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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
Commission file number: 0-13368
FIRST MID-ILLINOIS BANCSHARES, INC.
(Exact name of Company as specified in its charter)
Delaware 37-1103704
(State of incorporation) (I.R.S. employer identification No.)
1515 Charleston Avenue, Mattoon, Illinois 61938
(Address and Zip Code of Principal Executive Offices)
(217) 234-7454
(Company's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $4.00 per share,
and related Common Stock Purchase Rights
(Title of class)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark 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 Company'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 Company is an accelerated filer (as
defined in Exchange Act Rule 12b-2) YES [X] NO [ ]
As of March 1, 2004, 2,999,473 common shares, $4.00 par value, were
outstanding, and the aggregate market value of common shares (based on the last
sale price of the Company's common shares on March 12, 2004) held by
non-affiliates was approximately $143,975,000.
DOCUMENTS INCORPORATED BY REFERENCE
Document Into Form 10-K Part:
Portions of the Proxy Statement for 2004 Annual
Meeting of Shareholders to be held on May 26, 2004 III
First Mid-Illinois Bancshares, Inc.
Form 10-K Table of Contents
Page
Part I
Item 1 Business 3
Item 2 Properties 11
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Part II
Item 5 Market for Company's Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities 15
Item 6 Selected Financial Data 16
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 7A Quantitative and Qualitative Disclosures About
Market Risk 41
Item 8 Financial Statements and Supplementary Data 43
Item 9 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosures 72
Item 9A Controls and Procedures 72
Part III
Item 10 Directors and Executive Officers of the Company 72
Item 11 Executive Compensation 72
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 72
Item 13 Certain Relationships and Related Transactions 73
Item 14 Principal Accountant Fees and Services 73
Part IV
Item 15 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 74
Signatures 75
Exhibit Index 76
PART I
ITEM 1. BUSINESS
Company and Subsidiaries
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, a Delaware corporation, was incorporated on September 8, 1981,
pursuant to the approval of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") and became the holding company owning all of the
outstanding stock of First National Bank, Mattoon ("First National") on June 1,
1982. The Company acquired all of the outstanding stock of a number of community
banks on the following dates:
* Mattoon Bank, Mattoon ("Mattoon Bank") on April 2, 1984
* State Bank of Sullivan ("Sullivan Bank") on April 1, 1985
* Cumberland County National Bank in Neoga ("Cumberland County") on December
31, 1985
* First National Bank and Trust Company of Douglas County ("Douglas County")
on December 31, 1986
* Charleston Community Bank ("Charleston Bank")on December 30, 1987.
In April 1989, a purchase and assumption agreement was executed between
First National and Mattoon Bank whereby First National purchased substantially
all of the assets and assumed all of the liabilities of Mattoon Bank. On May 31,
1992, the Company merged Sullivan Bank, Cumberland County, Douglas County and
Charleston Bank into First National. First National changed its name at that
time to First Mid-Illinois Bank & Trust, N.A.
On July 1, 1992, the Company acquired and re-capitalized Heartland Federal
Savings and Loan Association ("Heartland"), a $125 million thrift headquartered
in Mattoon with offices in Charleston, Sullivan and Urbana, Illinois. Under the
terms of the acquisition, Heartland converted from the mutual form of
organization into a federally chartered, stock savings association and became a
wholly owned subsidiary of the Company. In connection with the Heartland
acquisition, $3.1 million of Series A perpetual, cumulative, non-voting,
convertible, preferred stock was issued to directors and certain senior officers
of the Company in a private placement.
On October 4, 1994, First Mid Bank acquired all of the outstanding stock of
Downstate Bancshares, Inc. ("DBI"), which owned all of the stock of Downstate
National Bank ("DNB"). DNB operated branch locations in Altamont and Effingham,
Illinois. Immediately following the acquisition, DBI was dissolved and DNB was
merged with and into First Mid Bank with First Mid Bank being the surviving
entity.
In December 1994, Heartland (formerly known as Heartland Federal Savings
and Loan Association) converted from a federally chartered stock savings
association to a state-chartered savings bank and changed its name to Heartland
Savings Bank.
On March 7, 1997, First Mid Bank acquired the Charleston, Illinois branch
location and the customer base of First of America Bank. This cash acquisition
added approximately $28 million to total deposits, $.5 million to loans, $1.3
million to premises and equipment and $3.8 million to intangible assets.
In November 1997, Heartland merged with and into First Mid Bank with First
Mid Bank being the surviving entity.
On May 7, 1999, the Company acquired the Monticello, Taylorville and DeLand
branch offices and deposit base of Bank One Illinois, N.A. This cash acquisition
added approximately $64 million to total deposits, $10 million to loans, $1.7
million to premises and equipment and $6.5 million to intangible assets. This
acquisition was accounted for using the purchase method of accounting whereby
the acquired assets and deposits of the branches were recorded at their fair
values as of the acquisition date.
On April 17, 2000, the Company opened a de novo branch in Decatur,
Illinois.
On September 5, 2000, the Company opened a banking center in the Student
Union of Eastern Illinois University in Charleston, Illinois.
On April 20, 2001, First Mid Bank acquired all of the outstanding stock of
American Bank of Illinois in Highland ("American Bank") and merged American Bank
with and into First Mid Bank with First Mid Bank being the surviving entity.
On January 29, 2002, the Company acquired all of the outstanding stock of
Checkley, an insurance agency located in Mattoon.
On November 13, 2002, the Company opened a de novo branch in Champaign,
Illinois.
On November 15, 2002, the Company opened a de novo branch in Maryville,
Illinois.
Description of Business
First Mid Bank conducts a general banking business encompassing most of the
services, both consumer and commercial, which banks may lawfully provide,
including the following principal services: the acceptance of deposits to
demand, savings and time accounts and the servicing of such accounts;
commercial, industrial, agricultural, consumer and real estate lending,
including installment, credit card, personal lines of credit and overdraft
protection; safe deposit box operations; and an extensive variety of additional
services tailored to the needs of customers, such as traveler's checks and
cashiers' checks, foreign currency, and other special services. First Mid Bank
also provides services to its customers through its trust department and
investment center.
Loans, both commercial and consumer, are provided on either a secured or
unsecured basis to corporations, partnerships and individuals. Commercial
lending covers such categories as business, industry, capital, construction,
agriculture, inventory and real estate. First Mid Bank's retail loan department
makes direct loans to consumers and some commercial customers, and purchases
retail obligations from retailers, primarily without recourse. Retail lending
covers such categories as residential real estate, automobile, and debt
consolidation loans.
First Mid Bank conducts its business in the middle of some of the richest
farmland in the world. Accordingly, First Mid Bank provides a wide range of
financial services to farmers and agribusiness within their respective markets.
The farm management department, headquartered in Mattoon, Illinois, has
approximately 33,000 acres under management and is the largest management
operation in the area, ranking in the top 100 firms nationwide. First Mid Bank
is the largest supplier of farm credit in the Company's market area with $93.3
million in agriculture-related loans at December 31, 2003. The farm credit
products offered by First Mid Bank include real estate loans, as well as
machinery and equipment loans, production loans, inventory financing and lines
of credit.
First Mid Bank had total assets of $786,807,000 and stockholders' equity of
$73,918,000 at December 31, 2003.
Employees
The Company, MIDS, Checkley and First Mid Bank, collectively, employed 314
people on a full-time equivalent basis as of December 31, 2003. 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 and management considers its employee
relations to be excellent.
The Company actively competes 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, Douglas, Effingham, Macon, Madison,
Moultrie, and Piatt. Each facility primarily serves the community in which it is
located. First Mid Bank serves seventeen different communities with twenty-four
separate locations in the towns of Altamont, Arcola, Champaign, Charleston,
Decatur, DeLand, Effingham, Highland, Maryville, Mattoon, Monticello, Neoga,
Pocahontas, Sullivan, Taylorville, Tuscola, and Urbana, 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 effect 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 funds 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
On November 12, 1999, the President signed into law the Gramm-Leach-Bliley
Act (the "GLB Act"). The GLB Act significantly changes 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 establishes 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. In addition, 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 consumer
information and setting forth certain rules with respect to the disclosure to
third parties of consumer information. 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 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. Banks now 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. The SEC issued interim final rules to
define certain terms in, and grant additional exemptions from, the provisions of
the GLB Act in May 2001. By several orders, the SEC extended the blanket
exemption for banks from the definition of "broker" and "dealer" while it has
considered amendments to the interim final rules. On February 13, 2003, the SEC
adopted amendments to its rules relating to the "dealer" exemption for banks,
and banks have been required to comply with those rules since September 30,
2003. The SEC has extended the blanket exemption for banks from the definition
of "broker" until November 12, 2004. 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.
Anti-Terrorism Legislation
On October 26, 2001, the President signed into law the USA Patriot Act of
2001, which contains 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 to
ensure 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.
The Company
General. As a registered bank holding company under the BHCA and as a
registered financial holding company under that 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 bank holding company that has elected to become 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 of 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.
The Company became a financial holding company effective December 14, 2001.
It continues to maintain its status as a bank holding company for purposes of
other Federal Reserve Board regulations.
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
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.
As of December 31, 2003, the Company had regulatory capital, calculated on
a consolidated basis, in excess of the Federal Reserve Board's minimum
requirements, with a risk-based capital ratio of 10.61% and a leverage ratio of
7.18%.
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. The FDIC has
adopted a risk-based assessment system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their respective levels of capital and results of
supervisory evaluations. Institutions classified as well capitalized (as defined
by the FDIC) and considered healthy pay the lowest premium while institutions
that are less than adequately capitalized (as defined by the FDIC) and
considered of substantial supervisory concern pay the highest premium. The FDIC
makes risk classification of all insured institutions for each semi-annual
assessment period.
During the year ended December 31, 2003, FDIC assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 2004, FDIC assessment rates will continue to range from 0% of
deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or written agreement
with, the FDIC. The FDIC may also suspend deposit insurance temporarily during
the hearing process for a permanent termination of insurance if the institution
has no tangible capital. Management of the Company is not aware of any activity
or condition that could result in termination of the deposit insurance of First
Mid Bank.
In addition to its insurance assessment, each insured bank is subject, in
2004, to quarterly debt service assessments in connection with bonds issued by a
government corporation that financed the federal savings and loan bailout. The
first quarter 2004 debt service assessment was .0154%.
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, 2003,
First Mid Bank paid supervisory fees to the OCC totaling $168,000.
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, 2003, First Mid Bank was not required by
the OCC to increase its capital to an amount in excess of the minimum regulatory
requirements. As of December 31, 2003, First Mid Bank exceeded its minimum
regulatory capital requirements with a risk-based capital ratio of 11.57% and a
leverage ratio of 7.85%.
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 ultimately, appointing a 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, 2003. As of December 31, 2003, approximately $13.2
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 Federal Reserve
Board 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, 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.
The Bank is subject to restrictions under federal law that limit 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.
Supplemental Item - Executive Officers of the Company
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 (57) Chairman of the Board of Directors,
President and Chief Executive Officer
Michael L. Taylor (35) Vice President
and Chief Financial Officer
John W. Hedges (56) President, First Mid Bank
Laurel G. Allenbaugh (44) Vice President
Christie L. Wright (47) Vice President, Secretary/Treasurer
Stanley E. Gilliland (59) Vice President
Robert J. Swift, Jr. (52) Vice President
Kelly A. Downs (36) Vice President
William S. Rowland, age 57, 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 35, has been the Vice President and Chief Financial
Officer of the Company since May 2000. He was with AMCORE Bank in Rockford,
Illinois from 1996 to 2000.
John W. Hedges, age 56, has been 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 44, has been Vice President of Operations since
February 2000. She served as Controller of the Company and First Mid Bank from
1990 to February 2000 and has been President of MIDS since 1998.
Christie L. Wright, age 47, has been Vice President of Investments since
1995 and Secretary since 1998.
Stanley E. Gilliland, age 59, has been Vice President of Lending of the
Company since 1985, and has been Executive Vice President of Lending for First
Mid Bank since 1990.
Robert J. Swift, Jr., age 52, has been Vice President of the Trust and
Financial Services Department of the Company since August 2000. He was with
Central Trust Bank in Jefferson City, Missouri from 1989 to 2000.
Kelly A. Downs, age 36, has been Vice President of Human Resources since
2001.
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-in teller stations, and three sit-down teller stations.
Adjacent to this building is a parking lot with parking for approximately one
hundred cars. A drive-up facility with nine drive-up lanes, including 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 walk-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 deposit services department 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.
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 two locations 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 tellers, six private offices and four drive-up lanes.
Adequate customer parking is available on two sides of the main office building.
The second office is a leased facility at 435 South Hamilton, Sullivan, Illinois
in the IGA. The facility has two teller stations, a vault, an ATM and a night
depository. There is also an 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. During 1996, an adjacent building with approximately 400 square feet
was purchased and was subsequently donated to the Neoga Food Pantry in February
2004. There is also an ATM located in the Neoga Phillips 66 Station on Route 45.
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
First Mid Bank has three offices in Charleston, Illinois. 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.
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 leases a facility at 324 South Chestnut Street, Arcola,
Illinois. This building is a one-story structure with approximately 1,140 square
feet of office space. This office space consists of two lobby teller stations,
one loan station, two drive-up teller lanes, one private office 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
Route133 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 is currently being leased to
a wholesale pharmacy company 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.
DeLand
First Mid Bank has an office at 220 North Highway Avenue, DeLand, Illinois.
It is a one-story structure with one private office, three teller stations and a
night depository. Adequate parking is available in front of the building.
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.
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 and four private offices. Adequate parking is available to
serve customers.
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.
Maryville
First Mid leases a facility 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.
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER OF PURCHASES OF EQUITY SECURITIES
The Company's common stock was held by approximately 677 shareholders of
record as of December 31, 2003 and is included for quotation on the
over-the-counter electronic bulletin board.
The following table shows, for the indicated periods, the range of reported
prices per share of the Company's common stock. These quotations represent
inter-dealer prices without retail mark-ups, mark-downs or commissions and do
not necessarily represent actual transactions.
Quarter High Low
------------------- ------------- -------------
2003
4th 46 3/4 44 3/4
3rd 48 32 1/2
2nd 34 28 8/9
1st 29 1/4 27
2002
4th 28 1/2 26 1/2
3rd 27 1/2 26 1/3
2nd 27 25 1/3
1st 25 1/3 23 3/4
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
--------------------------- ------------------- ------------------
12-16-2003 1-09-2004 $.40
4-22-2003 6-13-2003 $.25
12-26-2002 1-06-2003 $.27
5-22-2002 6-14-2002 $.23
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 and capital requirements, see "Note 17"
of the Notes to the Consolidated Financial Statements included under Item 8 of
this document. The Board of Directors of the Company has declared cash dividends
semi-annually during the two years ended December 31, 2003.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth a five-year comparison of selected financial data.
(dollars in thousands, except per share data)
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ -------------
Summary of Operations
Interest income $38,938 $41,387 $45,506 $44,191 $39,168
Interest expense 11,896 14,661 21,590 22,573 18,415
------------ ------------ ------------ ------------ -------------
Net interest income 27,042 26,726 23,916 21,618 20,753
Provision for loan losses 1,000 1,075 600 550 600
Other income 12,255 10,394 8,279 6,690 6,694
Other expense 24,530 24,006 22,039 20,063 19,378
------------ ------------ ------------ ------------ -------------
Income before income taxes 13,767 12,039 9,556 7,695 7,469
Income tax expense 4,674 4,005 3,040 2,035 2,237
------------ ------------ ------------ ------------ -------------
Net income $ 9,093 $ 8,034 $ 6,516 $ 5,660 $ 5,232
============ ============ ============ ============ =============
Per Common Share Data (1)
Basic earnings per share $ 2.88 $ 2.39 $ 1.93 $1.67 $1.60
Diluted earnings per share 2.82 2.38 1.92 1.67 1.53
Dividends per common share .65 .50 .43 .39 .37
Book value per common share 22.53 20.95 18.96 17.18 15.09
Financial Ratios
Net interest margin 3.75% 3.99% 3.87% 3.84% 3.95%
Return on average assets 1.17% 1.11% .97% .92% .91%
Return on average equity 13.11% 11.82% 10.56% 10.55% 10.14%
Return on average common equity 13.11% 11.82% 10.56% 10.55% 10.08%
Dividend payout ratio 22.57% 20.92% 22.28% 23.53% 22.95%
Average equity to average assets 8.94% 9.36% 9.20% 8.70% 8.96%
Capital to risk-weighted assets 10.61% 10.35% 11.23% 11.74% 11.98%
Year End Balances
Total assets $793,645 $776,240 $705,979 $642,999 $601,103
Net loans 548,398 496,141 469,541 426,026 385,380
Total deposits 614,992 613,452 559,420 503,985 485,011
Total equity 70,595 66,807 63,925 57,727 51,518
Average Balances
Total assets $776,072 $727,986 $670,890 $616,855 $575,903
Net loans 520,962 479,957 450,466 406,505 356,031
Total deposits 611,982 573,670 540,209 491,584 474,636
Total equity 69,349 67,989 61,714 53,674 51,577
(1) All share and per share data have been restated to reflect the 3-for-2
stock split effective November 16, 2001.
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, 2003, 2002
and 2001. This discussion and analysis should be read in conjunction with the
consolidated financial statements, related notes and selected financial data
appearing elsewhere in this report.
Forward-Looking Statements
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, such as discussions of the
Company's pricing and fee trends, credit quality and outlook, liquidity, new
business results, expansion plans, anticipated expenses and planned schedules.
The Company intends such forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and is including this statement for
purposes of these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies and
expectations of the Company, are identified by use of the words "believe,"
"expect," "intend," "anticipate," "estimate," "project," or similar expressions.
Actual results could differ materially from the results indicated by these
statements because the realization of those results is subject to many
uncertainties including: changes in interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
For the Years Ended December 31, 2003, 2002, and 2001
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 $9.1 million, $8.0 million, and $6.5 million and diluted
earnings per share was $2.82, $2.38, and $1.92 for the years ended December 31,
2003, 2002, and 2001, respectively. The increase in net income was primarily the
result of strong loan growth, increased fee income, maintaining strong asset
quality, and expense control. Return on average assets was 1.17%, 1.11%, and
..97% and return on average common shareholders' equity was 13.11%, 11.82%, and
10.56% for the years ended December 31, 2003, 2002, and 2001, respectively.
Return on average assets is calculated by dividing net income by the daily
average of total assets. Return on average common shareholders' equity is
calculated by dividing net income by the daily average of common shareholders'
equity.
Total assets at December 31, 2003, 2002, and 2001 were $793.6 million,
$776.2 million, and $706.0 million, respectively. This growth was a result of
the Company's strategic focus on commercial and commercial real estate lending,
de novo expansion into the new markets of Maryville and Champaign and the 2001
acquisition of American Bank of Illinois in Highland which added $34 million in
assets. Net loan balances were $548.4 million at December 31, 2003, an increase
of $52.3 million, or 11%, from $496.1 million at December 31, 2002 and $469.5
million at December 31, 2001. Total deposit balances increased to $615.0 million
at December 31, 2003 from $613.5 million at December 31, 2002 and $559.4 million
at December 31, 2001.
Net interest margin, defined as net interest income divided by average
interest-earning assets, was 3.75% for 2003, down from 3.99% in 2002 and 3.87%
in 2001. The decline in the net interest margin is attributable to declines in
the overall level of interest rates that led to lower yields on the securities
portfolio and loan portfolio. The lower yields on the securities portfolio
resulted from increased amortization of premiums on mortgage-backed securities
as a result of the high level of refinancings of home mortgages experienced
during 2003. The high-level of refinances and the repricing of variable rate
loans that compose 36% of the loan portfolio at lower rates led to the decline
in loan portfolio yields. Declines in yields on interest-earning assets were
partially offset by reductions in the cost of interest-bearing liabilities.
Also, demand deposits remain an important component of funding sources and
averaged 13.9% of total deposits in 2003 compared to 13.8% in 2002.
Net interest income before the provision for loan losses increased to $27.0
million in 2003 from $26.7 million in 2002 and $23.9 million in 2001. In 2003,
the growth in earning assets, primarily composed of the loan growth previously
mentioned, offset the decline in net interest margin. In 2002 both earning asset
growth and net interest margin expansion from the decline in the cost of
interest-bearing liabilities increased net interest income.
Noninterest income increased $1.9 million, or 18%, to $12.3 million in 2003
compared to $10.4 million in 2002 and $8.3 million in 2001. The primary drivers
of this increase were continued growth in service charge income and increased
mortgage banking revenues. Increased service charge income resulted from an
increase in overdraft fees after implementation of a new program called Payment
Privilege in July 2002. Under Payment Privilege, overdrafts up to a limit of
$500 are generally paid for prior qualifying customers in exchange for a fee. A
greater number of overdrafts paid resulted in an increase in fee income. In
addition, the historically low level of interest rates provided the impetus for
an increase in mortgage banking revenue. The Company's insurance revenues also
increased with the acquisition of Checkley in January 2002. Maintaining the
operations of Checkley for the full year of 2003 and increased underwritings of
business insurance led to greater insurance revenues than the previous year.
Noninterest expenses increased 2% or $524,000, to $24.5 million in 2003
compared to $24.0 million in 2002 and $22.0 million in 2001. The primary factor
in the expense increase was operating the Company's latest de novo branches in
Maryville and Champaign for the full year of 2003. Both branches were opened in
November 2002. This led to increased salaries and benefits expense and occupancy
expense for the year. In addition, amortization expense was higher in 2003 than
2002 from the Checkley acquisition.
Following is a summary of the factors that contributed to the changes in
net income (in thousands):
2003 vs 2002 2002 vs 2001
-------------- --------------
Net interest income $316 $2,810
Provision for loan losses 75 (475)
Other income, including securities transactions 1,861 2,115
Goodwill amortization expense - (704)
Other expenses (524) (1,263)
Income taxes (669) (965)
-------------- --------------
Increase in net income $1,059 $1,518
============== ==============
Credit quality is an area of importance to the Company and 2003 reflected
favorable results. Net charge-offs were 0.06% of average loans compared to .22%
in 2002 and .10% in 2001. In 2003, the Company received a recovery of $382,000
from two loans that had been charged-off in 2002. Total nonperforming loans,
which did not change materially, were $3.3 million, $3.1 million, and $3.6
million at December 31, 2003, 2002, 2001, respectively. Although loans grew by
11% at December 31, 2003 compared to the same period last year, the composition
of the loan portfolio remained similar to previous years. Loans secured by both
commercial and residential real estate comprised 71% of the loan portfolio as of
December 31, 2003 compared to 68% as of December 31, 2002.
The Company's capital position remains strong and has consistently
maintained regulatory capital ratios above the "well-capitalized" standards. The
Company's Tier 1 capital ratio to risk weighted assets ratio at December 31,
2003, 2002, and 2001 was 9.83%, 9.64%, and 10.47%, respectively. The Company's
total capital to risk weighted assets ratio at December 31, 2003, 2002, and 2001
was 10.61%, 10.35%, and 11.23%, respectively. The increase in 2003 was primarily
the result of an increase in retained earnings due to First Mid Bank's increase
in net income while the decline in 2002 was primarily due to a decline in equity
as a result of the increase in the number of shares repurchased under the
Company's stock repurchase program. Also, see subsequent event of February 9,
2004 under the heading Stock Plans-Stock Repurchase Program.
The Company's liquidity position remains sufficient to fund operations and
meet the requirements of borrowers, depositors, and creditors. The Company
maintains various sources of liquidity to fund its cash needs. See heading
Liquidity for a full listing of its sources and anticipated significant
contractual obligations. Also, see subsequent event of February 27, 2004
regarding the issuance of trust preferred securities under the heading
Liquidity.
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,
2003, 2002 and 2001 were $87.8 million, $86.9 million and $88.7 million,
respectively. See Note 13 - Disclosure of Fair Values of Financial Instruments"
and Note 18 - Commitments and Contingent Liabilities for further information.
Critical Accounting Policies
The Company has established various accounting policies that govern the
application of accounting principles generally accepted in the United States in
the preparation of the Company's financial statements. The significant
accounting policies of the Company are described in the footnotes to the
consolidated financial statements. Certain accounting policies involve
significant judgments and assumptions by management that have a material impact
on the carrying value of certain assets and liabilities; management considers
such accounting policies to be critical accounting policies. The judgments and
assumptions used by management are based on historical experience and other
factors, which are believed to be reasonable under the circumstances. Because of
the nature of the judgments and assumptions made by management, actual results
could differ from these judgments and assumptions, which could have a material
impact on the carrying values of assets and liabilities and the results of
operations of the Company.
