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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, 2004
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 period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
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 [ ]
The aggregate market value of the outstanding common stock, other than shares
held by persons who may be deemed affiliates of the Company, as of the last
business day of the Company's most recently completed second fiscal quarter was
approximately $149,077,000.
As of March 9, 2005, 4,437,447 shares of the Company's common stock, $4.00 par
value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Into Form 10-K Part:
Portions of the Proxy Statement for 2005 Annual
Meeting of Shareholders to be held on May 25, 2005 III
First Mid-Illinois Bancshares, Inc.
Form 10-K Table of Contents
Page
Part I
Item 1 Business 3
Item 2 Properties 9
Item 3 Legal Proceedings 11
Item 4 Submission of Matters to a Vote of Security Holders 11
Part II
Item 5 Market for Company's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 12
Item 6 Selected Financial Data 14
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 7A Quantitative and Qualitative Disclosures About Market Risk 35
Item 8 Financial Statements and Supplementary Data 37
Item 9 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 62
Item 9A Controls and Procedures 62
Item 9B Other Information 64
Part III
Item 10 Directors and Executive Officers of the Company 64
Item 11 Executive Compensation 64
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 64
Item 13 Certain Relationships and Related Transactions 65
Item 14 Principal Accountant Fees and Services 65
Part IV
Item 15 Exhibit and Financial Statement Schedules 66
67
Exhibit Index 68
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 also wholly owns
a statutory business trust, First Mid-Illinois Statutory Trust I (the "Trust").
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 $91.5
million in agriculture-related loans at December 31, 2004. 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 $820,586,000 and stockholders' equity of
$78,251,000 at December 31, 2004.
Employees
The Company, MIDS, Checkley and First Mid Bank, collectively, employed 317
people on a full-time equivalent basis as of December 31, 2004. 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. On June 17, 2004
the SEC proposed new rules and exemptions relating to bank brokerage activities
as Regulation B, which would replace the interim final rules. The SEC has
extended the blanket exemption for banks from the definition of "broker" until
March 31, 2005. If Regulation B is adopted as proposed banks would be exempted
from the term "broker" until January 1, 2006. 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, 2004, 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 11.71% and a leverage ratio of
7.99%.
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, 2004, FDIC assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 2005, 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 2005,
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 2005 debt service assessment was .0144%.
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, 2004, First Mid Bank
paid supervisory fees to the OCC totaling $176,000.
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, 2004, 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, 2004, First Mid Bank exceeded its minimum
regulatory capital requirements with a risk-based capital ratio of 11.88% and a
leverage ratio of 8.08%.
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, 2004. As of December 31, 2004, approximately $14.8 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 (58) Chairman of the Board of Directors, President
and Chief Executive Officer
Michael L. Taylor (36) Vice President and Chief Financial Officer
John W. Hedges (57) President, First Mid Bank
Laurel G. Allenbaugh (45) Vice President
Christie L. Wright (48) Vice President, Secretary/Treasurer
Stanley E. Gilliland (60) Vice President
Robert J. Swift, Jr. (53) Vice President
Kelly A. Downs (37) Vice President
William S. Rowland, age 58, 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 36, 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 57, 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 45, 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 48, has been Vice President of Investments since 1995
and Secretary and Treasurer since 1998.
Stanley E. Gilliland, age 60, 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 53, 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 37, 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 four 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 and a drive-up
automated teller machine ("ATM"), is located across the street from First Mid
Bank's main office.
First Mid Bank has a facility at 333 Broadway Avenue East, Mattoon, Illinois.
The one-story office building contains approximately 7,600 square feet of office
space. The main floor provides space for five teller windows, two private
offices, a safe deposit vault and four drive-up lanes. There is adequate parking
located adjacent to the building. A drive-up ATM is located adjacent to the
building.
First Mid Bank leases a facility at 1504-A Lakeland Boulevard, Mattoon, Illinois
that provides space for three tellers, two drive-up lanes and a drive-up ATM.
First Mid Bank owns a facility located at 1520 Charleston Avenue, Mattoon,
Illinois, which is used as the Corporate Headquarters of the Company and is used
by MIDS for its data processing and back room operations for the Company and
First Mid Bank. The office building consists of a two-story structure with an
occupied basement that has approximately 20,000 square feet of office space.
The Company owns a facility at 1500 Wabash Avenue, Mattoon, Illinois, which is
used by the 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 a walk-up ATM located in the Sullivan Citgo Station at
105 West Jackson.
Neoga
First Mid Bank's office in Neoga, Illinois, is located at 102 East Sixth Street,
Neoga, Illinois. The building consists of a one-story structure containing
approximately 4,000 square feet of office space. The main office building
provides space for four tellers in the lobby of the building, two drive-up
tellers, four private offices, two night depositories, and an ATM. Adequate
customer parking is available on three sides of the main office building. During
1996, an adjacent building with approximately 400 square feet was purchased and
was subsequently donated to the Neoga Food Pantry in 2004.
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 Route
133 at Interstate Five and the Arthur Citgo Station at 209 North Vine.
Monticello
First Mid Bank has two offices in Monticello. The main facility is located on
the northeast corner of the historic town square at 100 West Washington Street.
This building is a two-story structure that has 8,000 square feet of office
space consisting of five teller stations, seven private offices, and a night
depository. The second floor is furnished and 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, an ATM 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 673 shareholders of record
as of December 31, 2004 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
------------------- ------------- -------------
2004
4th 41 36 3/4
3rd 37 32 5/6
2nd 33 2/3 32
1st 33 4/9 31
2003
4th 31 1/6 29 5/6
3rd 32 21 2/3
2nd 22 2/3 19 1/4
1st 19 1/2 18
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
-----------------------------------------------------------------
12-14-2004 1-07-2005 $.24
4-27-2004 6-18-2004 $.21
12-16-2003 1-09-2004 $.27
4-22-2003 6-13-2003 $.16
On July 16, 2004, the Company effected a three-for-two stock split in the form
of a 50% stock dividend. Par value remained at $4 per share. All share and per
share amounts have been restated for years prior to 2004 to give retroactive
recognition to the stock split.
The Company's shareholders are entitled to receive such dividends as are
declared by the Board of Directors, which considers payment of dividends
semi-annually. The ability of the Company to pay dividends, as well as fund its
operations, is dependent upon receipt of dividends from First Mid Bank.
Regulatory authorities limit the amount of dividends that can be paid by First
Mid Bank without prior approval from such authorities. For further discussion of
First Mid Bank's dividend restrictions, see Note 16 - "Dividend Restrictions"
herein. The Board of Directors of the Company declared cash dividends
semi-annually during the two years ended December 31, 2004.
The following table summarizes share repurchase activity for the fourth quarter
of 2004:
ISSUER PURCHASES OF EQUITY SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------
Period (d) Approximate Dollar
(a)Total (c) Total Number of Value of Shares that
Number of (b) Average Shares Purchased as Part May Yet Be Purchased
Shares Price Paid of Publicly Announced Under the Plans or
Purchased per Share Plans or Programs Programs
- ----------------------------------------- --------------- ------------- -------------------------- ------------------------
October 1, 2004 - October 31, 2004 -- -- -- $5,192,000
November 1, 2004 - November 30, 2004 5,333 $36.95 5,333 $4,994,000
December 1, 2004 - December 31, 2004 17,537 $39.23 17,537 $4,306,000
--------------- ------------- -------------------------- ------------------------
Total 22,870 $38.70 22,870 $4,306,000
=============== ============= ========================== ========================
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 and on April 27,
2004, the Board approved the repurchase of an additional $5 million of shares of
the Company's common stock, bringing the aggregate total to 8% of the Company's
common stock plus $23 million of additional shares.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth a five-year comparison of selected financial data.
(dollars in thousands, except per share data)
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Summary of Operations
Interest income $40,024 $38,938 $41,387 $45,506 $44,191
Interest expense 11,644 11,896 14,661 21,590 22,573
-------- -------- -------- -------- --------
Net interest income 28,380 27,042 26,726 23,916 21,618
Provision for loan losses 588 1,000 1,075 600 550
Other income 11,639 12,255 10,394 8,279 6,690
Other expense 25,139 24,530 24,006 22,039 20,063
-------- -------- -------- -------- --------
Income before income taxes 14,292 13,767 12,039 9,556 7,695
Income tax expense 4,541 4,674 4,005 3,040 2,035
-------- -------- -------- -------- --------
Net income $ 9,751 $ 9,093 $ 8,034 $ 6,516 $ 5,660
======== ======== ======== ======== ========
Per Common Share Data (1)
Basic earnings per share $ 2.17 $ 1.92 $ 1.60 $ 1.29 $1.11
Diluted earnings per share 2.13 1.88 1.58 1.28 1.11
Dividends per common share .45 .43 .33 .29 .26
Book value per common share 15.53 15.02 13.97 12.64 11.45
Financial Ratios
Net interest margin 3.75% 3.75% 3.99% 3.87% 3.84%
Return on average assets 1.20% 1.17% 1.11% .97% .92%
Return on average common equity 14.24% 13.11% 11.82% 10.56% 10.55%
Dividend payout ratio 20.92% 22.57% 20.92% 22.28% 23.53%
Average equity to average assets 8.44% 8.94% 9.36% 9.20% 8.70%
Capital to risk-weighted assets 11.71% 10.61% 10.35% 11.23% 11.74%
Year End Balances
Total assets $826,728 $793,981 $776,240 $705,979 $642,999
Net loans 593,228 548,398 496,141 469,541 426,026
Total deposits 650,240 614,992 613,452 559,420 503,985
Total equity 69,154 70,595 66,807 63,925 57,727
Average Balances
Total assets $811,061 $776,072 $727,986 $670,890 $616,855
Net loans 568,271 520,962 479,957 450,466 406,505
Total deposits 638,445 611,982 573,670 540,209 491,584
Total equity 68,459 69,349 67,989 61,714 53,674
(1) All share and per share data have been restated to reflect the 3-for-2
stock splits effective July 16, 2004 and 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, 2004, 2003
and 2002. 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, 2004, 2003, and 2002
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 $9.8 million, $9.1 million, and $8.0 million and diluted earnings
per share was $2.13, $1.88, and $1.58 for the years ended December 31, 2004,
2003, and 2002, respectively. The increase in net income was primarily the
result of higher net interest income. The increase in earnings per share was the
result of improved net income and a decrease in the number of shares outstanding
due to share repurchases made through our stock buy-back program. During 2004,
the Company acquired 319,618 shares for a total investment of $10,365,000. The
following table shows the Company's annualized performance ratios for the years
ended December 31, 2004, 2003 and 2002:
2004 2003 2002
---------- ---------- ----------
Return on average assets 1.20% 1.17% 1.11%
Return on average equity 14.24% 13.11% 11.82%
Average equity to average 8.44% 8.94% 9.36%
assets
During the fourth quarter of 2004, the Company revised its estimates for
deferred net loan fees and costs, deferred compensation liabilities and accrued
income taxes and adjusted its 2004 earnings accordingly. The net effect of these
adjustments increased 2004 reported earnings by $147,000 or $.04 per diluted
share.
Total assets at December 31, 2004, 2003, and 2002 were $826.7 million, $794
million, and $776.2 million, respectively. This growth was a result of the
Company's strategic focus on commercial and commercial real estate lending and
de novo expansion into the new markets of Maryville and Champaign. Net loan
balances were $593.2 million at December 31, 2004, an increase of $44.8 million,
or 8%, from $548.4 million at December 31, 2003 and $496.1 million at December
31, 2002. Total deposit balances increased to $650.2 million at December 31,
2004 from $615.0 million at December 31, 2003 and $613.5 million at December 31,
2002.
Net interest margin, defined as net interest income divided by average
interest-earning assets, was 3.75% for 2004 and 2003, and 3.99% in 2002. The
decline in net interest margin from 2002 is a result of various factors in the
Company's market area including: a competitive environment for quality lending
and deposit relationships; a flattening of the interest rate yield curve whereby
rates on short-term financial instruments have increased faster than rates on
longer term instruments; a decision by management to shorten maturities on
interest-earning assets to position the Company for a sustained period of
overall higher interest rates; a commitment by management to not incur an
inordinate amount of credit risk; and increased amortization charges on
mortgage-backed securities resulting from a relatively high level of
refinancings by homeowners.
While the net interest margin declined between 2002 and 2003 and remained flat
between 2003 and 2004, net interest income increased from $26.7 million in 2002
to $27.0 million in 2003 and to $28.4 million in 2004. This increase was the
result of management's business development efforts that led to higher levels of
average interest-earning assets of $669.9 million in 2002, $721.7 million in
2003 and $756.8 million in 2004. This growth offset the factors previously
mentioned which led to margin compression and led to higher levels of net
interest income. The ability of the Company to continue to grow net interest
income is largely dependent on management's ability to succeed in its overall
business development efforts. Management expects these efforts to continue but
will not compromise credit quality and prudent management of the maturities of
interest-earning assets and interest-paying liabilities in order to achieve
growth.
