||
2008
|
||||||||||||||||
Available-for-sale:
|
||||||||||||||||
U.S.
Treasury securities and obligations of U.S.
|
||||||||||||||||
government
corporations and Agencies
|
$ | 72,074 | $ | 2,567 | $ | (9 | ) | $ | 74,632 | |||||||
Obligations
of states and political subdivisions
|
21,443 | 106 | (627 | ) | 20,922 | |||||||||||
Mortgage-backed
securities
|
61,102 | 1,715 | (15 | ) | 62,802 | |||||||||||
Trust
preferred securities
|
9,328 | - | (3,950 | ) | 5,378 | |||||||||||
Other
securities
|
6,210 | - | (468 | ) | 5,742 | |||||||||||
Total
available-for-sale
|
$ | 170,157 | $ | 4,388 | $ | (5,069 | ) | $ | 169,476 | |||||||
Held-to-maturity:
|
||||||||||||||||
Obligations
of states and political subdivisions
|
$ | 599 | $ | 11 | $ | - | $ | 610 |
The trust
preferred securities are four trust preferred pooled securities issued by FTN
Financial Securities Corp. (“FTN”). The unrealized losses of these securities,
which have maturities ranging from four years to twenty nine years, is primarily
due to their long-term nature, a lack of demand or inactive market for these
securities, and concerns regarding the underlying financial institutions that
have issued the trust preferred securities. See the heading “Trust Preferred
Securities” below for further information regarding these
securities. Except as discussed below, management believes the
declines in fair value for these securities are temporary.
Proceeds
from sales of investment securities, realized gains and losses and income tax
expense and benefit were as follows during the years ended December 31, 2009,
2008 and 2007:
2009
|
2008
|
2007
|
||||||||||
Proceeds
from sales
|
$ | 38,275 | $ | 2,322 | $ | 14,007 | ||||||
Gross
gains
|
637 | 293 | 256 | |||||||||
Gross
losses
|
- | - | - | |||||||||
Income
tax expense
|
223 | 103 | 90 |
The
following table indicates the expected maturities of investment securities
classified as available-for-sale and held-to-maturity, presented at amortized
cost, at December 31, 2009 (dollars in thousands) and the weighted average yield
for each range of maturities. Mortgage-backed securities are aged
according to their weighted average life. All other securities are
shown at their contractual maturity.
One
|
After
1
|
After
5
|
After
|
|||||||||||||||||
year
|
through
|
through
|
10 | |||||||||||||||||
or
less
|
5
years
|
10
years
|
years
|
Total
|
||||||||||||||||
Available-for-sale:
|
||||||||||||||||||||
U.S.
Treasury securities and obligations of U.S.
|
||||||||||||||||||||
government
corporations and agencies
|
$ | 50,227 | $ | 29,483 | $ | 9,930 | $ | - | $ | 89,640 | ||||||||||
Obligations
of state and political subdivisions
|
2,795 | 3,868 | 16,078 | 330 | 23,071 | |||||||||||||||
Mortgage-backed
securities
|
5,557 | 90,572 | 15,172 | - | 111,301 | |||||||||||||||
Trust
preferred securities
|
1,511 | 6,247 | - | - | 7,758 | |||||||||||||||
Other
securities
|
- | 6,131 | - | 35 | 6,166 | |||||||||||||||
Total
investments
|
$ | 60,090 | $ | 136,301 | $ | 41,180 | $ | 365 | $ | 237,936 | ||||||||||
Weighted
average yield
|
3.48 | % | 3.98 | % | 4.41 | % | 4.07 | % | 3.93 | % | ||||||||||
Full
tax-equivalent yield
|
3.57 | % | 4.04 | % | 5.18 | % | 6.06 | % | 4.12 | % | ||||||||||
Held-to-maturity:
|
||||||||||||||||||||
Obligations
of state and political subdivisions
|
$ | 408 | $ | 51 | $ | - | $ | - | $ | 459 | ||||||||||
Weighted
average yield
|
5.21 | % | 4.75 | % | - | % | - | % | 5.16 | % | ||||||||||
Full
tax-equivalent yield
|
7.77 | % | 6.58 | % | - | % | - | % | 7.64 | % |
The
weighted average yields are calculated on the basis of the amortized cost and
effective yields weighted for the scheduled maturity of each security. Full
tax-equivalent yields have been calculated using a 34% tax rate. With
the exception of obligations of the U.S. Treasury and other U.S. government
agencies and corporations, there were no investment securities of any single
issuer the book value of which exceeded 10% of stockholders’ equity at December
31, 2009.
Investment
securities carried at approximately $185,357,000 and $152,598,000 at December
31, 2009 and 2008, respectively, were pledged to secure public deposits and
repurchase agreements and for other purposes as permitted or required by
law.
The
following table presents the aging of gross unrealized losses and fair value by
investment category as of December 31, 2009 and 2008:
Less
than 12 months
|
12
months or more
|
Total
|
||||||||||||||||||||||
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
|||||||||||||||||||
December
31, 2009:
|
||||||||||||||||||||||||
U.S.
Treasury securities and obligations of U.S.
government
corporations and agencies
|
$ | 90,974 | $ | (52 | ) | $ | - | $ | - | $ | 90,974 | $ | (52 | ) | ||||||||||
Obligations
of states and political subdivisions
|
23,015 | (40 | ) | 1,170 | (57 | ) | 24,185 | (97 | ) | |||||||||||||||
Mortgage-backed
securities
|
114,431 | (124 | ) | 88 | (1 | ) | 114,519 | (125 | ) | |||||||||||||||
Trust
preferred securities
|
- | - | 3,155 | (4,603 | ) | 3,155 | (4,603 | ) | ||||||||||||||||
Corporate
bonds
|
6,318 | - | 15 | (20 | ) | 6,333 | (20 | ) | ||||||||||||||||
Total
|
$ | 234,738 | $ | (216 | ) | $ | 4,428 | $ | (4,681 | ) | $ | 239,166 | $ | (4,897 | ) | |||||||||
December
31, 2008:
|
||||||||||||||||||||||||
U.S.
Treasury securities and obligations of U.S.
government
corporations and agencies
|
$ | 68,925 | $ | - | $ | 5,707 | $ | (9 | ) | $ | 74,632 | $ | (9 | ) | ||||||||||
Obligations
of states and political subdivisions
|
21,532 | (627 | ) | - | - | 21,532 | (627 | ) | ||||||||||||||||
Mortgage-backed
securities
|
62,802 | (15 | ) | - | - | 62,802 | (15 | ) | ||||||||||||||||
Trust
preferred securities
|
3,448 | (842 | ) | 1,930 | (3,108 | ) | 5,378 | (3,950 | ) | |||||||||||||||
Corporate
bonds
|
5,742 | (468 | ) | 5,742 | (468 | ) | ||||||||||||||||||
Total
|
$ | 162,449 | $ | (1,952 | ) | $ | 7,637 | $ | (3,117 | ) | $ | 170,086 | $ | (5,069 | ) |
Obligations
of states and political subdivisions
At
December 31, 2009, there were four obligations of states and political
subdivisions issued by two municipalities with a fair value of $1,170,000 and
unrealized losses of $57,000 in a continuous unrealized loss position for twelve
months or more. This position was due to municipal rates increasing
since the purchase of the securities resulting in the market value being lower
than book value. The contractual terms of these investments do not permit the
issuer to settle the securities at a price less than the amortized cost basis of
the investments. Because the Company does not intend to sell these
securities and it is not more-likely-than-not the Company will be required to
sell these securities, before recovery of their amortized cost bases, which may
be maturity, the Company does not consider these investments to be other than
temporarily impaired at December 31, 2009.
Mortgage-backed
Securities
At
December 31, 2009, there was one mortgage-backed security issued by Federal Home
Loan Mortgage Corporation with a fair value of $88,000 and unrealized losses of
$583 in a continuous unrealized loss position for twelve months or
more. This position was due to intermediate rates increasing since
the purchase of these securities resulting in the market value of the security
being lower than book value. Because the decline in market value is attributable
to changes in interest rates and not credit quality, and because the Company
does not intend to sell this security and it is not more-likely-than-not the
Company will be required to sell this security before recovery of its amortized
cost basis, which may be maturity, the Company does not consider this investment
to be other than temporarily impaired at December 31, 2009.
Trust
Preferred Securities
At
December 31, 2009, there were four trust preferred securities with a fair value
of $3,155,000 and unrealized losses of $4,603,000 in a continuous unrealized
loss position for twelve months or more. These unrealized losses were
primarily due to the long-term nature of the trust preferred securities, a lack
of demand or inactive market for these securities, and concerns regarding the
underlying financial institutions that have issued the trust preferred
securities. The Company recorded a total of $1,812,000 of OTTI for these
securities during 2009. This loss established a new, lower amortized
cost basis for these securities and reduced non-interest income as of December
31, 2009. Because the Company does not intend to sell these securities and it is
not more-likely-than-not that the Company will be required to sell these
securities before recovery of their new, lower amortized cost basis, which may
be maturity, the Company does not consider the remainder of the investment in
these securities to be other-than-temporarily impaired at December 31, 2009.
However, future downgrades or additional deferrals and defaults in these
securities, in particular PreTSL XXVIII, could result in additional OTTI and
consequently, have a material impact on future earnings.
Following
are the details for each trust preferred security (in thousands):
Book
Value
|
Market
Value
|
Unrealized
Loss
|
Other-than-
temporary
Impairment
Recorded
|
|||||||||||||
PreTSL
I
|
$ | 1,230 | $ | 949 | $ | (281 | ) | $ | 220 | |||||||
PreTSL
II
|
1,547 | 1,088 | (459 | ) | 1,532 | |||||||||||
PreTSL
VI
|
281 | 188 | (93 | ) | 44 | |||||||||||
PreTSL
XXVIII
|
4,700 | 930 | (3,770 | ) | 16 | |||||||||||
Total
|
$ | 7,758 | $ | 3,155 | $ | (4,603 | ) | $ | 1,812 |
Other
securities
At
December 31, 2009, there was one corporate bond with a fair value of $15,000 and
unrealized losses of $20,000 in a continuous unrealized loss position for twelve
months or more. The long-term nature of this security has led to increased
supply, while demand has decreased, leading to devaluation of the security.
Management has evaluated this security and believes the decline in market value
is liquidity, and not credit, related. Because the Company does not intend to
sell this security and it is not more-likely-than-not the Company will be
required to sell this security before recovery of its amortized cost basis,
which may be maturity, the Company does not consider it to be other than
temporarily impaired at December 31, 2009.
The
Company does not believe any other individual unrealized loss as of December 31,
2009 represents OTTI. However, given the continued disruption in the financial
markets, the Company may be required to recognize OTTI losses in future periods
with respect to its available for sale investment securities portfolio. The
amount and timing of any additional OTTI will depend on the decline in the
underlying cash flows of the securities. Should the impairment of any of these
securities become other-than-temporary, the cost basis of the investment will be
reduced and the resulting loss recognized in the period the other-than-temporary
impairment is identified.