The Company believes the allowance for loan losses is the critical
accounting policy that requires the most significant judgments and assumptions
used in the preparation of its consolidated financial statements. In estimating
the allowance for loan losses, management utilizes historical experience, as
well as other factors, including the effect of changes in the local real estate
market on collateral values, the effect on the loan portfolio of current
economic indicators and their probable impact on borrowers, and increases or
decreases in nonperforming and impaired loans. Changes in these factors may
cause management's estimate of the allowance to increase or decrease and result
in adjustments to the Company's provision for loan losses. See "Loan Quality and
Allowance for Loan Losses" and "Note 1 Summary of Significant Accounting
Policies" for a detailed description of the Company's estimation process and
methodology related to the allowance for loan losses.
Mergers and Acquisitions
On April 20, 2001, First Mid Bank acquired all the outstanding stock of
American Bank of Illinois in Highland for $3.7 million in cash. This acquisition
added approximately $30.8 million to total deposits, $24.9 million to loans, $2
million to securities, $1.7 million to premises and equipment and $1.4 million
to intangible assets. The acquisition was accounted for using the purchase
method of accounting whereby the acquired assets and liabilities were recorded
at fair value as of the acquisition date and the excess cost over fair value of
net assets was recorded as goodwill. The consolidated financial statements
include the results of operations of American Bank of Illinois since the
acquisition date.
On January 29, 2002, the Company acquired all of the issued and outstanding
stock of Checkley, an insurance agency headquartered in Mattoon, Illinois.
Checkley was purchased for cash with a portion ($750,000) paid at closing and
the remainder ($1,000,000) to be paid pursuant to a promissory note over a
five-year period ending January 2007. Checkley operates as a separate subsidiary
of the Company and provides customers with commercial property, casualty, life,
auto and home insurance. In order to facilitate this acquisition, the Company
became a financial holding company under the GLB Act on December 14, 2001. The
results of Checkley's operations are included in the consolidated financial
statements since the acquisition date.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition (in thousands):
At January 29, 2002:
-----------------------------------------------------
Current assets $643
Property and equipment 76
Intangible assets 1,904
----------------
Total assets acquired 2,623
----------------
Current liabilities (771)
Debt (20)
----------------
Total liabilities (791)
----------------
Net assets acquired $1,832
================
The Company recorded $1,904,000 of acquired intangible assets. The
identified intangible assets were allocated to customer lists and are being
amortized over a period of ten 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, 2003 December 31, 2002 December 31, 2001
-----------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-----------------------------------------------------------------------------------
ASSETS
Interest-bearing deposits $ 10,715 $ 112 1.05% $9,933 $ 137 1.38% $3,621 $ 81 2.23%
Federal funds sold 16,285 164 1.01% 13,164 199 1.51% 10,410 335 3.22%
Investment securities
Taxable 141,120 4,961 3.52% 134,118 6,014 4.48% 119,245 6,820 5.72%
Tax-exempt 28,467 1,266 4.45% 28,894 1,311 4.54% 30,643 1,393 4.55%
Loans (1)(2) 525,095 32,435 6.18% 483,764 33,726 6.97% 454,108 36,877 8.12%
-----------------------------------------------------------------------------------
Total earning assets 721,682 38,938 5.40% 669,873 41,387 6.18% 618,027 45,506 7.36%
-----------------------------------------------------------------------------------
Cash and due from banks 18,464 18,450 17,125
Premises and equipment 16,578 16,498 16,385
Other assets 23,481 26,972 22,995
Allowance for loan losses (4,133) (3,807) (3,642)
---------- ---------- ----------
Total assets $776,072 $727,986 $670,890
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
Demand deposits $219,809 1,778 0.81% $200,653 2,667 1.33% $182,404 4,374 2.40%
Savings deposits 56,402 302 0.54% 51,634 799 1.55% 41,437 923 2.23%
Time deposits 250,403 7,671 3.06% 242,301 8,787 3.63% 247,348 13,476 5.40%
Securities sold under
agreements to repurchase 47,795 272 0.57% 34,389 345 1.00% 29,547 915 3.10%
FLB advances 31,094 1,632 5.25% 36,974 1,863 5.04% 28,866 1,664 5.76%
Federal funds purchased 14 - 0.00% 299 6 2.01% 236 12 5.09%
Other debt 9,411 241 2.56% 6,088 194 3.19% 4,325 226 5.23%
------------------------------------------------------------------------------------
Total interest-bearing
liabilities 614,928 11,896 1.93% 572,338 14,661 2.56% 534,163 21,590 4.04%
------------------------------------------------------------------------------------
Demand deposits 85,368 79,082 69,020
Other liabilities 6,427 8,577 5,993
Stockholders' equity 69,349 67,989 61,714
---------- ---------- ----------
Total liabilities & equity $776,072 $727,986 $670,890
========== ========== ==========
Net interest income $27,042 $26,726 $23,916
========== =========== =========
Net interest spread 3.47% 3.62% 3.32%
Impact of non-interest bearing
funds .28% .37% .55%
---------- ---------- ---------
Net yield on interest-earning
assets 3.75% 3.99% 3.87%
========== ========== =========
(1) Loan fees are included in interest income and are not material.
(2) Nonaccrual loans have been included in the average balances.
Changes in net interest income may also be analyzed by segregating the
volume and rate components of interest income and interest expense. The
following table summarizes the approximate relative contribution of changes in
average volume and interest rates to changes in net interest income for the past
two years (in thousands):
2003 Compared to 2002 2002 Compared to 2001
Increase - (Decrease) Increase - (Decrease)
---------------------------------------------------------------------------------
Total Rate/ Total Rate/
Change Volume Rate Volume(3) Change Volume Rate Volume(3)
---------------------------------------------------------------------------------
Earning Assets:
Interest-bearing deposits $ (25) $ 11 $ (33) $ (3) $ 56 $ 141 $ (31) $ (54)
Federal funds sold (35) 47 (66) (16) (136) 89 (178) (47)
Investment securities:
Taxable (1,053) 314 (1,288) (79) (806) 851 (1,479) (178)
Tax-exempt (45) (19) (26) - (82) (80) (3) 1
Loans (1)(2) (1,291) 2,881 (3,822) (350) (3,151) 2,408 (5,222) (337)
---------------------------------------------------------------------------------
Total interest income (2,449) 3,234 (5,235) (448) (4,119) 3,409 (6,913) (615)
---------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Interest-bearing deposits
Demand deposits (889) 255 (1,043) (101) (1,707) 438 (1,952) (193)
Savings deposits (497) 74 (522) (49) (124) 227 (282) (69)
Time deposits (1,116) 294 (1,381) (29) (4,689) (275) (4,502) 88
Securities sold under
agreements to repurchase (73) 134 (148) (59) (570) 150 (620) (100)
FHLB advances (231) (296) 78 (13) 199 467 (208) (60)
Federal funds purchased (6) (6) (6) 6 (6) 3 (7) (2)
Other debt 47 106 (38) (21) (32) 92 (88) (36)
---------------------------------------------------------------------------------
Total interest expense (2,765) 561 (3,060) (266) (6,929) 1,102 (7,659) (372)
---------------------------------------------------------------------------------
Net interest income $ 316 $2,673 $(2,175) $ (182) $2,810 $2,307 $ 746 $ (243)
=================================================================================
(1) Loan fees are included in interest income and are not material.
(2) Nonaccrual loans are not material and have been included in the average
balances.
(3) The changes in rate/volume are computed on a consistent basis by multiplying
the change in rates with the change in volume.
Net interest income increased $316,000, or 1.2% in 2003, compared to an
increase of $2,810,000, or 11.7% in 2002. The increase in net interest income in
2003 was primarily due to growth in interest-earning assets and the lower rates
paid on interest-bearing liabilities. The asset growth was primarily in
commercial real estate loan balances. In 2002, the increase in net interest
income was due primarily to growth in net interest-earning assets and an
increase in net interest spread.
In 2003, average earning assets increased by $51,809,000, or 7.7%, and
average interest-bearing liabilities increased $42,590,000 or 7.4% compared with
2002. In 2002, average earning assets increased by $51,846,000, or 8.4%, and
average interest-bearing liabilities increased $38,175,000 or 7.1% compared with
2001. Changes in average balances are shown below:
* Average loans increased by $41.3 million or 8.5% in 2003 as compared
to 2002. In 2002, average loans increased by $29.5 million or 6.5% as
compared to 2001.
* Average securities increased by $6.6 million or 4.1% in 2003 as
compared to 2002. In 2002, average securities decreased by $13.1
million or 8.7% as compared to 2001.
* Average interest-bearing deposits increased by $32.0 million or 6.5%
in 2003 as compared to 2002. In 2002, average interest-bearing
deposits increased by $23.4 million or 5.0% as compared to 2001.
* Average securities sold under agreements to repurchase increased by
$13.4 million or 39.0% in 2003 as compared to 2002. In 2002, average
securities sold under agreements to repurchase increased by $4.8
million or 16.3% as compared to 2001.
* Average borrowings and other debt decreased by $2.8 million or 6.5% in
2003 as compared to 2002. In 2002, average borrowings and other debt
increased by $9.9 million or 30.0% as compared to 2001.
* Federal funds rate declined to 1.00% at December 31, 2003 from 1.25%
at December 31, 2002 and from 1.75% at December 31, 2001.
* Net interest margin decreased to 3.75% in 2003 from 3.99% in 2002 and
from 3.87% in 2001. This period of historically low interest rates has
had the impact of compressing the net interest margin as asset yields
decreased by 78 basis points in 2003, while interest-bearing
liabilities only decreased by 63 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 2003, 2002 and 2001
were $652,000, $675,000 and $717,000, respectively. The net yield on
interest-earning assets (TE) was 3.84% in 2003, 4.09% in 2002 and 3.99% in 2001.
Provision for Loan Losses
The provision for loan losses in 2003 was $1,000,000 compared to $1,075,000
in 2002 and $600,000 in 2001. The decrease in the provision was due to a
decrease in net charge-offs, partially offset by an increase in non-performing
loans. Net charge-offs were $297,000 during 2003, $1,054,000 during 2002, and
$435,000 during 2001. For information on loan loss experience and nonperforming
loans, see the "Nonperforming Loans" and "Loan Quality and Allowance for Loan
Losses" sections below.
Other Income
An important source of the Company's revenue is derived from other income.
The following table sets forth the major components of other income for the last
three years (in thousands):
$ Change
From Prior Year
--------------------
2003 2002 2001 2003 2002
--------- --------- --------- --------- ----------
Trust $1,992 $1,855 $1,924 $ 137 $ (69)
Brokerage 283 265 234 18 31
Insurance commissions 1,476 1,257 256 219 1,001
Service charges 4,484 3,799 3,122 685 677
Securities gains 370 223 208 147 15
Mortgage banking 1,673 1,272 910 401 362
Other 1,977 1,723 1,625 254 98
--------- --------- --------- --------- ----------
Total other income $12,255 $10,394 $8,279 $1,861 $2,115
========= ========= ========= ========= ==========
Total non-interest income increased to $12,255,000 in 2003 as compared to
$10,394,000 in 2002 and $8,279,000 in 2001. The primary reasons for the more
significant year-to-year changes in other income components are as follows:
* Trust revenues increased $137,000 or 7.4% to $1,992,000 in 2003 from
$1,855,000 in 2002 and $1,924,000 in 2001. Approximately 50 percent of
trust revenue is market value dependent. The increase in trust
revenues was the result of new business and an increase in equity
prices.
* Revenues from brokerage and annuity sales increased $18,000 or 6.8% to
$283,000 in 2003 from $265,000 in 2002 and $234,000 in 2001 as a
result of an increase in the number of stock transactions.
* Insurance commissions increased $219,000 or 17.4% to $1,476,000 in
2003 from $1,257,000 in 2002 and $256,000 in 2001. Increased sales of
business property and casualty insurance has increased revenues.
* Fees from service charges increased $685,000 or 18.0% to $4,484,000 in
2003 from $3,799,000 in 2002 and $3,122,000 in 2001. This increase was
primarily the result of increased overdraft fees after implementation
of a new program called Payment Privilege in July 2002. Under Payment
Privilege, overdrafts up to a limit of $500 are generally paid for
qualifying customers in exchange for a fee. A greater number of
overdrafts paid has resulted in an increase in fee income.
* Net securities gains in 2003 were $370,000 compared to net securities
gains of $223,000 in 2002, and $208,000 in 2001. Several securities in
the available-for-sale portfolio were sold to improve the overall
portfolio mix and the margin in 2003, 2002 and 2001.
* Mortgage banking income increased $401,000 or 31.5% to $1,673,000 in
2003 from $1,272,000 in 2002 and $910,000 in 2001. This increase was
due to the volume of fixed rate loans originated and sold by First Mid
Bank. The increase in volume is largely attributed to the historically
low level of mortgage lending rates. Loans sold balances are as
follows:
* $135 million (representing 1,451 loans) in 2003
* $105 million (representing 1,116 loans) in 2002
* $71 million (representing 801 loans) in 2001
* Other income increased $254,000 or 14.7% to $1,977,000 in 2003 from
$1,723,000 in 2002 and $1,625,000 in 2001. In 2002, the increase was
primarily due to fees from ATM usage and placement of additional ATMs
late in 2002.
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
--------- ---------
2003 2002 2001 2003 2002
--------- --------- --------- --------- ---------
Salaries and benefits $13,232 $12,505 $10,942 $ 727 $ 1,563
Occupancy and equipment 4,290 4,055 3,909 235 146
Amortization of goodwill - - 704 - (704)
Amortization of other
intangibles 774 742 610 32 132
Stationery and supplies 566 679 671 (113) 8
Legal and professional fees 991 1,027 1,033 (36) (6)
Marketing and promotion 662 738 789 (76) (51)
Other 4,015 4,260 3,381 (245) 879
--------- --------- --------- --------- ---------
Total other expense $24,530 $24,006 $22,039 $ 524 $ 1,967
========= ========= ========= ========= =========
Total non-interest expense increased to $24,530,000 in 2003 from
$24,006,000 in 2002 and $22,039,000 in 2001. 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, increased $727,000 or 5.8% to $13,232,000 in 2003 from
$12,505,000 in 2002 and $10,942,000 in 2001. This increase can be
explained by merit and incentive increases for continuing employees
and salary expense for the full year 2003 for de novo branches in
Champaign and Maryville opened in November 2002. There were 314
full-time equivalent employees at December 31, 2003 compared to 319 at
December 31, 2002 and 295 at December 31, 2001.
* Occupancy and equipment expense increased $235,000 or 5.8% to
$4,290,000 in 2003 from $4,055,000 in 2002 and $3,909,000 in 2001.
This increase is due to the opening of new branches in Champaign and
Maryville, Illinois in November 2002, as well as building maintenance,
utilities and depreciation expense for all buildings.
* Amortization of goodwill expense remained $0 under SFAS 142 and SFAS
147. However, the Company continues to amortize goodwill for
acquisition of branches whereby the fair value of liabilities assumed
were greater than the assets obtained, which totaled $2.1 million at
January 1, 2002. Amortization of other intangibles expense increased
$32,000. This was a result of operation of Checkley for the full year
2003 of $17,000, and an increase in mortgage servicing rights
amortization expense of $34,000, partially offset by a reduction of
core deposit intangible expense of $19,000.
* Other operating expenses decreased $245,000 or 5.8% to 4,015,000 in
2003 from $4,260,000 in 2002 and $3,381,000 in 2001. The decrease was
primarily the result of professional fees for implementing the Payment
Privilege program that were paid in 2002.
* All other categories of operating expenses decreased a net of $225,000
or 9.2% to $2,219,000 from $2,444,000 in 2002 and $2,493,000 in 2001.
This decrease is due to expenses in 2002 resulting from the
acquisition of Checkley in January 2002 and opening of two de novo
branches in Champaign and Maryville in November 2002.
Income Taxes
Income tax expense amounted to $4,674,000 in 2003 as compared to $4,005,000
in 2002 and $3,040,000 in 2001. Effective tax rates were 33.9%, 33.3% and 31.8%,
respectively, for 2003, 2002 and 2001. The increase in the effective tax rate in
2003 compared to 2002 is due to an increase in non-deductible loan interest
income and a decrease in deductible interest income from U.S. Treasury
securities, resulting in a larger amount of non-deductible interest income and
greater state income tax expense. State income tax expense was $677,000,
$609,000 and $308,000 for 2003, 2002 and 2001, respectively. The increase in the
effective tax rate in 2002 compared to 2001 is due to increased loan interest
income, a decrease in deductible goodwill expense as a result of adoption of
SFAS 142 and SFAS 147, and an increase in state income tax expense to $609,000
in 2002 versus $308,000 in 2001. The increase in state tax is primarily due to a
decrease in interest income from U.S. Treasury securities.
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):
2003 2002 2001 2000 1999
------------------------------------------------------------------------
Real estate - mortgage $390,841 $340,033 $331,873 $299,252 $273,293
Commercial & agricultural 131,609 127,065 107,620 100,201 89,176
Installment 28,932 31,119 32,522 28,674 24,501
Other 1,442 1,647 1,228 1,161 1,349
------------------------------------------------------------------------
Total loans $552,824 $499,864 $473,243 $429,288 $388,319
========================================================================
Loan balances have increased over the past few years primarily as a result
of increased commercial real estate loans and commercial operating loans. The
increase in commercial real estate loans outstanding has been the result of
demand for credit for commercial real estate projects in central Illinois and
business development efforts. Also, corporate borrowers have required additional
capital for inventory and company expansion. The growth has been primarily in
the communities of Champaign, Decatur, Effingham, Highland, and Maryville.
Loan balances increased by $53 million or 10.60% from December 31, 2002 to
December 31, 2003, primarily as a result of an increase in commercial real
estate loan balances of $48 million. Loans secured by apartment buildings and
hotels comprised the largest percentage of the growth in commercial real estate
loans. During the 2003, the increase in commercial real estate loans offset a
decline of $7.7 million in residential real estate loans. The historically low
level of mortgage loan rates led many customers to refinance their loans.
Balances of loans sold into the secondary market were $135 million in 2003,
compared to $105 million in 2002. The balance of real estate loans held for sale
amounted to $751,000 and $7,070,000 as of December 31, 2003 and 2002,
respectively.
At December 31, 2003, the Company had loan concentrations in agricultural
industries of $93.3 million, or 18.1%, of outstanding loans and $90.7 million,
or 18.1%, at December 31, 2002. In addition, the Company had loan concentrations
in "motels, hotels and tourist courts" of $26.9 million or 4.9% of outstanding
loans at December 31, 2003 and $16.3 million or 3.26% of outstanding loans at
December 31, 2002, and concentrations in "apartment building operators" of $21.2
million or 3.8% of outstanding loans at December 31, 2003 and $7.4 million or
1.5% of outstanding loans at December 31, 2002. The Company had no further
industry loan concentrations in excess of 25% of Tier 1 risk-based capital.
The following table presents the balance of loans outstanding as of
December 31, 2003, by maturities (in thousands):
Maturity (1)
------------------------------------------------------
Over 1
One year through Over
or less(2) 5 years 5 years Total
------------------------------------------------------
Real estate - mortgage $123,061 $231,691 $ 36,089 $390,841
Commercial & agricultural 95,083 35,246 1,280 131,609
Installment 15,460 13,428 44 28,932
Other 670 618 154 1,442
------------------------------------------------------
Total loans $234,274 $280,983 $37,567 $552,824
======================================================
(1) Based upon remaining maturity.
(2) Includes demand loans, past due loans and overdrafts.
As of December 31, 2003, loans with maturities over one year consisted of
$229,378,000 in fixed rate loans and $89,172,000 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 rollovers and
borrower requests, which are handled on a case-by-case basis.
Nonperforming Loans
Nonperforming loans include: (a) loans accounted for on a nonaccrual basis;
(b) accruing loans contractually past due ninety days or more as to interest or
principal payments; and (c) loans not included in (a) and (b) above which are
defined as "renegotiated loans".
The following table presents information concerning the aggregate amount of
nonperforming loans (in thousands):
December 31,
-----------------------------------------------
2003 2002 2001 2000 1999
-----------------------------------------------
Nonaccrual loans $3,296 $2,961 $3,419 $2,982 $1,430
Loans past due ninety days
or more and still accruing -- -- -- 245 366
Renegotiated loans which are
performing in accordance
with revised terms 35 188 188 232 81
-----------------------------------------------
Total nonperforming loans $3,331 $3,149 $3,607 $3,459 $1,877
===============================================
At December 31, 2003, $1,907,000 of the nonperforming loans resulted from a
collateral-dependent loans to two borrowers. The $338,000 increase in nonaccrual
loans during the year resulted from the net of $2,524,000 of loans put on
nonaccrual status, offset by $291,000 loans transferred to other real estate
owned and $1,895,000 of loans becoming current or paid-off.
Interest income that would have been reported if nonaccrual and
renegotiated loans had been performing totaled $211,000, $158,000 and $247,000
for the years ended December 31, 2003, 2002 and 2001, respectively.
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 or when, in the
opinion of management, there is reasonable doubt as to the timely collection of
interest or principal. 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.
Loan Quality and Allowance for Loan Losses
The allowance for loan losses represents management's estimate of the
reserve necessary to adequately cover probable losses that could ultimately be
realized from current loan exposures. 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 and the current economic
conditions in the region where the Company operates. Management considers the
allowance for loan losses a critical accounting policy.
Management recognizes 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, 2003, the Company's loan
portfolio included $93.3 million of loans to borrowers whose businesses are
directly related to agriculture. The balance increased $2.6 million from $90.7
million at December 31, 2002. While the Company adheres to sound underwriting
practices, including collateralization of loans, any extended period of low
commodity prices, significantly reduced yields on crops and/or reduced levels of
government assistance to the agricultural industry could result in an increase
in the level of problem agriculture loans and potentially result in loan losses
within the agricultural portfolio.
The Company also has $26.9 million of loans to motels, hotels and tourist
courts. The performance of these loans is dependent on borrower specific issues
as well as the general level of business and personal travel within the region.
While the Company adheres to sound underwriting standards, a prolonged period of
reduced business or personal travel could result in an increase in
non-performing loans to this business segment and potentially in loan losses.
Loan loss experience for the years ending December 31, are summarized as
follows (dollars in thousands):
2003 2002 2001 2000 1999
--------------------------------------------------------------
Average loans outstanding,
net of unearned income $525,095 $483,764 $454,108 $409,648 $358,948
Allowance-beginning of year $3,723 $3,702 $3,262 $2,939 $2,715
Balance added through acquisitions - - 275 - 150
Charge-offs:
Commercial, financial and agricultural 589 673 244 57 511
Real estate-mortgage 50 200 86 47 17
Installment 139 255 171 183 98
--------------------------------------------------------------
Total charge-offs 778 1,128 501 287 626
Recoveries:
Commercial, financial and agricultural 427 12 22 26 69
Real estate-mortgage 15 17 - 1 3
Installment 39 45 44 33 28
--------------------------------------------------------------
Total recoveries 481 74 66 60 100
--------------------------------------------------------------
Net charge-offs 297 1,054 435 227 526
--------------------------------------------------------------
Provision for loan losses 1,000 1,075 600 550 600
--------------------------------------------------------------
Allowance-end of year $ 4,426 $ 3,723 $ 3,702 $ 3,262 $2,939
==============================================================
Ratio of net charge-offs to
average loans .06% .22% .10% .06% .15%
==============================================================
Ratio of allowance for loan losses to
loans outstanding (at end of year) .80% .74% .79% .76% .76%
==============================================================
Ratio of allowance for loan
losses to nonperforming loans 132.9% 118.2% 102.6% 94.3% 156.6%
==============================================================
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. On a monthly basis, 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 2003, the Company had net charge-offs of $297,000, compared to
$1,054,000 in 2002 and $435,000 in 2001. During 2003, the Company received a
recovery of $382,000 on two commercial loans of a single borrower that were
charged-off in 2002. This was the primary factor in the $757,000 decline in net
charge-offs from 2002 to 2003. The Company's significant charge-offs during 2003
included $170,000 on a commercial loan and $80,000 on an agricultural loan
secured by crops. During 2002, the company had two agricultural loan charge-offs
totaling $306,000 and one commercial borrower with a loss of $169,000. There
were no significant recoveries in 2002.
At December 31, 2003, the allowance for loan losses amounted to $4,426,000,
or .80% of total loans, and 132.9% of nonperforming loans. At December 31, 2002,
the allowance was $3,723,000, or .74% of total loans, and 118.2% of
nonperforming loans.