Noninterest income decreased $.7 million, or 5.7%, to $11.6 million in 2004
compared to $12.3 million in 2003 and $10.4 million in 2002. The primary cause
of this decrease was a decline in mortgage banking revenue from $1,673,000 in
2003 to $522,000 in 2004 due to the slowing of refinancings in early 2004. Also,
the Company received $370,000 in gains on the sale of securities during 2003,
compared to $92,000 in gains on the sale of securities during 2004. These
declines were partially offset by an increase in trust and brokerage revenues
due to improvement in equity prices and growth in new business and an increase
in service charges due to greater overdraft charges.
Noninterest expenses increased 2.5% or $.6 million, to $25.1 million in 2004
compared to $24.5 million in 2003 and $24.0 million in 2002. The primary factor
in the expense increase was increased salaries and benefits expense, increases
in marketing and promotion expense due to new products rolled out in 2004 and
increases in accounting and legal professional fees incurred in implementing the
requirements of the Sarbanes-Oxley Act of 2002.
Following is a summary of the factors that contributed to the changes in net
income (in thousands):
2004 vs 2003 2003 vs 2002
------------------- ------------------
Net interest income $1,338 $316
Provision for loan losses 412 75
Other income, including securities (616) 1,861
transactions
Other expenses (609) (524)
Income taxes 133 (669)
------------------- ------------------
Increase in net income $ 658 $1,059
=================== ==================
Credit quality is an area of importance to the Company and 2004 reflected
favorable results in this area. Total nonperforming loans were $3.1 million at
December 31, 2004, compared to $3.3 million at December 31, 2003. As a result,
the Company's provision for loan loss for 2004 was $588,000 compared to
$1,000,000 for 2003. At December 31, 2004, the composition of the loan portfolio
remained similar to 2003. In 2004, net charge-offs were $393,000 or .07% of
average loans compared to $297,000 or .06% of average loans in 2003. During
2004, the Company received a recovery of $68,500 on two commercial real estate
loans of a single borrower. During 2003, the Company received a recovery of
$382,000 on two commercial loans of a single borrower. Loans secured by both
commercial and residential real estate comprised 71% of the loan portfolio as of
December 31, 2004 and 2003.
The Company's capital position remains strong and the Company has consistently
maintained regulatory capital ratios above the "well-capitalized" standards. The
Company's Tier 1 capital ratio to risk weighted assets ratio at December 31,
2004, 2003, and 2002 was 10.94%, 9.83%, and 9.64%, respectively. The Company's
total capital to risk weighted assets ratio at December 31, 2004, 2003, and 2002
was 11.71%, 10.61%, and 10.35%, respectively. The increase in 2004 was the
result of the issuance of trust preferred securities by First Mid-Illinois
Statutory Trust I ("Trust"), which qualify as Tier I capital for the Company
under Federal Reserve Board guidelines. The Trust invested the proceeds of the
issuance in junior subordinated debentures of the Company. This was partially
offset by a decline in equity as a result of the increase in the number of
shares repurchased under the Company's stock repurchase program. The increase in
2003 was primarily the result of an increase in retained earnings due to First
Mid Bank's increase in net income.
The Company's liquidity position remains sufficient to fund operations and meet
the requirements of borrowers, depositors, and creditors. The Company maintains
various sources of liquidity to fund its cash needs. See "Liquidity" herein for
a full listing of its sources and anticipated significant contractual
obligations.
The Company enters into financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include lines of credit, letters of credit and other
commitments to extend credit. The total outstanding commitments at December 31,
2004, 2003 and 2002 were $94.2 million, $87.8 million and $86.9 million,
respectively. See Note 12 - "Disclosure of Fair Values of Financial Instruments"
and Note 17 - "Commitments and Contingent Liabilities" herein 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" herein for a detailed description of the Company's estimation process
and methodology related to the allowance for loan losses.
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 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, 2004 December 31, 2003 December 31, 2002
------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------
ASSETS
Interest-bearing deposits $ 4,729 $ 75 1.59% $ 10,715 $ 112 1.05% $9,933 $ 137 1.38%
Federal funds sold 8,813 103 1.17% 16,285 164 1.01% 13,164 199 1.51%
Investment securities
Taxable 143,568 4,860 3.39% 141,120 4,961 3.52% 134,118 6,014 4.48%
Tax-exempt 26,814 1,193 4.45% 28,467 1,266 4.45% 28,894 1,311 4.54%
Loans (1) 572,836 33,793 5.90% 525,095 32,435 6.18% 483,764 33,726 6.97%
------------------------------------------------------------------------------------
Total earning assets 756,760 40,024 5.29% 721,682 38,938 5.40% 669,873 41,387 6.18%
------------------------------------------------------------------------------------
Cash and due from banks 18,870 18,464 18,450
Premises and equipment 15,692 16,578 16,498
Other assets 24,304 23,481 26,972
Allowance for loan losses (4,565) (4,133) (3,807)
---------- ----------- ----------
Total assets $811,061 $776,072 $727,986
========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
Demand deposits $230,300 1,568 0.68% $219,809 1,778 0.81% $200,653 2,667 1.33%
Savings deposits 61,144 236 0.39% 56,402 302 0.54% 51,634 799 1.55%
Time deposits 261,564 7,318 2.80% 250,403 7,671 3.06% 242,301 8,787 3.63%
Securities sold under
agreements to repurchase 55,645 455 0.82% 47,795 272 0.57% 34,389 345 1.00%
FHLB advances 27,117 1,484 5.47% 31,094 1,632 5.25% 36,974 1,863 5.04%
Federal funds purchased 218 3 1.38% 14 - 0.00% 299 6 2.01%
Subordinated debentures 8,704 382 4.39% - - - - - -
Other debt 7,161 198 2.76% 9,411 241 2.56% 6,088 194 3.19%
------------------------------------------------------------------------------------
Total interest-bearing
liabilities 651,853 11,644 1.79% 614,928 11,896 1.93% 572,338 14,661 2.56%
------------------------------------------------------------------------------------
Demand deposits 85,437 85,368 79,082
Other liabilities 5,312 6,427 8,577
Stockholders' equity 68,459 69,349 67,989
---------- ----------- ----------
Total liabilities & equity $811,061 $776,072 $727,986
========== =========== ==========
Net interest income $28,380 $27,042 $26,726
========== ========== ==========
Net interest spread 3.50% 3.47% 3.62%
Impact of non-interest bearing
funds .25% .28% .37%
---------- ---------- ----------
Net yield on interest-earning
assets 3.75% 3.75% 3.99%
========== ========== ==========
(1) 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):
2004 Compared to 2003 2003 Compared to 2002
Increase - (Decrease) Increase - (Decrease)
-----------------------------------------------------------
Total Total
Change Volume (1) Rate (1) Change Volume (1) Rate (1)
-----------------------------------------------------------
Earning Assets:
Interest-bearing deposits $(37) $ (466) $429 $(25) $ 13 $(38)
Federal funds sold (61) (93) 32 (35) 87 (122)
Investment securities:
Taxable (101) 90 (191) (1,053) 339 (1,392)
Tax-exempt (73) (74) 1 (45) (19) (26)
Loans (2) 1,358 2,707 (1,349) (1,291) 3,953 (5,244)
-----------------------------------------------------------
Total interest income 1,086 2,164 (1,078) (2,449) 4,373 (6,822)
-----------------------------------------------------------
Interest-Bearing Liabilities:
Interest-bearing deposits
Demand deposits (210) 89 (299) (889) 288 (1,177)
Savings deposits (66) 29 (95) (497) 82 (579)
Time deposits (353) 391 (744) (1,116) 302 (1,418)
Securities sold under
agreements to repurchase 183 50 133 (73) 699 (772)
FHLB advances (148) (219) 71 (231) (314) 83
Federal funds purchased 3 1 2 (6) (3) (3)
Subordinated debentures 382 382 - - - -
Other debt (43) (64) 21 47 73 (26)
-----------------------------------------------------------
Total interest expense (252) 659 (911) (2,765) 1,127 (3,892)
-----------------------------------------------------------
Net interest income $1,338 $1,505 $(167) $ 316 $3,246 $(2,930)
===========================================================
(1) Changes attributable to the combined impact of volume and rate have been
allocated proportionately to the change due to volume and the change due to
rate.
(2) Nonaccrual loans are not material and have been included in the average
balances.
Net interest income increased $1,338,000, or 4.9% in 2004, compared to an
increase of $316,000, or 1.2% in 2003. The increase in net interest income in
2004 and 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 2004, average earning assets increased by $35 million, or 4.9%, and average
interest-bearing liabilities increased $36.9 million or 6.0% compared with 2003.
In 2003, average earning assets increased by $51.8 million or 7.7%, and average
interest-bearing liabilities increased $42.6 million or 7.4% compared with 2002.
Changes in average balances are shown below:
* Average loans increased by $47.7 million or 9.0% in 2004 compared to 2003.
In 2003, average loans increased by $41.3 million or 8.5% compared to 2002.
* Average securities increased by $.8 million or .5% in 2004 compared to
2003. In 2003, average securities increased by $6.6 million or 4.1%
compared to 2002.
* Average interest-bearing deposits increased by $26.4 million or 5.0% in
2004 compared to 2003. In 2003, average interest-bearing deposits increased
by $32.0 million or 6.5% compared to 2002.
* Average securities sold under agreements to repurchase increased by $7.9
million or 16.5% in 2004 compared to 2003. In 2003, average securities sold
under agreements to repurchase increased by $13.4 million or 39.0% compared
to 2002.
* Average borrowings and other debt increased by $2.7 million or 6.7% in 2004
compared to 2003. In 2003, average borrowings and other debt decreased by
$2.8 million or 6.5% compared to 2002.
* Federal funds rate increased to 2.25% at December 31, 2004 from 1.00% at
December 31, 2003 and from 1.25% at December 31, 2002.
* Net interest margin remained at 3.75% in 2004 compared to 2003 and
decreased from 3.99% in 2002. Asset yields decreased by 11 basis points in
2004, while interest-bearing liabilities decreased by 14 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 2004, 2003 and 2002 were $615,000, $652,000 and
$675,000, respectively. The net yield on interest-earning assets (TE) was 3.83%
in 2004, 3.84% in 2003 and 4.09% in 2002.
Provision for Loan Losses
The provision for loan losses in 2004 was $588,000 compared to $1,000,000 in
2003 and $1,075,000 in 2002. The decrease in the provision was primarily due to
a decrease in non-performing loans and a low level of net charge-offs. Net
charge-offs were $393,000 during 2004, $297,000 during 2003, and $1,054,000
during 2002. For information on loan loss experience and nonperforming loans,
see "Nonperforming Loans" and "Loan Quality and Allowance for Loan Losses"
herein.
Other Income
An important source of the Company's revenue is derived from other income. The
following table sets forth the major components of other income for the last
three years (in thousands):
$ Change
From Prior Year
---------- ---------- ---------- ----------------------
2004 2003 2002 2004 2003
---------- ---------- ---------- ---------- -----------
Trust $2,254 $1,992 $1,855 $ 262 $ 137
Brokerage 428 283 265 145 18
Insurance commissions 1,447 1,476 1,257 (29) 219
Service charges 4,746 4,484 3,799 262 685
Securities gains 92 370 223 (278) 147
Mortgage banking 522 1,673 1,272 (1,151) 401
Other 2,150 1,977 1,723 173 254
---------- ---------- ---------- ---------- -----------
Total other income $11,639 $12,255 $10,394 $(616) $1,861
========== ========== ========== ========== ===========
Total non-interest income decreased to $11,639,000 in 2004 compared to
$12,255,000 in 2003 and $10,394,000 in 2002. The primary reasons for the more
significant year-to-year changes in other income components are as follows:
* Trust revenues increased $262,000 or 13.2% to $2,254,000 in 2004 from
$1,992,000 in 2003 and $1,855,000 in 2002. 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.
* Revenue from brokerage and annuity sales increased $145,000 or 51.2% to
$428,000 in 2004 from $283,000 in 2003 and $265,000 in 2002 as a result of
an increase in the number of stock transactions.
* Insurance commissions decreased $29,000 or 2.0% to $1,447,000 in 2004 from
$1,476,000 in 2003 and $1,257,000 in 2002. Decreased commissions received
on sales of business property and casualty insurance resulted in less
revenue in 2004.