Other-than-temporary
Impairment
Upon
acquisition of a security, the Company decides whether it is within the scope of
the accounting guidance for beneficial interests in securitized financial assets
or will be evaluated for impairment under the accounting guidance for
investments in debt and equity securities.
The
accounting guidance for beneficial interests in securitized financial assets
provides incremental impairment guidance for a subset of the debt securities
within the scope of the guidance for investments in debt and equity
securities. For securities where the security is a beneficial
interest in securitized financial assets, the Company uses the beneficial
interests in securitized financial asset impairment model. For securities where
the security is not a beneficial interest in securitized financial assets, the
Company uses debt and equity securities impairment model.
The
Company routinely conducts periodic reviews to identify and evaluate each
investment security to determine whether OTTI has occurred. Economic models are
used to determine whether OTTI has occurred on these securities. While all
securities are considered, the securities primarily impacted by OTTI testing are
pooled trust preferred securities. For each pooled trust preferred security in
the investment portfolio (including but not limited to those whose fair value is
less than their amortized cost basis), an extensive, regular review is conducted
to determine if OTTI has occurred. Various inputs to the economic models are
sued to determine if an unrealized loss is other-than-temporary. The most
significant inputs are the following:
·
|
Prepayments
|
·
|
Defaults
|
·
|
Loss
severity
|
The
pooled trust preferred securities relate to trust preferred securities issued by
financial institutions. The pools typically consist of financial institutions
throughout the United States. Other inputs may include the actual collateral
attributes, which include credit ratings and other performance indicators of the
underlying financial institutions including profitability, capital ratios, and
asset quality.
To
determine if the unrealized losses for pooled trust preferred securities is
other-than-temporary, the Company projects total estimated defaults of the
underlying assets (financial institutions) and multiplies that calculated amount
by an estimate of realizable value upon sale in the marketplace (severity) in
order to determine the projected collateral loss. The Company also evaluated the
current credit enhancement underlying the bond to determine the impact on cash
flows. If the Company determines that a given pooled trust preferred security
position will be subject to a write-down or loss, the Company records the
expected credit loss as a charge to earnings.
For those
securities for which OTTI was determined to have occurred as of December 31,
2009 (that is, a determination was made that the entire amortized cost bases
will not likely be recovered), the following assumptions were used to measure
the amount of credit loss recognized in earnings. The Company’s assumptions for
the pooled trust preferred securities included default rates of 2% for the first
two quarters of 2010, 1% for the third and fourth quarters of 2010 and the first
quarter of 2011 and .375% for all quarters remaining over the life of the
securities, a 15% recovery with a 2 year lag, and no prepayments.
Credit
Losses Recognized on Investments
During
2009, the Company adopted the revisions to ASC 820, formerly FASB Staff Position
(“FSP”) 157-4, “Determining
Fair Value when the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions that are Not Orderly
“ and FSP 157-3, “Determining
the Fair Value of a Financial Asset When the market for That Asset
is Not Active” and ASC 320, formerly FSP 115-2 and FAS 124-2,
“Recognition and Presentation
of Other-Than-Temporary Impairments.” The effect of the adoption of these
new standards for 2009 was an increase in net income of approximately $4.6
million before taxes or approximately $3 million after taxes.
As
described above, some of the Company’s investments in trust preferred securities
have experienced fair value deterioration due to credit losses but are not
otherwise other-than-temporarily impaired. The following table provides
information about those trust preferred securities for which only a credit loss
was recognized in income and other losses are recorded in other comprehensive
income (loss) for the year ended December 31, 2009 (in thousands). There were no
credit losses recorded in income for the years ended December 31, 2008 or
2007.
Accumulated
|
||||
Credit
Losses
|
||||
December
31, 2009
|
||||
Credit
losses on trust preferred securities held
|
||||
Beginning
of year
|
$ | - | ||
Additions
related to OTTI losses not previously recognized
|
1,812 | |||
Reductions
due to sales
|
- | |||
Reductions
due to change in intent or likelihood of sale
|
- | |||
Additions
related to increases in previously recognized OTTI losses
|
- | |||
Reductions
due to increases in expected cash flows
|
- | |||
End
of year
|
$ | 1,812 |
Maturities
of investment securities were as follows at December 31, 2009 (in
thousands). Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Amortized
|
Estimated
|
|||||||
Cost
|
Fair
Value
|
|||||||
Available-for-sale:
|
||||||||
Due
in one year or less
|
$ | 54,533 | $ | 54,492 | ||||
Due
after one-five years
|
45,729 | 42,583 | ||||||
Due
after five-ten years
|
26,008 | 26,767 | ||||||
Due
after ten years
|
365 | 336 | ||||||
126,635 | 124,178 | |||||||
Mortgage-backed
securities
|
111,301 | 114,519 | ||||||
Total
available-for-sale
|
$ | 237,936 | $ | 238,697 | ||||
Held-to-maturity:
|
||||||||
Due
in one year or less
|
$ | 408 | $ | 414 | ||||
Due
after one-five years
|
51 | 55 | ||||||
Due
after five-ten years
|
- | - | ||||||
Due
after ten-years
|
- | - | ||||||
Total
held-to-maturity
|
$ | 459 | $ | 469 | ||||
Total
investment securities
|
$ | 238,395 | $ | 239,166 |
Note
5 – Loans
A summary
of loans at December 31, 2009 and 2008 follows (in thousands):
2009
|
2008
|
|||||||
Construction
and land development
|
$ | 28,041 | $ | 40,362 | ||||
Farm
loans
|
62,330 | 65,647 | ||||||
1-4
Family residential properties
|
180,415 | 200,204 | ||||||
Multifamily
residential properties
|
19,467 | 23,833 | ||||||
Commercial
real estate
|
226,400 | 217,307 | ||||||
Loans
secured by real estate
|
516,653 | 547,353 | ||||||
Agricultural
loans
|
54,144 | 54,098 | ||||||
Commercial
and industrial loans
|
105,351 | 109,324 | ||||||
Consumer
loans
|
20,815 | 25,806 | ||||||
All
other loans
|
3,787 | 5,357 | ||||||
Total
loans
|
$ | 700,750 | $ | 741,938 |
The real
estate mortgage loan balance in the above table includes loans held for sale of
$149,000 and $537,000 at December 31, 2009 and 2008, respectively.
The
aggregate principal balances of nonaccrual, past due ninety days or more and
renegotiated loans were $12,720,000 and $7,285,000 at December 31, 2009 and
2008, respectively. Interest income which would have been recorded under the
original terms of such nonaccrual or renegotiated loans totaled $672,000,
$274,000 and $426,000 in 2009, 2008 and 2007, respectively.
Impaired
loans are defined as those loans where it is probable that amounts due according
to contractual terms, including principal and interest, will not be
collected. Both nonaccrual and restructured loans meet this
definition. The Company evaluates all individual loans on nonaccrual
or restructured with a balance over $100,000 for impairment. Impaired
loans are measured by the Company at the present value of expected future cash
flows or, alternatively, if the loan is collateral dependant, at the fair value
of the collateral. Known losses of principal on these loans have been
charged off. Interest income on nonaccrual loans is recognized only
at the time cash is received. Interest income on restructured loans
is recorded according to the most recently agreed upon contractual
terms.
The
following table presents information on impaired loans at December 31, 2009 and
2008:
2009
|
2008
|
|||||||
Impaired
loans for which a specific allowance has been provided
|
$ | 5,131 | $ | 696 | ||||
Impaired
loans for which no specific allowance has been provided
|
7,589 | 6,589 | ||||||
Total
loans determined to be impaired
|
$ | 12,720 | $ | 7,285 | ||||
Allowance
on impaired loans
|
$ | 563 | $ | 160 | ||||
For
the year ended December 31,
|
||||||||
2009 | 2008 | |||||||
Average
recorded investment in impaired loans
|
$ | 9,912 | $ | 7,326 | ||||
Cash
basis interest income recognized from
|
||||||||
impaired
loans
|
473 | 352 |
Most of
the Company’s business activities are with customers located within east central
Illinois. At December 31, 2009, the Company’s loan portfolio included
$116.5 million of loans to borrowers whose businesses are directly related to
agriculture. Of this amount, $102.5 million was concentrated in other grain
farming. Total loans to borrowers whose businesses are directly related to
agriculture decreased $3.2 million from $119.7 million at December 31, 2008
while loans concentrated in other grain farming increased $6 million from $113.7
million at December 31, 2008. 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.
In
addition, the Company has $50.8 million of loans to motels and
hotels. 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 $72.0 million of loans to
lessors of non-residential buildings and $44.2 million of loans to lessors of
residential buildings and dwellings.
Mortgage
loans serviced by others for First Mid Bank are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these
loans at December 31, 2009 and 2008 were approximately $6,333,000 and
$8,495,000, respectively.
Note
6 – Allowance for Loan Losses
Changes
in the allowance for loan losses were as follows during the three years ended
December 31, 2009, 2008 and 2007:
2009
|
2008
|
2007
|
||||||||||
Balance,
beginning of year
|
$ | 7,587 | $ | 6,118 | $ | 5,876 | ||||||
Provision
for loan losses
|
3,594 | 3,559 | 862 | |||||||||
Recoveries
|
160 | 332 | 243 | |||||||||
Charge-offs
|
(1,879 | ) | (2,422 | ) | (863 | ) | ||||||
Balance,
end of year
|
$ | 9,462 | $ | 7,587 | $ | 6,118 |
Note
7 – Premises and Equipment, Net
Premises
and equipment at December 31, 2009 and 2008 consisted of:
2009
|
2008
|
|||||||
Land
|
$ | 3,569 | $ | 3,524 | ||||
Buildings
and improvements
|
17,347 | 16,437 | ||||||
Furniture
and equipment
|
13,223 | 12,072 | ||||||
Leasehold
improvements
|
1,341 | 1,295 | ||||||
Construction
in progress
|
- | 450 | ||||||
Subtotal
|
35,480 | 33,778 | ||||||
Accumulated
depreciation and amortization
|
19,993 | 18,793 | ||||||
Total
|
$ | 15,487 | $ | 14,985 |
Construction
in progress balances as of December 31, 2008, consisted primarily of
expenditures related to the construction of a new facility in Arcola, Illinois
completed during 2009. Depreciation and amortization expense was $1,538,000,
$1,617,000 and $1,629,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
Note
8 – 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 insurance agencies acquired, and intangible
assets arising from the rights to service mortgage loans for
others. The following table presents gross carrying amount and
accumulated amortization by major intangible asset class as of December 31, 2009
and 2008:
2009
|
2008
|
|||||||||||||||
Gross
Carrying
Value
|
Accumulated
Amortization
|
Gross
Carrying Value
|
Accumulated
Amortization
|
|||||||||||||
Goodwill
not subject to amortization
|
$ | 21,123 | $ | 3,760 | $ | 21,123 | $ | 3,760 | ||||||||
Intangibles
from branch acquisition
|
3,015 | 2,563 | 3,015 | 2,362 | ||||||||||||
Core
deposit intangibles
|
5,936 | 3,953 | 5,936 | 3,614 | ||||||||||||
Customer
list intangibles
|
1,904 | 1,507 | 1,904 | 1,317 | ||||||||||||
$ | 31,978 | $ | 11,783 | $ | 31,978 | $ | 11,053 |
Total
amortization expense for the years ended December 31, 2009, 2008 and 2007 was as
follows:
2009
|
2008
|
2007
|
||||||||||
Intangibles
from branch acquisitions
|
$ | 201 | $ | 201 | $ | 200 | ||||||
Core
deposit intangibles
|
339 | 374 | 431 | |||||||||
Customer
list intangibles
|
190 | 191 | 190 | |||||||||
$ | 730 | $ | 766 | $ | 821 |
Estimated
amortization expense for each of the five succeeding years is shown in the table
below:
Estimated
amortization expense:
|
||||
For
period ended 12/31/10
|
$ | 704 | ||
For
period ended 12/31/11
|
$ | 704 | ||
For
period ended 12/31/12
|
$ | 380 | ||
For
period ended 12/31/13
|
$ | 313 | ||
For
period ended 12/31/14
|
$ | 313 |
In
accordance with the provisions of SFAS 142,”Goodwill and Other Intangible
Assets,” codified in ASC 350, the Company performed testing of goodwill for
impairment as of September 30, 2009 and 2008, and determined, as of each of
these dates, that goodwill was not impaired. Management also
concluded that the remaining amounts and amortization periods were appropriate
for all intangible assets.