The allowance for loan losses, in management's judgment, is allocated as
follows to cover probable loan losses (dollars in thousands):
December 31, 2003 December 31, 2002 December 31, 2001
----------------------- ----------------------- -----------------------
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
----------------------- ----------------------- -----------------------
Real estate-mortgage $ 179 70.7% $ 241 68.1% $ 282 70.1%
Commercial, financial
and agricultural 2,952 23.8% 2,856 25.4% 2,524 22.7%
Installment 154 5.2% 190 6.2% 207 6.9%
Other - .3% - .3% - .3%
----------------------- ----------------------- -----------------------
Total allocated 3,285 3,287 3,013
Unallocated 1,141 N/A 436 N/A 689 N/A
----------------------- ----------------------- -----------------------
Allowance at end of
year $4,426 100.0% $3,723 100.0% $3,702 100.0%
======================= ======================= =======================
December 31, 2000 December 31, 1999
----------------------- -------------------------
Allowance % of Allowance % of
for loans for loans
loan to total loan to total
losses loans losses loans
----------------------- -------------------------
Real estate-mortgage $ 257 69.7% $227 70.4%
Commercial, financial
and agricultural 2,107 23.3% 1,685 23.0%
Installment 182 6.7% 181 6.3%
Other - .3% - .3%
----------------------- -------------------------
Total allocated 2,546 2,093
Unallocated 716 N/A 846 N/A
----------------------- -------------------------
Allowance at end of
year $3,262 100.0% $2,939 100.0%
======================= =========================
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 unallocated allowance
represents an estimate of the probable, inherent, but yet undetected, losses in
the loan portfolio. The increase in the unallocated allowance in 2003 compared
to 2002 reflects continued uncertainty surrounding near-term economic conditions
as well as the sustained effects of a weak economy over the past several years.
Securities
The Company's overall investment goal is to maximize earnings while
maintaining liquidity in securities having minimal credit risk. The types and
maturities of securities purchased are primarily based on the Company's current
and projected liquidity and interest rate sensitivity positions.
The following table sets forth the year-end amortized cost of the Company's
securities for the last three years (dollars in thousands):
December 31,
----------------------------------------------------------------------------------
2003 2002 2001
--------------------------- -------------------------- ---------------------------
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 $ 109,544 3.25% $ 76,342 3.80% $ 60,852 4.75%
Obligations of states and
political subdivisions 26,895 4.86% 27,597 4.63% 29,211 4.61%
Mortgage-backed securities 21,607 3.64% 44,697 3.72% 54,306 5.06%
Other securities 17,521 5.87% 15,807 5.86% 16,591 6.45%
------------- ------------- ------------- ------------ ------------- -------------
Total securities $175,567 3.81% $164,443 4.12% $160,960 5.01%
============= ============= ============= ============ ============= =============
At December 31, 2003, the investment portfolio showed a decrease in
mortgage-backed securities and an increase in obligations of U.S. government
corporations and agencies. This change in the portfolio mix improved the
characteristics of the portfolio relating to interest rate risk exposure and
portfolio yield.
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, 2003 (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 $ 22,086 $71,547 $10,938 $4,973 $109,544
Obligations of state and
political subdivisions 288 10,844 7,980 6,106 25,218
Mortgage-backed securities 1,687 19,920 - - 21,607
Other securities - - - 17,521 17,521
------------------------------------------------------------------------
Total investments $24,061 $102,311 $18,918 $28,600 $173,890
========================================================================
Weighted average yield 4.07% 3.20% 4.20% 5.40% 3.79%
Full tax-equivalent yield 4.09% 3.40% 5.05% 5.88% 4.08%
========================================================================
Held-to-maturity:
Obligations of state and
political subdivisions $125 $ 615 $ 410 $ 527 $ 1,677
========================================================================
Weighted average yield 5.05% 5.35% 5.61% 5.37% 5.40%
Full tax-equivalent yield 7.29% 7.74% 8.14% 7.77% 7.81%
========================================================================
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, 2003.
Investment securities carried at approximately $147,603,000 and
$141,462,000 at December 31, 2003 and 2002, respectively, were pledged to secure
public deposits and repurchase agreements and for other purposes as permitted or
required by law.
Deposits
Funding of the Company's earning assets is substantially provided by a
combination of consumer, commercial and public fund deposits. The Company
continues to focus its strategies and emphasis on retail core deposits, the
major component of funding sources. The following table sets forth the average
deposits and weighted average rates at December 31, 2003, 2002 and 2001 (dollars
in thousands):
2003 2002 2001
--------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
--------------------------------------------------------------------------
Demand deposits:
Non-interest bearing $ 85,368 - $ 79,082 - $ 69,020 -
Interest bearing 219,809 .81% 200,653 1.33% 182,404 2.40%
Savings 56,402 .54% 51,634 1.55% 41,437 2.23%
Time deposits 250,403 3.06% 242,301 3.63% 247,348 5.45%
--------------------------------------------------------------------------
Total average deposits $611,982 1.59% $573,670 2.14% $540,209 3.48%
==========================================================================
In 2003, the average balance of deposits increased by $38.3 million from
2002. The increase was attributable to growth in interest-bearing deposits
including money market accounts and Club 50 accounts. Average money market
account balances increased by $11 million as the Company began offering a new
market-indexed account in 2003. In addition, average balances in the Club 50
accounts increased by $6 million due to increased promotion of this product in
2003.
In 2002, the average balance of deposits increased by $33.5 million from
2001. The increase was attributable to having the Highland banking center for
the full year of 2002 and growth in money market accounts. American Bank of
Illinois in Highland was acquired on April 20, 2001. Average money market
account balances increased by $6 million as the Company increased promotion of
their money market products in 2002.
In 2003, the Company's significant deposits included brokered CDs, time
deposits with the State of Illinois, and a deposit relationship with a public
fund entity. The Company had six brokered CDs at various maturities with a total
balance of $22.9 million as of December 31, 2003. State of Illinois time
deposits maintained with the Company totaled $6.3 million as of December 31,
2003. These balances are subject to bid annually. In addition, the Company
maintains account relationships with various public fund entities throughout its
market areas. One public fund entity had total balances of $29.3 million in
various checking accounts and time deposits as of December 31, 2003. These
balances are subject to change depending upon the cash flow needs of the public
fund entity.
The following table sets forth the maturity of time deposits of $100,000 or
more (in thousands):
December 31,
-------------------------------------------
2003 2002 2001
--------------------------------------------
3 months or less $ 20,510 $ 29,085 $ 25,503
Over 3 through 6 months 10,906 18,926 20,228
Over 6 through 12 months 24,654 13,715 10,913
Over 12 months 28,446 32,225 4,794
-------------------------------------------
Total $ 84,516 $ 93,951 $ 61,438
===========================================
The balance of time deposits of $100,000 or more declined by $9.4 million
from December 31, 2002 to December 31, 2003. The decrease in balances was
primarily attributable to the movement of deposit balances from certificates of
deposit ("CDs") to money market and checking accounts due to the reduced
attractiveness of CDs in the low-rate environment. The balance of time deposits
of $100,000 or more increased by $32.5 million from December 31, 2001 to
December 31, 2002. The increase in balances was primarily attributable to an
increase in brokered CDs of $16 million.
Balances of time deposits of $100,000 or more includes brokered CDs, time
deposits maintained for public fund entities, and consumer time deposits. The
balance of brokered CDs was $22.9 million, $16.2 million and $0 as of December
31, 2003, 2002 and 2001, respectively. The Company also maintains time deposits
for the State of Illinois with balances of $6.3 million, $6.8 million and $6.8
million as of December 31, 2003, 2002 and 2001, respectively. The State of
Illinois deposits are subject to bid annually and could increase or decrease in
any given year.
Repurchase Agreements and Other Borrowings
Securities sold under agreements to repurchase are short-term obligations
of First Mid Bank. First Mid Bank collateralizes these obligations with certain
government securities that are direct obligations of the United States or one of
its agencies. First Mid Bank offers these retail repurchase agreements as a cash
management service to its corporate customers. Other borrowings consist of
Federal Home Loan Bank ("FHLB") advances, federal funds purchased, and loans
(short-term or long-term debt) that the Company has outstanding.
Information relating to securities sold under agreements to repurchase and
other borrowings for the last three years is presented below (dollars in
thousands):
2003 2002 2001
---------- ---------- ---------
At December 31:
Securities sold under agreements to repurchase $59,875 $44,184 $38,879
Federal Home Loan Bank advances:
Fixed term - due in one year or less 5,000 5,000 5,000
Fixed term - due after one year 25,300 30,300 28,300
Debt:
Loans due in one year or less 9,025 8,525 4,325
Loans due after one year 600 800 -
---------- ---------- ---------
Total $99,800 $88,809 $76,504
========== ========== =========
Average interest rate at year end 2.13% 2.53% 3.15%
Maximum Outstanding at Any Month-end
Securities sold under agreements to repurchase $59,875 $44,588 $40,646
Federal Home Loan Bank advances:
Overnight - 400 12,800
Fixed term - due in one year or less 5,000 8,000 5,000
Fixed term - due after one year 30,300 30,300 28,300
Federal funds purchased - 3,250 2,850
Debt:
Loans due in one year or less 9,025 9,525 4,325
Loans due after one year 600 800 -
---------- ---------- ---------
Total $104,800 $96,863 $93,921
========== ========== =========
Averages for the Year
Securities sold under agreements to repurchase $47,795 $34,389 $29,547
Federal Home Loan Bank advances:
Overnight - 521 2,161
Fixed term - due in one year or less 5,000 6,153 3,356
Fixed term - due after one year 26,094 30,300 23,349
Federal funds purchased 14 299 236
Debt:
Loans due in one year or less 8,796 5,350 4,325
Loans due after one year 615 738 -
---------- ---------- ---------
Total $88,314 $77,750 $62,974
========== ========== =========
Average interest rate during the year 2.41% 3.10% 4.47%
FHLB advances represent borrowings by First Mid Bank to economically fund
loan demand. The fixed term advances consist of $30.3 million as follows:
* $5 million advance at 3.45% with a 2-year maturity, due February 28, 2004
* $5 million advance at 6.16% with a 5-year maturity, due March 20, 2005
* $2.3 million advance at 6.10% with a 5-year maturity, due April 7, 2005
* $5 million advance at 6.12% with a 5-year maturity, due September 6, 2005
* $5 million advance at 5.34% with a 5-year maturity, due December 14, 2005
* $3 million advance at 5.98% with a 10-year maturity, due March 1, 2011
* $5 million advance at 4.33% with a 10-year maturity, due November 23, 2011
Other debt, both short-term and long-term, represents the outstanding loan
balances for the Company. At December 31, 2003, outstanding loan balances
include $8,825,000 on a revolving credit agreement with The Northern Trust
Company with a floating interest rate of 1.25% over the Federal funds rate
(2.22% as of December 31, 2003) and set to mature October 23, 2004. This loan
was renegotiated on October 24, 2003 and has a maximum available balance of $15
million. The loan is secured by all of the common stock of First Mid Bank. The
borrowing agreement contains requirements for the Company and First Mid Bank to
maintain various operating and capital ratios and also contains requirements for
prior lender approval for certain sales of assets, merger activity, the
acquisition or issuance of debt and the acquisition of treasury stock. The
Company and First Mid Bank were in compliance with the existing covenants at
December 31, 2003 and 2002.
The balance also includes a promissory note, of which $800,000 is
outstanding as of December 31, 2003, resulting from the acquisition of Checkley
with an annual interest rate equal to the prime rate listed in the money rate
section of the Wall Street Journal (4.00% as of December 31, 2003) and principal
payable in the amount of $200,000 annually over five years, with a final
maturity of January 2007.
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, 2003 (dollars in thousands):
Number of Months Until Next Repricing Opportunity
0-1 1-3 3-6 6-12 12+
------------- --------------- -------------- --------------- -------------
Interest-earning assets:
Federal funds sold $ 4,290 $ - $ - $ - $ -
Taxable investment securities 12,113 9,326 17,064 18,851 92,679
Nontaxable investment securities 153 532 - 1,278 26,161
Loans 174,500 39,791 39,831 51,620 247,082
------------- --------------- -------------- --------------- -------------
Total $191,056 $ 49,649 $56,895 $71,749 $365,922
------------- --------------- -------------- --------------- -------------
Interest-bearing liabilities:
Savings and N.O.W. accounts 48,029 1,955 1,599 3,519 149,513
Money market accounts 43,478 504 756 1,433 24,764
Other time deposits 22,635 31,235 30,212 71,589 89,183
Short-term borrowings/debt 59,875 5,000 - - -
Long-term borrowings/debt - - - - 25,300
------------- --------------- -------------- --------------- -------------
Total $174,017 $ 38,694 $32,567 $76,541 $ 288,760
------------- --------------- -------------- --------------- -------------
Periodic GAP $ 17,039 $ 10,955 $24,328 $(4,792) $ 77,162
------------- --------------- -------------- --------------- -------------
Cumulative GAP $ 17,039 $ 27,994 $52,322 $47,530 $ 124,692
============= =============== ============== =============== =============
GAP as a % of interest-earning assets:
Periodic 2.3% 1.5% 3.3% (0.7%) 10.5%
Cumulative 2.3% 3.8% 7.1% 6.5% 17.0%
============= =============== ============== =============== =============
The static GAP analysis shows that at December 31, 2003, the Company was
asset sensitive, on a cumulative basis, through the twelve-month time horizon.
This indicates that future increases in interest rates, if any, could have a
positive effect on net interest income. Conversely, future decreases in interest
rates could have an adverse effect on net interest income.
There are several ways the Company measures and manages the exposure to
interest rate sensitivity, 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, 2003, stockholders' equity increased $3,788,000 or 5.7% to
$70,595,000 from $66,807,000 as of December 31, 2002. During 2003, net income
contributed $9,093,000 to equity before the payment of dividends to common
stockholders of $2,047,000. The change in the market value of available-for-sale
investment securities decreased stockholders' equity by $792,000, net of tax.
Additional purchases of treasury stock (120,057 shares at an average cost of
$35.26 per share) decreased stockholders' equity by $4,233,000.
Stock Plans
On November 16, 2001, 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") for purposes of
the First Mid-Illinois Bancshares, Inc. Deferred Compensation Plan ("DCP"). At
December 31, 2003, the Company classified the cost basis of its common stock
issued and held in trust in connection with the DCP of approximately $1,881,000
as treasury stock. The Company also classified the cost basis of its related
deferred compensation obligation of approximately $1,881,000 as an equity
instrument (deferred compensation).
The DCP was effective as of June 1984, the purpose of which is to enable
directors, advisory directors, and key officers 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.
During 1996, the Company began issuing common stock for participants of the DCP.
The Company issued, pursuant to DCP:
* 7,244 common shares during 2003
* 5,785 common shares during 2002
* 8,108 common shares during 2001.
First Retirement and Savings Plan
The First Retirement and Savings Plan ("401k plan") was effective beginning
in 1985. Employees are eligible to participate in the 401k plan after six months
of service to the Company. During 1996, the Company began issuing common stock
as an investment option for participants of the 401k plan. The Company issued,
pursuant to the 401k plan:
* 13,860 common shares during 2003
* 6,770 common shares during 2002
* 9,983 common shares during 2001.
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 $2,047,000 in common stock dividends paid during 2003, $873,000
or 42.7%, was reinvested into shares of common stock of the Company through the
DRIP. Events that resulted in common shares being reinvested in the DRIP:
* During 2003, 31,172 common shares were issued from common stock
dividends
* During 2002, 37,309 common shares were issued from common stock
dividends
* During 2001, 39,766 common shares were issued from common stock
dividends.
Stock Incentive Plan
In December 1997, the Company established a Stock Incentive Plan ("SI
Plan") intended to provide a means whereby directors and certain officers can
acquire shares of the Company's common stock, and a maximum of 150,000 shares
were originally authorized under the SI Plan. In September 2001, the Board of
Directors authorized an additional 150,000 shares to be issued and sold under
the SI Plan. Options to acquire shares will be awarded at an exercise price
equal to the fair market value of the shares on the date of grant. Options to
acquire shares have a 10-year term. Options granted to employees vest over a
four-year period and those options granted to directors vest at the time they
are issued. The Company has awarded the following stock options:
* In December 2003, the Company granted 48,000 options at an option
price of $46.50
* In December 2002, the Company granted 43,500 options at an option
price of $27.25
* In December 2001, the Company granted 39,500 options at an option
price of $24.00
The Company applied APB Opinion No. 25 in accounting for the SI Plan and,
accordingly, compensation cost based on fair value at grant date has not been
recognized for its stock options in the consolidated financial statements for
the years ended December 31, 2003, 2002, and 2001.
Stock Repurchase Program
On August 5, 1998, the Company announced a stock repurchase program of up
to 3% of its common stock. In March 2000, the Board of Directors approved the
repurchase of an additional 5% of the Company's common stock. In September 2001,
the Board of Directors authorized the repurchase of $3 million additional shares
of the authorized common stock and in August 2002, the Board of Directors
authorized the repurchase of $5 million additional shares of the Company's
common stock. In September 2003, the Board of Directors approved the repurchase
of $10 million of additional shares of the Company's stock, bringing the
aggregate total to 8% of the Company's common stock plus $18 million of
additional shares.
During 2003, the Company repurchased 120,057 shares (3.8%) at a total price
of $4,233,000. Subsequently, on February 9, 2004, the Company acquired, as
treasury stock, a total of 100,000 shares of outstanding common stock from three
shareholders pursuant to privately negotiated transactions. Total consideration
for these share repurchases amounted to $4,750,000. This transaction is
described in a Form 8-K filed by the Company on February 9, 2004.
During 2002, the Company repurchased 240,346 shares (7.5%) at a total price
of $6,540,000. On November 1, 2002, the Company acquired, as treasury stock, a
total of 200,000 shares of outstanding common stock from two shareholders who
are the sisters of a director of the Company pursuant to privately negotiated
transactions. Total consideration for these share repurchases amounted to
$5,500,000. In 2001, 46,111 shares (1.4%) at a total price of $1,038,000 were
repurchased and 90,254 shares (2.7%) at a total price of $1,881,000 were
repurchased in 2000. As of December 31, 2003, the Company was authorized
pursuant to all repurchase programs to purchase an additional 206,866 shares.
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
regulatory capital requirements.
A tabulation of the Company and First Mid Bank's capital ratios as of
December 31, 2003 follows:
Tier One Capital Total Capital Tier One Capital
to Risk-Weighted to Risk-Weighted to Average
Assets Assets Assets
--------------------- --------------------- ---------------------
First Mid-Illinois Bancshares, Inc.
(Consolidated) 9.83% 10.61% 7.18%
First Mid-Illinois Bank & Trust, N.A. 10.79% 11.57% 7.85%
Banks and bank holding companies are generally expected to operate at or
above the minimum capital requirements. These ratios are in excess of regulatory
minimums and will allow the Company to operate without capital adequacy
concerns.
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 $17 million available in overnight federal fund
lines, including $10 million from Harris Trust and Savings Bank of
Chicago and $7 million from The Northern Trust Company. Availability
of the funds is subject to the First Mid Bank's meeting minimum
regulatory capital requirements for total capital to risk-weighted
assets and Tier 1 capital to total assets. As of December 31, 2003,
the First Mid Bank's ratios of total capital to risk-weighted assets
of 11.57% and Tier 1 capital to total average assets of 7.85% met
regulatory requirements.
* 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, 2003,
the excess collateral at the FHLB could support approximately $29
million of additional advances.
* First Mid Bank also receives deposits from the State of Illinois. The
receipt of these funds is subject to competitive bid and requires
collateral to be pledged at the time of placement.
* First Mid Bank is also a member of the Federal Reserve System and can
borrow funds provided that sufficient collateral is pledged.
* In addition, the Company has a revolving credit agreement in the
amount of $15 million with The Northern Trust Company. The Company has
an outstanding balance of $8,825,000 as of December 31, 2003 and
$6,175,000 in available funds. The credit agreement matures on October
23, 2004. The agreement contains requirements for the Company and
First Mid Bank to maintain various operating and capital ratios and
also contains requirements for prior lender approval for certain sales
of assets, merger activity, the acquisition or issuance of debt, and
the acquisition of treasury stock. The Company and First Mid Bank were
in compliance with the existing covenants at December 31, 2003.
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, 2003 (in thousands):
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
--------------- ---------------- ---------------- --------------- --------------
Time deposits $247,288 $157,737 $43,857 $45,127 $567
Debt 9,625 9,025 600 - -
Other borrowings 90,175 64,875 17,300 5,000 3000
Operating leases 2,309 300 485 375 1,149
--------------- ---------------- ---------------- --------------- --------------
$349,397 $231,937 $62,242 $50,502 $4,716
=============== ================ ================ =============== ==============
For the year ended December 31, 2003, net cash was provided from both
financing activities and operating activities ($8.4 million and $18.7 million,
respectively), while investing activities used net cash of $71.8 million. Thus,
cash and cash equivalents decreased by $44.7 million since year-end 2002.
Generally, during 2003, decreases in deposits due to seasonal outflow and funds
used to fund new loans reduced cash balances.
For the year ended December 2002, net cash was provided from both financing
activities and operating activities ($58.8 million and $9.8 million,
respectively), while investing activities used net cash of $32.0 million. Thus,
cash and cash equivalents increased by $36.6 million since year-end 2001.
Generally, during 2002, increases in deposits and customer repurchase agreements
increased cash balances. This was offset by declines in residential real estate
loan balances, which were greater than the growth in commercial loans and
securities since year-end 2001.
On February 27, 2004, the Company completed the issuance and sale of $10
million of floating rate trust preferred securities through First Mid-Illinois
Statutory Trust I (the "Trust") as part of a pooled offering. The Company
established the Trust for the purpose of issuing the trust preferred securities.
The underlying junior subordinated debt securities issued by the Company to the
Trust mature in 2034, bear interest at three-month London Interbank Offered Rate
("LIBOR") plus 280 basis points, reset quarterly, and are callable, at the
option of the Company, at par on or after April 7, 2009. The Company intends to
use the proceeds of the offering for general corporate purposes.
Effects of Inflation
Unlike industrial companies, virtually all of the assets and liabilities of
the Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or experience the same magnitude of changes as goods and services,
since such prices are effected by inflation. In the current economic
environment, liquidity and interest rate adjustments are features of the
Company's assets and liabilities 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.
Accounting Pronouncements
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). The Standard requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. The Company is required to adopt the provisions of SFAS 146 for exit or
disposal activities initiated after December 31, 2002. The adoption was not
material to the Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidated
Variable Interest Entities"("FIN 46"). The objective of FIN 46 is to provide
guidance on how to identify a variable interest entity and determine when the
assets, liabilities, non-controlling interests, and results of operations of a
variable interest in an entity need to be included in a company's consolidated
financial statements. A company that holds variable interests in an entity will
need to consolidate the entity if the company's interest in the variable
interest entity is such that the company will absorb a majority of the variable
interest entity's losses and/or receive a majority of the entity's expected
residual returns, if they occur. FIN 46 also requires additional disclosures by
primary beneficiaries and other significant variable interest holders. The
provisions of FIN 46 must be applied to an interest held in a variable interest
entity or potential variable interest entity at the end of the first interim
period after December 31, 2003. The Company does not expect the provisions of
FIN 46 to have a material impact on the Company's financial position or results
of operations.
In December 2003, the FASB issued Interpretation No. 46 (Revised),
"Consolidation of Variable Interest Entities" ("FIN 46R"), which provides
further guidance on the accounting for variable interest entities. The
provisions of FIN 46R must be applied to an interest held in a variable interest
entity or potential variable interest entity at the end of the first interim
period after December 31, 2003. The Company does not expect the provisions of
FIN 46R to have a material impact on the Company's financial position or results
of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. SFAS 149 was effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The adoption did not have a material impact on the Company's financial
position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances), many of
which were previously classified as equity. SFAS 150 was effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of the provisions of SFAS 150 did not have a material impact
on the Company's financial position or results of operations.
On December 16, 2003, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position 03-3, "Accounting for Certain
Loans or Debt Securities Acquired in a Transfer" ("SOP 03-3"). SOP 03-3 provides
guidance on the accounting for differences between contractual and expected cash
flows from the purchaser's initial investment in loans or debt securities
acquired in a transfer, if those differences are attributable, at least in part,
to credit quality. Among other things, SOP 03-3: (1) prohibits the recognition
of the excess of contractual cash flows over expected cash flows as an
adjustment of yield, loss accrual, or valuation allowance at the time of
purchase; (2) requires that subsequent increases in expected cash flows be
recognized prospectively through an adjustment of yield; and (3) requires the
subsequent decreases in expected cash flows be recognized as an impairment. In
addition, SOP 03-3 prohibits the creation or carrying over of a valuation
allowance in the initial accounting of all loans within its scope that are
acquired in a transfer. SOP 03-3 becomes effective for loans or debt securities
acquired in fiscal years beginning after December 15, 2004. The Company does not
expect the requirements of SOP 03-3 to have a material impact on its financial
position or results of operations.