* Fees from service charges increased $262,000 or 5.8% to $4,746,000 in 2004
from $4,484,000 in 2003 and $3,799,000 in 2002. This increase was primarily
the result of increased overdraft fees through the Company's Payment
Privilege program. 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 2004 were $92,000 compared to net securities gains
of $370,000 in 2003, and $223,000 in 2002. Several securities in the
available-for-sale portfolio were sold to improve the overall portfolio mix
and the margin in 2004, 2003 and 2002.
* Mortgage banking income decreased $1,151,000 or 68.8% to $522,000 in 2004
from $1,673,000 in 2003 and $1,272,000 in 2002. This decrease was due to
the declining volume of fixed rate loans originated and sold by First Mid
Bank. The decrease in volume is largely attributed to the slowdown in
mortgage refinancing activity. Loans sold balances are as follows:
* $42 million (representing 441 loans) in 2004
* $135 million (representing 1,451 loans) in 2003
* $105 million (representing 1,116 loans) in 2002
* Other income increased $173,000 or 8.8% to $2,150,000 in 2004 from
$1,977,000 in 2003 and $1,723,000 in 2002. The increase was primarily due
to increased ATM service fees and increased loan closing fees in our
Maryville branch.
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
--------- --------- --------- ---------------
2004 2003 2002 2004 2003
--------- --------- --------- ------- -------
Salaries and benefits $13,626 $13,232 $12,505 $ 394 $ 727
Occupancy and equipment 4,259 4,290 4,055 (31) 235
Amortization of other intangibles 623 774 742 (151) 32
Stationery and supplies 518 566 679 (48) (113)
Legal and professional fees 1,173 991 1,027 182 (36)
Marketing and promotion 771 662 738 109 (76)
Other 4,169 4,015 4,260 154 (245)
--------- --------- --------- ------- -------
Total other expense $25,139 $24,530 $24,006 $ 609 $ 524
========= ========= ========= ======= =======
Total non-interest expense increased to $25,139,000 in 2004 from $24,530,000 in
2003 and $24,006,000 in 2002. 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 $394,000 or 3.0% to $13,626,000 in 2004 from $13,232,000 in 2003
and $12,505,000 in 2002. This increase is primarily due to merit and
incentive increases for continuing employees and from adjustments to the
Company's estimates for deferred compensation during the fourth quarter of
2004 which netted to $139,000. There were 317 full-time equivalent
employees at December 31, 2004 compared to 314 at December 31, 2003 and 319
at December 31, 2002.
* Occupancy and equipment expense decreased $31,000 or .7% to $4,259,000 in
2004 from $4,290,000 in 2003 and $4,055,000 in 2002. This decrease is due
to a decrease in depreciation expense resulting from equipment that became
fully depreciated by mid-2004.
* There was no amortization of goodwill expense during 2004 in accordance
with SFAS 142 and SFAS 147. Amortization of other intangibles expense
decreased $151,000. This was a result of a reduction of core deposit
intangible expense of $92,000 and a reduction of mortgage servicing rights
amortization of $59,000.
* Other operating expenses increased $154,000 or 3.8% to 4,169,000 in 2004
from $4,015,000 in 2003 and $4,260,000 in 2002. This increase resulted from
increased franchise taxes paid by the Company.
* On a net basis, all other categories of operating expenses increased
$243,000 or 11.0% to $2,462,000 from $2,219,000 in 2003 and $2,444,000 in
2002. The increase was primarily due to increased legal and professional
fees resulting from the requirements of the Sarbanes-Oxley Act of 2002,
increased marketing and promotion expense due to new deposit products
rolled out in the second quarter of 2004 and from fees associated with the
issuance of trust preferred securities, the proceeds of which were invested
in junior subordinated debentures of the Company, during the first quarter
of 2004.
Income Taxes
Income tax expense amounted to $4,541,000 in 2004 compared to $4,674,000 in 2003
and $4,005,000 in 2002. Effective tax rates were 31.8%, 33.9% and 33.3%,
respectively, for 2004, 2003 and 2002. The decrease in the effective tax rate in
2004 compared to 2003 is due to a reduction in the current year tax expense
accrual to more accurately reflect the estimated tax liability position for
2004. 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.
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):
2004 2003 2002 2001 2000
---------- ---------- ----------- ---------- ----------
Real estate - mortgage $427,154 $390,841 $340,033 $331,873 $299,252
Commercial & agricultural 137,733 131,609 127,065 107,620 100,201
Installment 30,587 28,932 31,119 32,522 28,674
Other 2,375 1,442 1,647 1,228 1,161
---------- ---------- ----------- ---------- ----------
Total loans $597,849 $552,824 $499,864 $473,243 $429,288
========== ========== =========== ========== ==========
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 $45 million or 8.1% from December 31, 2003 to
December 31, 2004, primarily as a result of an increase in commercial real
estate loan balances of $30.9 million. Loans secured by apartment buildings and
hotels comprised the largest percentage of the growth in commercial real estate
loans. Balances of loans sold into the secondary market were $42 million in
2004, compared to $135 million in 2003. The balance of real estate loans held
for sale amounted to $2,689,000 and $751,000 as of December 31, 2004 and 2003,
respectively.
At December 31, 2004, the Company had loan concentrations in agricultural
industries of $91.5 million, or 15.3%, of outstanding loans and $93.3 million,
or 18.1%, at December 31, 2003. In addition, the Company had loan concentrations
in the following industries as of December 31, 2004 and 2003 (dollars in
thousands):
2004 2003
Principal % Outstanding Principal % Outstanding
balance loans balance loans
--------- ------------- ---------- -------------
Operators of non-residential $18,864 3.16% $11,633 2.10%
buildings
Apartment building owners 23,111 3.87% 21,207 3.84%
Motels, hotels & tourist courts 25,756 4.31% 26,962 4.88%
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,
2004, by maturities (in thousands):
Maturity (1)
---------------------------------------------------
Over 1
One year through Over
or less(2) 5 years 5 years Total
---------------------------------------------------
Real estate - mortgage $131,414 $253,146 $ 42,594 $427,154
Commercial & agricultural 97,091 37,551 3,091 137,733
Installment 15,827 14,725 35 30,587
Other 815 1,004 556 2,375
---------------------------------------------------
Total loans $245,147 $306,426 $46,276 $597,849
===================================================
(1) Based upon remaining maturity.
(2) Includes demand loans, past due loans and overdrafts.
As of December 31, 2004, loans with maturities over one year consisted of $249
million in fixed rate loans and $103 million in variable rate loans. The loan
maturities noted above are based on the contractual provisions of the individual
loans. The Company has no general policy regarding 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,
-------------------------------------------------
2004 2003 2002 2001 2000
-------------------------------------------------
Nonaccrual loans $3,106 $3,296 $2,961 $3,419 $2,982
Loans past due ninety days or
more and still accruing - - - - 245
Renegotiated loans which are
performing in accordance
with revised terms - 35 188 188 232
-------------------------------------------------
Total nonperforming loans $3,106 $3,331 $3,149 $3,607 $3,459
=================================================
At December 31, 2004, $2,069,000 of the nonperforming loans resulted from
collateral-dependent loans to three borrowers. The $190,000 decrease in
nonaccrual loans during the year resulted from the net of $1,695,000 of loans
put on nonaccrual status, offset by $18,000 of loans transferred to other real
estate owned, $49,000 of loans charged off and $1,818,000 of loans becoming
current or paid-off.
Interest income that would have been reported if nonaccrual and renegotiated
loans had been performing totaled $169,000, $213,000 and $164,000 for the years
ended December 31, 2004, 2003 and 2002, 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 earlier 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 account for 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, 2004, the Company's loan portfolio
included $91.5 million of loans to borrowers whose businesses are directly
related to agriculture. The balance decreased $1.8 million from $93.3 million at
December 31, 2003. While the Company adheres to sound underwriting practices,
including collateralization of loans, any extended period of low commodity
prices, significantly reduced yields on crops and/or reduced levels of
government assistance to the agricultural industry could result in an increase
in the level of problem agriculture loans and potentially result in loan losses
within the agricultural portfolio.
In addition, the Company has $25.8 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.
The Company also has $18.9 million of loans to operators of non-residential
buildings and $23.1 million of loans to apartment building owners.
Loan loss experience for the years ending December 31, 2004, 2003, 2002, 2001,
and 2000, respectively are summarized as follows (dollars in thousands):
2004 2003 2002 2001 2000
--------------------------------------------------------------
Average loans outstanding,
net of unearned income $572,836 $525,095 $483,764 $454,108 $409,648
Allowance-beginning of year $4,426 $3,723 $3,702 $3,262 $2,939
Balance added through acquisitions - - - 275 -
Charge-offs:
Commercial, financial and agricultural 436 589 673 244 57
Real estate-mortgage 23 50 200 86 47
Installment 129 139 255 171 183
--------------------------------------------------------------
Total charge-offs 588 778 1,128 501 287
Recoveries:
Commercial, financial and agricultural 146 427 12 22 26
Real estate-mortgage - 15 17 - 1
Installment 49 39 45 44 33
--------------------------------------------------------------
Total recoveries 195 481 74 66 60
--------------------------------------------------------------
Net charge-offs 393 297 1,054 435 227
--------------------------------------------------------------
Provision for loan losses 588 1,000 1,075 600 550
--------------------------------------------------------------
Allowance-end of year $ 4,621 $ 4,426 $ 3,723 $ 3,702 $ 3,262
==============================================================
Ratio of net charge-offs to
average loans .07% .06% .22% .10% .06%
==============================================================
Ratio of allowance for loan losses to
loans outstanding (at end of year) .77% .80% .74% .79% .76%
==============================================================
Ratio of allowance for loan
losses to nonperforming loans 148.8% 132.9% 118.2% 102.6% 94.3%
==============================================================
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 2004, the Company had net charge-offs of $393,000 compared to $297,000 in
2003 and $1,054,000 in 2002. During 2004, significant charge-offs included
$118,000 on two commercial loans of a single borrower and $124,000 on two
commercial real estate loans of a single borrower. The Company also recovered
$85,000 in interest on an agricultural real estate loan that had been
charged-off in a prior period and $68,500 on two commercial real estate loans
that were previously charged-off. 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 2003, the Company also 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.
At December 31, 2004, the allowance for loan losses amounted to $4,621,000, or
..77% of total loans, and 148.8% of nonperforming loans. At December 31, 2003,
the allowance was $4,426,000, or .80% of total loans, and 132.9% 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, 2004 December 31, 2003 December 31, 2002
------------------------ ------------------------ ------------------------
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 $ 240 71.4% $ 179 70.7% $ 241 68.1%
Commercial, financial
and agricultural 3,124 23.1% 2,952 23.8% 2,856 25.4%
Installment 150 5.1% 154 5.2% 190 6.2%
Other - .4% - .3% - .3%
------------------------ ------------------------ ------------------------
Total allocated 3,514 3,285 3,287
Unallocated 1,107 N/A 1,141 N/A 436 N/A
------------------------ ------------------------ ------------------------
Allowance at end of
year $4,621 100.0% $4,426 100.0% $3,723 100.0%
======================== ======================== ========================
December 31, 2001 December 31, 2000
------------------------ ------------------------
Allowance % of Allowance % of
for loans for loans
loan to total loan to total
losses loans losses loans
------------------------ ------------------------
Real estate-mortgage $ 282 70.1% $ 257 69.7%
Commercial, financial
and agricultural 2,524 22.7% 2,107 23.3%
Installment 207 6.9% 182 6.7%
Other - .3% - .3%
------------------------ ------------------------
Total allocated 3,013 2,546
Unallocated 689 N/A 716 N/A
------------------------ ------------------------
Allowance at end of
year $3,702 100.0% $3,262 100.0%
======================== ========================
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. It is based on factors that cannot necessarily be associated
with a specific credit or loan category and represents management's attempt to
ensure that the overall allowance of loan losses appropriately reflects a margin
for the imprecision necessarily inherent in the estimates of expected credit
losses. A number of subjective factors are considered when determining the
unallocated portion, including local and general economic business factors and
trends, portfolio concentrations, and changes in size, mix and general terms of
the portfolio.