Note
10 – Deposits
As of
December 31, 2009 and 2008, deposits consisted of the following:
2009
|
2008
|
|||||||
Demand
deposits:
|
||||||||
Non-interest
bearing
|
$ | 128,726 | $ | 119,986 | ||||
Interest-bearing
|
169,480 | 152,340 | ||||||
Savings
|
131,941 | 88,502 | ||||||
Money
market
|
184,224 | 121,809 | ||||||
Time
deposits
|
226,039 | 323,717 | ||||||
Total
deposits
|
$ | 840,410 | $ | 806,354 |
Total
interest expense on deposits for the years ended December 31, 2009, 2008 and
2007 was as follows:
2009
|
2008
|
2007
|
||||||||||
Interest-bearing
demand
|
$ | 539 | $ | 1,100 | $ | 1,872 | ||||||
Savings
|
882 | 618 | 291 | |||||||||
Money
market
|
2,304 | 2,535 | 4,587 | |||||||||
Time
deposits
|
9,245 | 12,339 | 14,841 | |||||||||
Total
|
$ | 12,970 | $ | 16,592 | $ | 21,591 |
As of
December 31, 2009, 2008 and 2007, the aggregate amount of time deposits in
denominations of more than $100,000 and the total interest expense on such
deposits was as follows:
2009
|
2008
|
2007
|
||||||||||
Outstanding
|
$ | 81,692 | $ | 129,397 | $ | 98,052 | ||||||
Interest
expense for the year
|
3,857 | 4,416 | 4,652 |
The
following table shows the amount of maturities for all time deposits as of
December 31, 2009:
Less
than 1 year
|
$ | 179,548 | ||
1
year to 2 years
|
18,333 | |||
2
years to 3 years
|
10,767 | |||
3
years to 4 years
|
9,563 | |||
4
years to 5 years
|
7,592 | |||
Over
5 years
|
236 | |||
Total
|
$ | 226,039 |
In 2009,
the Company’s significant deposits included brokered CDs and deposit
relationships with various public entities. As of December 31, 2009, the Company
had three brokered CDs which totaled $15 million. In addition, the
Company maintains account relationships with various public entities throughout
its market areas. Five public entities had total balances of $25.3 million in
various checking accounts and time deposits as of December 31, 2009. These
balances are subject to change depending upon the cash flow needs of the public
entity.
Note
11 – Borrowings
As of
December 31, 2009 and 2008 borrowings consisted of the following:
2009
|
2008
|
|||||||
Securities
sold under agreements to repurchase
|
$ | 80,386 | $ | 80,708 | ||||
Federal
Home Loan Bank advances:
|
||||||||
Fixed-term
advances
|
32,750 | 37,750 | ||||||
Subordinated
debentures
|
20,620 | 20,620 | ||||||
Other
debt:
|
||||||||
Loans
due in one year or less
|
- | - | ||||||
Loans
due after one year
|
- | 13,000 | ||||||
Total
|
$ | 133,756 | $ | 152,078 |
Aggregate
annual maturities of long-term borrowings at December 31, 2009 are:
2010
|
$ | 10,000 | ||
2011
|
3,000 | |||
2012
|
14,750 | |||
2013
|
- | |||
2014
|
- | |||
Thereafter
|
25,620 | |||
$ | 53,370 |
FHLB
advances represent borrowings by First Mid Bank to economically fund loan
demand. The fixed term advances totaling $32.75 million are as
follows:
·
|
$5
million advance at 4.58% with a 5-year maturity, due March 22,
2010
|
·
|
$2.5
million advance at 5.46% with a 3-year maturity, due June 12,
2010
|
·
|
$2.5
million advance at 5.12% with a 3-year maturity, due June 12, 2010, one
year lockout, callable quarterly
|
·
|
$3
million advance at 5.98% with a 10-year maturity, due March 1,
2011
|
·
|
$5
million advance at 4.82% with a 5-year maturity, due January 19, 2012, two
year lockout, callable quarterly
|
·
|
$5
million advance at 4.69% with a 5-year maturity, due February 23, 2012,
two year lockout, callable
quarterly
|
·
|
$4.75
million advance at 1.60% with a 5-year maturity, due December 24,
2012
|
·
|
$5
million advance at 4.58% with a 10-year maturity, due July 14, 2016, one
year lockout, callable quarterly
|
2009
|
2008
|
2007
|
||||||||||
Securities
sold under agreements to repurchase:
|
||||||||||||
Maximum
outstanding at any month-end
|
$ | 83,826 | $ | 80,708 | $ | 68,300 | ||||||
Average
amount outstanding for the year
|
72,589 | 61,108 | 54,962 |
First Mid
Bank has collateral pledge agreements whereby it has agreed to keep on hand at
all times, free of all other pledges, liens, and encumbrances, whole first
mortgages on improved residential property with unpaid principal balances
aggregating no less than 133% of the outstanding advances and letters of credit
($0 on December 31, 2009) from the FHLB. The securities underlying
the repurchase agreements are under the Company’s control.
At
December 31, 2009 and 2008, outstanding loan balances included $0 and $13
million, respectively, on a revolving credit agreement with The Northern Trust
Company. This loan was renegotiated on April 24, 2009. The revolving credit
agreement has a maximum available balance of $20 million with a term of one year
from the date of closing. The interest rate (2.3% at December 31, 2009) is
floating at 2.25% over the federal funds rate. The loan is unsecured and subject
to a borrowing agreement containing requirements for the Company and First Mid
Bank to maintain various operating and capital ratios. The Company was in
compliance with all of the existing covenants at December 31, 2009 except the
Company’s return on assets ratio was .74% as of December 31, 2009 which was
below the covenant ratio required of .75%. The Company has received a waiver
from Northern Trust Company for this covenant as of December 31, 2009. The
Company and First Mid Bank were in compliance with the existing covenants at
December 31, 2008 and 2007.
On
February 27, 2004, the Company completed the issuance and sale of $10 million of
floating rate trust preferred securities through Trust I, a statutory business
trust and wholly-owned unconsolidated subsidiary of the Company, as part of a
pooled offering. The Company established Trust I for the purpose of
issuing the trust preferred securities. 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 Trust I 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. At December 31, 2009 and 2008 the rate was
3.10% and 6.56%, respectively. The Company used the proceeds of the offering for
general corporate purposes.
On April
26, 2006, the Company completed the issuance and sale of $10 million of
fixed/floating rate trust preferred securities through Trust II, a statutory
business trust and wholly-owned unconsolidated subsidiary of the Company, as
part of a pooled offering. The Company established Trust II for the
purpose of issuing the trust preferred securities. The $10 million in proceeds
from the trust preferred issuance and an additional $310,000 for the Company’s
investment in common equity of Trust II, 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 Trust II mature in 2036, bear
interest at a fixed rate of 6.98% (three-month LIBOR plus 160 basis points) paid
quarterly and convert to floating rate (LIBOR plus 160 basis points) after June
15, 2011. The net proceeds to the Company were used for general corporate
purposes, including the Company’s acquisition of Mansfield.
The trust
preferred securities issued by Trust I and Trust II 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 provided a five-year
transition period, ending September 30, 2009, for application of the revised
quantitative limits. On March 17, 2009, the Federal Reserve Board adopted an
additional final rule that delayed the effective date of the new limits on
inclusion of trust preferred securities in the calculation of Tier 1 capital
until September 30, 2011. The Company does not expect the application of the
revised quantitative limits to have a significant impact on its calculation of
Tier 1 capital for regulatory purposes or its classification as
well-capitalized.
Note
12 – Regulatory Capital
The
Company is subject to various regulatory capital requirements administered by
the federal banking agencies. Bank holding companies follow minimum
regulatory requirements established by the Federal Reserve
Board. First Mid Bank follows similar minimum regulatory requirements
established for national banks by the OCC. Failure to meet minimum
capital requirements can result in the initiation of 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 minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital to risk-weighted assets,
and of Tier 1 capital to average assets. Management believes, as of
December 31, 2009 and 2008, that all capital adequacy requirements have been
met.
As of
December 31, 2009 and 2008, the most recent notification from the primary
regulators categorized First Mid Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, minimum total risk-based, Tier 1 risk-based and Tier 1 leverage
ratios must be maintained as set forth in the table. At December 31,
2009, there are no conditions or events since the most recent notification that
management believes have changed this categorization.