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, 2003,
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 (dollars in thousands):
Increase (Decrease) In
Net Interest Net Interest Return On
December 31, 2003 Income Income Average Equity
Prime rate is 4.00% 2003=13.01%
-----------------------------------------------
Prime rate increase of:
200 basis points to 6.00% $ 2,315 8.2 % 1.78 %
100 basis points to 5.00% 1,452 5.1 % 1.13 %
Prime rate decrease of:
200 basis points to 2.00% (3,637) (12.9)% (2.96)%
100 basis points to 3.00% (1,501) (5.3)% (1.20)%
The following table shows the same analysis performed as of December 31,
2002.
Increase (Decrease) In
Net Interest Net Interest Return On
December 31, 2002 Income Income Average Equity
Prime rate is 4.25% 2002=12.87%
-----------------------------------------------
Prime rate increase of:
200 basis points to 6.25% $ 1,445 5.3 % 1.24 %
100 basis points to 5.25% 1,177 4.3 % 1.01 %
Prime rate decrease of:
200 basis points to 2.25% (3,677) (13.6)% (3.33)%
100 basis points to 3.25% (1,904) (7.0)% (1.69)%
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.
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 tables present, in thousands, First Mid
Bank's projected change in EVE for the various rate shock levels at December 31,
2003 and December 31, 2002. All market risk sensitive instruments presented in
the tables are held-to-maturity or available-for-sale. First Mid Bank has no
trading securities.
December 31, 2003
Change in
Changes In Economic Value of Equity
Interest Rates Amount Percent
(basis points) of Change of Change
----------------------------------------------------------
+200 bp $(10,194) (10.1)%
+100 bp (2,296) (2.3)%
-200 bp 1,735 1.7 %
-100 bp 7,248 7.2 %
December 31, 2002
Change in
Changes In Economic Value of Equity
Interest Rates Amount Percent
(basis points) of Change of Change
----------------------- ----------------- -----------------
+200 bp $(1,833) (2.0)%
+100 bp 3,027 3.3 %
-200 bp 6,672 7.2 %
-100 bp 6,473 7.0 %
As indicated above, at December 31, 2003, in the event of a sudden and
sustained increase in prevailing market interest rates, First Mid Bank's EVE
would be expected to decrease, and in the event of a sudden and sustained
decrease in prevailing market interest rates, First Mid Bank's EVE would be
expected to increase. At December 31, 2003, First Mid Bank's estimated changes
in EVE were within the industry 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, 2003 and 2002
(In thousands, except share data) 2003 2002
--------------- ---------------
Assets
Cash and due from banks (note 4):
Non-interest bearing $ 20,659 $ 22,437
Interest bearing 2,915 19,995
Federal funds sold 1,375 27,225
--------------- ---------------
Cash and cash equivalents 24,949 69,657
Investment securities (note 5):
Available-for-sale, at fair value 176,481 166,415
Held-to-maturity, at amortized cost
(estimated fair value of $1,687 and $1,927
at December 31, 2003 and 2002, respectively) 1,677 1,902
Loans (note 6) 552,824 499,864
Less allowance for loan losses (note 7) (4,426) (3,723)
--------------- ---------------
Net loans 548,398 496,141
Premises and equipment, net (note 8) 16,059 16,916
Accrued interest receivable 5,570 6,362
Goodwill, net (notes 3 and 9) 9,034 9,034
Intangible assets, net (notes 3 and 9) 3,969 4,743
Other assets (note 16) 7,508 5,070
--------------- ---------------
Total assets $793,645 $776,240
=============== ===============
Liabilities and Stockholders' Equity
Deposits (note 10):
Non-interest bearing $ 94,723 $ 84,025
Interest bearing 520,269 529,427
--------------- ---------------
Total deposits 614,992 613,452
Accrued interest payable 1,228 1,793
Securities sold under agreements to
repurchase (note 11) 59,875 44,184
Other borrowings (note 11) 39,925 44,625
--------------- ---------------
Other liabilities (note 16) 7,030 5,379
--------------- ---------------
Total liabilities 723,050 709,433
--------------- ---------------
Stockholders' Equity (notes 12 and 15):
Common stock, $4 par value; authorized 6,000,000
shares; issued 3,667,887 shares in 2003 and
3,603,737 shares in 2002 14,672 14,415
Additional paid-in capital 15,960 14,450
Retained earnings 52,942 45,896
Deferred compensation 1,881 1,589
Accumulated other comprehensive income 1,581 2,373
Less treasury stock at cost, 534,619 shares
in 2003 and 414,562 shares in 2002 (16,441) (11,916)
--------------- ---------------
Total stockholders' equity 70,595 66,807
--------------- ---------------
Total liabilities and stockholders' equity $793,645 $776,240
=============== ===============
See accompanying notes to consolidated financial statements.
Consolidated Statements of Income
For the years ended December 31, 2003, 2002 and 2001
(In thousands, except per share data)
2003 2002 2001
---------- ---------- ----------
Interest income:
Interest and fees on loans $32,435 $33,726 $36,877
Interest on investment securities:
Taxable 4,961 6,014 6,820
Exempt from federal income tax 1,266 1,311 1,393
Interest on federal funds sold 164 199 335
Interest on deposits with other financial
institutions 112 137 81
---------- ---------- ----------
Total interest income 38,938 41,387 45,506
Interest expense:
Interest on deposits (note 10) 9,751 12,253 18,773
Interest on securities sold under agreements
to repurchase 272 345 915
Interest on FHLB advances 1,632 1,863 1,664
Interest on federal funds purchased - 6 12
Interest on debt 241 194 226
---------- ---------- ----------
Total interest expense 11,896 14,661 21,590
---------- ---------- ----------
Net interest income 27,042 26,726 23,916
Provision for loan losses (note 7) 1,000 1,075 600
---------- ---------- ----------
Net interest income after provision for loan
losses 26,042 25,651 23,316
Other income:
Trust revenues 1,992 1,855 1,924
Brokerage commissions 283 265 234
Insurance commissions 1,476 1,257 256
Service charges 4,484 3,799 3,122
Gain on sale of securities, net (note 5) 370 223 208
Mortgage banking income 1,673 1,272 910
Other 1,977 1,723 1,625
---------- ---------- ----------
Total other income 12,255 10,394 8,279
Other expense:
Salaries and employee benefits (note 14) 13,232 12,505 10,942
Net occupancy and equipment expense 4,290 4,055 3,909
Amortization of goodwill (note 9) - - 704
Amortization of other intangible assets (note 9) 774 742 610
Stationery and supplies 566 679 671
Legal and professional 991 1,027 1,033
Marketing and promotion 662 738 789
Other 4,015 4,260 3,381
---------- ---------- ----------
Total other expense 24,530 24,006 22,039
---------- ---------- ----------
Income before income taxes 13,767 12,039 9,556
Income taxes (note 16) 4,674 4,005 3,040
---------- ---------- ----------
Net income $ 9,093 $ 8,034 $ 6,516
========== ========== ==========
Per common share data:
Basic earnings per share $2.88 $2.39 $1.93
Diluted earnings per share 2.82 2.38 1.92
========== ========== ==========
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 2003, 2002 and 2001
(In thousands, except share and per share data) Accumulated
Additional Other
Common Paid-In- Retained Deferred Comprehensive Treasury
Stock Capital Earnings Compensation Income (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 $9,302 $12,293 $39,169 $1,218 $(288) $(3,967) $57,727
Comprehensive income:
Net income - - 6,516 - - - 6,516
Net unrealized change in available-for-
sale investment securities - - - - 1,028 - 1,028
--------
Total Comprehensive Income 7,544
Cash dividends on common stock ($.43 per share) - - (1,460) - - - (1,460)
Issuance of 39,766 common shares pursuant
to the Dividend Reinvestment Plan 85 690 - - - - 775
Issuance of 8,108 common shares pursuant
to the Deferred Compensation Plan 32 134 - - - - 166
Issuance of 9,983 common shares pursuant
to the First Retirement & Savings Plan 40 171 - - - - 211
Purchase of 46,110 treasury shares - - - - - (1,038) (1,038)
Deferred compensation - - - 174 - (174) -
3-for-2 stock split in the form of 50% stock
dividend (3 for 2) 4,725 - (4,725) - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 $ 14,184 $13,288 $39,500 $1,392 $740 $(5,179) $63,925
Comprehensive income:
Net income - - 8,034 - - - 8,034
Net unrealized change in available-for-
sale investment securities - - - - 1,633 - 1,633
---------
Total Comprehensive Income 9,667
Cash dividends on common stock ($.50 per share) - - (1,638) - - - (1,638)
Issuance of 37,309 common shares pursuant
to the Dividend Reinvestment Plan 150 762 - - - - 912
Issuance of 5,785 common shares pursuant
to the Deferred Compensation Plan 23 122 - - - - 145
Issuance of 6,770 common shares pursuant
to the First Retirement & Savings Plan 27 142 - - - - 169
Purchase of 240,346 treasury shares - - - - - (6,540) (6,540)
Deferred compensation - - - 197 - (197) -
Issuance of 7,813 common shares pursuant
to the exercise of stock options 31 136 - - - - 167
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2002 $ 14,415 $14,450 $45,896 $1,589 $2,373 $(11,916) $66,807
====================================================================================
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 2003, 2002 and 200
(In thousands, except share and per share data) Accumulated
Additional Other
Common Paid-In- Retained Deferred Comprehensive Treasury
Stock Capital Earnings Compensation Income (Loss) Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 2002 $ 14,415 $14,450 $45,896 $1,589 $2,373 $(11,916) $66,807
Comprehensive income:
Net income - - 9,093 - - - 9,093
Net unrealized change in available-for-
sale investment securities - - - - (792) - (792)
--------
Total Comprehensive Income 8,301
Cash dividends on common stock ($.65 per share) - - (2,047) - - - (2,047)
Issuance of 31,172 common shares pursuant
to the Dividend Reinvestment Plan 125 748 - - - - 873
Issuance of 7,244 common shares pursuant
to the Deferred Compensation Plan 29 194 - - - - 223
Issuance of 13,860 common shares pursuant
to the First Retirement & Savings Plan 55 382 - - - - 437
Purchase of 120,056 treasury shares - - - - - (4,233) (4,233)
Deferred compensation - - - 292 - (292) -
Issuance of 11,875 common shares pursuant
to the exercise of stock options 48 186 - - - - 234
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2003 $ 14,672 $15,960 $52,942 $1,881 $1,581 $(16,441) $70,595
====================================================================================
See accompanying notes to financial statements.
Consolidated Statements of Cash Flows
For the years ended December 31, 2003, 2002 and 2001
(In thousands) 2003 2002 2001
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 9,093 $ 8,034 $ 6,516
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,000 1,075 600
Depreciation, amortization and accretion, net 3,104 3,169 3,204
Gain on sale of securities, net (370) (223) (208)
Loss on sale of other real property owned, net 53 107 132
Gain on sale of mortgage loans held for sale, net (1,813) (1,350) (998)
Deferred income taxes (226) (146) (313)
Decrease in accrued interest receivable 792 428 605
Decrease in accrued interest payable (565) (577) (258)
Origination of mortgage loans held for sale (128,708) (106,461) (76,212)
Proceeds from sale of mortgage loans held for sale 136,840 106,312 72,226
Impairment of other investment - 250 -
Increase in other assets (1,773) (2,057) (841)
Increase in other liabilities 1,257 1,232 48
---------- ---------- ----------
Net cash provided by operating activities 18,684 9,793 4,501
---------- ---------- ----------
Cash flows from investing activities:
Capitalization of mortgage servicing rights (1) (6) (47)
Purchases of premises and equipment (1,052) (2,130) (1,625)
Net increase in loans (59,576) (26,176) (14,512)
Proceeds from sales of:
Securities available-for-sale 13,815 12,091 9,888
Proceeds from maturities of:
Securities available-for-sale 139,783 45,253 88,213
Securities held-to-maturity 225 20,331 456
Purchases of:
Securities available-for-sale (163,266) (81,250) (103,216)
Securities held-to-maturity (1,734) (164) (394)
Purchase of financial organizations, net of cash
received - 15 606
---------- ---------- ----------
Net cash used in investing activities (71,806) (32,036) (20,631)
---------- ---------- ----------
Cash flows from financing activities:
Net increase in deposits 1,540 54,032 24,854
Increase in repurchase agreements 15,691 5,305 7,783
Decrease in short-term FHLB advances (5,000) (3,000) (15,000)
Increase in long-term FHLB advances - 5,000 8,000
Repayment of short-term debt (200) (1,000) -
Repayment of long-term debt - - (4,325)
Proceeds from issuance of short-term debt 500 5,000 4,325
Increase in other borrowings - 200 -
Proceeds from issuance of common stock 894 481 377
Purchase of treasury stock (4,233) (6,540) (1,038)
Dividends paid on common stock (778) (674) (590)
---------- ---------- ----------
Net cash provided by financing activities 8,414 58,804 24,386
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents (44,708) 36,561 8,256
Cash and cash equivalents at beginning of year 69,657 33,096 24,840
---------- ---------- ----------
Cash and cash equivalents at end of year $24,949 $69,657 $33,096
========== ========== ==========
Additional disclosures of cash flow information
Cash paid during the year for:
Interest $12,461 $15,238 $21,848
Income taxes 4,632 4,228 3,171
Loans transferred to real estate owned 890 841 617
Dividends reinvested in common shares 873 913 775
========== ========== ==========
See accompanying notes to consolidated financial statements.
Notes To Consolidated Financial Statements
December 31, 2003, 2002 and 2001
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 2003 presentation and there
was no impact on net income or stockholders' equity. 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.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from these estimates.
Cash Equivalents
For purposes of reporting cash flows, cash equivalents include amounts 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 2003, 2002 or 2001.
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.
Loans
Loans are stated at the principal amount outstanding less unearned
discount, net of the allowance for loan losses. Interest on substantially all
loans is credited to income based on the principal amount outstanding.
The Company's policy is to generally discontinue the accrual of interest
income on any loan for which principal or interest is ninety days past due and
when, in the opinion of management, there is reasonable doubt as to the timely
collectibility of interest or principal. 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 carried at cost less accumulated depreciation
and amortization. Depreciation and amortization is determined principally by the
straight-line method over the estimated useful lives of the assets.
Goodwill and Intangible Assets
The Company has goodwill from business combinations, identifiable
intangible assets assigned to core deposit relationships and customer lists of
acquisitions, and intangible assets arising from the rights to service mortgage
loans for others.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 142 provides that intangible assets with finite useful lives be
amortized and that goodwill and intangible assets with indefinite lives will not
be amortized, but rather will be tested at least annually for impairment. If
goodwill is considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the goodwill exceeds the
implied fair value of the goodwill. Effective October 1, 2002, the Company
adopted Statement of Financial Accounting Standard No. 147, "Acquisitions of
Certain Financial Institutions" ("SFAS 147"). SFAS 147 requires that all
acquisitions of financial institutions that meet the definition of a business,
including acquisitions of a part of a financial institution that meet the
definition of a business, be accounted for in accordance with SFAS 142.
Accordingly, unidentifiable intangible assets were reclassified to goodwill and
were no longer amortized.
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 agencies. 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.
The Company recognizes as a separate asset the rights to service mortgage
loans for others. Mortgage servicing rights are not subject to SFAS 142, but are
amortized in proportion to and over the period of estimated net servicing income
and are subject to periodic impairment testing.
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 bases, 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.
Trust Department Assets
Property held for customers in fiduciary or agency capacities is not
included in the accompanying consolidated balance sheets since such items are
not assets of the Company or its subsidiaries.
Stock Split
On November 16, 2001, the Company effected a three-for-two stock split in
the form of a 50 % stock dividend. Par value remained at $4 per share. The stock
split increased the Company's outstanding common shares from 2,250,714 to
3,376,071 shares. All share and per share amounts have been restated for years
prior to 2001 to give retroactive recognition to the stock split.
Stock Options
The Company applies APB Opinion No. 25 in accounting for the Stock
Incentive Plan and, accordingly, compensation cost based on fair value at grant
date has not been recognized for its stock options in the consolidated financial
statements. As required by SFAS 123, "Accounting for Stock-Based Compensation"
as amended by SFAS 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure," the Company provides pro forma net income and pro forma earnings
per share disclosures for employee stock option grants.
Recent Accounting Pronouncements
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). The Standard requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. The Company is required to adopt the provisions of SFAS 146 for exit or
disposal activities initiated after December 31, 2002. The adoption was not
material to the Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidated
Variable Interest Entities"("FIN 46"). The objective of FIN 46 is to provide
guidance on how to identify a variable interest entity and determine when the
assets, liabilities, non-controlling interests, and results of operations of a
variable interest in an entity need to be included in a company's consolidated
financial statements. A company that holds variable interests in an entity will
need to consolidate the entity if the company's interest in the variable
interest entity is such that the company will absorb a majority of the variable
interest entity's losses and/or receive a majority of the entity's expected
residual returns, if they occur. FIN 46 also requires additional disclosures by
primary beneficiaries and other significant variable interest holders. The
provisions of FIN 46 must be applied to an interest held in a variable interest
entity or potential variable interest entity at the end of the first interim
period after December 31, 2003. The Company does not expect the provisions of
FIN 46 to have a material impact on the Company's financial position or results
of operations.
In December 2003, the FASB issued Interpretation No. 46 (Revised),
"Consolidation of Variable Interest Entities" ("FIN 46R"), which provides
further guidance on the accounting for variable interest entities. The
provisions of FIN 46R must be applied to an interest held in a variable interest
entity or potential variable interest entity at the end of the first interim
period after December 31, 2003. The Company does not expect the provisions of
FIN 46R to have a material impact on the Company's financial position or results
of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. SFAS 149 was effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The adoption did not have a material impact on the Company's financial
position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances), many of
which were previously classified as equity. SFAS 150 was effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of the provisions of SFAS 150 did not have a material impact
on the Company's financial position or results of operations.
On December 16, 2003, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position 03-3, "Accounting for Certain
Loans or Debt Securities Acquired in a Transfer" ("SOP 03-3"). SOP 03-3 provides
guidance on the accounting for differences between contractual and expected cash
flows from the purchaser's initial investment in loans or debt securities
acquired in a transfer, if those differences are attributable, at least in part,
to credit quality. Among other things, SOP 03-3: (1) prohibits the recognition
of the excess of contractual cash flows over expected cash flows as an
adjustment of yield, loss accrual, or valuation allowance at the time of
purchase; (2) requires that subsequent increases in expected cash flows be
recognized prospectively through an adjustment of yield; and (3) requires the
subsequent decreases in expected cash flows be recognized as an impairment. In
addition, SOP 03-3 prohibits the creation or carrying over of a valuation
allowance in the initial accounting of all loans within its scope that are
acquired in a transfer. SOP 03-3 becomes effective for loans or debt securities
acquired in fiscal years beginning after December 15, 2004. The Company does not
expect the requirements of SOP 03-3 to have a material impact on its financial
position or results of operations.
Comprehensive Income
The Company's comprehensive income for the years ended December 31,
2003, 2002 and 2001 is as follows (in thousands):
2003 2002 2001
------------ ----------- -----------
Net income $9,093 $8,034 $6,516
Other comprehensive income:
Unrealized gains (losses) during the year (929) 2,889 1,886
Reclassification adjustment for net
gains realized in net income (370) (223) (208)
Tax effect 507 (1,033) (650)
------------ ----------- -----------
Comprehensive income $8,301 $9,667 $7,544
============ =========== ===========
Note 2 - Earnings Per Share
The Company follows Financial Accounting Standards Board's Statement No.
128, "Earnings Per Share" ("SFAS 128") in which income for Basic Earnings per
Share ("EPS") is based on the weighted average number of common shares
outstanding. Diluted EPS is computed by using the weighted average number of
common shares outstanding, increased by the assumed conversion of stock options,
if not anti-dilutive.
The components of basic and diluted earnings per common share for the years
ended December 31, 2003, 2002, and 2001 are as follows:
2003 2002 2001
---------------- --------------- ----------------
Basic Earnings per Share:
Net income available to common stockholders $9,093,000 $8,034,000 $6,516,000
================ =============== ================
Weighted average common shares outstanding 3,162,140 3,357,571 3,378,019
================ =============== ================
Basic earnings per common share $2.88 $2.39 $1.93
================ =============== ================
Diluted Earnings per Share:
Net income available to common stockholders $9,093,000 $8,034,000 $6,516,000
================ =============== ================
Weighted average common shares outstanding 3,162,140 3,357,571 3,378,019
Assumed conversion of stock options 57,290 24,166 11,195
---------------- --------------- ----------------
Diluted weighted average common shares outstanding 3,219,430 3,381,737 3,389,214
================ =============== ================
Diluted earnings per common share $2.82 $2.38 $1.92
================ =============== ================
Note 3 - Mergers and Acquisitions
On January 29, 2002, the Company acquired all of the issued and outstanding
stock of Checkley, an insurance agency headquartered in Mattoon, Illinois.
Checkley was purchased for cash with a portion ($750,000) paid at closing and
the remainder ($1,000,000) to be paid pursuant to a promissory note over a
five-year period ending January 2007. Checkley operates as a separate subsidiary
of the Company and provides customers with commercial property, casualty, life,
auto and home insurance. In order to facilitate this acquisition, the Company
became a financial holding company under the GLB Act on December 14, 2001. The
results of Checkley's operations are included in the consolidated financial
statements since the acquisition date.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition (in thousands):
At January 29, 2002:
----------------------------------------------------------
Current assets $643
Property and equipment 76
Intangible assets 1,904
---------------------
Total assets acquired 2,623
---------------------
Current liabilities (771)
Debt (20)
---------------------
Total liabilities (791)
---------------------
Net assets acquired $1,832
=====================
The Company recorded $1,904,000 of intangible assets. The identified
intangible assets were allocated to customer lists and are amortized over a
period of ten years.
On April 20, 2001, First Mid Bank acquired all the outstanding stock of
American Bank for $3.7 million in cash. This acquisition added approximately
$30.8 million in total deposits, $24.9 million in loans, $2 million in
securities, $1.7 million in premises and equipment and $1.4 million in
intangible assets. The acquisition was accounted for using the purchase method
of accounting whereby the acquired assets and liabilities were recorded at fair
value as of the acquisition date and the excess cost over fair value of net
assets was recorded as goodwill. The consolidated financial statements include
the results of operations of American Bank since the acquisition date.
Note 4 - Cash and Due from Banks
Aggregate cash and due from bank balances of $437,000 and $270,000 at
December 31, 2003 and 2002, were maintained in satisfaction of statutory reserve
requirements of the Federal Reserve Bank.
Note 5 - 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, 2003 and 2002 were as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- --------------- ---------------
2003
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $109,544 $ 786 $ (98) $110,232
Obligations of states and political
subdivisions 25,218 1,229 - 26,447
Mortgage-backed securities 21,607 259 (94) 21,772
Federal Home Loan Bank stock 5,000 - - 5,000
Other securities 12,521 509 - 13,030
-------------- -------------- --------------- ---------------
Total available-for-sale $173,890 $ 2,783 $ (192) $176,481
============== ============== =============== ===============
Held-to-maturity:
Obligations of states and political
subdivisions $ 1,677 $ 12 $ (2) $ 1,687
============== ============== =============== ===============
2002
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $ 76,342 $1,665 $ (30) $ 77,977
Obligations of states and political
subdivisions 25,695 1,232 - 26,927
Mortgage-backed securities 44,697 749 (4) 45,442
Federal Home Loan Bank stock 3,266 - - 3,266
Other securities 12,541 293 (31) 12,803
-------------- -------------- --------------- ---------------
Total available-for-sale $162,541 $ 3,939 $ (65) $166,415
============== ============== =============== ===============
Held-to-maturity:
Obligations of states and political
subdivisions $ 1,902 $ 27 $ (2) $ 1,927
============== ============== =============== ===============
Proceeds from sales of investment securities and realized gains and losses
were as follows during the years ended December 31, 2003, 2002 and 2001 (in
thousands):
2003 2002 2001
-------------- ------------- --------------
Proceeds from sales $13,815 $12,091 $ 9,888
Gross gains 370 223 208
Gross losses - - -
The following table presents the age of gross unrealized losses and fair
value by investment category (in thousands) as of December 31, 2003:
Less than 12 months 12 months or more Total
-------------------- -------------------- ---------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
--------- ---------- --------- ---------- --------- -----------
U.S. Treasury securities and obligations
of U.S.government corporations and agencies $14,886 $ (98) $ - $ - $14,886 $ (98)
Obligations of states and political
subdivisions 583 (2) - - 583 (2)
Mortgage-backed securities 11,756 (94) - - 11,756 (94)
--------- ---------- --------- ---------- --------- -----------
Total $27,225 $ (194) $ - $ - $27,225 $ (194)
========= ========== ========= ========== ========= ===========
Management does not believe any individual unrealized loss as of December
31, 2003 represents an other than temporary impairment. The unrealized losses
reported for U.S. Agency securities relate primarily to nine securities issued
by Federal Home Loan Bank. These unrealized losses are primarily attributable to
changes in interest rates and individually were 1% or less of their respective
amortized cost basis. The unrealized losses reported for mortgage-backed
securities relate primarily to three securities issued by FNMA and FHLMC. These
unrealized losses are also primarily attributable to changes in interest rates
and individually were 2% or less of their respective amortized cost basis. The
Company has both the intent and ability to hold the securities included in the
above table for a time necessary to recover the amortized cost.