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,
--------------------------------------------------------------
2004 2003 2002
-------------------- -------------------- --------------------
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 $92,369 2.81% $ 109,544 3.25% $ 76,342 3.80%
Obligations of states and
political subdivisions 25,133 4.54% 26,895 4.86% 27,597 4.63%
Mortgage-backed securitiess 34,032 3.82% 21,607 3.64% 44,697 3.72%
Other securities 17,817 6.02% 17,521 5.87% 15,807 5.86%
--------- ---------- ---------- --------- ---------- ---------
Total securities $169,351 3.61% $175,567 3.81% $164,443 4.12%
========= ========== ========== ========= ========== =========
At December 31, 2004, the investment portfolio showed an increase in
mortgage-backed securities and a decrease 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, 2004 (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 $ 22,512 $51,396 $13,479 $4,982 $92,369
Obligations of state and
political subdivisions 3,151 7,463 10,684 2,283 23,581
Mortgage-backed securities 6,205 27,827 - - 34,032
Other securities - - - 17,817 17,817
-----------------------------------------------------------------------
Total investments $31,868 $86,686 $24,163 $25,082 $167,799
=======================================================================
Weighted average yield 2.12% 3.59% 4.27% 5.38% 3.59%
Full tax-equivalent yield 2.31% 3.76% 5.22% 5.59% 3.89%
========================================================================
Held-to-maturity:
Obligations of state and
political subdivisions $140 $ 600 $ 280 $ 532 $ 1,552
========================================================================
Weighted average yield 5.19% 5.41% 5.67% 5.38% 5.43%
Full tax-equivalent yield 7.66% 7.99% 8.39% 7.94% 8.02%
========================================================================
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, 2004.
At December 31, 2004, there were no securities in a continuous unrealized loss
position for twelve or more months.
Investment securities carried at approximately $143,560,000 and $147,603,000 at
December 31, 2004 and 2003, 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, 2004, 2003 and 2002 (dollars
in thousands):
2004 2003 2002
--------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
--------------------------------------------------------------------------
Demand deposits:
Non-interest bearing $ 85,437 - $ 85,368 - $ 79,082 -
Interest bearing 230,300 .68% 219,809 .81% 200,653 1.33%
Savings 61,144 .39% 56,402 .54% 51,634 1.55%
Time deposits 261,564 2.80% 250,403 3.06% 242,301 3.63%
--------------------------------------------------------------------------
Total average deposits $638,445 1.43% $611,982 1.59% $573,670 2.14%
==========================================================================
In 2004, the average balance of deposits increased by $26.5 million from 2003.
The increase was primarily attributable to growth in interest-bearing deposits,
including money market accounts, Club 50 accounts, and brokered certificate of
deposit balances ("CDs"). Average money market account balances increased by
$6.5 million, average balances in the Club 50 accounts increased by $9.6
million, and brokered CD balances increased by $19.3 million, partially offset
by a decline in other time deposit balances. In 2003, the average balance of
deposits increased by $38.3 million from 2002. The increase was primarily
attributable to growth in interest-bearing deposits including money market
accounts and Club 50 accounts.
In 2004, the Company's significant deposits included brokered CDs, time deposits
with the State of Illinois, and a deposit relationship with a public entity. The
Company had thirteen brokered CDs at various maturities with a total balance of
$42.1 million as of December 31, 2004. State of Illinois time deposits
maintained with the Company totaled $4.4 million as of December 31, 2004. These
balances are subject to bid annually. In addition, the Company maintains account
relationships with various public entities throughout its market areas. One
public entity had total balances of $22.8 million in various checking accounts
and time deposits as of December 31, 2004. These balances are subject to change
depending upon the cash flow needs of the public entity.
The following table sets forth the maturity of time deposits of $100,000 or more
(in thousands):
December 31,
----------------------------------------------
2004 2003 2002
----------------------------------------------
3 months or less $26,916 $ 20,510 $ 29,085
Over 3 through 6 months 17,560 10,906 18,926
Over 6 through 12 months 22,826 24,654 13,715
Over 12 months 48,031 28,446 32,225
----------------------------------------------
Total $115,333 $ 84,516 $ 93,951
==============================================
The balance of time deposits of $100,000 or more increased by $30.8 million from
December 31, 2003 to December 31, 2004. The increase in balances was primarily
attributable to the movement of deposit balances into CDs due to rising rates
and to an increase in brokered deposits. The balance of time deposits of
$100,000 or more decreased by $9.4 million from December 31, 2002 to December
31, 2003. The decrease in balances was primarily attributable to movement of
deposit balances from CDs to money market and checking accounts due to the
reduced attractiveness of CDs in the low rate environment.
Balances of time deposits of $100,000 or more includes brokered CDs, time
deposits maintained for public entities, and consumer time deposits. The balance
of brokered CDs was $42.1 million, $22.9 million and $16.2 as of December 31,
2004, 2003 and 2002, respectively. The Company also maintains time deposits for
the State of Illinois with balances of $4.4 million, $6.3 million and $6.8
million as of December 31, 2004, 2003 and 2002, respectively. The State of
Illinois deposits are subject to bid annually and could increase or decrease in
any given year.
Repurchase Agreements and Other Borrowings
Securities sold under agreements to repurchase are short-term obligations of
First Mid Bank. First Mid Bank collateralizes these obligations with certain
government securities that are direct obligations of the United States or one of
its agencies. First Mid Bank offers these retail repurchase agreements as a cash
management service to its corporate customers. Other borrowings consist of
Federal Home Loan Bank ("FHLB") advances, federal funds purchased, junior
subordinated debentures and loans (short-term or long-term debt) that the
Company has outstanding.
Information relating to securities sold under agreements to repurchase and other
borrowings for the last three years is presented below (dollars in thousands):
2004 2003 2002
------------ ------------- -------------
At December 31:
Securities sold under agreements to repurchase $59,835 $59,875 $44,184
Federal Home Loan Bank advances:
Fixed term - due in one year or less 17,300 5,000 5,000
Fixed term - due after one year 8,000 25,300 30,300
Junior subordinated debentures 10,310 - -
Debt:
Loans due in one year or less 4,200 9,025 8,525
Loans due after one year 400 600 800
------------ ------------- -------------
Total $100,045 $99,800 $88,809
============ ============= =============
Average interest rate at year end 2.59% 2.13% 2.53%
Maximum Outstanding at Any Month-end
Securities sold under agreements to repurchase $63,517 $59,875 $44,588
Federal Home Loan Bank advances:
Overnight 7,000 - 400
Fixed term - due in one year or less 17,300 5,000 8,000
Fixed term - due after one year 25,300 30,300 30,300
Federal funds purchased - - 3,250
Junior subordinated debentures 10,310 - -
Debt:
Loans due in one year or less 9,025 9,025 9,525
Loans due after one year 400 600 800
------------ ------------- -------------
Total $132,852 $104,800 $96,863
============ ============= =============
Averages for the Year
Securities sold under agreements to repurchase $55,645 $47,795 $34,389
Federal Home Loan Bank advances:
Overnight 997 - 521
Fixed term - due in one year or less 8,200 5,000 6,153
Fixed term - due after one year 17,920 26,094 30,300
Federal funds purchased 218 14 299
Junior subordinated debentures 8,704 - -
Debt:
Loans due in one year or less 6,746 8,796 5,350
Loans due after one year 415 615 738
------------ ------------- -------------
Total $98,845 $88,314 $77,750
============ ============= =============
Average interest rate during the year 2.63% 2.41% 3.10%
FHLB advances represent borrowings by First Mid Bank to economically fund loan
demand. The fixed term advances consist of $25.3 million as follows:
* $5 million advance at 6.16% with a 5-year maturity, due March 21, 2005,
callable quarterly
* $2.3 million advance at 6.10% with a 5-year maturity, due April 7, 2005,
callable quarterly
* $5 million advance at 6.12% with a 5-year maturity, due September 6, 2005,
callable quarterly
* $5 million advance at 5.34% with a 5-year maturity, due December 14, 2005,
callable quarterly
* $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,
five year lockout, one-time call 11/23/06
At December 31, 2004, outstanding loan balances include $4,000,000 on a
revolving credit agreement with The Northern Trust Company with a floating
interest rate of 1.25% over the Federal funds rate (3.48% as of December 31,
2004) and set to mature October 22, 2005. This loan was renegotiated on October
23, 2004 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, 2004 and 2003.
The balance also includes a promissory note, of which $600,000 is outstanding as
of December 31, 2004, 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 (5.25% as of December 31, 2004) and principal payable in the
amount of $200,000 annually over five years, with a final maturity of January
2007.
On February 27, 2004, the Company completed the issuance and sale of $10 million
of floating rate trust preferred securities through First Mid-Illinois Statutory
Trust I (the "Trust"), a statutory business trust and wholly-owned subsidiary of
the Company, as part of a pooled offering. The Company established the Trust for
the purpose of issuing the trust preferred securities. Upon adoption of FIN 46R,
the Company was required to de-consolidate its investment in the Trust. The $10
million in proceeds from the trust preferred issuance and an additional $310,000
for the Company's investment in common equity of the Trust, a total of $10,310
000, was invested in junior subordinated debentures of the Company. The
underlying junior subordinated debentures issued by the Company to the Trust
mature in 2034, bear interest at three-month London Interbank Offered Rate
("LIBOR") plus 280 basis points, reset quarterly, and are callable, at the
option of the Company, at par on or after April 7, 2009. The Company intends to
use the proceeds of the offering for general corporate purposes. The trust
preferred securities issued by the Trust are included as Tier 1 capital of the
Company for regulatory capital purposes. On July 2, 2003, the Federal Reserve
Board issued a supervisory letter instructing bank holding companies to continue
to include trust preferred securities in the calculation of Tier 1 capital for
regulatory purposes until further notice. As a result of the issuance of FIN
46R, the Federal Reserve Board is currently evaluating whether de-consolidation
of the Trust will affect the qualification of the trust preferred securities as
Tier 1 capital. If it is determined that the trust preferred securities no
longer qualify as Tier 1 capital, the Company would still be classified as
well-capitalized.
Interest Rate Sensitivity
The Company seeks to maximize its net interest margin while maintaining an
acceptable level of interest rate risk. Interest rate risk can be defined as the
amount of forecasted net interest income that may be gained or lost due to
changes in the interest rate environment, a variable over which management has
no control. Interest rate risk, or sensitivity, arises when the maturity or
repricing characteristics of assets differ significantly from the maturity or
repricing characteristics of liabilities.
The Company monitors its interest rate sensitivity position to maintain a
balance between rate-sensitive assets and rate-sensitive liabilities. This
balance serves to limit the adverse effects of changes in interest rates. The
Company's asset/liability management committee (ALCO) oversees the interest rate
sensitivity position and directs the overall allocation of funds.
In the banking industry, a traditional way to measure potential net interest
income exposure to changes in interest rates is through a technique known as
"static GAP" analysis which measures the cumulative differences between the
amounts of assets and liabilities maturing or repricing at various intervals. By
comparing the volumes of interest-bearing assets and liabilities that have
contractual maturities and repricing points at various times in the future,
management can gain insight into the amount of interest rate risk embedded in
the balance sheet.
The following table sets forth the Company's interest rate repricing gaps for
selected maturity periods at December 31, 2004 (dollars in thousands):
Number of Months Until Next Repricing Opportunity
Interest-earning assets: 0-1 1-3 3-6 6-12 12+
------------- --------------- -------------- --------------- -------------
Federal funds sold $ 4,435 $ - $ - $ - $ -
Taxable investment securities 5,966 20,216 1,995 2,489 113,821
Nontaxable investment securities 1,799 2,165 1,332 1,516 19,075
Loans 187,785 39,869 44,992 53,970 271,233
------------- --------------- -------------- --------------- -------------
Total $199,985 $ 62,250 $48,319 $57,975 $404,129
------------- --------------- -------------- --------------- -------------
Interest-bearing liabilities:
Savings and N.O.W. accounts 39,655 1,941 1,683 3,727 159,970
Money market accounts 50,564 612 918 1,741 30,096
Other time deposits 20,946 31,431 34,548 61,439 125,583
Short-term borrowings/debt 60,035 5,000 2,300 14,000 -
Long-term borrowings/debt - - - - 18,710
------------- --------------- -------------- --------------- -------------
Total $171,200 $ 38,984 $39,449 $80,907 $ 334,359
------------- --------------- -------------- --------------- -------------
Periodic GAP $ 28,785 $ 23,266 $ 8,870 $(22,932) $ 69,770
------------- --------------- -------------- --------------- -------------
Cumulative GAP $ 28,785 $ 52,051 $60,921 $37,989 $ 107,759
============= =============== ============== =============== =============
GAP as a % of interest-earning assets:
Periodic 3.7% 3.0% 1.1% (3.0%) 9.0%
Cumulative 3.7% 6.7% 7.9% 4.9% 13.9%
============= =============== ============== =============== =============
The static GAP analysis shows that at December 31, 2004, the Company was asset
sensitive, on a cumulative basis, through the twelve-month time horizon. 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, 2004, stockholders' equity decreased $1,441,000 or 2.0% to
$69,154,000 from $70,595,000 as of December 31, 2003. During 2004, net income
contributed $9,751,000 to equity before the payment of dividends to common
stockholders of $2,023,000. The change in the market value of available-for-sale
investment securities decreased stockholders' equity by $958,000, net of tax.