To
Be Well
|
|||||||||||||||||||||
Capitalized
Under
|
|||||||||||||||||||||
For
Capital
|
Prompt
Corrective
|
||||||||||||||||||||
Actual
|
Adequacy
Purposes
|
Action
Provisions
|
|||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||
December
31, 2009
|
|||||||||||||||||||||
Total
Capital (to risk-weighted assets)
|
|||||||||||||||||||||
Company
|
$ | 123,977 | 15.76 | % | $ | 62,949 |
>
8.00%
|
N/A | N/A | ||||||||||||
First
Mid Bank
|
112,982 | 14.50 | % | 62,367 |
>
8.00%
|
$ | 77,958 |
>
10.00%
|
|||||||||||||
Tier
1 Capital (to risk-weighted assets)
|
|||||||||||||||||||||
Company
|
114,635 | 14.57 | % | 31,474 |
>
4.00%
|
N/A | N/A | ||||||||||||||
First
Mid Bank
|
103,730 | 13.31 | % | 31,183 |
>
4.00%
|
46,775 |
>
6.00%
|
||||||||||||||
Tier
1 Capital (to average assets)
|
|||||||||||||||||||||
Company
|
114,635 | 10.63 | % | 43,150 |
>
4.00%
|
N/A | N/A | ||||||||||||||
First
Mid Bank
|
103,730 | 9.67 | % | 42,886 |
>
4.00%
|
53,607 |
>
5.00%
|
||||||||||||||
December
31, 2008
|
|||||||||||||||||||||
Total
Capital (to risk-weighted assets)
|
|||||||||||||||||||||
Company
|
$ | 93,469 | 11.99 | % | $ | 62,364 |
>
8.00%
|
N/A | N/A | ||||||||||||
First
Mid Bank
|
100,531 | 13.00 | % | 61,855 |
>
8.00%
|
$ | 77,319 |
>
10.00%
|
|||||||||||||
Tier
1 Capital (to risk-weighted assets)
|
|||||||||||||||||||||
Company
|
85,882 | 11.02 | % | 31,182 |
>
4.00%
|
N/A | N/A | ||||||||||||||
First
Mid Bank
|
92,944 | 12.02 | % | 30,927 |
>
4.00%
|
46,391 |
>
6.00%
|
||||||||||||||
Tier
1 Capital (to average assets)
|
|||||||||||||||||||||
Company
|
85,882 | 8.41 | % | 40,845 |
>
4.00%
|
N/A | N/A | ||||||||||||||
First
Mid Bank
|
92,844 | 9.16 | % | 40,600 |
>
4.00%
|
50,750 |
>
5.00%
|
Note
13 – Disclosure of Fair Values of Financial Instruments
Effective
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”
which was codified into ASC 820. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.
SFAS No.
157 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. SFAS No. 157 also establishes a
fair value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair
value.
In
accordance with SFAS No. 157, the Company groups its financial assets and
financial liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value. These levels
are:
Level 1
|
Valuations
for assets and liabilities traded in active exchange markets, such as the
New York Stock Exchange. Valuations are obtained from readily
available pricing sources for market transactions involving identical
assets or liabilities.
|
Level 2
|
Valuations
for assets and liabilities traded in less active dealer or broker
markets. Valuations are obtained from third party pricing
services for identical or comparable assets or liabilities which use
observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities; quoted prices in active markets that are
not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities.
|
Level
3
|
Unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or
liabilities.
|
Following
is a description of the inputs and valuation methodologies used for assets
measured at fair value on a recurring basis and recognized in the accompanying
balance sheets, as well as the general classification of such assets pursuant to
the valuation hierarchy.
Available-for-Sale
Securities
The fair
value of available-for-sale securities are determined by various valuation
methodologies. Where quoted market prices are available in an active
market, securities are classified within Level 1. Level 1 securities include
exchange traded equities. If quoted market prices are not available, then fair
values are estimated by using pricing models or quoted prices of securities with
similar characteristics. Level 2 securities include U.S. Treasury
securities, obligations of U.S. government corporations and agencies,
obligations of states and political subdivisions, mortgage-backed securities,
collateralized mortgage obligations and corporate bonds. In certain cases where
Level 1 or Level 2 inputs are not available, securities are classified within
Level 3 of the hierarchy and include subordinated tranches of collateralized
mortgage obligations and investments in trust preferred securities.
The trust
preferred securities are collateralized debt obligation securities that are
backed by trust preferred securities issued by banks, thrifts, and insurance
companies. The market for these securities at December 31, 2009 is not active
and markets for similar securities are also not active. The inactivity was
evidenced first by a significant widening of the bid-ask spread in the brokered
markets in which trust preferred securities trade and then by a significant
decrease in the volume of trades relative to historical levels. The new issue
market is also inactive as no new trust preferred securities have been issued
since 2007. There are currently very few market participants who are willing and
or able to transact for these securities. The market values for these securities
(and any securities other than those issued or guaranteed by the US Treasury)
are very depressed relative to historical levels.
Given
conditions in the debt markets today and the absence of observable transactions
in the secondary and new issue markets, we determined:
·
|
The
few observable transactions and market quotations that are available are
not reliable for purposes of determining fair value at December 31,
2009,
|
·
|
An
income valuation approach technique (present value technique) that
maximizes the use of relevant observable inputs and minimizes the use of
unobservable inputs will be equally or more representative of fair value
than the market approach valuation technique used at prior measurement
dates , and
|
·
|
The
Company’s trust preferred securities will be classified within Level 3 of
the fair value hierarchy because we determined that significant
adjustments are required to determine fair value at the measurement
date.
|
The
following table presents the Company’s assets that are measured at fair value on
a recurring basis and the level within the FAS 157 hierarchy in which the fair
value measurements fall as of December 31, 2009 and 2008 (in
thousands):
Fair
Value Measurements Using
|
||||||||||||||||
December
31, 2009
|
Fair
Value
|
Quoted
Prices in Active Markets for Identical Assets (Level
1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable
Inputs
(Level
3)
|
||||||||||||
Available-for-sale
securities:
|
||||||||||||||||
U.S.
Treasury securities and obligations of U.S. government corporations and
agencies
|
$ | 90,974 | $ | - | $ | 90,974 | $ | - | ||||||||
Obligations
of states and political subdivisions
|
23,716 | - | 23,716 | - | ||||||||||||
Mortgage-backed
securities
|
114,519 | - | 114,444 | 75 | ||||||||||||
Trust
preferred securities
|
3,155 | - | - | 3,155 | ||||||||||||
Other
securities
|
6,333 | 15 | 6,318 | - | ||||||||||||
Total
available-for-sale securities
|
$ | 238,697 | $ | 15 | $ | 235,452 | $ | 3,230 |
Fair
Value Measurements Using
|
||||||||||||||||
December
31, 2008
|
Fair
Value
|
Quoted
Prices in Active Markets for Identical Assets (Level
1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable
Inputs
(Level
3)
|
||||||||||||
Available-for-sale
securities:
|
||||||||||||||||
U.S.
Treasury securities and obligations of U.S. government corporations and
agencies
|
$ | 74,632 | $ | - | $ | 74,632 | $ | - | ||||||||
Obligations
of states and political subdivisions
|
20,922 | - | 20,922 | - | ||||||||||||
Mortgage-backed
securities
|
62,802 | - | 62,721 | 81 | ||||||||||||
Trust
preferred securities
|
5,378 | - | - | 5,378 | ||||||||||||
Other
securities
|
5,742 | 7 | 5,735 | - | ||||||||||||
Total
available-for-sale securities
|
$ | 169,476 | $ | 7 | $ | 164,010 | $ | 5,459 |
The
change in fair value of assets measured on a recurring basis using significant
unobservable inputs (Level 3) for the year ended December 31, 2009 and 2008 is
summarized as follows (in thousands):
Available-for-Sale
Securities
|
||||||||||||
December
31, 2009
|
Mortgaged-backed
Securities
|
Trust
Preferred
Securities
|
Total
|
|||||||||
Beginning
balance
|
$ | 81 | $ | 5,378 | $ | 5,459 | ||||||
Transfers
into Level 3
|
- | - | - | |||||||||
Transfers
out of Level 3
|
- | - | - | |||||||||
Total
gains or losses
|
||||||||||||
Included
in net income
|
- | (1,812 | ) | (1,812 | ) | |||||||
Included
in other comprehensive income (loss)
|
2 | (653 | ) | (651 | ) | |||||||
Purchases,
issuances, sales and settlements
|
||||||||||||
Purchases
|
- | - | - | |||||||||
Issuances
|
- | - | - | |||||||||
Sales
|
- | - | - | |||||||||
Settlements
|
(8 | ) | 242 | 234 | ||||||||
Ending
balance
|
$ | 75 | $ | 3,155 | $ | 3,230 | ||||||
Total
gains or losses for the period included in net income attributable to the
change in unrealized gains or losses related to assets and liabilities
still held at the reporting date
|
$ | - | $ | (1,812 | ) | $ | (1,812 | ) |
December
31, 2008
|
||||||||||||
Beginning
balance
|
$ | 91 | $ | 9,400 | $ | 9,491 | ||||||
Transfers
into Level 3
|
- | - | - | |||||||||
Transfers
out of Level 3
|
- | - | - | |||||||||
Total
gains or losses
|
||||||||||||
Included
in net income
|
- | - | - | |||||||||
Included
in other comprehensive income (loss)
|
184 | (3,950 | ) | (3,766 | ) | |||||||
Purchases,
issuances, sales and settlements
|
||||||||||||
Purchases
|
- | - | - | |||||||||
Issuances
|
- | - | - | |||||||||
Sales
|
- | - | - | |||||||||
Settlements
|
(194 | ) | (72 | ) | (266 | ) | ||||||
Ending
balance
|
$ | 81 | $ | 5,378 | $ | 5,459 | ||||||
Total
gains or losses for the period included in net income attributable to the
change in unrealized gains or losses related to assets and liabilities
still held at the reporting date
|
$ | - | $ | - | $ | - |
Following
is a description of the valuation methodologies used for assets measured at fair
value on a nonrecurring basis and recognized in the accompanying balance sheets,
as well as the general classification of such assets pursuant to the valuation
hierarchy.
Impaired
Loans (Collateral Dependent)
Loans for
which it is probable that the Company will not collect all principal and
interest due according to contractual terms are measured for
impairment. Allowable methods for determining the amount of
impairment and estimating fair value include using the fair value of the
collateral for collateral dependent loans.
If the
impaired loan is identified as collateral dependent, then the fair value method
of measuring the amount of impairment is utilized. This method requires
obtaining a current independent appraisal of the collateral and applying a
discount factor to the value. Impaired loans that are collateral dependent are
classified within Level 3 of the fair value hierarchy when impairment is
determined using the fair value method.
Management
establishes a specific reserve for loans that have an estimated fair value that
is below the carrying value. The total carrying amount of loans for which a
specific reserve has been established as of December 31, 2009 was $5,631,000 and
a fair value of $5,068,000 resulting in specific loss exposures of
$563,000.
When
there is little prospect of collecting either principal or interest, loans, or
portions of loans, may be charged-off to the allowance for loan
losses. Losses are recognized in the period an obligation becomes
uncollectible. The recognition of a loss does not mean that the loan
has absolutely no recovery or salvage value, but rather that it is not practical
or desirable to defer writing off the loan even though partial recovery may be
effected in the future.
Foreclosed
Assets Held For Sale
Other
real estate owned acquired through loan foreclosure are initially recorded at
fair value less costs to sell when acquired, establishing a new cost basis. The
adjustment at the time of foreclosure is recorded through the allowance for loan
losses. Due to the subjective nature of establishing the fair value when the
asset is acquired, the actual fair value of the other real estate owned or
foreclosed asset could differ from the original estimate. If it is determined
that fair value declines subsequent to foreclosure, a valuation allowance is
recorded through noninterest expense. Operating costs associated with the assets
after acquisition are also recorded as noninterest expense. Gains and losses on
the disposition of other real estate owned and foreclosed assets are netted and
posted to other noninterest expense. The total carrying amount of other real
estate owned as of December 31, 2009 was $2,862,000. Other real estate owned
measured at fair value on a nonrecurring basis in 2009 amounted to
$1,020,000.