Maturities of investment securities were as follows at December 31, 2003
(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 $22,374 $22,699
Due after one-five years 82,391 83,339
Due after five-ten years 18,918 19,351
Due after ten years 28,600 29,320
--------------- ---------------
152,283 154,709
Mortgage-backed securities 21,607 21,772
--------------- ---------------
Total available-for-sale $173,890 $176,481
--------------- ---------------
Held-to-maturity:
Due in one year or less $ 125 $ 125
Due after one-five years 615 617
Due after five-ten years 410 415
Due after ten-years 527 530
--------------- ---------------
Total held-to-maturity $ 1,677 $ 1,687
--------------- ---------------
Total investment securities $175,567 $178,168
=============== ===============
Investment securities of approximately $147,603,000 and $141,462,000 at
December 31, 2003 and 2002, respectively, were pledged to secure public deposits
and repurchase agreements and for other purposes as permitted or required by
law.
Note 6 - Loans
A summary of loans at December 31, 2003 and 2002 follows (in thousands):
2003 2002
--------------- ----------------
Commercial, financial and agricultural $131,620 $127,077
Real estate mortgage 390,841 340,033
Installment 28,952 31,174
Other 1,442 1,647
--------------- ----------------
Total gross loans 552,855 499,931
Less unearned discount 31 67
--------------- ----------------
Net loans $552,824 $499,864
=============== ================
The real estate mortgage loan balance in the above table includes loans
held for sale of $751,000 and $7,070,000 at December 31, 2003 and 2002,
respectively. Certain officers, directors and principal stockholders of the
Company and its subsidiaries, their immediate families or their affiliated
companies 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 and do not involve more than the normal risk of collectibility. Loans to
related parties totaled approximately $22,101,000 at December 31, 2003 and
$23,358,000 at December 31, 2002.
Activity during 2003 was as follows (in thousands):
Balance at December 31, 2002 $23,358
New loans 3,505
Loan repayments (4,762)
-----------------
Balance at December 31, 2003 $22,101
=================
The aggregate principal balances of nonaccrual, past due and renegotiated
loans were as follows at December 31, 2003 and 2002 (in thousands):
2003 2002
---------------- ---------------
Nonaccrual loans $3,296 $2,961
Renegotiated loans which are performing
in accordance with revised terms 35 188
Interest income which would have been recorded under the original terms of
such nonaccrual or renegotiated loans totaled $213,000, $164,000 and $247,000 in
2003, 2002 and 2001, 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 renegotiated loans meet this definition. The
Company evaluates all individual loans on nonaccrual or renegotiated 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
renegotiated loans is recorded according to the most recently agreed upon
contractual terms.
The following table presents information on impaired loans (in thousands):
At December 31, 2003 2002
-------------- --------------
Impaired loans for which a specific
allowance has been provided $ 858 $1,429
Impaired loans for which no specific
allowance has been provided 2,438 1,532
-------------- --------------
Total loans determined to be impaired $3,296 $2,961
============== ==============
Allowance on impaired loans $ 90 $386
============== ==============
For the year ended December 31, 2003 2002
-------------- --------------
Average recorded investment in impaired loans $4,434 $3,053
Cash basis interest income recognized from
impaired loans 114 200
Most of the Company's business activities are with customers located within
east central Illinois. At December 31, 2003 and 2002, the Company's loan
portfolio included approximately $93,340,000 and $90,729,000, respectively, of
loans to borrowers directly related to the agricultural industry.
Mortgage loans serviced for others by First Mid Bank are not included in
the accompanying consolidated balance sheets. The unpaid principal balances of
these loans at December 31, 2003 and 2002 was approximately $14,360,000 and
$26,391,000, respectively.
Note 7 - Allowance for Loan Losses
Changes in the allowance for loan losses were as follows during the
three-year period ended December 31, 2003, 2002 and 2001 (in thousands):
2003 2002 2001
------------- -------------- -------------
Balance, beginning of year $3,723 $3,702 $3,262
Provision for loan losses 1,000 1,075 600
Added through acquisitions - - 275
Recoveries 481 74 66
Charge-offs (778) (1,128) (501)
------------- -------------- -------------
Balance, end of year $4,426 $3,723 $3,702
============= ============== =============
Note 8 - Premises and Equipment, Net
Premises and equipment at December 31, 2003 and 2002 consisted of (in
thousands):
2003 2002
-------------- --------------
Land $ 3,364 $ 3,364
Buildings and improvements 14,544 14,219
Furniture and equipment 10,264 10,297
Leasehold improvements 1,049 1,049
Construction in progress 105 8
-------------- --------------
Subtotal 29,326 28,937
Accumulated depreciation and
amortization 13,267 12,021
-------------- --------------
Total $16,059 $16,916
============== ==============
Depreciation and amortization expense was $1,909,000, $1,946,000 and
$2,040,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
Note 9 - 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.
As of January 1, 2002, the date of adoption of SFAS 142 and the effective
date of SFAS 147, the Company had unamortized goodwill of $9 million, which was
subject to the transition provisions of SFAS 142 and SFAS 147, and is no longer
being amortized. The Company also had $2.1 million of intangible assets for an
acquisition of a branch whereby the liabilities assumed were greater than the
assets obtained and was not considered an acquisition of a business, $1.3
million of core deposit intangibles, and $217,000 of intangible assets arising
from the rights to service mortgage loans for others, all which continue to be
amortized. In January 2002, the Company added an additional $1.9 million of
amortizable intangibles as a result of the acquisition of Checkley. The
following table presents gross carrying amount and accumulated amortization by
major intangible asset class as of December 31, 2003 and 2002 (in thousands):
December 31, 2003 December 31, 2002
---------------------------------- ---------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
------------- -------------------- -------------- ------------------
Goodwill not subject to amortization $12,794 $3,760 $12,794 $3,760
Intangibles from branch acquisition 3,015 1,358 3,015 1,157
Core deposit intangibles 2,805 2,089 2,805 1,807
Mortgage servicing rights 608 551 608 451
Customer list intangibles 1,904 365 1,904 174
------------- -------------------- -------------- ------------------
$21,126 $8,123 $21,126 $7,349
============= ==================== ============== ==================
Net income and earnings per share adjusted for the adoption of SFAS 142 and
147 is as follows (dollars in thousands):
2003 2002 2001
----------- ------------ -----------
Net income, as reported $9,093 $8,034 $6,516
Add back: Goodwill amortization, net of tax benefit - - 568
----------- ------------ -----------
Adjusted net income $9,093 $8,034 $7,084
=========== ============ ===========
BASIC EARNINGS PER SHARE:
Net income, as reported $2.88 $2.39 $1.93
Add back: Goodwill amortization, net of tax benefit - - .17
----------- ------------ -----------
Adjusted net income $2.88 $2.39 $2.10
=========== ============ ===========
DILUTED EARNINGS PER SHARE:
Net income, as reported $2.82 $2.38 $1.92
Add back: Goodwill amortization, net of tax benefit - - .17
----------- ------------ -----------
Adjusted net income $2.82 $2.38 $2.09
=========== ============ ===========
Total amortization expense for the years ended December 31, 2003, 2002 and
2001 was as follows (in thousands):
2003 2002 2001
------------ ------------- ------------
Goodwill not subject to amortization - - $704
Intangibles from branch acquisitions $201 $201 201
Core deposit intangibles 282 300 323
Mortgage servicing rights 100 66 86
Customer list intangibles 191 175 -
------------ ------------- ------------
$774 $742 $1,314
============ ============= ============
Estimated amortization expense for each of the five succeeding years is
shown in the table below (in thousands):
Estimated amortization expense:
For period ended 12/31/04 $623
For period ended 12/31/05 $578
For period ended 12/31/06 $579
For period ended 12/31/07 $515
For period ended 12/31/08 $454
In accordance with the provisions of SFAS 142, the Company performed
testing of goodwill for impairment as of September 30, 2003 and 2002,
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, 2003 and 2002, deposits consisted of the following (in
thousands):
2003 2002
--------------- --------------
Demand deposits:
Non-interest bearing $ 94,723 $ 84,025
Interest-bearing 143,324 143,189
Savings 58,862 52,285
Money market 70,795 69,089
Time deposits 247,288 264,864
--------------- --------------
Total deposits $614,992 $613,452
=============== ==============
Total interest expense on deposits for the years ended December 31, 2003,
2002 and 2001 was as follows (in thousands):
2003 2002 2001
------------ ------------- ------------
Interest-bearing demand $ 907 $ 1,542 $ 2,603
Savings 263 799 923
Money market 872 1,125 1,771
Time deposits 7,709 8,787 13,476
------------ ------------- ------------
Total $9,751 $12,253 $18,773
============ ============= ============
As of December 31, 2003, 2002 and 2001, the aggregate amount of time
deposits in denominations of more than $100,000 and the total interest expense
on such deposits was as follows (in thousands):
2003 2002 2001
----------- ------------ -----------
Outstanding $84,516 $93,951 $61,438
Interest expense for the year 2,462 2,766 3,607
The following table shows the amount of maturities for all time deposits as
of December 31, 2003 (in thousands):
Less than 1 year $157,737
1 year to 2 years 38,005
2 years to 3 years 5,852
3 years to 4 years 40,178
Over 4 years 5,516
------------------
Total $247,288
==================
In 2003, the Company's significant deposits included brokered CD's, time
deposits with the State of Illinois, and a deposit relationship with a public
fund entity. The Company had six brokered CD's at various maturities with a
total balance of $22.9 million as of December 31, 2003. State of Illinois time
deposits maintained with the Company totaled $6.3 million as of December 31,
2003. These balances are subject to bid annually. In addition, the Company
maintains account relationships with various public fund entities throughout
their market areas. One public fund entity had total balances of $29.3 million
in various checking accounts and time deposits as of December 31, 2003. These
balances are subject to change depending upon the cash flow needs of the public
fund entity.
Note 11 - Other Borrowings
As of December 31, 2003 and 2002 other borrowings consisted of the
following (in thousands):
2003 2002
------------- --------------
Securities sold under agreements to repurchase $59,875 $44,184
Federal Home Loan Bank advances:
Fixed-term advances 30,300 35,300
Other debt:
Loans due in one year or less 9,025 8,525
Loans due after one year 600 800
------------- --------------
Total $99,800 $88,809
============= ==============
The Federal Home Loan Bank fixed-term advances at December 31, 2003
consisted of the following:
* $5 million advance at 3.45%, due February 28, 2004
* $5 million advance at 6.16%, due March 20, 2005, callable annually
* $2.3 million advance at 6.10%, due April 7, 2005, callable quarterly
* $5 million advance at 6.12%, due September 6, 2005
* $5 million advance at 5.34%, due December 14, 2005
* $3 million advance at 5.98%, due March 1, 2011
* $5 million advance at 4.33%, due November 23, 2011
2003 2002 2001
--------- --------- ---------
Securities sold under agreements to repurchase:
Maximum outstanding at any month-end $59,875 $44,588 $40,646
Average amount outstanding for the year 47,795 34,389 29,547
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 167% of the outstanding advances from the
FHLB. The securities underlying the repurchase agreements are under the
Company's control.
The Company had an other debt balance of $9,625,000 as of December 31,
2003, consisting of a loan agreement with The Northern Trust Company with a
balance of $8,825,000 and $800,000 remaining on a $1 million promissory note for
the Checkley acquisition of which $200,000 is due in one year or less and
$600,000 is due after one year. As of December 31, 2002, the Company had an
other debt balance of $9,325,000 that consisted of a loan agreement with The
Northern Trust Company and a $1 million promissory note for the Checkley
acquisition of which $200,000 was due in one year or less and $800,000 was due
after one year. Terms of the Northern Trust loan agreement are a floating
interest rate of 1.25% over the federal funds rate with interest due quarterly.
The interest rate as of December 31, 2003 was 2.22% (2.5% at December 31, 2002).
The loan is a revolving credit agreement with a maximum available balance of $15
million. The outstanding loan balance matures October 23, 2004. Management of
the Company expects this loan to be renewed in the future. The loan is secured
by all of the common stock of First Mid Bank. The borrowing agreement contains
requirements for the Company and First Mid Bank to maintain various operating
and capital ratios and also contains requirements for prior lender approval for
certain sales of assets, merger activity, the acquisition or issuance of debt
and the acquisition of treasury stock. The Company and First Mid Bank were in
compliance with the existing covenants at December 31, 2003 and 2002.
The $800,000 promissory note resulting from the acquisition of Checkley has
an annual interest rate equal to the prime rate listed in the money rate section
of the Wall Street Journal (4.00% as of December 31, 2003) and principal payable
in the amount of $200,000 annually over five years, with a final maturity of
January 2007.
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, 2003 and 2002, that all capital adequacy
requirements have been met.
As of December 31, 2003 and 2002, 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, 2003, 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
(dollars in thousands) Actual Adequacy Purposes Action Provisions
------------------------ ------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ----------- ------------ ------------ ------------ -------------
December 31, 2003
Total Capital
(to risk-weighted assets)
Company $ 60,494 10.61% $ 45,613 > 8.00% N/A N/A
-
First Mid Bank 65,356 11.57 45,190 > 8.00 $56,488 > 10.00%
- -
Tier 1 Capital
(to risk-weighted assets)
Company 56,068 9.83 22,807 > 4.00 N/A N/A
-
First Mid Bank 60,930 10.79 22,595 > 4.00 33,893 > 6.00
- -
Tier 1 Capital
(to average assets)
Company 56,068 7.18 31,217 > 4.00 N/A N/A
-
First Mid Bank 60,930 7.85 31,059 > 4.00 38,824 > 5.00
- -
December 31, 2002
Total Capital
(to risk-weighted assets)
Company $ 54,380 10.35% $ 42,051 > 8.00% N/A N/A
-
First Mid Bank 59,476 11.42 41,653 > 8.00 $52,067 > 10.00%
- -
Tier 1 Capital
(to risk-weighted assets)
Company 50,657 9.64 21,026 > 4.00 N/A N/A
-
First Mid Bank 55,753 10.71 20,827 > 4.00 31,240 > 6.00
- -
Tier 1 Capital
(to average assets)
Company 50,657 6.62 30,630 > 4.00 N/A N/A
-
First Mid Bank 55,753 7.39 30,158 > 4.00 37,698 > 5.00
- -
Note 13 - Disclosure of Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" ("SFAS 107") requires the disclosure of the
estimated fair value of financial instrument assets and liabilities. For the
Company, as for most financial institutions, most of the assets and liabilities
are considered financial instruments as defined in SFAS 107. However, many of
the Company's financial instruments lack an available trading market as
characterized by a willing buyer and seller engaging in an exchange transaction.
Additionally, the Company's general practice and intent is to hold its financial
instruments until maturity and not to engage in trading or sales activity.
Accordingly, the Company, for purposes of the SFAS 107 disclosure, used
significant assumptions and estimations as well as present value calculations.
Future changes in these assumptions or methodologies may have a material effect
on estimated fair values.
The Company has determined estimated fair values using the best available
information and an estimation methodology suitable for each category of
financial instrument. The estimation methodology used, the estimated fair values
and the carrying amount at December 31, 2003 and 2002 were as follows (in
thousands):
Financial instruments for which an active secondary market exists have been
valued using quoted available market prices.
2003 2002
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------- -------------- --------------- --------------
Cash and cash equivalents $ 24,949 $ 24,949 $ 69,657 $ 69,657
Investments available-for-sale 176,481 176,481 166,415 166,415
Investments held-to-maturity 1,677 1,687 1,902 1,927
Financial instrument liabilities with stated maturities and other
borrowings have been valued at present value, using a discount rate
approximating current market rates for similar assets and liabilities.
2003 2002
------------------------------ -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- --------------- -------------- --------------
Deposits with stated maturities $247,282 $249,857 $264,864 $268,376
Securities sold under agreements
to repurchase 59,875 59,872 44,184 44,180
Federal Home Loan Bank advances 30,300 32,313 35,300 37,881
Financial instrument liabilities without stated maturities and floating
rate debt have estimated fair values equal to both the amount payable on demand
and the carrying amount.
2003 2002
------------------------------ -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- --------------- -------------- --------------
Deposits with no stated maturity $367,710 $367,710 $348,588 $348,588
Floating rate debt 9,625 9,625 9,325 9,325
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.
2003 2002
------------------------------ -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- --------------- -------------- --------------
Net loan portfolio $548,398 $555,154 $496,141 $505,990
Off-balance sheet items such as loan commitments and stand-by letters of
credit generally approximate their estimated fair values.
Note 14 - Retirement Plan
The Company has a defined contribution retirement plan which covers
substantially all employees and which provides for base contributions of 4% of
compensation and a matching contribution by the Company of up to 50% of the
first 4% of voluntary employee contributions. Employee contributions are limited
to 15% of compensation. The total expense for the plan amounted to $544,000,
$516,000 and $450,000 in 2003, 2002 and 2001, respectively. The Company also has
two agreements in place to pay $50,000 annually for 20 years from the retirement
date to one retired senior officer of the Company and to one current senior
officer. Total expense under these two agreements amounted to $81,000, $81,000
and $50,000 in 2003, 2002 and 2001, respectively.
Note 15 - Stock Option Plan
The Company established a Stock Incentive Plan ("SI Plan") intended to
provide a means whereby directors and certain officers can acquire shares of the
Company's common stock. A maximum of 300,000 shares have been authorized under
the SI Plan. Options to acquire shares will be awarded at an exercise price
equal to the fair market value of the shares on the date of grant. Options to
acquire shares have a 10-year term. Options granted to employees vest over a
four-year period and those options granted to directors vest at the time they
are issued.
A summary of the status of stock options under the SI Plan at December 31,
2003, 2002 and 2001 and changes during the years then ended are presented in the
following table:
For the year ended December 31,
2003 2002 2001
---------------------- ---------------------- ----------------------
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ----------- ---------- ----------- ---------- -----------
Beginning of year 167,437 $22.65 131,750 $21.06 92,250 $19.81
Granted 48,000 46.50 43,500 27.25 39,500 24.00
Exercised (11,875) 19.75 (7,813) 21.43 - -
---------- ----------- ---------- ----------- ---------- -----------
End of year 203,562 $28.45 167,437 $22.65 131,750 $21.06
========== =========== ========== =========== ========== ===========
Options exercisable 93,627 $24.46 66,565 $19.96 58,250 $19.61
========== =========== ========== =========== ========== ===========
Fair value of options
granted during year $ 8.67 $ 6.80 $ 6.48
============ =========== ===========
At December 31, 2003, options for 73,750 shares were available for grant
under the SI Plan.
The Company applies APB Opinion No. 25 in accounting for the SI Plan and,
accordingly, compensation cost based on fair value at grant date has not been
recognized for its stock options in the consolidated financial statements. As
required by SFAS 123, "Accounting for Stock-Based Compensation" as amended by
SFAS 148, "Accounting for Stock-Based Compensation--Transition and Disclosure,"
the Company provides pro forma net income and pro forma earnings per share
disclosures for employee stock option grants. The following table illustrates
the effect on net income if the fair-value-based method had been applied
(dollars in thousands).
For the years ended December 31,
2003 2002 2001
------------ ----------- -----------
Net income, as reported $ 9,093 $ 8,034 $ 6,516
Stock-based compensation expense
determined under fair-value-based
method, net of related tax effect (206) (143) (136)
------------ ----------- -----------
Pro forma net income $ 8,887 $ 7,891 $ 6,380
============ =========== ===========
Basic Earnings Per Share:
As reported $ 2.88 $ 2.39 $ 1.93
Pro forma 2.81 2.35 1.89
Diluted Earnings Per Share:
As reported $ 2.82 $ 2.38 $ 1.92
Pro forma 2.76 2.33 1.88
The fair value of options granted is estimated on the grant date using the
Black-Scholes option pricing model. The following assumptions were used in
estimating the fair value for options granted in 2003, 2002 and 2001:
2003 2002 2001
------------- ------------ ------------
Dividend yield 1.8% 1.8% 2.0%
Risk free interest rate 2.49% 4.56% 5.16%
Weighted average expected life 9.9 yrs 9.9 yrs 9.9 yrs
Expected volatility 15.5% 15% 16%
Note 16 - Income Taxes
The components of federal and state income tax expense (benefit) for
the years ended December 31, 2003, 2002 and 2001 were as follows (in thousands):
2003 2002 2001
-------------- ------------- --------------
Current
Federal $4,183 $3,515 $2,977
State 717 636 376
-------------- ------------- --------------
Total Current 4,900 4,151 3,353
Deferred
Federal (186) (119) (275)
State (40) (27) (38)
-------------- ------------- --------------
Total Deferred (226) (146) (313)
-------------- ------------- --------------
Total $4,674 $4,005 $3,040
============== ============= ==============
Recorded income tax expense differs from the expected tax expense (computed
by applying the applicable statutory U.S. Federal tax rate of 34.25% in 2003 and
34% in 2002 and 2001 to income before income taxes). The principal reasons for
this difference are as follows (in thousands):
2003 2002 2001
-------------- ------------- -------------
Expected income taxes $4,819 $4,093 $3,249
Effects of:
Tax-exempt income (550) (577) (659)
Nondeductible interest expense 35 46 82
Goodwill amortization - - 120
State taxes, net of federal taxes 440 402 222
Other items 19 41 26
Effect of marginal tax rate (89) - -
-------------- ------------- -------------
Total $4,674 $4,005 $3,040
============== ============= =============
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,
2003 and 2002 are presented below (in thousands):
2003 2002
--------------- ----------------
Deferred tax assets:
Allowance for loan losses $ 1,725 $ 1,442
Deferred compensation 619 460
Supplemental retirement 71 59
Other (57) 216
--------------- ----------------
Total gross deferred tax assets $ 2,358 $ 2,177
=============== ================
Deferred tax liabilities:
Depreciation $ 15 $ 93
Available-for-sale investment securities 1,009 1,501
Core deposit premium amortization 88 128
Other 344 282
--------------- ----------------
Total gross deferred tax liabilities $ 1,456 $ 2,004
--------------- ----------------
Net deferred tax assets $ 902 $ 173
=============== ================
Net deferred tax assets or deferred tax liabilities are recorded in other
assets or other liabilities, respectively, on the consolidated balance sheets.
No valuation allowance related to deferred tax assets has been recorded at
December 31, 2003 and 2002 as management believes it is more likely than not
that the deferred tax assets will be fully realized.
Note 17 - Dividend Restrictions
Banking regulations impose restrictions on the ability of First Mid Bank to
pay dividends to the Company. At December 31, 2003, regulatory approval would
have been required for aggregate dividends from First Mid Bank to the Company in
excess of approximately $13.2 million. The amount of such dividends that could
be paid is further restricted by the limitations of sound and prudent banking
principles.
Note 18 - 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, 2003 and 2002 are as follows (in
thousands):
2003 2002
--------------- ----------------
Unused commitments including
lines of credit:
Commercial real estate $24,283 $31,506
Commercial operating 32,928 31,160
Home Equity 13,207 9,509
Other 14,991 13,753
--------------- ----------------
Total $85,409 $85,928
=============== ================
Standby letters of credit $2,440 $997
=============== ================
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.