Additional purchases of treasury stock (319,618 shares at an average cost of
$32.43 per share) decreased stockholders' equity by $10,365,000.
Stock Plans
On July 16, 2004, 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, 2004, the Company classified the cost basis of its common stock issued and
held in trust in connection with the DCP of approximately $2,168,000 as treasury
stock. The Company also classified the cost basis of its related deferred
compensation obligation of approximately $2,168,000 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:
* 6,421 common shares during 2004
* 10,866 common shares during 2003
* 8,678 common shares during 2002.
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:
* 8,225 common shares during 2004
* 20,790 common shares during 2003
* 10,155 common shares during 2002.
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 $2,023,000 in common stock dividends paid during 2004, $1,252,000 or 61.9%,
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 2004, 39,481 common shares were issued from common stock
dividends
* During 2003, 46,756 common shares were issued from common stock
dividends
* During 2002, 55,964 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 225,000 shares were
originally authorized under the SI Plan. In September 2001, the Board of
Directors authorized an additional 225,000 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 2004, the Company granted 74,250 options at an option
price of $41.00
* In December 2003, the Company granted 72,000 options at an option
price of $31.00
* In December 2002, the Company granted 65,250 options at an option
price of $18.17
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, 2004, 2003, and 2002.
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 and on April 27,
2004, the Board approved the repurchase of an additional $5 million of shares of
the Company's common stock, bringing the aggregate total to 8% of the Company's
common stock plus $23 million of additional shares.
During 2004, the Company repurchased 319,618 shares (7.2% of common shares) at a
total price of $10,365,000. 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. During 2003, the Company
repurchased 120,057 shares (3.8% of common shares) at a total price of
$4,233,000. As of December 31, 2004, the Company was authorized pursuant to all
repurchase programs to purchase an additional 88,338 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, 2004 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) 10.94% 11.71% 7.99%
First Mid-Illinois Bank &
Trust, N.A. 11.10% 11.88% 8.08%
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, 2004,
the First Mid Bank's ratios of total capital to risk-weighted assets
of 11.88% and Tier 1 capital to total average assets of 8.08% 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, 2004,
the excess collateral at the FHLB could support approximately $45
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 $4,000,000 as of December 31, 2004 and
$11,000,000 in available funds. The credit agreement matures on
October 22, 2005. 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, 2004.
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, 2004 (in thousands):
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
--------------- ---------------- ----------------- --------------- ---------------
Time deposits $276,358 $150,520 $114,097 $11,332 $ 409
Debt 15,110 4,400 400 - 10,310
Other borrowings 85,135 77,135 - 5,000 3,000
Operating leases 2,876 296 516 488 1,576
Supplemental retirement
liability 743 50 150 150 393
--------------- ---------------- ----------------- --------------- ---------------
$380,222 $232,401 $115,163 $16,970 $15,688
=============== ================ ================= =============== ===============
For the year ended December 31, 2004, net cash was provided from both operating
activities and financing activities ($11.2 million and $24.7 million,
respectively), while investing activities used net cash of $37.3 million. Thus,
cash and cash equivalents decreased by $1.4 million since year-end 2003.
Generally, during 2004, cash balances were reduced by funds used to fund new
loans offset by an increase in deposit balances primarily brokered deposits.
For the year ended December 2003, net cash was provided from both operating
activities and financing activities ($17.8 million and $8.4 million,
respectively), while investing activities used net cash of $70.9 million. Thus,
cash and cash equivalents decreased by $44.7 million since year-end 2002.
Generally, during 2003, decreases in deposits and increase in funds used to fund
new loans reduced cash balances.
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.
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 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. Upon adoption of FIN 46R, the Company was
required to de-consolidate its investment in First Mid-Illinois Statutory Trust
I ("Trust"), a statutory business trust and wholly-owned subsidiary of the
Company. On February 27, 2004, the Company completed the issuance and sale of
$10 million of floating rate capital securities ("Trust Preferred") through the
Trust as part of a pooled offering. The $10 million in proceeds from the Trust
Preferred issuance and an additional $310,000 for the Company's investment in
common equity of the Trust, a total of $10,310 000, was invested in junior
subordinated debentures of the Company. The Trust Preferred held by the Trust
presently qualify as Tier I Capital for regulatory capital purposes. The
adoption of FIN 46R and the de-consolidation of the Trust did not have a
material impact on the Company's financial position or results of operations.
Currently, the Company does not have any other investments affected by FIN 46R.
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 adoption of the requirements
of SOP 03-3 is not expected to have a material impact on the Company's financial
position or results of operations.
In March 2004, the FASB reached a consensus on Emerging Issues Task Force Issue
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" ("EITF 03-1"). EITF 03-1 provides guidance for determining
when an investment is impaired and whether the impairment is other than
temporary. EITF 03-01 also incorporates into its consensus the required
disclosures about unrealized losses on investments announced by the EITF in late
2003 and adds new disclosure requirements relating to cost-method investments.
The new disclosure requirements are effective for annual reporting periods
ending June 15, 2004 and the new impairment accounting guidance was to become
effective for reporting periods beginning June 15, 2004. In September 2004, the
FASB delayed the effective date of EITF 03-1 for measurement and recognition of
impairment losses until implementation guidance is issued. The Company does not
expect the adoption of impairment guidance contained in EITF 03-1 to have a
material impact on its financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29 Accounting for Nonmonetary Assets"
("SFAS 153"). SFAS 153 amends the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged and more
broadly provides for exceptions regarding exchanges of nonmonetary assets that
do not have commercial substance. The provisions of this Statement are effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. The Company does not expect the requirements of SFAS 153 to have a
material impact on its financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised), "Accounting for
Stock-Based Compensation" ("SFAS 123R"). SFAS 123R establishes accounting
requirements for share-based compensation to employees and carries forward prior
guidance on accounting for awards to non-employees. The Statement requires an
entity to recognize compensation expense based on an estimate of the number of
awards expected to actually vest, exclusive of awards expected to be forfeited.
The provisions of this Statement will become effective July 1, 2005 for all
equity awards granted after the effective date. The Company is evaluating the
impact of SFAS 123R on its financial position and results of operations.
In May 2004, the FASB issued FASB Staff Position on Financial Accounting
Standard 106-2, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" ("FSP FAS 106-2").
FSP FAS 106-2 provides guidance on the accounting for the effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the
Act"); the Act was signed in law on December 8, 2003. Under the Act, a subsidy
is available to sponsors of postretirement health care plans whose benefits are
actuarially equivalent to Medicare Part D. The Company does not expect the
requirements of FSP FAS 106-2 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, 2004, 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, 2004 Income Income Average Equity
Prime rate is 5.25% 2004=13.62%
-------------------------------------------------
Prime rate increase of:
200 basis points to 7.25% $ 1,279 4.1 % .94 %
100 basis points to 6.25% 642 2.1 % .47 %
Prime rate decrease of:
200 basis points to 3.25% (3,654) (11.8)% (2.79)%
100 basis points to 4.25% (1,778) (5.8)% (1.34)%
The following table shows the same analysis performed as of December 31, 2003.
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)%
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,
2004 and December 31, 2003. 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, 2004
Change in
Changes In Economic Value of Equity
Interest Rates Amount Percent
(basis points) of Change of Change
----------------------------------------------------------
+200 bp $(10,846) (10.5)%
+100 bp (2,273) (2.2)%
-200 bp 1,137 1.1 %
-100 bp 6,825 6.6 %
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 %
As indicated above, at December 31, 2004, 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, 2004, 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, 2004 and 2003
(In thousands, except share data) 2004 2003
---------- ----------
Assets
Cash and due from banks:
Non-interest bearing $ 19,119 $ 20,659
Interest bearing 1,985 2,915
Federal funds sold 2,450 1,375
---------- ----------
Cash and cash equivalents 23,554 24,949
Investment securities (note 4):
Available-for-sale, at fair value 168,821 176,481
Held-to-maturity, at amortized cost (estimated fair
value of $1,598 and $1,687 at December 31, 2004 and
2003, respectively) 1,552 1,677
Loans (note 5) 597,849 552,824
Less allowance for loan losses (note 6) (4,621) (4,426)
---------- ----------
Net loans 593,228 548,398
Premises and equipment, net (note 7) 15,227 16,059
Accrued interest receivable 5,405 5,570
Goodwill, net (note 8) 9,034 9,034
Intangible assets, net (note 8) 3,346 3,969
Other assets 6,561 7,844
---------- ----------
Total assets $826,728 $793,981
========== ==========
Liabilities and Stockholders' Equity
Deposits (note 9):
Non-interest bearing $ 85,524 $ 94,723
Interest bearing 564,716 520,269
---------- ----------
Total deposits 650,240 614,992
Accrued interest payable 1,506 1,228
Securities sold under agreements to repurchase (note 10) 59,835 59,875
Junior subordinated debentures (note 10) 10,310 -
---------- ----------
Other borrowings (note 10) 29,900 39,925
---------- ----------
Other liabilities 5,783 7,366
---------- ----------
Total liabilities 757,574 723,386
---------- ----------
Stockholders' Equity
Common stock, $4 par value; authorized 18,000,000 shares;
shares issued 5,578,897 shares in 2004 and 5,501,831
shares in 2003 22,316 14,672
Additional paid-in capital 17,845 15,960
Retained earnings 53,259 52,942
Deferred compensation 2,204 1,881
Accumulated other comprehensive income 623 1,581
Less treasury stock at cost, 1,121,546 shares
in 2004 and 801,928 shares in 2003 (27,093) (16,441)
---------- ----------
Total stockholders' equity 69,154 70,595
---------- ----------
Total liabilities and stockholders' equity $826,728 $793,981
========== ==========
See accompanying notes to consolidated financial statements.