The
following table presents the fair value measurement of assets measured at fair
value on a nonrecurring basis and the level within the SFAS No. 157 fair value
hierarchy in which the fair value measurements fall at December 31, 2009 and
2008 (in thousands):
Fair
Value Measurements Using
|
||||||||||||||||
December
31, 2009
|
Fair
Value
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable
Inputs
(Level
3)
|
||||||||||||
Impaired
loans (collateral dependent)
|
$ | 5,068 | $ | - | $ | - | $ | 5,068 | ||||||||
Foreclosed
assets held for sale
|
1,020 | - | - | 1,020 |
Fair
Value Measurements Using
|
||||||||||||||||
December
31, 2008
|
Fair
Value
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable
Inputs
(Level
3)
|
||||||||||||
Impaired
loans (collateral dependent)
|
$ | 1,584 | $ | - | $ | - | $ | 1,584 |
Other
The
following methods were used to estimate the fair value of all other financial
instruments recognized in the accompanying balance sheets at amounts other than
fair value.
Cash
and cash equivalents and Federal Reserve and Federal Home Loan Bank
Stock
The
carrying amount approximates fair value.
Held-to-maturity
Securities
Fair
value is based on quoted market prices, if available. If a quoted market price
is not available, fair value is estimated using quoted market prices for similar
securities.
Loans
For loans
with floating interest rates, it is assumed that the estimated fair values
generally approximate the carrying amount balances. Fixed rate loans
have been valued using a discounted present value of projected cash flow. The
discount rate used in these calculations is the current rate at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities. The carrying amount of accrued interest
approximates it fair value.
Deposits
Deposits
include demand deposits, savings accounts, NOW accounts and certain money market
deposits. The carrying amount of these deposits approximates fair value. The
fair value of fixed-maturity time deposits is estimated using a discounted cash
flow calculation that applies the rates currently offered for deposits of
similar remaining maturities.
Short-term
Borrowings and Interest Payable
The
carrying amount approximates fair value.
Long-term
Debt and Federal Home Loan Bank Advances
Rates
currently available to the Company for debt with similar terms and remaining
maturities are used to estimate the fair value of existing debt.
The
following table presents estimated fair values of the Company’s financial
instruments in accordance with FAS 107-1 and APB 28-1, codified with ASC
805.
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
Amount
|
Value
|
Amount
|
Value
|
|||||||||||||
Financial
Assets
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 39,755 | $ | 39,787 | $ | 48,343 | $ | 48,343 | ||||||||
Federal
funds sold
|
60,000 | 60,000 | 38,300 | 38,300 | ||||||||||||
Available-for-sale
securities
|
238,697 | 238,697 | 169,476 | 169,476 | ||||||||||||
Held-to-maturity
securities
|
459 | 469 | 599 | 610 | ||||||||||||
Loans
held for sale
|
149 | 149 | 537 | 537 | ||||||||||||
Loans
net of allowance for loan losses
|
691,139 | 698,798 | 733,814 | 752,735 | ||||||||||||
Interest
receivable
|
6,871 | 6,871 | 7,161 | 7,161 | ||||||||||||
Federal
Reserve Bank stock
|
1,368 | 1,368 | 1,366 | 1,366 | ||||||||||||
Federal
Home Loan Bank stock
|
3,727 | 3,727 | 3,727 | 3,727 | ||||||||||||
Financial
Liabilities
|
||||||||||||||||
Deposits
|
$ | 840,410 | $ | 841,737 | $ | 806,354 | $ | 811,284 | ||||||||
Securities
sold under agreements to repurchase
|
80,386 | 80,389 | 80,708 | 80,720 | ||||||||||||
Interest
payable
|
861 | 861 | 1,616 | 1,616 | ||||||||||||
Federal
Home Loan Bank borrowings
|
32,750 | 34,448 | 37,750 | 40,763 | ||||||||||||
Other
borrowings
|
- | - | 13,000 | 13,000 | ||||||||||||
Junior
subordinated debentures
|
20,620 | 20,620 | 20,620 | 20,620 |
Note
14—Deferred Compensation Plan
The
Company follows the provisions of the EITF 97-14, which was codified into ASC
710, for purposes of the First Mid-Illinois Bancshares, Inc. Deferred
Compensation Plan (“DCP”). At December 31, 2009, the Company
classified the cost basis of its common stock issued and held in trust in
connection with the DCP of approximately $2,894,000 as treasury
stock. The Company also classified the cost basis of its related
deferred compensation obligation of approximately $2,894,000 as an equity
instrument (deferred compensation).
The DCP
was effective as of June 1984. The purpose of the DCP is to enable directors,
advisory directors, and key employees the opportunity to defer a portion of the
fees and cash compensation paid by the Company as a means of maximizing the
effectiveness and flexibility of compensation arrangements. The
Company invests all participants’ deferrals in shares of common stock. Dividends
paid on the shares are credited to participants’ DCP accounts and invested in
additional shares. During 2009 and 2008 the Company issued 9,916
common shares and 7,600 common shares, respectively, pursuant to the
DCP.
Note
15 – Stock Option Plan
At the
Annual Meeting of Stockholders held May 23, 2007, the stockholders approved the
First Mid-Illinois Bancshares, Inc. 2007 Stock Incentive Plan (“SI
Plan”). The SI Plan was implemented to succeed the Company’s 1997
Stock Incentive Plan, which had a ten-year term that expired October 21, 2007,
under which there are still options outstanding. The SI Plan is intended to
provide a means whereby directors, employees, consultants and advisors of the
Company and its Subsidiaries may sustain a sense of proprietorship and personal
involvement in the continued development and financial success of the Company
and its Subsidiaries, thereby advancing the interests of the Company and its
stockholders. Accordingly, directors and selected employees,
consultants and advisors may be provided the opportunity to acquire shares of
Common Stock of the Company on the terms and conditions established in the SI
Plan.
A maximum
of 300,000 shares are authorized under the SI Plan. This amount reflects the
Company’s stock split which occurred on June 29, 2007. Options to acquire shares
are awarded at an exercise price equal to the fair market value of the shares on
the date of grant and have a 10-year term. Options granted to
employees vest over a four-year period and options granted to directors vest at
the time they are issued.
The fair
value of options granted is estimated on the grant date using the Black-Scholes
option-pricing model. There were no options granted during 2009. The
following assumptions were used in estimating the fair value for options granted
in 2008 and 2007. Expected volatility is based on historical volatility of the
Company’s stock and other factors. The Company uses historical data
to estimate option exercise and employee termination within the valuation model;
separate groups of employees who have similar historical exercise behavior are
considered separately for valuation purposes. The expected term of
options granted is derived from the output of the option valuation model and
represents the period of time that options granted are expected to be
outstanding. The risk-free rate for periods within the contractual
life of the option is based on the U.S. Treasury yield curve in effect at the
time of the grant.
2008
|
2007
|
|||||||
Average
expected volatility
|
13.4 | % | 13.2 | % | ||||
Average
expected dividend yield
|
1.6 | % | 1.4 | % | ||||
Average
expected term
|
5.9
yrs
|
5.7
yrs
|
||||||
Average
risk-free interest rate
|
1.3 | % | 3.4 | % |
The total
compensation cost recognized in the income statement for 2009 was $53,000 with a
related tax benefit of $2,000. The total compensation cost recognized in the
income statement for 2008 was $58,000 with a related tax benefit of $1,000. The
total compensation cost recognized in the income statement for 2007 was $61,000
with a related tax benefit of $3,000.
A summary
of option activity under the SI Plan and the 1997 Stock Incentive Plan as of
December 31, 2009, 2008 and 2007, and changes during the years then ended is
presented below:
2009
|
||||||||||||||||
Weighted-Average
|
||||||||||||||||
Weighted-Average
|
Remaining
|
Aggregate
|
||||||||||||||
Shares
|
Exercise
Price
|
Contractual
Term
|
Intrinsic
Value
|
|||||||||||||
Outstanding,
beginning of year
|
352,425 | $ | 19.73 | |||||||||||||
Granted
|
- | - | ||||||||||||||
Exercised
|
(37,267 | ) | 10.42 | |||||||||||||
Forfeited
or expired
|
(26,125 | ) | 24.08 | |||||||||||||
Outstanding,
end of year
|
289,033 | $ | 20.54 | 4.67 | $ | 533,000 | ||||||||||
Exercisable,
end of year
|
239,658 | $ | 19.73 | 3.88 | $ | 533,000 |
Stock
options for 202,970 and 153,595 shares of common stock were not considered in
computing the aggregate intrinsic value of outstanding shares and exercisable
shares, respectively, for 2009 because they were anti-dilutive.
2008
|
||||||||||||||||
Weighted-Average
|
||||||||||||||||
Weighted-Average
|
Remaining
|
Aggregate
|
||||||||||||||
Shares
|
Exercise
Price
|
Contractual
Term
|
Intrinsic
Value
|
|||||||||||||
Outstanding,
beginning of year
|
397,484 | $ | 17.85 | |||||||||||||
Granted
|
27,500 | 23.00 | ||||||||||||||
Exercised
|
(72,559 | ) | 10.66 | |||||||||||||
Forfeited
or expired
|
- | - | ||||||||||||||
Outstanding,
end of year
|
352,425 | $ | 19.73 | 5.35 | $ | 1,494,000 | ||||||||||
Exercisable,
end of year
|
276,472 | $ | 18.21 | 4.44 | $ | 1,494,000 |
Stock
options for 124,813 and 76,359 shares of common stock were not considered in
computing the aggregate intrinsic value of outstanding shares and exercisable
shares, respectively, for 2008 because they were anti-dilutive.
2007
|
||||||||||||||||
Weighted-Average
|
||||||||||||||||
Weighted-Average
|
Remaining
|
Aggregate
|
||||||||||||||
Shares
|
Exercise
Price
|
Contractual
Term
|
Intrinsic
Value
|
|||||||||||||
Outstanding,
beginning of year
|
414,989 | $ | 16.75 | |||||||||||||
Granted
|
32,000 | 26.10 | ||||||||||||||
Exercised
|
(39,801 | ) | 11.09 | |||||||||||||
Forfeited
or expired
|
(9,704 | ) | 26.17 | |||||||||||||
Outstanding,
end of year
|
397,484 | $ | 17.85 | 5.40 | $ | 3,382,000 | ||||||||||
Exercisable,
end of year
|
316,124 | $ | 15.88 | 4.74 | $ | 3,293,000 |
Stock
options for 124,813 and 59,906 shares of common stock were not considered in
computing the aggregate intrinsic value of outstanding shares and exercisable
shares, respectively, for 2007 because they were anti-dilutive.
The
weighted-average grant-date fair value of options granted during the year 2008
and 2007 was $2.51 and $4.32, respectively. There were no options granted during
the year 2009. The total intrinsic value of options exercised during
the years ended December 31, 2009, 2008 and 2007, was $308,000, $1,176,000, and
$655,000, respectively.