Note 19 - Parent Company Only Financial Statements
Presented below are condensed balance sheets, statements of income and cash
flows for the Company (in thousands):
First Mid-Illinois Bancshares, Inc. (Parent Company)
Balance Sheets
December 31, 2003 2002
------------- ------------
Assets
Cash $ 1,743 $ 1,229
Premises and equipment, net 275 1
Investment in subsidiaries 77,209 73,223
Other assets 3,647 2,635
------------- ------------
Total Assets $82,874 $77,088
============= ============
Liabilities and Stockholders' equity
Liabilities
Dividends payable $ 1,256 $ 861
Debt 9,625 9,325
Other liabilities 1,398 95
------------- ------------
Total Liabilities 12,279 10,281
------------- ------------
Stockholders' equity 70,595 66,807
------------- ------------
Total Liabilities and Stockholders' equity $82,874 $77,088
============= ============
First Mid-Illinois Bancshares, Inc. (Parent Company)
Statements of Income
Years ended December 31, 2003 2002 2001
---------- --------- ---------
Income:
Dividends from subsidiaries $4,922 $3,515 $3,281
Other income 80 42 93
---------- --------- ---------
5,002 3,557 3,374
Operating expenses 1,068 1,205 1,006
---------- --------- ---------
Income before income taxes and equity
in undistributed earnings of subsidiaries 3,934 2,352 2,368
Income tax benefit 381 425 319
---------- --------- ---------
Income before equity in undistributed
earnings of subsidiaries 4,315 2,777 2,687
Equity in undistributed earnings of subsidiaries 4,778 5,257 3,829
---------- --------- ---------
Net income $9,093 $8,034 $6,516
========== ========= =========
First Mid-Illinois Bancshares, Inc. (Parent Company)
Statements of Cash Flows
Years ended December 31, 2003 2002 2001
---------- --------- ---------
Cash flows from operating activities:
Net income $9,093 $8,034 $6,516
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization, accretion, net 6 2 2
Equity in undistributed earnings of
subsidiaries (4,778) (5,257) (3,829)
Increase in other assets (1,292) (1,495) (543)
Increase (decrease) in other liabilities 1,301 (12) 50
---------- --------- ---------
Net cash provided by operating activities 4,330 1,272 2,196
--------- --------- ---------
Cash flows from financing activities:
Repayment of long-term debt (200) (3,525) -
Proceeds from short-term debt 500 8,525 -
Proceeds from issuance of common stock 895 481 377
Purchase of treasury stock (4,233) (6,540) (1,038)
Dividends paid on common stock (778) (674) (590)
---------- --------- ---------
Net cash used in financing activities (3,816) (1,733) (1,251)
---------- --------- ---------
Increase (decrease) in cash 514 (461) 945
Cash at beginning of year 1,229 1,690 745
---------- --------- ---------
Cash at end of year $ 1,743 $ 1,229 $ 1,690
========== ========= =========
Note 20 - Quarterly Financial Data - Unaudited
The following table presents summarized quarterly data for each of the two
years ended December 31:
Quarters ended in 2003
March 31 June 30 September 30 December 31
------------- ------------ ----------------- --------------
Selected operations data:
Interest income $9,720 $9,729 $9,667 $9,822
Interest expense 3,240 3,104 2,807 2,745
------------- ------------ ----------------- --------------
Net interest income 6,480 6,625 6,860 7,077
Provision for loan losses 250 250 250 250
------------- ------------ ----------------- --------------
Net interest income after 6,230 6,375 6,610 6,827
provision for loan losses
Other income 3,300 2,970 3,217 2,768
Other expense 5,936 6,135 6,177 6,282
------------- ------------ ----------------- --------------
Income before income taxes 3,594 3,210 3,650 3,313
Income taxes 1,232 1,088 1,257 1,097
------------- ------------ ----------------- --------------
Net income $2,362 $2,122 $2,393 $2,216
============= ============ ================= ==============
Basic earnings per share $0.74 $0.67 $0.76 $0.71
Diluted earnings per share $0.73 $0.67 $0.74 $0.68
Quarters ended in 2002
March 31 (1) June 30 (1) September 30 (1) December 31
------------- ------------ ----------------- --------------
Selected operations data:
Interest income $10,365 $10,320 $10,384 $10,318
Interest expense 3,951 3,612 3,505 3,593
------------- ------------ ----------------- --------------
Net interest income 6,414 6,708 6,879 6,725
Provision for loan losses 125 150 500 300
------------- ------------ ----------------- --------------
Net interest income after 6,289 6,558 6,379 6,425
provision for loan losses
Other income 2,211 2,330 2,832 3,021
Other expense 5,519 5,868 6,165 6,454
------------- ------------ ----------------- --------------
Income before income taxes 2,981 3,020 3,046 2,992
Income taxes 972 1,014 1,016 1,003
------------- ------------ ----------------- --------------
Net income $ 2,009 $ 2,006 $ 2,030 $ 1,989
============= ============ ================= ==============
Basic earnings per share $0.59 $0.60 $0.59 $0.61
Diluted earnings per share $0.59 $0.59 $0.59 $0.61
(1) Restated for adoption of SFAS No. 147
Independent Auditors' Report
The Board of Directors
First Mid-Illinois Bancshares, Inc.
Mattoon, Illinois:
We have audited the accompanying consolidated balance sheets of First
Mid-Illinois Bancshares, Inc. and subsidiaries as of December 31, 2003 and 2002,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as 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. and subsidiaries as of December 31, 2003 and 2002,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in notes 1 and 9 to the consolidated financial statements, the
Company changed its method of accounting for goodwill in 2002.
/s/ KPMG LLP
Chicago, Illinois
February 27, 2004
Statement of Responsibility for Financial Data
Management is responsible for the integrity of all the financial data
included in this Annual Report. The financial statements and related notes are
prepared in accordance with accounting principles generally accepted in the
United States of America. Financial information elsewhere in this Report is
consistent with that in the financial statements.
Management maintains a system of internal accounting control, including an
internal audit program, which provides reasonable assurance that assets are
safeguarded against loss from unauthorized use or disposition, transactions are
properly authorized and accounting records are reliable for the preparation of
financial statements. The foundation of the system of internal accounting
control rests upon careful selection and training of personnel, segregation of
responsibilities and application of formal policies and procedures that are
consistent with the highest standards of business conduct. The system of
internal accounting control is being continuously modified and improved in
response to changes in business conditions and operations.
The board of directors has an audit committee comprised of seven outside
directors. The Committee meets periodically with the independent auditors, the
internal auditors and management to ensure that the system of internal
accounting control is being properly administered and that financial data is
being properly reported. The committee reviews the scope and timing of both the
internal and external audits, including recommendations made with respect to the
system of internal accounting control by the independent auditors.
KPMG LLP, independent certified public accountants, as identified in the
accompanying Independent Auditors' Report, has audited the consolidated
financial statements. The audits were conducted in accordance with auditing
standards generally accepted in the United States of America, which included
tests of the accounting records and other auditing procedures considered
necessary to formulate an opinion as to the fairness, in all material respects,
of the consolidated financial statements.
March 12, 2004
William S. Rowland
Chairman & Chief Executive Officer
Michael L. Taylor
Chief Financial Officer
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management evaluated its disclosure controls and procedures
as of December 31, 2003. Based on this evaluation, the Chief Executive Officer
and the Chief Financial Officer each concludes that as of December 31, 2003, the
Company maintained effective disclosure controls and procedures in all material
respects, including those to ensure that information required to be disclosed in
reports filed or submitted under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms, and is accumulated and communicated to management,
including the Chief Executive Officer and the Chief Financial Officer, as
appropriate to allow for timely decisions regarding required disclosure.
There has been no change in the Company's internal control over financial
reporting that occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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 2004 Proxy
Statement under the captions "Proposal 1 - Election of Directors" and "Section
16 - Beneficial Ownership Reporting Compliance."
The information called for by Item 10 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 10 with respect to audit committee
financial expert is incorporated by reference to the Company's 2004 Proxy
Statement under the caption "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. A copy of this code of ethics is filed herewith as Exhibit 14.1. This
code of ethics is also available 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 2004 Proxy Statement under the caption "Executive Compensation,"
"Common Stock Price Performance Graph" and "Directors' Compensation."
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 Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance
of outstanding options outstanding options under equity compensation plans
(a) (b) (c)
- ---------------------------------------- ------------------------- ------------------------- ----------------------------------
Equity compensation plans approved by
security holders:
(1) Deferred Compensation Plan 102,334 $18.31 197,666
(2) Stock Incentive Plan 203,562 28.45 73,750
Equity compensation plans not approved
by security holders - - -
------------------------- ------------------------- ----------------------------------
Total 305,896 $25.06 271,416
========================= ========================= ==================================
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 of the Company's financial statements.
The information called for by Item 12 with respect to security ownership is
incorporated by reference to the Company's 2004 Proxy Statement under the
caption "Voting Securities and Principal Holders Thereof."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated by reference to the
Company's 2004 Proxy Statement under the caption "Certain Relationships and
Related Transactions."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for by Item 14 is incorporated by reference to the
Company's 2004 Proxy Statement under the caption "Fees of Independent Auditors."
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(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, 2003 and 2002
* Consolidated Statements of Income -- For the Years Ended December 31,
2003, 2002 and 2001
* Consolidated Statements of Changes in Stockholders' Equity -- For the
Years Ended December 31, 2003, 2002 and 2001
* Consolidated Statements of Cash Flows -- For the Years Ended December
31, 2003, 2002 and 2001.
(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.
(b) Reports on Form 8-K
The Company filed Form 8-K on January 29, 2003 regarding the Company's
financial statements as of December 31, 2002.
The Company filed Form 8-K on April 24, 2003 regarding the Company's
financial statements as of March 31, 2003.
The Company filed Form 8-K on July 23, 2003 regarding the Company's
financial statements as of June 30, 2003.
The Company filed Form 8-K on October 29, 2003 regarding the Company's
financial statements as of September 30, 2003.
The Company filed Form 8-K on January 28, 2004 regarding the Company's
financial statements as of December 31, 2003.
The Company filed Form 8-K on February 9, 2004 regarding the Company's
acquisition, as treasury stock, of 100,000 shares of outstanding common
stock.
The Company filed Form 8-K on February 27, 2004 regarding the Company's
issuance and sale of $10 million of floating rate trust preferred
securities.
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 12, 2004
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 12th day of March, 2004, 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, Director,
President and Chief Executive Officer
/s/ Michael L. Taylor
Michael L. Taylor,
Vice President and Chief Financial Officer
/s/ Charles A. Adams
Charles A. Adams, Director
/s/ Kenneth R. Diepholz
Kenneth R. Diepholz, Director
/s/ Steven L. Grissom
Steven L. Grissom, Director
/s/ Richard A. Lumpkin
Richard A. Lumpkin, Director
/s/ Daniel E. Marvin, Jr.
Daniel E. Marvin, Jr., 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 Index to Annual Report on Form 10-K
Exhibit
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 (File No. 0-13368)
3.2 Restated Bylaws of First Mid-Illinois Bancshares, Inc. and Amendment
thereto Incorporated by reference to Exhibit 3.2 to First Mid-Illinois
Bancshares, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2002 (File No. 0-13368)
4.1 Rights Agreement, dated as of September 21, 1999, 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 22, 1999
10.1 Employment Agreement between the Company and William S. Rowland
(Filed herewith)
10.2 Employment Agreement between the Company and John W. Hedges
(Filed herewith)
10.3 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 year ended December 31, 1998 (File No 0-13368)
10.4 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 year ended December 31, 1998 (File No 0-13368)
10.5 Schedule of Parties to Employment Agreements and Form of Employment
Agreement The following Company officers have entered into Employment
Agreements with the Company: Robert Swift. The contracts are
substantially identical in all material respects except as to the
parties, the execution dates and the monthly base payout. A sample
form of the agreement is filed herewith.
11.1 Statement re: Computation of Earnings Per Share (Filed herewith)
14.1 Form of Code of Ethics The Chief Executive Officer and the Chief
Financial Officer signed Code of Ethics with the Company. The forms
are identical in all material respects except for the dates signed. A
sample form of the Code of Ethics is filed herewith.
21.1 Subsidiaries of the Company (Filed herewith)
23.1 Consent of KPMG LLP (Filed herewith)
31.1 Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into this
25th day of January, 2002, by and between First Mid-Illinois Bancshares, Inc.
("the Company"), a corporation with its principal place of business located in
Mattoon, Illinois, and William S. Rowland ("Executive").
In consideration of the promises and mutual covenants and agreements
contained herein, the parties hereto acknowledge and agree as follows:
ARTICLE ONE
TERM AND NATURE OF AGREEMENT
1.01 Term of Agreement. The term of this Agreement shall commence as of
February 1, 2002 and shall continue until December 31, 2004. Thereafter, unless
Executive's employment with the Company has been previously terminated,
Executive shall continue his employment with the Company on an at will basis
and, except as provided in Articles Five, Six and Seven, this Agreement shall
terminate unless extended by mutual written agreement.
1.02 Employment as President and CEO. The Company agrees to employ
Executive as its President and Chief Executive Officer commencing February 1,
2002 and Executive accepts such employment by the Company on the terms and
conditions herein set forth. The duties of Executive shall be determined by the
Company's Board of Directors and Executive shall adhere to the policies and
procedures of the Company and shall follow the supervision and direction of the
Board in the performance of such duties. During the term of his employment,
Executive agrees to devote his full working time, attention and energies to the
diligent and satisfactory performance of his duties hereunder. Executive shall
not, while he is employed by the Company, engage in any activity which would (a)
interfere with, or have an adverse effect on, the reputation, goodwill or any
business relationship of the Company or any of its subsidiaries; (b) result in
economic harm to the Company or any of its subsidiaries; or (c) result in a
breach of Section Six of the Agreement.
1.03 Service as Chairman. The Company shall use its best efforts to
continue Executive's position as Chairman of the Board of Directors of the
Company during the term of his employment, to which position he was elected
effective as of June 1, 1999.
ARTICLE TWO
COMPENSATION AND BENEFITS
While Executive is employed with the Company during the term of this
Agreement, the Company shall provide Executive with the following compensation
and benefits:
2.01 Base Salary. The Company shall pay Executive an annual base salary of
$187,000.00 per fiscal year, payable in accordance with the Company's customary
payroll practices for executive employees. The Board may review and adjust
Executive's base salary from year to year; provided, however, that during the
term of Executive's employment, the Company shall not decrease Executive's base
salary.
2.02 Incentive Compensation Plan. Executive shall continue to participate
in the First Mid-Illinois Bancshares, Inc. Incentive Compensation Plan in
accordance with the terms and conditions of such Plan. Pursuant to the Plan,
Executive shall have an opportunity to receive incentive compensation of up to a
maximum of 50% of Executive's annual base salary. The incentive compensation
payable for a particular fiscal year will be based upon the attainment of the
performance goals in effect under the Plan for such year and will be paid in
accordance with the terms of the Plan and at the sole discretion of the Board.
2.03 Deferred Compensation Plan. Executive may continue to participate in
the First Mid-Illinois Bancshares, Inc. Deferred Compensation Plan in accordance
with the terms and conditions of such Plan.
2.04 Supplemental Executive Retirement Plan. Executive shall continue to
participate in the First Mid-Illinois Bancshares, Inc. Supplemental Executive
Retirement Plan with retirement benefit payable under the Plan upon Executive's
retirement at age 63 of $50,000 per year and unreduced benefits commencing at
age 63. All other provisions of the Plan shall remain unchanged.
2.05 Stock Option Plan. Executive may continue to participate in the First
Mid-Illinois Bancshares, Inc. 1997 Stock Incentive Plan.
2.06 Vacation. Executive shall be entitled to four (4) weeks of paid
vacation each year during the term of this Agreement.
2.07 Fringe Benefits. The Company shall provide the following additional
fringe benefits to Executive:
(a) Use of a Company-owned or leased vehicle for professional and personal
use.
(b) An amount equal to the annual dues for a Class "H" membership at the
Mattoon Golf and Country Club.
(c) Use of a cellular phone for work-related calls and calls associated
with Internet connection for Executive's home.
2.08 Other Benefits. Executive shall be eligible (to the extent he
qualifies) to participate in any other retirement, health, accident and
disability insurance, or similar employee benefit plans as may be maintained
from time to time by the Company for its other executives or employees subject
to and on a consistent basis with the terms, conditions and overall
administration of such plans.
2.09 Business Expenses. Executive shall be entitled to reimbursement by the
Company for all reasonable expenses actually and necessarily incurred by him on
its behalf in the course of his employment hereunder and in accordance with
expense reimbursement plans and policies of the Company from time to time in
effect for executive employees.
2.10. Withholding. All salary, incentive compensation and other benefits
provided to Executive pursuant to this Agreement shall be subject to withholding
for federal, state or local taxes, amounts withheld under applicable employee
benefit plans, policies or programs, and any other amounts that may be required
to be withheld by law, judicial order or otherwise or by agreement with, or
consent of, Executive.
ARTICLE THREE
DEATH OF EXECUTIVE
This Agreement shall terminate prior to the end of the term described in
Section 1.01 upon Executive's termination of employment with the Company due to
his death. Upon Executive's termination due to death, the Company shall pay
Executive's estate the amount of Executive's base salary and his accrued but
unused vacation time earned through the date of such death and any incentive
compensation earned for the preceding fiscal year that is not yet paid as of the
date of such death.
ARTICLE FOUR
TERMINATION OF EMPLOYMENT
Executive's employment with the Company may be terminated by Executive or
by the Company at any time for any reason. Upon Executive's termination of
employment prior to the end of the term of the Agreement, the Company shall pay
Executive as follows:
4.01 Termination by the Company for Other Than Cause. If the Company
terminates Executive's employment for any reason other than Cause, the Company
shall pay Executive the following:
(a) An amount equal to Executive's monthly base salary in effect at the
time of such termination of employment for a period of twelve (12)
months thereafter. Such amount shall be paid to Executive periodically
in accordance with the Company's customary payroll practices for
executive employees.
(b) The base salary and accrued but unused paid vacation time earned
through the date of termination and any incentive compensation earned
for the preceding fiscal year that is not yet paid.
(c) Continued coverage for Executive and/or Executive's family under the
Company's health plan pursuant to Title I, Part 6 of the Employee
Retirement Income Security Act of 1974 ("COBRA") and for such purpose
the date of Executive's termination of employment shall be considered
the date of the "qualifying event" as such term is defined by COBRA.
During the twelve month period beginning on the date of such
termination, the Executive shall be charged for such coverage in the
amount that he would have paid for such coverage had he remained
employed by the Company, and for the duration of the COBRA period, the
Executive shall be charged for such coverage in accordance with the
provisions of COBRA.
For purposes of this Agreement, "Cause" shall mean Executive's (i)
conviction in a court of law of (or entering a plea of guilty or no contest to)
any crime or offense involving fraud, dishonesty or breach of trust or involving
a felony; (ii) performance of any act which, if known to the customers, clients,
stockholders or regulators of the Company, would materially and adversely impact
the business of the Company; (iii) act or omission that causes a regulatory body
with jurisdiction over the Company to demand, request, or recommend that
Executive be suspended or removed from any position in which Executive serves
with the Company; (iv) substantial nonperformance of any of his obligations
under this Agreement; (v) misappropriation of or intentional material damage to
the property or business of the Company or any affiliate; or (vi) breach of
Article Five or Six of this Agreement.
4.02 Termination Following a Change in Control. Notwithstanding Section
4.01, if, following a Change in Control, Executive's employment is terminated by
the Company (or any successor thereto) for any reason other than Cause, or if
Executive terminates his employment because of a decrease in his then current
base salary or a substantial diminution in his position and responsibilities,
the Company (or any successor thereto) shall pay Executive the following:
(a) Two times Executive's annual base salary in effect at the time of such
termination. Such amount shall be paid, at Executive's election, in
either a lump sum payment as soon as practicable following the date of
such termination or periodically in accordance with the Company's or
successor's customary payroll practices for executive employees.
(b) An amount equal to the incentive compensation earned by or paid to
Executive for the fiscal year immediately preceding the year in which
Executive's termination of employment occurs. Such amount shall be
paid to Executive in a lump sum as soon as practicable after the date
of his termination.
(c) The base salary and accrued but unused paid vacation time earned
through the date of termination and any incentive compensation earned
for the preceding fiscal year that is not yet paid.
(d) Continued coverage for Executive and/or Executive's family under the
Company's health plan pursuant to Title I, Part 6 of the Employee
Retirement Income Security Act of 1974 ("COBRA") and for such purpose
the date of Executive's termination of employment shall be considered
the date of the "qualifying event" as such term is defined by COBRA.
During the twelve month period beginning on the date of such
termination, the Executive shall be charged for such coverage in the
amount that he would have paid for such coverage had he remained
employed by the Company, and for the duration of the COBRA period, the
Executive shall be charged for such coverage in accordance with the
provisions of COBRA.
For purposes of this Agreement, "Change in Control" shall have the meaning
as set forth in the First Mid-Illinois Bancshares, Inc. 1997 Stock Incentive
Plan.
4.03 Other Termination of Employment. If the Company terminates Executive's
employment for Cause, or if Executive terminates his employment for any reason
other than as described in Section 4.02 above, the Company shall pay Executive
the base salary and accrued but unused paid vacation time earned through the
date of such termination and any incentive compensation earned for the preceding
fiscal year that is not yet paid.
ARTICLE FIVE
CONFIDENTIAL INFORMATION
5.01 Non-Disclosure of Confidential Information. During his employment with
the Company, and after his termination of such employment with the Company,
Executive shall not, in any form or manner, directly or indirectly, use,
divulge, disclose or communicate to any person, entity, firm, corporation or any
other third party, any Confidential Information, except as required in the
performance of Executive's duties hereunder, as required by law or as necessary
in conjunction with legal proceedings.
5.02 Definition of Confidential Information. For the purposes of this
Agreement, the term "Confidential Information" shall mean any and all
information either developed by Executive during his employment with the Company
and used by the Company or its affiliates or developed by or for the Company or
its affiliates of which Executive gained knowledge by reason of his employment
with the Company that is not readily available in or known to the general public
or the industry in which the Company or any affiliate is or becomes engaged.
Such Confidential Information shall include, but shall not be limited to, any
technical or non-technical data, formulae, compilations, programs, devices,
methods, techniques, procedures, manuals, financial data, business plans, lists
of actual or potential customers, lists of employees and any information
regarding the Company's or any affiliate's products, marketing or database. The
Company and Executive acknowledge and agree that such Confidential Information
is extremely valuable to the Company and may constitute trade secret information
under applicable law. In the event that any part of the Confidential Information
becomes generally known to the public through legitimate origins (other than by
the breach of this Agreement by Executive or by other misappropriation of the
Confidential Information), that part of the Confidential Information shall no
longer be deemed Confidential Information for the purposes of this Agreement,
but Executive shall continue to be bound by the terms of this Agreement as to
all other Confidential Information.
5.03 Delivery Upon Termination. Upon termination of Executive's employment
with the Company for any reason, Executive shall promptly deliver to the Company
all correspondence, files, manuals, letters, notes, notebooks, reports,
programs, plans, proposals, financial documents, and any other documents or data
concerning the Company's or any affiliate's customers, database, business plan,
marketing strategies, processes or other materials which contain Confidential
Information, together with all other property of the Company or any affiliate in
Executive's possession, custody or control.
ARTICLE SIX
NON-COMPETE AND NON-SOLICITATION COVENANTS
6.01 Covenant Not to Compete. During the term of this Agreement and for a
period of two years following the later of (i) the termination of Executive's
employment for any reason or (ii) the last day of the term of the Agreement,
Executive shall not, on behalf of himself or on behalf of another person,
corporation, partnership, trust or other entity, within the counties of Coles,
Moultrie, Douglas, Cumberland, Effingham, Champaign, Christian, Madison, Macon,
Bond or Piatt, Illinois, or any other county in which the Company or any
affiliate conducts business:
(a) Directly or indirectly own, manage, operate, control, participate in
the ownership, management, operation or control of, be connected with
or have any financial interest in, or serve as an officer, employee,
advisor, consultant, agent or otherwise to any person, firm,
partnership, corporation, trust or other entity which owns or operates
a business similar to that of the Company or its affiliates.
(b) Solicit for sale, represent, and/or sell Competing Products to any
person or entity who or which was the Company's customer or client
during the last two years of Executive's employment. "Competing
Products," for purposes of this Agreement, means products or services
which are similar to, compete with, or can be used for the same
purposes as products or services sold or offered for sale by the
Company or any affiliate or which were in development by the Company
or any affiliate within the last two years of Executive's employment.
6.02 Covenant Not to Solicit. For a period of two years following the later
of (i) the termination of Executive's employment for any reason or (ii) the last
day of the term of this Agreement, Executive shall not:
(a) Attempt in any manner to solicit from any client or customer business
of the type performed by the Company or any affiliate or persuade any
client or customer of the Company or any affiliate to cease to do such
business or to reduce the amount of such business which any such
client or customer has customarily done or contemplates doing with the
Company or any affiliate, whether or not the relationship between the
Company or affiliate and such client or customer was originally
established in whole or in part through Executive's efforts.