Consolidated Statements of Income
For the years ended December 31, 2004, 2003 and 2002
(In thousands, except per share data) 2004 2003 2002
---------- ---------- ---------
Interest income:
Interest and fees on loans $33,793 $32,435 $33,726
Interest on investment securities:
Taxable 4,860 4,961 6,014
Exempt from federal income tax 1,193 1,266 1,311
Interest on federal funds sold 103 164 199
Interest on deposits with other financial institutions 75 112 137
---------- ---------- ---------
Total interest income 40,024 38,938 41,387
Interest expense:
Interest on deposits (note 9) 9,122 9,751 12,253
Interest on securities sold under agreements
to repurchase 455 272 345
Interest on FHLB advances 1,484 1,632 1,863
Interest on federal funds purchased 3 - 6
Interest on subordinated debt 382 - -
Interest on other debt 198 241 194
---------- ---------- ---------
Total interest expense 11,644 11,896 14,661
---------- ---------- ---------
Net interest income 28,380 27,042 26,726
Provision for loan losses (note 6) 588 1,000 1,075
---------- ---------- ---------
Net interest income after provision for loan losses 27,792 26,042 25,651
Other income:
Trust revenues 2,254 1,992 1,855
Brokerage commissions 428 283 265
Insurance commissions 1,447 1,476 1,257
Service charges 4,746 4,484 3,799
Gains on sale of securities, net (note 4) 92 370 223
Mortgage banking revenue 522 1,673 1,272
Other 2,150 1,977 1,723
---------- ---------- ---------
Total other income 11,639 12,255 10,394
Other expense:
Salaries and employee benefits 13,626 13,232 12,505
Net occupancy and equipment expense 4,259 4,290 4,055
Amortization of other intangible assets (note 8) 623 774 742
Stationery and supplies 518 566 679
Legal and professional 1,173 991 1,027
Marketing and promotion 771 662 738
Other 4,169 4,015 4,260
---------- ---------- ---------
Total other expense 25,139 24,530 24,006
---------- ---------- ---------
Income before income taxes 14,292 13,767 12,039
Income taxes (note 15) 4,541 4,674 4,005
---------- ---------- ---------
Net income
$ 9,751 $ 9,093 $ 8,034
========== ========== =========
Per common share data:
Basic earnings per share $2.17 $1.92 $1.60
Diluted earnings per share 2.13 1.88 1.58
========== ========== =========
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 2004, 2003 and 2002
(In thousands, except share and per share data)
Additional Other
Common Paid-In- Retained Deferred Comprehensive Treasury
Stock Capital Earnings Compensation Income (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 $ 14,184 $13,288 $39,500 $1,392 $740 $(5,179) $63,925
Comprehensive income:
Net income - - 8,034 - - - 8,034
Net unrealized change in available-for-sale
investment securities - - - - 1,633 - 1,633
Total Comprehensive Income 9,667
Cash dividends on common stock ($.33 per share) - - (1,638) - - - (1,638)
Issuance of 55,964 common shares pursuant
to the Dividend Reinvestment Plan 150 762 - - - - 912
Issuance of 8,678 common shares pursuant
to the Deferred Compensation Plan 23 122 - - - - 145
Issuance of 10,155 common shares pursuant
to the First Retirement & Savings Plan 27 142 - - - - 169
Purchase of 360,519 treasury shares - - - - - (6,540) (6,540)
Deferred compensation - - - 197 - (197) -
Issuance of 11,720 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) $66,807
Comprehensive income:
Net income - - 9,093 - - - 9,093
Net unrealized change in available-for-sale
investment securities - - - - (792) - (792)
Total Comprehensive Income 8,301
Cash dividends on common stock ($.43 per share) - - (2,047) - - - (2,047)
Issuance of 46,756 common shares pursuant
to the Dividend Reinvestment Plan 125 748 - - - - 873
Issuance of 10,866 common shares pursuant
to the Deferred Compensation Plan 29 194 - - - - 223
Issuance of 20,790 common shares pursuant
to the First Retirement & Savings Plan 55 382 - - - - 437
Purchase of 180,085 treasury shares - - - - - (4,233) (4,233)
Deferred compensation - - - 292 - (292) -
Issuance of 17,813 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
===================================================================================
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 2004, 2003 and 2002
(In thousands, except share and per share data)
Additional Other
Common Paid-In- Retained Deferred Comprehensive Treasury
Stock Capital Earnings Compensation Income (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2003 $ 14,672 $15,960 $52,942 $1,881 $1,581 $(16,441) $70,595
Comprehensive income:
Net income - - 9,751 - - - 9,751
Net unrealized change in available-for-
sale investment securities - - - - (958) - (958)
Total Comprehensive Income 8,793
Cash dividends on common stock ($.45 per share) - - (2,023) - - - (2,023)
Issuance of 39,481 common shares pursuant
to the Dividend Reinvestment Plan 105 1,143 - - - - 1,248
Issuance of 6,421 common shares pursuant
to the Deferred Compensation Plan 20 188 - - - - 208
Issuance of 8,225 common shares pursuant
to the First Retirement & Savings Plan 29 240 - - - - 269
Purchase of 319,618 treasury shares - - - - - (10,365) (10,365)
Deferred compensation - - - 287 - (287) -
Tax benefit related to deferred compensation
distributions - - - 36 - - 36
Issuance of 22,938 common shares pursuant
to the exercise of stock options 79 246 - - - - 325
Tax benefit related to exercise of incentive
stock options - 58 - - - - 58
Tax benefit related to exercise of non-qualified
stock options - 10 - - - - 10
3-for-2 stock split in the form of 50% stock
dividend 7,411 - (7,411) - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2004 $ 22,316 $17,845 $53,259 $2,204 $623 $(27,093) $69,154
==================================================================================
See accompanying notes to financial statements.
Consolidated Statements of Cash Flows
For the years ended December 31, 2004, 2003 and 2002
(In thousands)
2004 2003 2002
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 9,751 $ 9,093 $ 8,034
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 588 1,000 1,075
Depreciation, amortization and accretion, net 2,450 3,104 3,169
Gain on sale of securities, net (92) (370) (223)
Loss on sale of other real property owned, net 76 53 107
Gain on sale of mortgage loans held for sale, net (595) (1,813) (1,350)
Deferred income taxes 178 (226) (146)
Decrease in accrued interest receivable 165 792 428
Increase (decrease) in accrued interest payable 278 (565) (577)
Origination of mortgage loans held for sale (44,019) (128,708) (106,461)
Proceeds from sale of mortgage loans held for sale 42,675 136,840 106,312
Impairment of other investment - - 250
Decrease (increase) in other assets 794 (2,698) (2,710)
(Decrease) increase in other liabilities (1,068) 1,257 1,232
---------- ---------- ----------
Net cash provided by operating activities 11,181 17,759 9,140
---------- ---------- ----------
Cash flows from investing activities:
Capitalization of mortgage servicing rights - (1) (6)
Purchases of premises and equipment (889) (1,052) (2,130)
Net increase in loans (43,479) (59,576) (26,176)
Proceeds from sales of other real property owned 924 925 653
Proceeds from sales of securities available-for-sale 5,137 13,815 12,091
Proceeds from maturities of securities available-for-sale 96,442 139,783 45,253
Proceeds from maturities of securities held-to-maturity 125 225 20,331
Purchases of securities available-for-sale (95,502) (163,266) (81,250)
Purchases of securities held-to-maturity - (1,734) (164)
Purchase of financial organizations, net of cash received - - 15
---------- ---------- ----------
Net cash used in investing activities (37,242) (70,881) (31,383)
---------- ---------- ----------
Cash flows from financing activities:
Net increase in deposits 35,248 1,540 54,032
(Decrease) increase in repurchase agreements (40) 15,691 5,305
Decrease in short-term FHLB advances (5,000) (5,000) (3,000)
Increase in long-term FHLB advances - - 5,000
Repayment of short-term debt (11,700) (200) (1,000)
Proceeds from short-term debt 6,675 500 5,000
Issuance of junior subordinated debentures 10,000 - -
Increase in other borrowings - - 200
Proceeds from issuance of common stock 802 894 481
Purchase of treasury stock (10,365) (4,233) (6,540)
Dividends paid on common stock (954) (778) (674)
---------- ---------- ----------
Net cash provided by financing activities 24,666 8,414 58,804
---------- ---------- ----------
(Decrease) increase in cash and cash equivalents (1,395) (44,708) 36,561
Cash and cash equivalents at beginning of year 24,949 69,657 33,096
---------- ---------- ----------
Cash and cash equivalents at end of year $23,554 $24,949 $69,657
========== ========== ==========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $11,366 $12,461 $15,238
Income taxes 4,658 4,632 4,228
Supplemental disclosure of noncash investing
and financing activities:
Loans transferred to real estate owned $1,250 890 841
Dividends reinvested in common shares 1,248 873 913
Net tax benefit related to option and
deferred compensation plans 104 - -
See accompanying notes to consolidated financial statements.
Notes To Consolidated Financial Statements
December 31, 2004, 2003 and 2002
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 2004 presentation and there was no impact on net
income or stockholders' equity from these reclassfications. 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 2004, 2003 or 2002.
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 net of unearned discounts,
unearned income and the allowance for loan losses. Unearned income includes
deferred loan origination fees reduced by loan origination costs and is
amortized to interest income over the life of the related loan using methods
which approximate the effective interest rate method. Interest on substantially
all loans is credited to income based on the principal amount outstanding.
The Company's policy is to discontinue the accrual of interest income on any
loan that becomes ninety days past due as to principal or interest or earlier
when, in the opinion of management there is reasonable doubt as to the timely
collection of principal or interest. Nonaccrual loans are returned to accrual
status when, in the opinion of management, the financial position of the
borrower indicates there is no longer any reasonable doubt as to the timely
collectibility of interest or principal.
Loans expected to be sold are classified as held for sale in the consolidated
financial statements and are recorded at the lower of aggregate cost or market
value, taking into consideration future commitments to sell the loans.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level deemed appropriate by
management to provide for probable losses inherent in the loan portfolio. The
allowance is based on a continuing review of the loan portfolio, the underlying
value of the collateral securing the loans, current economic conditions and past
loan loss experience. Loans that are deemed to be uncollectible are charged off
to the allowance. The provision for loan losses and recoveries are credited to
the allowance.
Management, considering current information and events regarding the borrowers'
ability to repay their obligations, considers a loan to be impaired when it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the note agreement, including principal and interest.
The amount of the impairment is measured based on the fair value of the
collateral, if the loan is collateral dependent, or alternatively, at the
present value of expected future cash flows discounted at the loan's effective
interest rate. Certain homogeneous loans such as residential real estate
mortgage and installment loans are excluded from the impaired loan provisions.
Interest income on impaired loans is recorded when cash is received and only if
principal is considered to be fully collectible.
Premises and Equipment
Premises and equipment are 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 July 16, 2004, 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 2,981,539 to 4,472,309
shares. All share and per share amounts have been restated for years prior to
2004 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 in Note 14 - "Stock
Option Plan."
Recent Accounting Pronouncements
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. Upon adoption of FIN 46R, the Company was
required to de-consolidate its investment in First Mid-Illinois Statutory Trust
I ("Trust"), a statutory business trust and wholly-owned subsidiary of the
Company. On February 27, 2004, the Company completed the issuance and sale of
$10 million of floating rate capital securities ("Trust Preferred") through the
Trust as part of a pooled offering. The $10 million in proceeds from the Trust
Preferred issuance and an additional $310,000 for the Company's investment in
common equity of the Trust, a total of $10,310 000, was invested in junior
subordinated debentures of the Company. The Trust Preferred held by the Trust
presently qualify as Tier I Capital for regulatory capital purposes. The
adoption of FIN 46R and the de-consolidation of the Trust did not have a
material impact on the Company's financial position or results of operations.
Currently, the Company does not have any other investments affected by FIN 46R.
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 adoption of the requirements
of SOP 03-3 is not expected to have a material impact on the Company's financial
position or results of operations.
In March 2004, the FASB reached a consensus on Emerging Issues Task Force Issue
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" ("EITF 03-1"). EITF 03-1 provides guidance for determining
when an investment is impaired and whether the impairment is other than
temporary. EITF 03-01 also incorporates into its consensus the required
disclosures about unrealized losses on investments announced by the EITF in late
2003 and adds new disclosure requirements relating to cost-method investments.
The new disclosure requirements are effective for annual reporting periods
ending June 15, 2004 and the new impairment accounting guidance was to become
effective for reporting periods beginning June 15, 2004. In September 2004, the
FASB delayed the effective date of EITF 03-1 for measurement and recognition of
impairment losses until implementation guidance is issued. The Company does not
expect the adoption of impairment guidance contained in EITF 03-1 to have a
material impact on its financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29 Accounting for Nonmonetary Assets"
("SFAS 153"). SFAS 153 amends the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged and more
broadly provides for exceptions regarding exchanges of nonmonetary assets that
do not have commercial substance. The provisions of this Statement are effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. The Company does not expect the requirements of SFAS 153 to have a
material impact on its financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised), "Accounting for
Stock-Based Compensation" ("SFAS 123R"). SFAS 123R establishes accounting
requirements for share-based compensation to employees and carries forwards
prior guidance on accounting for awards to non-employees. The Statement requires
an entity to recognize compensation expense based on an estimate of the number
of awards expected to actually vest, exclusive of awards expected to be
forfeited. The provisions of this Statement will become effective July 1, 2005
for all equity awards granted after the effective date. The Company is
evaluating the impact of SFAS 123R on its financial position and results of
operations.
In May 2004, the FASB issued FASB Staff Position on Financial Accounting
Standard 106-2, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" ("FSP FAS 106-2").
FSP FAS 106-2 provides guidance on the accounting for the effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the
Act"); the Act was signed in law on December 8, 2003. Under the Act, a subsidy
is available to sponsors of postretirement health care plans whose benefits are
actuarially equivalent to Medicare Part D. The Company does not expect the
requirements of FSP FAS 106-2 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, 2004, 2003
and 2002 is as follows (in thousands):
2004 2003 2002
---------- ---------- ----------
Net income $9,751 $9,093 $8,034
Other comprehensive income:
Unrealized gains (losses) during the year (1,478) (929) 2,889
Reclassification adjustment for net
gains realized in net income (92) (370) (223)
Tax effect 612 507 (1,033)
---------- ---------- ----------
Comprehensive income $8,793 $8,301 $9,667
========== ========== ==========
Note 2 - Earnings Per Share
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, 2004, 2003, and 2002 are as follows:
2004 2003 2002
------------- ------------ ------------
Basic Earnings per Share:
Net income available to common stockholders $9,751,000 $9,093,000 $8,034,000
============= ============ ============
Weighted average common shares outstanding 4,499,092 4,743,210 5,036,357
============= ============ ============
Basic earnings per common share $2.17 $1.92 $1.60
============= ============ ============
Diluted Earnings per Share:
Net income available to common stockholders $9,751,000 $9,093,000 $8,034,000
============= ============ ============
Weighted average common shares outstanding 4,499,092 4,743,210 5,036,357
Assumed conversion of stock options 88,967 85,935 36,249
------------- ------------ ------------
Diluted weighted average common shares outstanding 4,588,059 4,829,145 5,072,606
============= ============ ============
Diluted earnings per common share $2.13 $1.88 $1.58
============= ============ ============
Note 3 - Cash and Due from Banks
Aggregate cash and due from bank balances of $722,000 and $437,000 at December
31, 2004 and 2003, were maintained in satisfaction of statutory reserve
requirements of the Federal Reserve Bank.