A summary
of the status of the Company’s shares subject to unvested options under the SI
Plan and the 1997 Stock Incentive Plan as of December 31, 2009, 2008 and 2007,
and changes during the years then ended, is presented below:
2009
|
2008
|
2007
|
||||||||||||||||||||||
Shares
|
Weighted-Average
Grant-Date
Fair
Value
|
Shares
|
Weighted-Average
Grant-Date
Fair
Value
|
Shares
|
Weighted-Average
Grant-Date
Fair
Value
|
|||||||||||||||||||
Unvested,
beginning of year
|
75,953 | $ | 3.90 | 81,359 | $ | 6.26 | 108,562 | $ | 4.69 | |||||||||||||||
Granted
|
- | - | 27,500 | 2.51 | 32,000 | 4.32 | ||||||||||||||||||
Vested
|
(24,453 | ) | 5.29 | (32,906 | ) | 4.81 | (52,451 | ) | 6.35 | |||||||||||||||
Forfeited
|
(2,125 | ) | 3.70 | - | - | (6,751 | ) | 8.93 | ||||||||||||||||
Unvested,
end of year
|
49,375 | $ | 3.34 | 75,953 | $ | 3.90 | 81,360 | $ | 6.26 |
As of
December 31, 2009 and 2008, there was $120,000 and $172,000, respectively, of
total unrecognized compensation cost related to unvested options granted under
the SI Plan and the 1997 Stock Incentive Plan. That cost is expected
to be recognized over a period of four years. The total fair value of
shares subject to options that vested during the years ended December 31, 2009,
2008, and 2007, was $129,000, $158,000, and $333,000, respectively.
The
following table summarizes information about stock options under the SI Plan and
the 1997 Stock Incentive Plan outstanding at December 31, 2009:
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||
Range
of Exercise Prices
|
Number
Outstanding
|
Weighted-Average
Remaining Contractual Life
|
Weighted-Average
Exercise Price
|
Number
Exercisable
|
Weighted-Average
Exercise Price
|
|||||||||||||||||
Below
$17.50
|
86,064 | 2.44 | $ | 11.31 | 86,064 | $ | 11.31 | |||||||||||||||
$ | 17.50 to $25.00 | 91,469 | 5.41 | $ | 21.34 | 64,969 | $ | 20.67 | ||||||||||||||
Above
$25.00
|
111,500 | 5.78 | $ | 27.00 | 88,625 | $ | 27.23 | |||||||||||||||
289,033 | 4.67 | $ | 20.54 | 239,658 | $ | 19.73 |
Note
16 – Retirement Plans
The
Company has a defined contribution retirement plan which covers substantially
all employees and which provides for a Company contribution equal to 4% of each
participant’s compensation and a Company matching contribution of up to 50% of
the first 4% of pre-tax contributions made by each
participant. Employee contributions are limited to the 402(g) limit
of compensation. The total expense for the plan amounted to $757,000,
$739,000 and $700,000 in 2009, 2008 and 2007, respectively. The
Company also has two agreements in place to pay $50,000 annually for 20 years
from the retirement date to the surviving spouse of a deceased former senior
officer of the Company and to one current senior officer. Total
expense under these two agreements amounted to $90,000, $86,000 and $82,000 in
2009, 2008 and 2007, respectively. The current liability recorded for these two
agreements was $903,000 and $863,000, as of December 31, 2009 and 2008,
respectively.
Note
17 – Income Taxes
The
components of federal and state income tax expense (benefit) for the years ended
December 31, 2009, 2008 and 2007 were as follows:
2009
|
2008
|
2007
|
||||||||||
Current
|
||||||||||||
Federal
|
$ | 4,761 | $ | 5,342 | $ | 4,998 | ||||||
State
|
761 | 732 | 307 | |||||||||
Total
Current
|
5,522 | 6,074 | 5,305 | |||||||||
Deferred
|
||||||||||||
Federal
|
(1,201 | ) | (492 | ) | (184 | ) | ||||||
State
|
(314 | ) | (139 | ) | (34 | ) | ||||||
Total
Deferred
|
(1,515 | ) | (631 | ) | (218 | ) | ||||||
Total
|
$ | 4,007 | $ | 5,443 | $ | 5,087 |
Recorded
income tax expense differs from the expected tax expense (computed by applying
the applicable statutory U.S. federal tax rate of 35% to income before income
taxes). During 2009, 2008 and 2007, the Company was in a graduated
tax rate position. The principal reasons for the difference are as
follows:
2009
|
2008
|
2007
|
||||||||||
Expected
income taxes
|
$ | 4,277 | $ | 5,589 | $ | 5,336 | ||||||
Effects
of:
|
||||||||||||
Tax-exempt
income
|
(483 | ) | (469 | ) | (423 | ) | ||||||
Nondeductible
interest expense
|
31 | 41 | 50 | |||||||||
State
taxes, net of federal taxes
|
291 | 385 | 177 | |||||||||
Other
items
|
(9 | ) | (3 | ) | 46 | |||||||
Effect
of marginal tax rate
|
(100 | ) | (100 | ) | (99 | ) | ||||||
Total
|
$ | 4,007 | $ | 5,443 | $ | 5,087 |
Tax
expense recorded by the Company during 2009, 2008 and 2007 did not include any
interest or penalties. Tax returns filed with the Internal Revenue Service and
Illinois Department of Revenue are subject to review by law under a three-year
statute of limitations. The Company is no longer subject to U.S. federal or
state income tax examinations by tax authorities for years before
2006.
The tax
effects of the temporary differences that gave rise to significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 2009 and
2008 are presented below:
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Allowance
for loan losses
|
$ | 3,695 | $ | 2,922 | ||||
Available-for-sale
investment securities
|
- | 265 | ||||||
Deferred
compensation
|
940 | 932 | ||||||
Supplemental
retirement
|
352 | 337 | ||||||
Core
deposit premium amortization
|
47 | 69 | ||||||
Depreciation
|
30 | 158 | ||||||
Interest
on non-accrual loans
|
328 | 128 | ||||||
Other-than-temporary
impairment on securities
|
708 | - | ||||||
Other
|
180 | 136 | ||||||
Total
gross deferred tax assets
|
$ | 6,280 | $ | 4,947 | ||||
Deferred
tax liabilities:
|
||||||||
Deferred
loan costs
|
$ | 80 | $ | 74 | ||||
Goodwill
|
1,402 | 1,240 | ||||||
Prepaid
expenses
|
149 | 121 | ||||||
FHLB
stock dividend
|
322 | 322 | ||||||
Purchase
accounting
|
709 | 834 | ||||||
Accumulated
accretion
|
99 | 87 | ||||||
Available-for-sale
investment securities
|
297 | - | ||||||
Total
gross deferred tax liabilities
|
$ | 3,058 | $ | 2,678 | ||||
Net
deferred tax assets
|
$ | 3,222 | $ | 2,269 |
Net
deferred tax assets are recorded in other assets on the consolidated balance
sheets. No valuation allowance related to deferred tax assets has been recorded
at December 31, 2009 and 2008 as management believes it is more likely than not
that the deferred tax assets will be fully realized.
Note
18 – Dividend Restrictions
The
National Bank Act imposes limitations on the amount of dividends that may be
paid by a national bank, such as First Mid Bank. Generally, a
national bank may pay dividends out of its undivided profits, in such amounts
and at such times as the bank’s board of directors deems
prudent. Without prior OCC approval, however, a national bank may not
pay dividends in any calendar year which, in the aggregate, exceed the bank’s
year-to-date net income plus the bank’s adjusted retained net income for the two
preceding years. Factors that could adversely affect First Mid Bank’s net income
include other-than-temporary impairment on investment securities that result in
credit losses and economic conditions in industries where there are
concentrations of loans outstanding that result in impairment of these loans
and, consequently loan charges and the need for increased allowances for losses.
See “Item 1A. Risk Factors,” Note 4 – “Investment Securities” and Note 5 –
“Loans” for a more detailed discussion of the factors.
The
payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and a financial institution
generally is prohibited from paying any dividends if, following payment thereof,
the institution would be undercapitalized. As described above, First
Mid Bank exceeded its minimum capital requirements under applicable guidelines
as of December 31, 2009. As of December 31, 2009, approximately $18.6
million was available to be paid as dividends to the Company by First Mid
Bank. Notwithstanding the availability of funds for dividends,
however, the OCC may prohibit the payment of any dividends by First Mid Bank if
the OCC determines that such payment would constitute an unsafe or unsound
practice.
Note
19 – Commitments and Contingent Liabilities
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, and interest
rate and liquidity risk in excess of the amounts recognized in the consolidated
balance sheets. The Company uses the same credit policies and
requires similar collateral in approving lines of credit and commitments and
issuing letters of credit as it does in making loans. The exposure to credit
losses on financial instruments is represented by the contractual amount of
these instruments. However, the Company does not anticipate any losses from
these instruments.
The
off-balance sheet financial instruments whose contract amounts represent credit
risk at December 31, 2009 and 2008 are as follows:
2009
|
2008
|
|||||||
Unused
commitments including lines of credit:
|
||||||||
Commercial
real estate
|
$ | 7,341 | $ | 21,876 | ||||
Commercial
operating
|
68,178 | 73,406 | ||||||
Home
Equity
|
19,150 | 21,350 | ||||||
Other
|
30,515 | 29,674 | ||||||
Total
|
$ | 125,184 | $ | 146,306 | ||||
Standby
letters of credit
|
$ | 7,738 | $ | 6,579 |
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 liens 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 at December 31, 2009
and 2008. The Company’s deferred revenue under standby letters of credit
agreements was nominal.
Note
20—Related Party Transactions
Certain
officers, directors and principal stockholders of the Company and its
subsidiaries, their immediate families or their affiliated companies (“related
parties”) have loans with one or more of the subsidiaries. These
loans are made in the ordinary course of business on substantially the same
terms, including interest and collateral, as those prevailing for comparable
transactions with others. Loans to related parties totaled approximately
$9,850,000 and $18,817,000 at December 31, 2009 and 2008,
respectively. Activity during 2009 and 2008 was as
follows:
2009
|
2008
|
|||||||
Beginning
balance
|
$ | 18,817 | $ | 14,682 | ||||
New
loans
|
14,254 | 7,751 | ||||||
Loan
repayments
|
(23,221 | ) | (3,616 | ) | ||||
Ending
balance
|
$ | 9,850 | $ | 18,817 |
Deposits
from related parties held by First Mid Bank at December 31, 2009 and 2008
totaled $17,591,000 and $18,471,000, respectively.
Note
21 – Leases
The
Company has several noncancellable operating leases, primarily for property
rental of banking buildings that expire over the next ten
years. These leases generally contain renewal options for periods
ranging from one to five years. Rental expense for these leases was
$543,000, $458,000 and $473,000 for the years ended December 31, 2009, 2008 and
2007, respectively.