(b) Render any services of the type rendered by the Company or any
affiliate for any client or customer of the Company.
(c) Solicit or encourage, or assist any other person to solicit or
encourage, any employees, agents or representatives of the Company or
an affiliate to terminate or alter their relationship with the Company
or any affiliate.
(d) Do or cause to be done, directly or indirectly, any acts which may
impair the relationship between the Company or any affiliate with
their respective clients, customers or employees.
ARTICLE SEVEN
REMEDIES
Executive acknowledges that compliance with the provisions of Articles Five
and Six herein is necessary to protect the business, goodwill and proprietary
information of the Company and that a breach of these covenants will irreparably
and continually damage the Company for which money damages may not be
inadequate. Consequently, Executive agrees that, in the event that he breaches
or threatens to breach any of these provisions, the Company shall be entitled to
both (a) a temporary, preliminary or permanent injunction in order to prevent
the continuation of such harm; and (b) money damages insofar as they can be
determined. In addition, the Company will cease payment of all compensation and
benefits under Articles Three and Four hereof. In the event that any of the
provisions, covenants, warranties or agreements in this Agreement are held to be
in any respect an unreasonable restriction upon the Executive or are otherwise
invalid, for whatsoever cause, then the court so holding shall reduce, and is so
authorized to reduce, the territory to which it pertains and/or the period of
time in which it operates, or the scope of activity to which it pertains or
effect any other change to the extent necessary to render any of the
restrictions of this Agreement enforceable.
ARTICLE EIGHT
MISCELLANEOUS
8.01 Successors and Assignability.
(a) No rights or obligations of the Company under this Agreement may be
assigned or transferred except that the Company will require any
successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession had
taken place.
(b) No rights or obligations of Executive under this Agreement may be
assigned or transferred by Executive other than his rights to payments
or benefits hereunder which may be transferred only by will or the
laws of descent and distribution.
8.02 Entire Agreement. This Agreement contains the entire agreement between
the parties with respect to the subject matter hereof and may not be modified
except in writing by the parties hereto. Furthermore, the parties hereto
specifically agree that all prior agreements, whether written or oral, relating
to Executive's employment by the Company shall be of no further force or effect
from and after the date hereof.
8.03 Severability. If any phrase, clause or provision of this Agreement is
deemed invalid or unenforceable, such phrase, clause or provision shall be
deemed severed from this Agreement, but will not affect any other provisions of
this Agreement, which shall otherwise remain in full force and effect. If any
restriction or limitation in this Agreement is deemed to be unreasonable,
onerous or unduly restrictive, it shall not be stricken in its entirety and held
totally void and unenforceable, but shall be deemed rewritten and shall remain
effective to the maximum extent permissible within reasonable bounds.
8.04 Controlling Law and Jurisdiction. This Agreement shall be governed by
and interpreted and construed according to the laws of the State of Illinois.
The parties hereby consent to the jurisdiction of the state and federal courts
in the State of Illinois in the event that any disputes arise under this
Agreement.
8.05 Notices. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed to have been duly given
(a) on the date of service if served personally on the party to whom notice is
to be given; (b) on the day after delivery to an overnight courier service; (c)
on the day of transmission if sent via facsimile to the facsimile number given
below; or (d) on the third day after mailing, if mailed to the party to whom
notice is to be given, by first class mail, registered or certified, postage
prepaid and properly addressed, to the party as follows:
If to Executive: William S. Rowland
1 Prairie Sun Lane
Mattoon, IL 61938
If to the Company: First Mid-Illinois Bancshares, Inc.
1515 Charleston Avenue
Mattoon, Illinois 61938
Facsimile: 217-234-0485
Attention: Chairman of Compensation Committee
Any party may change its address for the purpose of this Section by giving
the other party written notice of its new address in the manner set forth above.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
FIRST MID-ILLINOIS BANCSHARES, INC.
By: /s/ Kenneth R. Diepholz
Kenneth R. Diepholz
Title: Chairman, Compensation Committee
EXECUTIVE:
/s/ William S. Rowland
William S. Rowland
Exhibit 10.2
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into this
1st day of October, 2002, by and between First Mid-Illinois Bancshares, Inc.
("the Company"), a corporation with its principal place of business located in
Mattoon, Illinois, and John W. Hedges ("Executive").
In consideration of the promises and mutual covenants and agreements
contained herein, the parties hereto acknowledge and agree as follows:
ARTICLE ONE
TERM AND NATURE OF AGREEMENT
1.01 Term of Agreement. The term of this Agreement shall commence as of
October 1, 2002 and shall continue for three years, until September 30, 2005.
Thereafter, unless Executive's employment with the Company has been previously
terminated, Executive shall continue his employment with the Company on an at
will basis and, except as provided in Articles Five, Six and Seven, this
Agreement shall terminate unless extended by mutual written agreement.
1.02 Employment. The Company agrees to employ Executive as President of
First Mid-Illinois Bank & Trust, N.A. commencing October 1, 1999 and Executive
accepts such employment by the Company on the terms and conditions herein set
forth. The duties of Executive shall be determined by the Company's Board of
Directors and Executive shall adhere to the policies and procedures of the
Company and shall follow the supervision and direction of the Board in the
performance of such duties. During the term of his employment, Executive agrees
to devote his full working time, attention and energies to the diligent and
satisfactory performance of his duties hereunder. Executive shall not, while he
is employed by the Company, engage in any activity which would (a) interfere
with, or have an adverse effect on, the reputation, goodwill or any business
relationship of the Company or any of its subsidiaries; (b) result in economic
harm to the Company or any of its subsidiaries; or (c) result in a breach of
Section Six of the Agreement.
ARTICLE TWO
COMPENSATION AND BENEFITS
While Executive is employed with the Company during the term of this
Agreement, the Company shall provide Executive with the following compensation
and benefits:
2.01 Base Salary. The Company shall pay Executive an annual base salary of
$130,000 per fiscal year, payable in accordance with the Company's customary
payroll practices for executive employees. The Board may review and adjust
Executive's base salary from year to year; provided, however, that during the
term of Executive's employment, the Company shall not decrease Executive's base
salary.
2.02 Incentive Compensation Plan. Executive shall continue to participate
in the First Mid-Illinois Bancshares, Inc. Incentive Compensation Plan in
accordance with the terms and conditions of such Plan. Pursuant to the Plan,
Executive shall have an opportunity to receive incentive compensation of up to a
maximum of 35% of Executive's annual base salary. The incentive compensation
payable for a particular fiscal year will be based upon the attainment of the
performance goals in effect under the Plan for such year and will be paid in
accordance with the terms of the Plan and at the sole discretion of the Board.
2.03 Deferred Compensation Plan. Executive shall be eligible to participate
in the First Mid-Illinois Bancshares, Inc. Deferred Compensation Plan in
accordance with the terms and conditions of such Plan.
2.04 Vacation. Executive shall be entitled to three (3) weeks of paid
vacation each year during the term of this Agreement.
2.05 Fringe Benefits. The Company shall provide the following additional
fringe benefits to Executive:
(a) Use of a Company-owned or leased vehicle for professional and personal
use.
(b) An amount equal to the annual dues for a Class "H" membership at the
Mattoon Golf and Country Club.
(c) Use of a cellular phone for work-related calls and calls associated
with Internet connection for Executive's home.
2.06 Other Benefits. Executive shall be eligible (to the extent he
qualifies) to participate in any other retirement, health, accident and
disability insurance, or similar employee benefit plans as may be maintained
from time to time by the Company for its other executives or employees subject
to and on a consistent basis with the terms, conditions and overall
administration of such plans.
2.07 Business Expenses. Executive shall be entitled to reimbursement by the
Company for all reasonable expenses actually and necessarily incurred by him on
its behalf in the course of his employment hereunder and in accordance with
expense reimbursement plans and policies of the Company from time to time in
effect for executive employees.
2.08 Withholding. All salary, incentive compensation and other benefits
provided to Executive pursuant to this Agreement shall be subject to withholding
for federal, state or local taxes, amounts withheld under applicable employee
benefit plans, policies or programs, and any other amounts that may be required
to be withheld by law, judicial order or otherwise or by agreement with, or
consent of, Executive.
ARTICLE THREE
DEATH OF EXECUTIVE
This Agreement shall terminate prior to the end of the term described in
Section 1.01 upon Executive's termination of employment with the Company due to
his death. Upon Executive's termination due to death, the Company shall pay
Executive's estate the amount of Executive's base salary and his accrued but
unused vacation time earned through the date of such death and any incentive
compensation earned for the preceding fiscal year that is not yet paid as of the
date of such death.
ARTICLE FOUR
TERMINATION OF EMPLOYMENT
Executive's employment with the Company may be terminated by Executive or
by the Company at any time for any reason. Upon Executive's termination of
employment prior to the end of the term of the Agreement, the Company shall pay
Executive as follows:
4.01 Termination by the Company for Other Than Cause. If the Company
terminates Executive's employment for any reason other than Cause, the Company
shall pay Executive the following:
(a) An amount equal to Executive's monthly base salary in effect at the
time of such termination of employment for a period of twelve (12)
months thereafter. Such amount shall be paid to Executive periodically
in accordance with the Company's customary payroll practices for
executive employees.
(b) The base salary and accrued but unused paid vacation time earned
through the date of termination and any incentive compensation earned
for the preceding fiscal year that is not yet paid.
(c) Continued coverage for Executive and/or Executive's family under the
Company's health plan pursuant to Title I, Part 6 of the Employee
Retirement Income Security Act of 1974 ("COBRA") and for such purpose
the date of Executive's termination of employment shall be considered
the date of the "qualifying event" as such term is defined by COBRA.
During the twelve month period beginning on the date of such
termination, the Executive shall be charged for such coverage in the
amount that he would have paid for such coverage had he remained
employed by the Company, and for the duration of the COBRA period, the
Executive shall be charged for such coverage in accordance with the
provisions of COBRA.
(d) For purposes of this Agreement, "Cause" shall mean Executive's (i)
conviction in a court of law of (or entering a plea of guilty or no
contest to) any crime or offense involving fraud, dishonesty or breach
of trust or involving a felony; (ii) performance of any act which, if
known to the customers, clients, stockholders or regulators of the
Company, would materially and adversely impact the business of the
Company; (iii) act or omission that causes a regulatory body with
jurisdiction over the Company to demand, request, or recommend that
Executive be suspended or removed from any position in which Executive
serves with the Company; (iv) substantial nonperformance of any of his
obligations under this Agreement; (v) misappropriation of or
intentional material damage to the property or business of the Company
or any affiliate; or (vi) breach of Article Five or Six of this
Agreement.
4.02 Termination Following a Change in Control. Notwithstanding Section
4.01, if, following a Change in Control, Executive's employment is terminated by
the Company (or any successor thereto) for any reason other than Cause, or if
Executive terminates his employment because of a decrease in his then current
base salary or a substantial diminution in his position and responsibilities,
the Company (or any successor thereto) shall pay Executive the following:
(a) Two times Executive's annual base salary in effect at the time of such
termination. Such amount shall be paid, at Executive's election, in
either a lump sum payment as soon as practicable following the date of
such termination or periodically in accordance with the Company's or
successor's customary payroll practices for executive employees.
(b) An amount equal to the incentive compensation earned by or paid to
Executive for the fiscal year immediately preceding the year in which
Executive's termination of employment occurs. Such amount shall be
paid to Executive in a lump sum as soon as practicable after the date
of his termination.
(c) The base salary and accrued but unused paid vacation time earned
through the date of termination and any incentive compensation earned
for the preceding fiscal year that is not yet paid.
(d) Continued coverage for Executive and/or Executive's family under the
Company's health plan pursuant to Title I, Part 6 of the Employee
Retirement Income Security Act of 1974 ("COBRA") and for such purpose
the date of Executive's termination of employment shall be considered
the date of the "qualifying event" as such term is defined by COBRA.
During the twelve month period beginning on the date of such
termination, the Executive shall be charged for such coverage in the
amount that he would have paid for such coverage had he remained
employed by the Company, and for the duration of the COBRA period, the
Executive shall be charged for such coverage in accordance with the
provisions of COBRA.
For purposes of this Agreement, "Change in Control" shall have the meaning
as set forth in the First Mid-Illinois Bancshares, Inc. 1997 Stock Incentive
Plan.
4.03 Other Termination of Employment. If the Company terminates Executive's
employment for Cause, or if Executive terminates his employment for any reason
other than as described in Section 4.02 above, the Company shall pay Executive
the base salary and accrued but unused paid vacation time earned through the
date of such termination and any incentive compensation earned for the preceding
fiscal year that is not yet paid.
ARTICLE FIVE
CONFIDENTIAL INFORMATION
5.01 Non-Disclosure of Confidential Information. During his employment with
Company, and after his termination of such employment with the Company,
Executive shall not, in any form or manner, directly or indirectly, use,
divulge, disclose or communicate to any person, entity, firm, corporation or any
other third party, any Confidential Information, except as required in the
performance of Executive's duties hereunder, as required by law or as necessary
in conjunction with legal proceedings.
5.02 Definition of Confidential Information. For the purposes of this
Agreement, the term "Confidential Information" shall mean any and all
information either developed by Executive during his employment with the Company
and used by the Company or its affiliates or developed by or for the Company or
its affiliates of which Executive gained knowledge by reason of his employment
with the Company that is not readily available in or known to the general public
or the industry in which the Company or any affiliate is or becomes engaged.
Such Confidential Information shall include, but shall not be limited to, any
technical or non-technical data, formulae, compilations, programs, devices,
methods, techniques, procedures, manuals, financial data, business plans, lists
of actual or potential customers. Lists of employees and any information
regarding the Company's or any affiliate's products, marketing or database. The
Company and Executive acknowledge and agree that such Confidential Information
is extremely valuable to the Company and may constitute trade secret information
under applicable law. In the event that any part of the Confidential Information
becomes generally known to the public through legitimate origins (other than by
the breach of this Agreement by Executive or by other misappropriation of the
Confidential Information), that part of the Confidential Information shall no
longer be deemed Confidential Information for the purposes of this Agreement,
but Executive shall continue to be bound by the terms of this Agreement as to
all other Confidential Information.
5.03 Delivery Upon Termination. Upon termination of Executive's employment
with the Company for any reason, Executive shall promptly deliver to the Company
all correspondence, files, manuals, letters, notes, notebooks, reports,
programs, plans, proposals, financial documents, and any other documents or data
concerning the Company's or any affiliate's customers, database, business plan,
marketing strategies, processes or other materials which contain Confidential
Information, together with all other property of the Company or any affiliate in
Executive's possession, custody or control.
ARTICLE SIX
NON-COMPETE AND NON-SOLICITATION COVENANTS
6.01 Covenant Not to Compete. During the term of this Agreement and for a
period of two years following the later of (i) the termination of Executive's
employment for any reason or (ii) the last day of the term of the Agreement,
Executive shall not, on behalf of himself or on behalf of another person,
corporation, partnership, trust or other entity, within the counties of Coles,
Moultrie, Douglas, Cumberland, Effingham, Champaign, Christian or Piatt,
Illinois:
(a) Directly or indirectly own, manage, operate, control, participate in
the ownership, management, operation or control of, be connected with
or have any financial interest in, or serve as an officer, employee,
advisor, consultant, agent or otherwise to any person, firm,
partnership, corporation, trust or other entity which owns or operates
a business similar to that of the Company or its affiliates.
(b) Solicit for sale, represent, and/or sell Competing Products to any
person or entity who or which was the Company's customer or client
during the last two years of Executive's employment. "Competing
Products," for purposes of this Agreement, means products or services
which are similar to, compete with, or can be used for the same
purposes as products or services sold or offered for sale by the
Company or any affiliate or which were in development by the Company
or any affiliate within the last two years of Executive's employment.
6.02 Covenant Not to Solicit. For a period of two years following the later
of (i) the termination of Executive's employment for any reason or (ii) the last
day of the term of this Agreement, Executive shall not:
(a) Attempt in any manner to solicit from any client or customer business
of the type performed by the Company or any affiliate or persuade any
client or customer of the Company or any affiliate to cease to do such
business or to reduce the amount of such business which any such
client or customer has customarily done or contemplates doing with the
Company or any affiliate, whether or not the relationship between the
Company or affiliate and such client or customer was originally
established in whole or in part through Executive's efforts.
(b) Render any services of the type rendered by the Company or any
affiliate for any client or customer of the Company.
(c) Solicit or encourage, or assist any other person to solicit or
encourage, any employees, agents or representatives of the Company or
an affiliate to terminate or alter their relationship with the Company
or any affiliate.
(d) Do not cause to be done, directly or indirectly, any acts which may
impair the relationship between the Company or any affiliate with
their respective clients, customers or employees.
ARTICLE SEVEN
REMEDIES
Executive acknowledges that compliance with the provisions of Articles Five
and Six herein is necessary to protect the business, goodwill and proprietary
information of the Company and that a breach of these covenants will irreparably
and continually damage the Company for which money damages may not be
inadequate. Consequently, Executive agrees that, in the event that he breaches
or threatens to breach any of these provisions, the Company shall be entitled to
both (a) a temporary, preliminary or permanent injunction in order to prevent
the continuation of such harm; and (b) money damages insofar as they can be
determined. In addition, the Company will cease payment of all compensation and
benefits under Articles Three and Four hereof. In the event that any of the
provisions, covenants, warranties or agreements in this Agreement are held to be
in any respect an unreasonable restriction upon the Executive or are otherwise
invalid, for whatsoever cause, then the court so holding shall reduce, and is so
authorized to reduce, the territory to which it pertains and/or the period of
time in which it operates, or the scope of activity to which it pertains or
effect any other change to the extent necessary to render any of the
restrictions of this Agreement enforceable.
ARTICLE EIGHT
MISCELLANEOUS
8.01 Successors and Assignability.
(a) No rights or obligations of the Company under this Agreement may be
assigned or transferred except that the Company will require any
successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession had
taken place.
(b) No rights or obligations of Executive under this Agreement may be
assigned or transferred by Executive other than his rights to payments
or benefits hereunder which may be transferred only by will or the
laws of descent and distribution.
8.02 Entire Agreement. This Agreement contains the entire agreement between
the parties with respect to the subject matter hereof and may not be modified
except in writing by the parties hereto. Furthermore, the parties hereto
specifically agree that all prior agreements, whether written or oral, relating
to Executive's employment by the Company shall be of no further force or effect
from and after the date hereof.
8.03 Severability. If any phrase, clause or provision of this Agreement is
deemed invalid or unenforceable, such phrase, clause or provision shall be
deemed severed from this Agreement, but will not affect any other provisions of
this Agreement, which shall otherwise remain in full force and effect. If any
restriction or limitation in this Agreement is deemed to be unreasonable,
onerous or unduly restrictive, it shall not be stricken in its entirety and held
totally void and unenforceable, but shall be deemed rewritten and shall remain
effective to the maximum extent permissible within reasonable bounds.
8.04 Controlling Law and Jurisdiction. This Agreement shall be governed by
and interpreted and construed according to the laws of the State of Illinois.
The parties hereby consent to the jurisdiction of the state and federal courts
in the State of Illinois in the event that any disputes arise under this
Agreement.
8.05 Notices. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed to have been duly given
(a) on the date of service if served personally on the party to whom notice is
to be given; (b) on the day after delivery to an overnight courier service; (c)
on the day of transmission if sent via facsimile to the facsimile number given
below; or (d) on the third day after mailing, if mailed to the party to whom
notice is to be given, by first class mail, registered or certified, postage
prepaid and properly addressed, to the party as follows:
If to Executive: __________________
__________________
__________________
Facsimile: __________________
If to the Company: First Mid-Illinois Bancshares, Inc.
1515 Charleston Avenue
Mattoon IL 61938
Facsimile: 217-258-0485
Attention: Chairman
Any party may change its address for the purpose of this Section by giving
the other party written notice of its new address in the manner set forth above.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
FIRST MID-ILLINOIS BANCSHARES, INC.
By: /s/ William S. Rowland
William S. Rowland
Title: Chairman of the Board
EXECUTIVE: /s/ John W. Hedges
John W. Hedges
Exhibit 10.5
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into this
1st day of ____________, 2003, by and between First Mid-Illinois Bancshares,
Inc. ("the Company"), a corporation with its principal place of business located
in Mattoon, Illinois, and _____________ ("Manager").
In consideration of the promises and mutual covenants and agreements
contained herein, the parties hereto acknowledge and agree as follows:
ARTICLE ONE
TERM AND NATURE OF AGREEMENT
1.01 Term of Agreement. The term of this Agreement shall commence as of
_________, 2003 and shall continue until ___________, 2006. Thereafter, unless
Manager's employment with the Company has been previously terminated, Manager
shall continue his employment with the Company on an at will basis and, except
as provided in Articles Five, Six and Seven, this Agreement shall terminate
unless extended by mutual written agreement.
1.02 Employment. The Company agrees to employ Manager and Manager accepts
such employment by the Company on the terms and conditions herein set forth. The
duties of Manager shall be determined by the Company's Chief Executive Officer
and shall adhere to the policies and procedures of the Company and shall follow
the supervision and direction of the Chief Executive Officer or his designee in
the performance of such duties. During the term of his employment, Manager
agrees to devote his full working time, attention and energies to the diligent
and satisfactory performance of his duties hereunder. Manager shall not, while
he is employed by the Company, engage in any activity which would (a) interfere
with, or have an adverse effect on, the reputation, goodwill or any business
relationship of the Company or any of its subsidiaries; (b) result in economic
harm to the Company or any of its subsidiaries; or (c) result in a breach of
Section Six of the Agreement.
ARTICLE TWO
COMPENSATION AND BENEFITS
While Manager is employed with the Company during the term of this
Agreement, the Company shall provide Manager with the following compensation and
benefits:
2.01 Base Salary. The Company shall pay Manager an annual base salary of
$________ per fiscal year, payable in accordance with the Company's customary
payroll practices for management employees. The Chief Executive Officer or his
designee may review and adjust Manager's base salary from year to year;
provided, however, that during the term of Manager's employment, the Company
shall not decrease Manager's base salary.
2.02 Incentive Compensation Plan. Manager shall continue to participate in
the First Mid-Illinois Bancshares, Inc. Incentive Compensation Plan in
accordance with the terms and conditions of such Plan. Pursuant to the Plan,
Manager shall have an opportunity to receive incentive compensation of up to a
maximum of ____% of Manager's annual base salary. The incentive compensation
payable for a particular fiscal year will be based upon the attainment of the
performance goals in effect under the Plan for such year and will be paid in
accordance with the terms of the Plan and at the sole discretion of the Board.
2.03 Vacation. Manager shall be entitled to _ weeks of paid vacation each
year during the term of this Agreement.
2.04 Other Benefits. Manager shall be eligible (to the extent he qualifies)
to participate in any other retirement, health, accident and disability
insurance, or similar employee benefit plans as may be maintained from time to
time by the Company for its other management employees subject to and on a
consistent basis with the terms, conditions and overall administration of such
plans.
2.05 Business Expenses. Manager shall be entitled to reimbursement by the
Company for all reasonable expenses actually and necessarily incurred by him on
its behalf in the course of his employment hereunder and in accordance with
expense reimbursement plans and policies of the Company from time to time in
effect for management employees.
2.6. Withholding. All salary, incentive compensation and other benefits
provided to Manager pursuant to this Agreement shall be subject to withholding
for federal, state or local taxes, amounts withheld under applicable employee
benefit plans, policies or programs, and any other amounts that may be required
to be withheld by law, judicial order or otherwise or by agreement with, or
consent of, Manager.
ARTICLE THREE
DEATH OF MANAGER
This Agreement shall terminate prior to the end of the term described in
Section 1.01 upon Manager's termination of employment with the Company due to
his death. Upon Manager's termination due to death, the Company shall pay
Manager's estate the amount of Manager's base salary and his accrued but unused
vacation time earned through the date of such death and any incentive
compensation earned for the preceding fiscal year that is not yet paid as of the
date of such death.
ARTICLE FOUR
TERMINATION OF EMPLOYMENT
Manager's employment with the Company may be terminated by Manager or by
the Company at any time for any reason. Upon Manager's termination of employment
prior to the end of the term of the Agreement, the Company shall pay Manager as
follows:
4.01 Termination by the Company for Other Than Cause. If the Company
terminates Manager's employment for any reason other than Cause, the Company
shall pay Manager the following:
(a) An amount equal to Manager's monthly base salary in effect at the time
of such termination of employment for a period of _____ months
thereafter. Such amount shall be paid to Manager periodically in
accordance with the Company's customary payroll practices for
management employees.