Note 4 - Investment Securities
The amortized cost, gross unrealized gains and losses and estimated fair values
of available-for-sale and held-to-maturity securities by major security type at
December 31, 2004 and 2003 were as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ -----------
2004
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. government corporations and
Agencies $92,369 $ 35 $(507) $91,897
Obligations of states and political
Subdivisions 23,581 755 (2) 24,334
Mortgage-backed securities 34,032 220 (54) 34,198
Federal Home Loan Bank stock 5,293 - - 5,293
Other securities 12,524 575 - 13,099
----------- ------------ ------------ -----------
Total available-for-sale $167,799 $ 1,585 $ (563) $168,821
=========== ============ ============ ===========
Held-to-maturity:
Obligations of states and political
Subdivisions $ 1,552 $ 48 $ (2) $ 1,598
=========== ============ ============ ===========
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
=========== ============ ============ ===========
Proceeds from sales of investment securities and realized gains and losses were
as follows during the years ended December 31, 2004, 2003 and 2002 (in
thousands):
2004 2003 2002
---------- ---------- ----------
Proceeds from sales $5,137 $13,815 $12,091
Gross gains 92 370 223
Gross losses - - -
The following table presents the age of gross unrealized losses and fair value
by investment category (in thousands) as of December 31, 2004:
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 $76,886 $(507) $ - $ - $76,886 $(507)
Obligations of states and political
subdivisions 2,659 (4) - - 2,659 (4)
Mortgage-backed securities 11,505 (54) - - 11,505 (54)
--------- ---------- --------- ---------- --------- -----------
Total $91,050 $ (565) $ - $ - $91,050 $ (565)
========= ========== ========= ========== ========= ===========
Management does not believe any individual unrealized loss as of December 31,
2004 represents an other than temporary impairment. The unrealized losses
reported for U.S. agency securities relate primarily to eleven securities issued
by Federal Home Loan Bank and five U.S. Treasury securities. These unrealized
losses are primarily attributable to changes in interest rates and individually
were 2% or less of their respective amortized cost basis. The unrealized losses
reported for mortgage-backed securities relate primarily to three securities
issued by 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, 2004 (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 $25,663 $25,618
Due after one-five years 58,859 58,750
Due after five-ten years 24,163 24,566
Due after ten years 25,082 25,689
-------------- --------------
133,767 134,623
Mortgage-backed securities 34,032 34,198
-------------- --------------
Total available-for-sale $167,799 $168,821
-------------- --------------
Held-to-maturity:
Due in one year or less $ 140 $ 140
Due after one-five years 600 629
Due after five-ten years 280 295
Due after ten-years 532 534
-------------- --------------
Total held-to-maturity $ 1,552 $ 1,598
-------------- --------------
Total investment securities $169,351 $170,419
============== ==============
Investment securities of approximately $143,560,000 and $147,603,000 at December
31, 2004 and 2003, respectively, were pledged to secure public deposits and
repurchase agreements and for other purposes as permitted or required by law.
Note 5 - Loans
A summary of loans at December 31, 2004 and 2003 follows (in thousands):
2004 2003
--------------- ----------------
Commercial, financial and agricultural $137,738 $131,620
Real estate mortgage 427,154 390,841
Installment 30,592 28,952
Other 2,375 1,442
--------------- ----------------
Total gross loans 597,859 552,855
Less unearned discount 10 31
--------------- ----------------
Net loans $597,849 $552,824
=============== ================
The real estate mortgage loan balance in the above table includes loans held for
sale of $2,689,000 and $751,000 at December 31, 2004 and 2003, 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 $25,079,000 and $22,101,000 at December 31, 2004
and 2003, respectively.
Activity during 2004 was as follows (in thousands):
Balance at December 31, 2003 $22,101
New loans 8,100
Loan repayments (5,122)
-----------------
Balance at December 31, 2004 $25,079
=================
The aggregate principal balances of nonaccrual, past due and renegotiated loans
were as follows at December 31, 2004 and 2003 (in thousands):
2004 2003
---------------- ---------------
Nonaccrual loans $3,106 $3,296
Renegotiated loans which are performing
in accordance with revised terms - 35
Interest income which would have been recorded under the original terms of such
nonaccrual or renegotiated loans totaled $169,000, $213,000 and $164,000 in
2004, 2003 and 2002, 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 at December 31, 2004
and 2003 (in thousands):
2004 2003
----------- -----------
Impaired loans for which a specific allowance has
been provided $ 790 $ 858
Impaired loans for which no specific allowance has
been provided 2,316 2,438
----------- -----------
Total loans determined to be impaired $3,106 $3,296
=========== ===========
Allowance on impaired loans $ 39 $ 90
=========== ===========
For the year ended December 31, 2004 2003
----------- -----------
Average recorded investment in impaired loans $3,324 $4,434
Cash basis interest income recognized from
impaired loans 97 114
Most of the Company's business activities are with customers located within east
central Illinois. At December 31, 2004 and 2003, the Company's loan portfolio
included approximately $91,477,000 and $93,340,000, 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, 2004 and 2003 was approximately $10,830,000 and
$14,360,000, respectively.
Note 6 - Allowance for Loan Losses
Changes in the allowance for loan losses were as follows during the three-year
period ended December 31, 2004, 2003 and 2002 (in thousands):
2004 2003 2002
------------ ------------- ------------
Balance, beginning of year $4,426 $3,723 $3,702
Provision for loan losses 588 1,000 1,075
Recoveries 195 481 74
Charge-offs (588) (778) (1,128)
------------ ------------- ------------
Balance, end of year $4,621 $4,426 $3,723
============ ============= ============
Note 7 - Premises and Equipment, Net
Premises and equipment at December 31, 2004 and 2003 consisted of (in
thousands):
2004 2003
------------ ------------
Land $ 3,364 $ 3,364
Buildings and improvements 14,806 14,544
Furniture and equipment 10,262 10,264
Leasehold improvements 1,049 1,049
Construction in progress 29 105
------------ ------------
Subtotal 29,510 29,326
Accumulated depreciation and amortization 14,283 13,267
------------ ------------
Total $15,227 $16,059
============ ============
Depreciation and amortization expense was $1,721,000, $1,909,000 and $1,946,000
for the years ended December 31, 2004, 2003 and 2002, respectively.
Note 8 - Goodwill and Intangible Assets
The Company has goodwill from business combinations, intangible assets from
branch acquisitions, identifiable intangible assets assigned to core deposit
relationships and customer lists of insurance agencies acquired, and intangible
assets arising from the rights to service mortgage loans for others.
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, 2004 and 2003 (in thousands):
2004 2003
---------------------------------- ---------------------------------
Gross Accumulated Gross Accumulated
Carrying Carrying
Value Amortization Value Amortization
--------------- ------------------ -------------- ------------------
Goodwill not subject to amortization $12,794 $3,760 $12,794 $3,760
Intangibles from branch acquisition 3,015 1,559 3,015 1,358
Core deposit intangibles 2,805 2,279 2,805 2,089
Mortgage servicing rights 608 593 608 551
Customer list intangibles 1,904 555 1,904 365
--------------- ------------------ -------------- ------------------
$21,126 $8,746 $21,126 $8,123
=============== ================== ============== ==================
Total amortization expense for the years ended December 31, 2004, 2003 and 2002
was as follows (in thousands):
2004 2003 2002
----------- ------------ -----------
Intangibles from branch acquisitions $201 $201 $201
Core deposit intangibles 190 282 300
Mortgage servicing rights 41 100 66
Customer list intangibles 191 191 175
----------- ------------ -----------
$623 $774 $742
=========== ============ ===========
Estimated amortization expense for each of the five succeeding years is shown in
the table below (in thousands):
Estimated amortization expense:
For period ended 12/31/05 $578
For period ended 12/31/06 $579
For period ended 12/31/07 $515
For period ended 12/31/08 $454
For period ended 12/31/09 $417
In accordance with the provisions of SFAS 142, the Company performed testing of
goodwill for impairment as of September 30, 2004 and 2003, and determined, as of
each of these dates, that goodwill was not impaired. Management also concluded
that the remaining amounts and amortization periods were appropriate for all
intangible assets.
Note 9 - Deposits
As of December 31, 2004 and 2003, deposits consisted of the following (in
thousands):
2004 2003
------------------- ------------------
Demand deposits:
Non-interest bearing $ 85,524 $ 94,723
Interest-bearing 146,668 143,324
Savings 57,897 58,862
Money market 83,793 70,795
Time deposits 276,358 247,288
------------------- ------------------
Total deposits $650,240 $614,992
=================== ==================
Total interest expense on deposits for the years ended December 31, 2004, 2003
and 2002 was as follows (in thousands):
2004 2003 2002
----------- ------------ ------------
Interest-bearing demand $ 759 $ 907 $ 1,542
Savings 203 263 799
Money market 809 872 1,125
Time deposits 7,351 7,709 8,787
----------- ------------ ------------
Total $9,122 $9,751 $12,253
=========== ============ ============
As of December 31, 2004, 2003 and 2002, 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):
2004 2003 2002
------------- ------------- -------------
Outstanding $115,333 $84,516 $93,951
Interest expense for the year 2,956 2,462 2,766
The following table shows the amount of maturities for all time deposits as of
December 31, 2004 (in thousands):
Less than 1 year $150,520
1 year to 2 years 63,637
2 years to 3 years 50,460
3 years to 4 years 4,746
Over 4 years 6,995
------------------
Total $276,358
==================
In 2004, the Company's significant deposits included brokered CDs, time deposits
with the State of Illinois, and a deposit relationship with a public entity. The
Company had thirteen brokered CDs at various maturities with a total balance of
$42.1 million as of December 31, 2004. State of Illinois time deposits
maintained with the Company totaled $4.4 million as of December 31, 2004. These
balances are subject to bid annually. In addition, the Company maintains account
relationships with various public entities throughout their market areas. One
public entity had total balances of $22.8 million in various checking accounts
and time deposits as of December 31, 2004. These balances are subject to change
depending upon the cash flow needs of the public entity.
Note 10 - Other Borrowings
As of December 31, 2004 and 2003 other borrowings consisted of the following (in
thousands):
2004 2003
------------- --------------
Securities sold under agreements to repurchase $59,835 $59,875
Federal Home Loan Bank advances:
Fixed-term advances 25,300 30,300
Subordinated debentures 10,310 -
Other debt:
Loans due in one year or less 4,200 9,025
Loans due after one year 400 600
------------- --------------
Total $100,045 $99,800
============= ==============
The Federal Home Loan Bank fixed-term advances at December 31, 2004 consisted of
the following:
* $5 million advance at 6.16%, due March 21, 2005, callable quarterly
* $2.3 million advance at 6.10%, due April 7, 2005, callable quarterly
* $5 million advance at 6.12%, due September 6, 2005, callable quarterly
* $5 million advance at 5.34%, due December 14, 2005, callable quarterly
* $3 million advance at 5.98%, due March 1, 2011
* $5 million advance at 4.33%, due November 23, 2011, five year lockout,
one-time call 11/23/06
2004 2003 2002
---------- --------- ---------
Securities sold under agreements to repurchase:
Maximum outstanding at any month-end $63,517 $59,875 $44,588
Average amount outstanding for the year 55,645 47,795 34,389
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 159% of the outstanding advances and letters of credit
($8 million on December 31, 2004) from the FHLB. The securities underlying the
repurchase agreements are under the Company's control.
The Company had debt outstanding of $4.6 million as of December 31, 2004,
consisting of a loan agreement with The Northern Trust Company with a balance of
$4 million and $.6 million remaining on a $1 million promissory note for the
Checkley acquisition of which $.2 million is due in one year or less and $.4
million is due after one year. As of December 31, 2003, the Company's debt
outstanding of $9.625 million consisted of a loan agreement with The Northern
Trust Company with a balance of $8.825 million and $.8 million on a $1 million
promissory note for the Checkley acquisition of which $200,000 was due in one
year or less and $600,000 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, 2004 was 3.48%
(2.22% at December 31, 2003). The loan is a revolving credit agreement with a
maximum available balance of $15 million. The outstanding loan balance matures
October 22, 2005. 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, 2004 and 2003.
The $600,000 balance remaining on the 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 (5.25% as of
December 31, 2004) and principal payable in the amount of $200,000 annually over
five years, with a final maturity of January 2007.