Future
minimum lease payments under operating leases are:
Operating
Leases
|
||||
2010
|
$ | 531 | ||
2011
|
489 | |||
2012
|
489 | |||
2013
|
389 | |||
2014
|
390 | |||
Thereafter
|
675 | |||
Total
minimum lease payments
|
$ | 2,963 |
Note
22– Parent Company Only Financial Statements
Presented
below are condensed balance sheets, statements of income and cash flows for the
Company:
First
Mid-Illinois Bancshares, Inc. (Parent Company)
|
||||||||
Balance
Sheets
|
||||||||
December
31,
|
2009
|
2008
|
||||||
Assets
|
||||||||
Cash
|
$ | 5,860 | $ | 1,523 | ||||
Premises
and equipment, net
|
528 | 576 | ||||||
Investment
in subsidiaries
|
123,513 | 112,622 | ||||||
Other
assets
|
4,890 | 4,240 | ||||||
Total
Assets
|
$ | 134,791 | $ | 118,961 | ||||
Liabilities
and Stockholders’ equity
|
||||||||
Liabilities
|
||||||||
Dividends
payable
|
$ | 1,688 | $ | 1,177 | ||||
Debt
|
20,620 | 33,620 | ||||||
Other
liabilities
|
1,262 | 1,386 | ||||||
Total
Liabilities
|
23,570 | 36,183 | ||||||
Stockholders’
equity
|
111,221 | 82,778 | ||||||
Total
Liabilities and Stockholders’ equity
|
$ | 134,791 | $ | 118,961 |
First
Mid-Illinois Bancshares, Inc. (Parent Company)
|
||||||||||||
Statements
of Income
|
||||||||||||
Years
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
Income:
|
||||||||||||
Dividends
from subsidiaries
|
$ | - | $ | 9,375 | $ | 5,625 | ||||||
Other
income
|
29 | 307 | 48 | |||||||||
29 | 9,682 | 5,673 | ||||||||||
Operating
expenses
|
2,958 | 3,284 | 3,861 | |||||||||
Income
before income taxes and equity
|
||||||||||||
in
undistributed earnings of subsidiaries
|
(2,929 | ) | 6,398 | 1,812 | ||||||||
Income
tax benefit
|
1,148 | 1,325 | 1,639 | |||||||||
Income
before equity in undistributed
|
||||||||||||
earnings
of subsidiaries
|
(1,781 | ) | 7,723 | 3,451 | ||||||||
Equity
in undistributed earnings of subsidiaries
|
9,995 | 2,801 | 6,708 | |||||||||
Net
income
|
$ | 8,214 | $ | 10,524 | $ | 10,159 |
First
Mid-Illinois Bancshares, Inc. (Parent Company)
|
||||||||||||
Statements
of Cash Flows
|
||||||||||||
Years
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income
|
$ | 8,214 | $ | 10,524 | $ | 10,159 | ||||||
Adjustments
to reconcile net income to net
|
||||||||||||
cash
provided by operating activities:
|
||||||||||||
Depreciation,
amortization, accretion, net
|
47 | 48 | 47 | |||||||||
Equity
in undistributed earnings of
|
||||||||||||
subsidiaries
|
(9,995 | ) | (2,801 | ) | (6,708 | ) | ||||||
(Increase)
decrease in other assets
|
(447 | ) | 2,049 | 357 | ||||||||
Increase
(decrease) in other liabilities
|
(126 | ) | 119 | 13 | ||||||||
Net
cash provided by operating activities
|
6,644 | 9,939 | 3,868 | |||||||||
Cash
flows from financing activities:
|
||||||||||||
Repayment
of long-term debt
|
(13,000 | ) | (6,500 | ) | (5,500 | ) | ||||||
Proceeds
from long-term debt
|
- | 5,000 | 9,000 | |||||||||
Proceeds
from issuance of preferred stock
|
24,635 | - | - | |||||||||
Proceeds
from issuance of common stock
|
894 | 1,136 | 810 | |||||||||
Purchase
of treasury stock
|
(3,122 | ) | (6,784 | ) | (6,481 | ) | ||||||
Dividends
paid on preferred stock
|
(1,242 | ) | - | - | ||||||||
Dividends
paid on common stock
|
(1,521 | ) | (1,553 | ) | (1,512 | ) | ||||||
Net
cash provided by (used in) financing activities
|
6,644 | (8,701 | ) | (3,683 | ) | |||||||
(Decrease)
increase in cash
|
4,337 | 1,238 | 185 | |||||||||
Cash
at beginning of year
|
1,523 | 285 | 100 | |||||||||
Cash
at end of year
|
$ | 5,860 | $ | 1,523 | $ | 285 |
Note
23 – Quarterly Financial Data – Unaudited
The
following table presents summarized quarterly data for each of the two years
ended December 31:
Quarters
ended in 2009
|
||||||||||||||||
March
31
|
June
30
|
September
30
|
December
31
|
|||||||||||||
Selected
operations data:
|
||||||||||||||||
Interest
income
|
$ | 12,964 | $ | 12,906 | $ | 12,938 | $ | 12,601 | ||||||||
Interest
expense
|
4,360 | 4,415 | 4,034 | 3,028 | ||||||||||||
Net
interest income
|
8,604 | 8,491 | 8,904 | 9,573 | ||||||||||||
Provision
for loan losses
|
604 | 638 | 928 | 1,424 | ||||||||||||
Net
interest income after provision for loan losses
|
8,000 | 7,853 | 7,976 | 8,149 | ||||||||||||
Other
income
|
3,683 | 3,644 | 3,195 | 2,933 | ||||||||||||
Other
expense
|
8,383 | 8,615 | 7,949 | 8,265 | ||||||||||||
Income
before income taxes
|
3,300 | 2,882 | 3,222 | 2,817 | ||||||||||||
Income
taxes
|
1,115 | 883 | 1,078 | 931 | ||||||||||||
Net
income
|
2,185 | 1,999 | 2,144 | 1,886 | ||||||||||||
Dividends
on preferred shares
|
266 | 509 | 515 | 531 | ||||||||||||
Net
income available to common stockholders
|
$ | 1,919 | $ | 1,490 | $ | 1,629 | $ | 1,355 | ||||||||
Basic
earnings per common share
|
$ | 0.31 | $ | 0.25 | $ | 0.27 | $ | 0.21 | ||||||||
Diluted
earnings per common share
|
$ | 0.31 | $ | 0.25 | $ | 0.27 | $ | 0.21 |
Quarters
ended in 2008
|
||||||||||||||||
March
31
|
June
30
|
September
30
|
December
31
|
|||||||||||||
Selected
operations data:
|
||||||||||||||||
Interest
income
|
$ | 14,787 | $ | 14,284 | $ | 14,138 | $ | 13,857 | ||||||||
Interest
expense
|
6,285 | 5,482 | 4,914 | 4,663 | ||||||||||||
Net
interest income
|
8,502 | 8,802 | 9,224 | 9,194 | ||||||||||||
Provision
for loan losses
|
191 | 868 | 677 | 1,823 | ||||||||||||
Net
interest income after provision for loan losses
|
8,311 | 7,934 | 8,547 | 7,371 | ||||||||||||
Other
income
|
3,970 | 4,078 | 3,697 | 3,519 | ||||||||||||
Other
expense
|
7,785 | 7,928 | 8,007 | 7,740 | ||||||||||||
Income
before income taxes
|
4,496 | 4,084 | 4,237 | 3,150 | ||||||||||||
Income
taxes
|
1,574 | 1,390 | 1,420 | 1,059 | ||||||||||||
Net
income
|
2,922 | 2,694 | 2,817 | 2,091 | ||||||||||||
Dividends
on preferred shares
|
- | - | - | - | ||||||||||||
Net
income available to common stockholders
|
$ | 2,922 | $ | 2,694 | $ | 2,817 | $ | 2,091 | ||||||||
Basic
earnings per common share
|
$ | 0.47 | $ | 0.43 | $ | 0.45 | $ | 0.34 | ||||||||
Diluted
earnings per common share
|
$ | 0.46 | $ | 0.42 | $ | 0.45 | $ | 0.34 |
Report
of Independent Registered Public Accounting Firm
Audit
Committee, Board of Directors and Stockholders
First
Mid-Illinois Bancshares, Inc.
Mattoon,
Illinois
We have
audited the accompanying consolidated balance sheets of First Mid-Illinois
Bancshares, Inc. as of December 31, 2009 and 2008, and the related
consolidated statements of income, stockholders’ equity and cash flows for each
of the years in the three-year period ended December 31, 2009. The
Company's management is responsible for these financial
statements. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. Our
audits included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of First Mid-Illinois
Bancshares, Inc. as of December 31, 2009 and 2008, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2009, in conformity with accounting principles generally accepted
in the United States of America.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), First Mid-Illinois Bancshares, Inc.’s internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated March
3, 2010 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
As
discussed in Note 4, in 2009 the Company changed its method of accounting for
other-than-temporary impairment of debt securities in accordance with ASC 820,
formerly FASB Staff Positions 157-3 and 157-4, and ASC 320, formerly FASB Staff
Positions 115-2 and 124-2.
/s/ BKD LLP
Decatur,
Illinois
March 3,
2010
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A. CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures
The
Company’s management carried out an evaluation, under the supervision and with
the participation of the chief executive officer and the chief financial
officer, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as such term is defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934) as of December 31,
2009. Based upon that evaluation, the chief executive officer along
with the chief financial officer concluded that the Company’s disclosure
controls and procedures as of December 31, 2009, are effective.
Management’s
Annual Report on Internal Control over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company. The Company’s
internal control over financial reporting is a process designed under the
supervision of the Company’s chief executive officer and chief financial officer
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of the Company’s financial statements for external reporting
purposes in accordance with U.S. generally accepted accounting
principles.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2009 based on the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
“Internal Control—Integrated Framework.” Based on the assessment,
management determined that, as of December 31, 2009, the Company’s internal
control over financial reporting is effective, based on those
criteria. Management’s assessment of the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2009 has
been audited by BKD, LLP, an independent registered public accounting firm, as
stated in their report following.
March 3,
2010
/s/ William S. Rowland
William
S. Rowland
President
and Chief Executive Officer
/s/ Michael L. Taylor
Michael
L. Taylor
Chief
Financial Officer
Report
of Independent Registered Public Accounting Firm
Audit
Committee, Board of Directors and Stockholders
First
Mid-Illinois Bancshares, Inc.
Mattoon,
Illinois
We have
audited First Mid-Illinois Bancshares, Inc.’s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s report. Our responsibility
is to express an opinion on the Company’s internal control over financial
reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed 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. A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, First Mid-Illinois Bancshares, Inc. maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements of First
Mid-Illinois Bancshares, Inc. and our report dated March 3, 2010 expressed an
unqualified opinion thereon.
/s/ BKD LLP
Decatur,
Illinois
March 3,
2010
Changes
in Internal Control Over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting that
occurred during the Company’s fourth fiscal quarter of 2009 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
ITEM
9B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The
information called for by Item 10 with respect to directors and director
nominees is incorporated by reference to the Company’s Proxy Statement for the
2010 Annual Meeting of the Company’s shareholders under the captions “Proposal 1
– Election of Directors,” “Corporate Governance” and “Section 16 – Beneficial
Ownership Reporting Compliance.”