(b) The base salary and accrued but unused paid vacation time earned
through the date of termination and any incentive compensation earned
for the preceding fiscal year that is not yet paid.
(c) Continued coverage for Manager and/or Manager's family under the
Company's health plan pursuant to Title I, Part 6 of the Employee
Retirement Income Security Act of 1974 ("COBRA") and for such purpose
the date of Manager's termination of employment shall be considered
the date of the "qualifying event" as such term is defined by COBRA.
During the period beginning on the date of such termination and ending
at the end of the period described in Section 4.01(a), Manager shall
be charged for such coverage in the amount that he would have paid for
such coverage had he remained employed by the Company, and for the
duration of the COBRA period, Manager shall be charged for such
coverage in accordance with the provisions of COBRA.
For purposes of this Agreement, "Cause" shall mean Manager's (i) conviction
in a court of law of (or entering a plea of guilty or no contest to) any crime
or offense involving fraud, dishonesty or breach of trust or involving a felony;
(ii) performance of any act which, if known to the customers, clients,
stockholders or regulators of the Company, would materially and adversely impact
the business of the Company; (iii) act or omission that causes a regulatory body
with jurisdiction over the Company to demand, request, or recommend that Manager
be suspended or removed from any position in which Manager serves with the
Company; (iv) substantial nonperformance of any of his obligations under this
Agreement; (v) misappropriation of or intentional material damage to the
property or business of the Company or any affiliate; or (vi) breach of Article
Five or Six of this Agreement.
4.02 Termination Following a Change in Control. Notwithstanding Section
4.01, if, following a Change in Control, and prior to the end of the term of
this Agreement, Manager's employment is terminated by the Company (or any
successor thereto) for any reason other than Cause, or if Manager terminates his
employment because of a decrease in his then current base salary or a
substantial diminution in his position and responsibilities, the Company (or any
successor thereto) shall pay Manager the following:
(a) An amount equal to Manager's monthly base salary in effect at the time
of such termination for a period of twelve (12) months thereafter.
Such amount shall be paid in accordance with the Company's or
successor's customary payroll practices for Manager employees.
(b) The base salary and accrued but unused paid vacation time earned
through the date of termination and any incentive compensation earned
for the preceding fiscal year that is not yet paid.
(c) Continued coverage for Manager and/or Manager's family under the
Company's health plan pursuant to Title I, Part 6 of the Employee
Retirement Income Security Act of 1974 ("COBRA") and for such purpose
the date of Manager's termination of employment shall be considered
the date of the "qualifying event" as such term is defined by COBRA.
During the period beginning on the date of such termination and ending
at the end of the period described in Section 4.02(a), Manager shall
be charged for such coverage in the amount that he would have paid for
such coverage had he remained employed by the Company, and for the
duration of the COBRA period, Manager shall be charged for such
coverage in accordance with the provisions of COBRA.
For purposes of this Agreement, "Change in Control" shall have the meaning
as set forth in the First Mid-Illinois Bancshares, Inc. 1997 Stock Incentive
Plan.
4.03 Other Termination of Employment. If, prior to the end of the term of
this Agreement, the Company terminates Manager's employment for Cause, or if
Manager terminates his employment for any reason other than as described in
Section 4.02 above, the Company shall pay Manager the base salary and accrued
but unused paid vacation time earned through the date of such termination and
any incentive compensation earned for the preceding fiscal year that is not yet
paid.
ARTICLE FIVE
CONFIDENTIAL INFORMATION
5.01 Non-Disclosure of Confidential Information. During his employment with
the Company, and after his termination of such employment with the Company,
Manager shall not, in any form or manner, directly or indirectly, use, divulge,
disclose or communicate to any person, entity, firm, corporation or any other
third party, any Confidential Information, except as required in the performance
of Manager's duties hereunder, as required by law or as necessary in conjunction
with legal proceedings.
5.02 Definition of Confidential Information. For the purposes of this
Agreement, the term "Confidential Information" shall mean any and all
information either developed by Manager during his employment with the Company
and used by the Company or its affiliates or developed by or for the Company or
its affiliates of which Manager gained knowledge by reason of his employment
with the Company that is not readily available in or known to the general public
or the industry in which the Company or any affiliate is or becomes engaged.
Such Confidential Information shall include, but shall not be limited to, any
technical or non-technical data, formulae, compilations, programs, devices,
methods, techniques, procedures, manuals, financial data, business plans, lists
of actual or potential customers, lists of employees and any information
regarding the Company's or any affiliate's products, marketing or database. The
Company and Manager acknowledge and agree that such Confidential Information is
extremely valuable to the Company and may constitute trade secret information
under applicable law. In the event that any part of the Confidential Information
becomes generally known to the public through legitimate origins (other than by
the breach of this Agreement by Manager or by other misappropriation of the
Confidential Information), that part of the Confidential Information shall no
longer be deemed Confidential Information for the purposes of this Agreement,
but Manager shall continue to be bound by the terms of this Agreement as to all
other Confidential Information.
5.03 Delivery Upon Termination. Upon termination of Manager's employment
with the Company for any reason, Manager shall promptly deliver to the Company
all correspondence, files, manuals, letters, notes, notebooks, reports,
programs, plans, proposals, financial documents, and any other documents or data
concerning the Company's or any affiliate's customers, database, business plan,
marketing strategies, processes or other materials which contain Confidential
Information, together with all other property of the Company or any affiliate in
Manager's possession, custody or control.
ARTICLE SIX
NON-COMPETE AND NON-SOLICITATION COVENANTS
6.01 Covenant Not to Compete. During the term of this Agreement and for a
period of one year following the later of (i) the termination of Manager's
employment for any reason or (ii) the last day of the term of the Agreement,
Manager shall not, on behalf of himself or on behalf of another person,
corporation, partnership, trust or other entity, within the counties of Coles,
Moultrie, Douglas, Cumberland, Effingham, Champaign, Christian, Madison, Macon,
Bond or Piatt, Illinois, or any other county in which the Company or any
affiliate conducts business:
(a) Directly or indirectly own, manage, operate, control, participate in
the ownership, management, operation or control of, be connected with
or have any financial interest in, or serve as an officer, employee,
advisor, consultant, agent or otherwise to any person, firm,
partnership, corporation, trust or other entity which owns or operates
a business similar to that of the Company or its affiliates.
(b) Solicit for sale, represent, and/or sell Competing Products to any
person or entity who or which was the Company's customer or client
during the last year of Manager's employment. "Competing Products,"
for purposes of this Agreement, means products or services which are
similar to, compete with, or can be used for the same purposes as
products or services sold or offered for sale by the Company or any
affiliate or which were in development by the Company or any affiliate
within the last year of Manager's employment.
6.02 Covenant Not to Solicit. For a period of one year following the later
of (i) the termination of Manager's employment for any reason or (ii) the last
day of the term of this Agreement, Manager shall not:
(a) Attempt in any manner to solicit from any client or customer business
of the type performed by the Company or any affiliate or persuade any
client or customer of the Company or any affiliate to cease to do such
business or to reduce the amount of such business which any such
client or customer has customarily done or contemplates doing with the
Company or any affiliate, whether or not the relationship between the
Company or affiliate and such client or customer was originally
established in whole or in part through Manager's efforts.
(b) Render any services of the type rendered by the Company or any
affiliate for any client or customer of the Company.
(c) Solicit or encourage, or assist any other person to solicit or
encourage, any employees, agents or representatives of the Company or
an affiliate to terminate or alter their relationship with the Company
or any affiliate.
(d) Do or cause to be done, directly or indirectly, any acts which may
impair the relationship between the Company or any affiliate with
their respective clients, customers or employees.
ARTICLE SEVEN
REMEDIES
Manager acknowledges that compliance with the provisions of Articles Five
and Six herein is necessary to protect the business, goodwill and proprietary
information of the Company and that a breach of these covenants will irreparably
and continually damage the Company for which money damages may be inadequate.
Consequently, Manager agrees that, in the event that he breaches or threatens to
breach any of these provisions, the Company shall be entitled to both (a) a
temporary, preliminary or permanent injunction in order to prevent the
continuation of such harm; and (b) money damages insofar as they can be
determined. In addition, the Company will cease payment of all compensation and
benefits under Articles Three and Four hereof. In the event that any of the
provisions, covenants, warranties or agreements in this Agreement are held to be
in any respect an unreasonable restriction upon Manager or are otherwise
invalid, for whatsoever cause, then the court so holding shall reduce, and is so
authorized to reduce, the territory to which it pertains and/or the period of
time in which it operates, or the scope of activity to which it pertains or
effect any other change to the extent necessary to render any of the
restrictions of this Agreement enforceable.
ARTICLE EIGHT
MISCELLANEOUS
8.01 Successors and Assignability.
(a) No rights or obligations of the Company under this Agreement may be
assigned or transferred except that the Company will require any
successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession had
taken place.
(b) No rights or obligations of Manager under this Agreement may be
assigned or transferred by Manager other than his rights to payments
or benefits hereunder which may be transferred only by will or the
laws of descent and distribution.
8.02 Entire Agreement. This Agreement contains the entire agreement between
the parties with respect to the subject matter hereof and may not be modified
except in writing by the parties hereto. Furthermore, the parties hereto
specifically agree that all prior agreements, whether written or oral, relating
to Manager's employment by the Company shall be of no further force or effect
from and after the date hereof.
8.03 Severability. If any phrase, clause or provision of this Agreement is
deemed invalid or unenforceable, such phrase, clause or provision shall be
deemed severed from this Agreement, but will not affect any other provisions of
this Agreement, which shall otherwise remain in full force and effect. If any
restriction or limitation in this Agreement is deemed to be unreasonable,
onerous or unduly restrictive, it shall not be stricken in its entirety and held
totally void and unenforceable, but shall be deemed rewritten and shall remain
effective to the maximum extent permissible within reasonable bounds.
8.04 Controlling Law and Jurisdiction. This Agreement shall be governed by
and interpreted and construed according to the laws of the State of Illinois.
The parties hereby consent to the jurisdiction of the state and federal courts
in the State of Illinois in the event that any disputes arise under this
Agreement.
8.05 Notices. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed to have been duly given
(a) on the date of service if served personally on the party to whom notice is
to be given; (b) on the day after delivery to an overnight courier service; (c)
on the day of transmission if sent via facsimile to the facsimile number given
below; or (d) on the third day after mailing, if mailed to the party to whom
notice is to be given, by first class mail, registered or certified, postage
prepaid and properly addressed, to the party as follows:
If to Manager: ________________
________________
If to the Company: First Mid-Illinois Bancshares, Inc.
1515 Charleston Avenue
Mattoon, Illinois 61938
Facsimile: 217-234-0485
Attention: Chairman and Chief Executive Officer
Any party may change its address for the purpose of this Section by giving
the other party written notice of its new address in the manner set forth above.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
FIRST MID-ILLINOIS BANCSHARES, INC.
By: /s/ William S. Rowland
-----------------------------------
William S. Rowland
Title: Chairman of the Board
MANAGER: /s/
---------------------------------
Exhibit 11.1
Computation of Earnings Per Share
The Company follows Financial Accounting Standards Board's Statement No.
128, "Earnings Per Share" ("SFAS 128") in which income for Basic Earnings per
Share ("EPS") is adjusted for dividends attributable to preferred stock and is
based on the weighted average number of common shares outstanding. Diluted EPS
is computed by using the weighted average number of common shares outstanding,
increased by the assumed conversion of the convertible preferred stock and the
assumed conversion of the stock options.
The components of basic and diluted earnings per common share for the years
ended December 31, 2003, 2002, and 2001 are as follows:
2003 2002 2001
------------- ------------ --------------
Basic Earnings per Share:
Net income available to common stockholders $9,093,000 $8,034,000 $6,516,000
============= ============ ==============
Weighted average common shares outstanding 3,162,140 3,357,571 3,378,019
Basic earnings per common share $2.88 $2.39 $1.93
============= ============ ==============
Diluted Earnings per Share:
Net income available to common stockholders $9,093,000 $8,034,000 $6,516,000
============= ============ ==============
Weighted average common shares outstanding 3,162,140 3,357,571 3,378,019
Assumed conversion of stock options 57,290 24,166 11,195
------------- ------------ --------------
Diluted weighted average common
shares outstanding 3,219,430 3,381,737 3,389,214
============= ============ ==============
Diluted earnings per common share $2.82 $2.38 $1.92
============= ============ ==============
Exhibit 14.1
CODE OF ETHICS
FOR SENIOR FINANCIAL MANAGEMENT
FIRST MID-ILLINOIS BANCSHARES, INC.
DATED DECEMBER 16, 2003
I. OVERVIEW
The banking business is based on trust.
Our shareholders and customers entrust us with their money and confidential
information because of our reputation for honesty, integrity and high ethical
standards.
The Chief Executive Officer and the Chief Financial Officer (referred to in this
Code as the "Senior Financial Management" collectively or "you") of First
Mid-Illinois Bancshares, Inc. (referred to in this Code as "First Mid" or "we"
or "our" or "us") are required to maintain high ethical standards.
The Code of Ethics for Senior Financial Management of First Mid-Illinois
Bancshares, Inc. ("Code") sets forth the guiding principles by which we operate
our company and conduct our daily business with our shareholders and customers
as well as with our directors, advisory board members, officers and employees.
These principles apply to each member of the Senior Financial Management of
First Mid. Each member of the Senior Financial Management of First Mid has a
responsibility to read, understand and comply with this Code.
Any person who has information concerning any violation of this Code by any
member of the Senior Financial Management of First Mid must promptly bring such
information to the attention of the Audit Committee Chairperson or his or her
designee. If the Chairperson or his or her designee determines that there is a
conflict of interest that would make it inappropriate for him or her to resolve
the matter, he or she shall refer the matter to the Audit Committee of the Board
of Directors for resolution.
Violations of this Code may subject the member of Senior Financial Management to
appropriate actions, such as censure, suspension or termination. Such actions
shall be reasonably designed to deter wrongdoing and to promote accountability
for adherence to this Code.
II. PRINCIPLES
Ethical Behavior
Each member of the Senior Financial Management must (a) act honestly and
ethically, including the ethical handling of actual or apparent conflicts of
interest between personal and professional relationships; (b) act in good faith,
responsibly, and with due care, competence and diligence, without
misrepresenting material facts or allowing the member's independent judgment to
be subordinated; (c) share knowledge and maintain skills relevant to carry out
the member's duties within First Mid; and (d) proactively promote ethical
behavior as a responsible partner among peers and colleagues in the work
environment and community.
Complying with Laws, Regulations, Policies and Procedures
All members of the Senior Financial Management of First Mid must understand,
respect and comply with all of the laws, rules, regulations, policies and
procedures that apply to them in their position with First Mid as well as those
that affect the conduct of First Mid's business and financial reporting. All
members of the Senior Financial Management of First Mid are responsible for
determining which laws, rules, regulations and First Mid policies apply to their
position and affect the conduct of First Mid's business and financial reporting
and what training is necessary to understand and comply with them. All members
of the Senior Financial Management of First Mid are directed to specific
policies and procedures available from the Corporate Secretary.
Conflicts of Interest
All members of the Senior Financial Management of First Mid should be scrupulous
in avoiding any action or interest that conflicts or gives the appearance of a
conflict with First Mid's interests. A "conflict of interest" exists whenever an
individual's private interests interfere or conflict in any way (or even appear
to interfere or conflict) with the interests of First Mid. A conflict situation
can arise when a member of the Senior Financial Management of First Mid takes
action or has interests that may make it difficult to perform his or her work
for First Mid objectively and effectively. Conflicts of interest may also arise
when a member of the Senior Financial Management of First Mid or a member of his
or her family receives improper personal benefits as a result of his or her
position with First Mid, whether from a third party or from First Mid. All
members of the Senior Financial Management of First Mid should utilize First
Mid's products and services, when appropriate, but this must be done on an
arm's-length basis. Conflicts of interest are prohibited as a matter of First
Mid policy.
Conflicts of interest may not always be clear-cut, so if a question arises, you
should consult with higher levels of management or the Corporate Secretary. Any
member of the Senior Financial Management of First Mid who becomes aware of a
conflict or potential conflict should bring it to the attention of a supervisor,
manager or other appropriate personnel.
Corporate Opportunity
All members of the Senior Financial Management of First Mid are prohibited from
(a) taking for themselves personally opportunities that properly belong to First
Mid or are discovered through the use of corporate property, information or
position; (b) using corporate property, information and position for personal
gain; and (c) competing with First Mid. All members of the Senior Financial
Management of First Mid owe a duty to First Mid to advance First Mid's
legitimate interests when the opportunity to do so arises.
Confidentiality
All members of the Senior Financial Management of First Mid must respect the
confidentiality of all information acquired in the course of work, except when
disclosure is specifically authorized or required by laws, regulations or legal
proceedings. Such information includes (a) information entrusted to members of
the Senior Financial Management by First Mid or its customers and (b) all
non-public information that might be of use to competitors of First Mid or
harmful to First Mid or its customers or employees if disclosed.
Fair Dealing
We seek to outperform our competition fairly and honestly. We do not seek
competitive advantages through unethical or illegal business practices. Stealing
proprietary information, possessing or utilizing trade secret information that
was obtained without the owner's consent or inducing such disclosures by past or
present employees of other companies is prohibited.
Each member of the Senior Financial Management of First Mid is expected to deal
fairly with the customers, competitors, officers and employees of First Mid. No
one should take unfair advantage of anyone through manipulation, concealment,
abuse of privileged information, misrepresentation of material facts or any
other unfair dealing.
Bribery
No member of the Senior Financial Management of First Mid may solicit or accept
a bribe. Use good judgment in determining what constitutes a bribe. When a
customer buys you lunch, that is not a bribe. When a customer pays you a fee to
make a loan, you are being bribed. A discount from a local department store,
available to everyone, is not a bribe. A free car from a customer is a bribe.
No member of the Senior Financial Management of First Mid may pay a bribe. Use
good judgment in determining what constitutes a bribe. A political contribution
within the law is not a bribe. An under-the-table fee paid to a government
officer is a bribe. A loan made to a public official, under normal terms and
conditions and with proper approvals, is not a bribe. A no-interest loan to a
government official is a bribe. Strict laws and regulations apply to favors
granted to public officials and you must consult with executive management about
any questionable situation.
Protection and Proper Use of First Mid Assets
All members of the Senior Financial Management of First Mid should protect First
Mid's assets and ensure their efficient use. Each member of the Senior Financial
Management of First Mid must achieve responsible use of and control over all
assets and resources of First Mid entrusted to the member. Theft, carelessness
and waste have a direct impact on First Mid's ability to do business
effectively. All First Mid assets should be used for legitimate business
purposes. This includes such things as the internet, software, office supplies
and office equipment.
Public Company Reporting
As a public company, it is of critical importance that First Mid's filings with
the Securities and Exchange Commission (the "SEC") be accurate and timely. You
may be called upon to provide necessary information to assure that First Mid's
public reports are complete, fair and understandable. First Mid expects all
members of the Senior Financial Management to take this responsibility very
seriously and to provide prompt and accurate answers to inquiries related to
First Mid's public disclosure requirements. All members of the Senior Management
of First Mid must provide full, fair, accurate, timely and understandable
disclosures in reports and documents First Mid files with, or submits to, the
SEC and in other public communications by First Mid.
Financial Statements and Other Records
All of First Mid's books, records, accounts and financial statements must be
maintained in reasonable detail, must appropriately reflect First Mid's
transactions and must conform to applicable legal requirements and to First
Mid's system of internal controls. Unrecorded or "off the books" funds or assets
should not be maintained unless permitted by applicable law or regulation.
III. REPORTING ILLEGAL OR UNETHICAL BEHAVIOR
Reporting Illegal or Unethical Behavior
All members of the Senior Financial Management of First Mid who suspect or know
of violations of this Code or illegal or unethical business or workplace conduct
by employees, officers, advisory board members or directors have an obligation
to contact either the Corporate Secretary or the manager in First Mid's Audit
Department. Such communications will be kept confidential to the extent
feasible. If concerns or complaints require confidentiality, then this
confidentiality will be protected to the extent feasible, subject to applicable
law.
Accounting Complaints
First Mid's policy is to comply with all applicable financial reporting and
accounting regulations. If any member of the Senior Financial Management of
First Mid has unresolved concerns or complaints regarding questionable
accounting or auditing matters of First Mid, then he or she is encouraged to
submit those concerns or complaints (anonymously, confidentially or otherwise)
to the manager in First Mid's Audit Department. Subject to his or her legal
duties, the manager in First Mid's Audit Department will treat such submissions
confidentially. All members of the Senior Financial Management of First Mid must
promptly bring to the attention of the Audit Committee Chairperson any
information concerning (a) significant deficiencies in the design or operation
of internal controls which could adversely affect First Mid's ability to record,
process, summarize and report financial data or (b) any fraud, whether or not
material, that involves management or other employees who have a significant
role in First Mid's financial reporting, disclosures or internal controls.
Non-Retaliation
First Mid prohibits retaliation of any kind against individuals who have made
good faith reports or complaints of violations of this Code or other known or
suspected illegal or unethical conduct.
IV. AMENDMENT, MODIFICATION AND WAIVER
The Audit Committee of the Board of Directors shall consider any request for a
waiver of this Code and any amendment to this Code and all such waivers or
amendments shall be disclosed promptly as required by law or SEC regulation.
CODE OF ETHICS
FOR SENIOR FINANCIAL MANAGEMENT
FIRST MID-ILLINOIS BANCSHARES, INC.
DATED DECEMBER 16, 2003
Agreement
I acknowledge receipt of and have read, understand, and agree to comply in all
respects with the Code of Ethics for Senior Financial Management of First
Mid-Illinois Bancshares, Inc. dated December 16, 2003 ("Code").
I am not engaged on the date set forth below, and will not engage, in any
enterprise or activity which is prohibited by, or might give rise to, any
non-compliance with this Code, except as stated below:
(If none, insert "None")
Should, to my knowledge, any change in my situation occur, I will immediately
notify the Corporate Secretary or the manager of First Mid-Illinois Bancshares,
Inc.'s Audit Department, as applicable, in writing with such details as he or
she may reasonably request.
Signed this ____ day of ________________
Signed: _____________________________
Print Name: __________________________
Title: _______________________________
Location: ____________________________
Exhibit 21.1
Subsidiaries of the Company
First Mid-Illinois Bank & Trust, N.A. (a national banking association)
Mid-Illinois Data Services, Inc. (a Delaware corporation)
FirstMid-Illinois Insurance Services, Inc. (an Illinois corporation; 100% owned
by First Mid Bank)
The Checkley Agency, Inc. (an Illinois corporation)
Exhibit 23.1
CONSENT OF INDEPENDENT
PUBLIC ACCOUNTANTS
The Board of Directors
First Mid-Illinois Bancshares, Inc.:
RE: Registration Statements
Registration No. 033-84404 on Form S-3
Registration No. 033-64061 on Form S-8
Registration No. 033-64139 on Form S-8
Registration No. 333-69673 on Form S-8
We consent to incorporation by reference in the Registration Statements on Forms
S-3 and S-8 of First Mid-Illinois Bancshares, Inc. of our report dated February
27, 2004, relating to the consolidated balance sheets of First Mid-Illinois
Bancshares, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2003, which report appears in the December 31, 2003 annual report on Form 10-K
of First Mid-Illinois Bancshares, Inc.
Our report refers to a change in the method of accounting for goodwill in 2002.
/s/ KPMG LLP
Chicago, Illinois
March 12, 2004
Exhibit 31.1
CERTIFICATION
I, William S. Rowland, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of First Mid-Illinois
Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) [Reserved]
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 12, 2004
/s/ William S. Rowland
- --------------------------------------
William S. Rowland
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Michael L. Taylor, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of First Mid-Illinois
Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) [Reserved]
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 12, 2004
/s/ Michael L. Taylor
- --------------------------------------
Michael L. Taylor
Chief Financial Officer
Exhibit 32.1
Certification pursuant to
18 U.S.C. section 1350,
as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of First Mid-Illinois Bancshares, Inc.
(the "Company") on Form 10-K for the period ended December 31, 2003 (the
"Report"), we, William S. Rowland, as President and Chief Executive Officer of
the Company, and Michael L. Taylor, as Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: March 12, 2004
/s/ William S. Rowland
- ------------------------------------
William S. Rowland
President and Chief Executive Officer
/s/ Michael L. Taylor
- ------------------------------------
Michael L. Taylor
Chief Financial Officer