The
information called for by Item 9 with respect to executive officers is
incorporated by reference to Part I hereof under the caption “Supplemental Item
– Executive Officers of the Company.”
The
information called for by Item 9 with respect to audit committee financial
expert is incorporated by reference to the Company’s Proxy Statement for the
2010 Annual Meeting of the Company’s shareholders under the captions “Audit
Committee” and “Report of the Audit Committee to the Board of
Directors.”
The
Company has adopted a code of ethics for senior financial management applicable
to the Chief Executive Officer and Chief Financial Officer of the
Company. This code of ethics is posted on the Company’s
website. In the event that the Company amends or waives any
provisions of this code of ethics, the Company intends to disclose the same on
its website at www.firstmid.com.
ITEM
11. EXECUTIVE COMPENSATION
The
information called for by Item 11 is incorporated by reference to the Company’s
Proxy Statement for the 2010 Annual Meeting of the Company’s shareholders under
the captions “Executive Compensation,” “Non-qualified Deferred Compensation,”
Potential Payments Upon Termination or Change in Control of the Company,”
“Directors’ Compensation,” Corporate Governance Matters-Compensation Committee
Interlocks and Insider Participation,” and “Compensation Committee
Report.”
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The
information called for by Item 12 with respect to equity compensation plans is
provided in the table below.
Equity
Compensation Plan Information
|
||||||||||||
Plan
category
|
Number
of securities to be issued upon exercise of outstanding
options
(a)
|
Weighted-average
exercise price of outstanding options
(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans
(c)
|
|||||||||
Equity
compensation plans approved by security holders:
|
||||||||||||
(A)
Deferred Compensation Plan
|
- | - | 409,140 | (1) | ||||||||
(B)
Stock Incentive Plan
|
289,033 | (2) | $ | 20.54 | (3) | 240,500 | (4) | |||||
Equity
compensation plans not approved by security holders (5)
|
- | - | - | |||||||||
Total
|
289,033 | $ | 20.54 | 649,640 |
(1)
|
Consists
of shares issuable with respect to participant deferral contributions
invested in common stock.
|
(2)
|
Consists
of stock options.
|
(3)
|
Represents
the weighted-average exercise price of outstanding stock
options.
|
(4)
|
Consists
of stock option and/or restricted
stock.
|
(5)
|
The
Company does not maintain any equity compensation plans not approved by
stockholders.
|
The
Company’s equity compensation plans approved by security holders consist of the
Deferred Compensation Plan and the Stock Incentive Plan. Additional
information regarding each plan is available in “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Stock Plans” and
Note 15 – “Stock Option Plan” herein.
The
information called for by Item 12 with respect to security ownership is
incorporated by reference to the Company’s Proxy Statement for the 2010 Annual
Meeting of the Company’s shareholders under the caption “Voting Securities and
Principal Holders Thereof.”
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The
information called for by Item 13 is incorporated by reference to the Company’s
Proxy Statement for the 2010 Annual Meeting of the Company’s shareholders under
the captions “Certain Relationships and Related Transactions” and “Corporate
Governance Matters – Board of Directors.”
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
information called for by Item 14 is incorporated by reference to the Company’s
Proxy Statement for the 2010 Annual Meeting of the Company’s shareholders under
the caption “Fees of Independent Auditors.”
PART
IV
ITEM
15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
(a)(1)
and (2) -- Financial Statements and Financial Statement Schedules
The
following consolidated financial statements and financial statement schedules of
the Company are filed as part of this document under Item 8.
Financial
Statements and Supplementary Data:
·
|
Consolidated
Balance Sheets -- December 31, 2009 and
2008
|
·
|
Consolidated
Statements of Income -- For the Years Ended December 31, 2009, 2008 and
2007
|
·
|
Consolidated
Statements of Changes in Stockholders’ Equity -- For the Years Ended
December 31, 2009, 2008 and 2007
|
·
|
Consolidated
Statements of Cash Flows -- For the Years Ended December 31, 2009, 2008
and 2007.
|
(a)(3) –
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 immediately precedes the
exhibits filed.
SIGNATURES
Pursuant
to the requirements of Section 13 of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST
MID-ILLINOIS BANCSHARES, INC.
|
(Company)
|
Dated: March
3, 2010
By: /s/
William S. Rowland
William
S. Rowland
President
and Chief Executive Officer
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below on the 3rd day of March 2010, by the following persons on behalf of
the Company and in the capacities listed.
Signature
and Title
/s/ William S. Rowland
William S. Rowland, Chairman of the Board,
President
and Chief Executive Officer and Director
(Principal
Executive Officer)
/s/ Michael L. Taylor
Michael
L. Taylor, Vice President and Chief Financial Officer
(Principal
Financial Officer and Principal Accounting Officer)
/s/ Charles A. Adams
Charles
A. Adams, Director
/s/ Kenneth R. Diepholz
Kenneth
R. Diepholz, Director
/s/ Joseph R. Dively
Joseph R.
Dively, Director
/s/ Steven L. Grissom
Steven L.
Grissom, Director
/s/ Benjamin I. Lumpkin
Benjamin
I. Lumpkin, Director
/s/ Gary W. Melvin
Gary W.
Melvin, Director
/s/ Sara Jane Preston
Sara Jane
Preston, Director
/s/ Ray A. Sparks
Ray A.
Sparks, Director
Exhibit
|
Exhibit
Index to Annual Report on Form 10-K
|
Number
|
Description
and Filing or Incorporation Reference
|
3.1
|
Restated
Certificate of Incorporation and Amendment to Restated Certificate of
Incorporation of First Mid-Illinois Bancshares, Inc.
Incorporated
by reference to Exhibit 3(a) to First Mid-Illinois Bancshares, Inc.’s
Annual Report on Form 10-K for the year ended December
31, 1987.
|
3.2
|
Amended
and Restated Bylaws of First Mid-Illinois Bancshares, Inc.
Incorporated
by reference to Exhibit 3.2 to First Mid-Illinois Bancshares, Inc.’s
Current Report on Form 8-K filed with the SEC on November 14,
2007.
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3.3
|
Certificate
of Designation, Preferences and Rights of Series B 9% Non-Cumulative
Perpetual Convertible Preferred Stock of the Company
Incorporated
by reference to Exhibit 4.1 to First Mid-Illinois Bancshares, Inc.’s
Current Report on Form 8-K filed with the SEC on February 11,
2009.
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4.1
|
Rights
Agreement, dated as of September 22, 2009, between First Mid-Illinois
Bancshares, Inc. and Harris Trust and Savings Bank, as
Rights Agent
Incorporated
by reference to Exhibit 4.1 to First Mid-Illinois Bancshares, Inc.’s
Registration Statement on Form 8-A filed with the SEC on September
24, 2009.
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4.2
|
Form
of Registration Rights Agreement
Incorporated
by reference to Exhibit 4.2 to First Mid-Illinois Bancshares, Inc.’s
Current Report on Form 8-K filed with the SEC on February 11,
2009.
|
10.1
|
Employment
Agreement between the Company and William S. Rowland
Incorporated
by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s
Current Report on Form 8-K filed with the SEC on December 12,
2007.
|
10.2
|
Employment
Agreement between the Company and John W. Hedges
Incorporated
by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s
Report on Form 8-K filed with the SEC on October 1, 2008.
|
10.4
|
Employment
Agreement between the Company and Michael L. Taylor
Incorporated
by reference to Exhibit 10.2 to First Mid-Illinois Bancshares, Inc.’s
Current Report on Form 8-K filed with the SEC on May 3, 2007.
|
10.5
|
Employment
Agreement between the Company and Laurel G. Allenbaugh
Incorporated
by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s
Current Report on Form 8-K filed with the SEC on May 3, 2007.
|
10.6
|
Employment
Agreement between the Company and Charles A. LeFebvre
Incorporated
by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s
Current Report on Form 8-K filed with the SEC on April 25,
2007.
|
10.7
|
First
Amendment to Employment Agreement between the Company and
Charles A. LeFebvre
Incorporated
by reference to Exhibit 10.7 to First Mid-Illinois Bancshares, Inc.’s
Annual Report on Form 10-K for the year ended December
31, 2008.
|
10.8
|
Employment
Agreement between the Company and Kelly A. Downs
Incorporated
by reference to Exhibit 10.2 to First Mid-Illinois Bancshares, Inc.’s
Current Report on Form 8-K filed with the SEC on December 12,
2007.
|
10.9
|
Employment
Agreement between the Company and Eric S. McRae
Incorporated
by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s
Current Report on Form 8-K filed with the SEC on February 24,
2009.
|
10.10
|
Amended
and Restated Deferred Compensation Plan
Incorporated
by reference to Exhibit 10.4 to First Mid-Illinois Bancshares, Inc.’s
Annual Report on Form 10-K for the for the year ended December
31, 2005.
|
10.11
|
2007
Stock Incentive Plan
Incorporated
by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s
Current Report on Form 8-K filed with the SEC on May 23,
2007.
|
10.12
|
First
Amendment to 2007 Stock Incentive Plan (filed
herewith)
|
Exhibit
|
Exhibit
Index to Annual Report on Form 10-K
|
Number
|
Description
and Filing or Incorporation Reference
|
10.13
|
1997
Stock Incentive Plan
Incorporated
by reference to Exhibit 10.5 to First Mid-Illinois Bancshares, Inc.’s
Annual Report on Form 10-K for the for the year ended December
31, 1998.
|
10.14
|
Form
of 2007 Stock Incentive Plan Stock Option Agreement
Incorporated
by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s
Current Report on Form 8-K filed with the SEC on December 12,
2007.
|
10.15
|
Supplemental
Executive Retirement Plan
Incorporated
by reference to Exhibit 10.8 to First Mid-Illinois Bancshares, Inc.’s
Annual Report on Form 10-K for the for the year ended December
31, 2005.
|
10.16
|
First
Amendment to Supplemental Executive Retirement Plan
Incorporated
by reference to Exhibit 10.9 to First Mid-Illinois Bancshares, Inc.’s
Annual Report on Form 10-K for the for the year ended December
31, 2005.
|
10.17
|
Participation
Agreement (as Amended and Restated) to Supplemental Executive
Retirement Plan between the Company and William
S. Rowland
Incorporated
by reference to Exhibit 10.10 to First Mid-Illinois Bancshares, Inc.’s
Annual Report on Form 10-K for the year ended December 31,
2005.
|
10.18
|
Description
of Incentive Compensation Plan
Incorporated
by reference to Exhibit 10.16 to First Mid-Illinois Bancshares, Inc.’s
Annual Report on Form 10-K for the year ended December
31, 2008.
|
11.1
|
Statement
re: Computation of Earnings Per Share (Filed
herewith)
|
21.1
|
Subsidiaries
of the Company (Filed herewith)
|
23.1
|
Consent of
BKD LLP (Filed herewith)
|
31.1
|
Certification
of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley
Act of 2002 (Filed herewith)
|
31.2
|
Certification
of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley
Act of 2002 (Filed herewith)
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 (Filed herewith)
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 (Filed herewith)
|