On February 27, 2004, the Company completed the issuance and sale of $10 million
of floating rate trust preferred securities through First Mid-Illinois Statutory
Trust I (the "Trust"), a statutory business trust and wholly-owned subsidiary of
the Company, as part of a pooled offering. The Company established the Trust for
the purpose of issuing the trust preferred securities. Upon adoption of FIN 46R,
the Company was required to de-consolidate its investment in the Trust. The $10
million in proceeds from the trust preferred issuance and an additional $310,000
for the Company's investment in common equity of the Trust, a total of
$10,310,000, was invested in junior subordinated debentures of the Company. The
underlying junior subordinated debentures issued by the Company to the Trust
mature in 2034, bear interest at three-month London Interbank Offered Rate
("LIBOR") plus 280 basis points, reset quarterly, and are callable, at the
option of the Company, at par on or after April 7, 2009. The Company intends to
use the proceeds of the offering for general corporate purposes. The trust
preferred securities issued by the Trust are included as Tier 1 capital of the
Company for regulatory capital purposes. On July 2, 2003, the Federal Reserve
Board issued a supervisory letter instructing bank holding companies to continue
to include trust preferred securities in the calculation of Tier 1 capital for
regulatory purposes until further notice. As a result of the issuance of FIN
46R, the Federal Reserve Board is currently evaluating whether de-consolidation
of the Trust will affect the qualification of the trust preferred securities as
Tier 1 capital. If it is determined that the trust preferred securities no
longer qualify as Tier 1 capital, the Company would still be classified as
well-capitalized.
Note 11 - 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, 2004 and 2003, that all capital adequacy
requirements have been met.
As of December 31, 2004 and 2003, 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, 2004, 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, 2004
Total Capital
(to risk-weighted assets)
Company $ 70,787 11.71% $ 48,371 > 8.00% N/A N/A
-
First Mid Bank 71,233 11.88 47,988 > 8.00 $59,986 > 10.00%
- -
Tier 1 Capital
(to risk-weighted assets)
Company 66,166 10.94 24,185 > 4.00 N/A N/A
-
First Mid Bank 66,612 11.10 23,994 > 4.00 35,991 > 6.00
- -
Tier 1 Capital
(to average assets)
Company 66,166 7.99 33,132 > 4.00 N/A N/A
-
First Mid Bank 66,612 8.08 32,961 > 4.00 41,201 > 5.00
- -
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
- -
Note 12 - 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, 2004 and 2003 were as follows (in
thousands):
Financial instruments for which an active secondary market exists have been
valued using quoted available market prices.
2004 2003
------------------------------ -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- --------------- -------------- --------------
Cash and cash equivalents $ 23,554 $ 23,554 $ 24,949 $ 24,949
Investments available-for-sale 168,821 168,821 176,481 176,481
Investments held-to-maturity 1,552 1,598 1,677 1,687
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.
2004 2003
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------- -------------- -------------- ---------------
Deposits with stated maturities $273,947 $275,578 $247,282 $249,857
Securities sold under agreements
to repurchase 59,835 59,847 59,875 59,872
Federal Home Loan Bank advances 25,300 26,178 30,300 32,313
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.
2004 2003
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------- -------------- -------------- ---------------
Deposits with no stated maturity $376,293 $376,293 $367,710 $367,710
Floating rate debt 4,600 4,600 9,625 9,625
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.
2004 2003
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------- -------------- -------------- ---------------
Net loan portfolio $593,228 $596,175 $548,398 $555,154
Off-balance sheet items such as loan commitments and stand-by letters of credit
generally approximate their estimated fair values.
Note 13 - 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 $570,000,
$544,000 and $516,000 in 2004, 2003 and 2002, 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 $610,000 in 2004
and $81,000 per year in 2003 and 2002. During the fourth quarter of 2004, the
Company revised its estimate for supplemental retirement benefits and made a
non-recurring entry of $528,000 to expense to reflect the change in the
estimate.
Note 14 - 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 450,000 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, 2004,
2003 and 2002 and changes during the years then ended are presented in the
following table:
2004 2003 2002
-------------------------- ---------------------------- ---------------------------
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------- ------------ --------------- ------------- -------------
Beginning of year 305,343 $18.97 251,156 $15.10 197,625 $14.04
Granted 74,250 41.00 72,000 31.00 65,250 18.17
Exercised (22,937) 14.15 (17,813) 12.85 (11,719) 14.29
------------ ------------- ------------ --------------- ------------- -------------
End of year 356,656 $23.86 305,343 $18.97 251,156 $15.10
============ ============= ============ =============== ============= =============
Options exercisable 176,380 $19.33 140,441 $16.31 99,848 $13.31
============ ============= ============ =============== ============= =============
Fair value of options
granted during year $ 7.81 $ 5.79 $ 4.40
============= =============== =============
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,
2004 2003 2002
--------------- -------------- --------------
Net income, as reported $ 9,751 $ 9,093 $ 8,034
Stock-based compensation expense determined under
fair-value-based method, net of related tax effect (259) (206) (143)
--------------- -------------- --------------
Pro forma net income $ 9,492 $ 8,887 $ 7,891
=============== ============== ==============
Basic Earnings Per Share:
As reported $ 2.17 $ 1.92 $ 1.60
Pro forma 2.11 1.87 1.57
Diluted Earnings Per Share:
As reported $ 2.13 $ 1.88 $ 1.58
Pro forma 2.07 1.84 1.56
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 2004, 2003 and 2002:
2004 2003 2002
------------ ----------- -----------
Dividend yield 1.3% 1.8% 1.8%
Average risk free interest rate 3.51% 2.49% 4.56%
Weighted average expected life 5.2 yrs 9.9 yrs 9.9 yrs
Average expected volatility 17.2% 15.5% 15.0%
Note 15 - Income Taxes
The components of federal and state income tax expense (benefit) for the years
ended December 31, 2004, 2003 and 2002 were as follows (in thousands):
2004 2003 2002
---------------- --------------- ----------------
Current
Federal $3,644 $4,183 $3,515
State 719 717 636
---------------- --------------- ----------------
Total Current 4,363 4,900 4,151
Deferred
Federal 156 (186) (119)
State 22 (40) (27)
---------------- --------------- ----------------
Total Deferred 178 (226) (146)
---------------- --------------- ----------------
Total $4,541 $4,674 $4,005
================ =============== ================
Recorded income tax expense differs from the expected tax expense (computed by
applying the applicable statutory U.S. Federal tax rate of 35% in 2004 and 2003
and 34% in 2002 to income before income taxes). During 2004 and 2003, the
Company was in a graduated tax rate position. The principal reasons for the
difference are as follows (in thousands):
2004 2003 2002
-------------- ------------- -------------
Expected income taxes $5,002 $4,819 $4,093
Effects of:
Tax-exempt income (530) (550) (577)
Nondeductible interest expense 32 35 46
State taxes, net of federal taxes 487 440 402
Other items (350) 19 41
Effect of marginal tax rate (100) (89) -
-------------- ------------- -------------
Total $4,541 $4,674 $4,005
============== ============= =============
The Company reduced its accrual for taxes in 2004 by $355,000 based upon
management's best estimate of future tax liability. Tax returns filed with the
Internal Revenue Service and Illinois Department of Revenue are subject to
review by law under a three-year statute of limitations.
The tax effects of the temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2004 and 2003 are presented below (in thousands):
2004 2003
--------------- ----------------
Deferred tax assets:
Allowance for loan losses $ 1,801 $ 1,725
Deferred compensation 696 619
Supplemental retirement 289 71
Other 68 48
--------------- ----------------
Total gross deferred tax assets $ 2,854 $ 2,463
--------------- ----------------
Deferred tax liabilities:
Deferred loan costs $ 133 $ -
Goodwill 378 253
FHLB stock dividend 407 293
Core deposit premium amortization 57 (5)
Depreciation 41 (128)
Purchase accounting 63 88
Other 42 51
Available-for-sale investment securities 398 1,009
--------------- ----------------
Total gross deferred tax liabilities $1,519 $ 1,561
--------------- ----------------
Net deferred tax assets $1,335 $ 902
=============== ================
Net deferred tax assets are recorded in other assets on the consolidated balance
sheets. No valuation allowance related to deferred tax assets has been recorded
at December 31, 2004 and 2003 as management believes it is more likely than not
that the deferred tax assets will be fully realized.
Note 16 - Dividend Restrictions
Banking regulations impose restrictions on the ability of First Mid Bank to pay
dividends to the Company. At December 31, 2004, regulatory approval would have
been required for aggregate dividends from First Mid Bank to the Company in
excess of approximately $14.8 million. The amount of such dividends that could
be paid is further restricted by the limitations of sound and prudent banking
principles.
Note 17 - 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, 2004 and 2003 are as follows (in thousands):
2004 2003
------------- ------------
Unused commitments including lines of credit:
Commercial real estate $25,837 $24,283
Commercial operating 35,986 32,928
Home Equity 16,002 13,207
Other 13,577 14,991
------------- ------------
Total $91,402 $85,409
============= ============
Standby letters of credit $2,840 $2,440
============= ============
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 18 - 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, 2004 2003
------------ -----------
Assets
Cash $ 36 $ 1,743
Premises and equipment, net 268 275
Investment in subsidiaries 82,179 77,209
Other assets 3,115 3,647
------------ -----------
Total Assets $85,598 $82,874
============ ===========
Liabilities and Stockholders' equity
Liabilities
Dividends payable $ 1,073 $ 1,256
Debt 14,910 9,625
Other liabilities 461 1,398
------------ -----------
Total Liabilities 16,444 12,279
Stockholders' equity 69,154 70,595
------------ -----------
Total Liabilities and Stockholders' equity $85,598 $82,874
============ ===========
First Mid-Illinois Bancshares, Inc. (Parent Company)
Statements of Income
Years ended December 31, 2004 2003 2002
--------- --------- ----------
Income:
Dividends from subsidiaries $5,156 $4,922 $3,515
Other income 104 80 42
--------- --------- ----------
5,260 5,002 3,557
Operating expenses 2,212 1,068 1,205
--------- --------- ----------
Income before income taxes and equity
in undistributed earnings of subsidiaries 3,048 3,934 2,352
Income tax benefit 1,202 381 425
--------- --------- ----------
Income before equity in undistributed
earnings of subsidiaries 4,250 4,315 2,777
Equity in undistributed earnings of
subsidiaries 5,501 4,778 5,257
--------- --------- ----------
Net income $9,751 $9,093 $8,034
========= ========= ==========
First Mid-Illinois Bancshares, Inc. (Parent Company)
Statements of Cash Flows
Years ended December 31, 2004 2003 2002
--------- --------- ----------
Cash flows from operating activities:
Net income $9,751 $9,093 $8,034
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization, accretion, net 7 6 2
Equity in undistributed earnings of
subsidiaries (5,501) (4,778) (5,257)
(Increase) decrease in other assets 209 (1,292) (1,495)
(Decrease) increase in other liabilities (631) 1,301 (12)
--------- --------- ----------
Net cash provided by operating activities 3,835 4,330 1,272
--------- --------- ----------
Cash flows from financing activities:
Repayment of debt (11,700) (200) (3,525)
Proceeds from debt 6,675 500 8,525
Issuance of subordinated debt 10,000 - -
Proceeds from issuance of common stock 802 895 481
Purchase of treasury stock (10,365) (4,233) (6,540)
Dividends paid on common stock (954) (778) (674)
--------- --------- ----------
Net cash used in financing activities (5,542) (3,816) (1,733)
--------- --------- ----------
(Decrease) increase in cash (1,707) 514 (461)
Cash at beginning of year 1,743 1,229 1,690
--------- --------- ----------
Cash at end of year $ 36 $ 1,743 $ 1,229
========= ========= ==========
Note 19 - Quarterly Financial Data - Unaudited
The following table presents summarized quarterly data for each of the two years
ended December 31:
Quarters ended in 2004
March 31 June 30 September 30 December 31 (1)
------------- ------------- -------------- ----------------
Selected operations data:
Interest income $9,727 $9,761 $10,099 $10,437
Interest expense 2,687 2,727 2,986 3,244
------------- ------------- -------------- ----------------
Net interest income 7,040 7,034 7,113 7,193
Provision for loan losses 187 188 62 151
------------- ------------- -------------- ----------------
Net interest income after 6,853 6,846 7,051 7,042
provision for loan losses
Other income 2,898 2,943 2,876 2,922
Other expense 6,168 6,236 6,252 6,483
------------- ------------- -------------- ----------------
Income before income taxes 3,583 3,553 3,675 3,481
Income taxes 1,194 1,190 1,246 911
------------- ------------- -------------- ----------------
Net income $ 2,389 $ 2,363 $ 2,429 $ 2,570
============= ============= ============== ================
Basic earnings per share $0.52 $0.53 $0.54 $0.58
Diluted earnings per share $0.51 $0.52 $0.53 $0.57
(1) During the fourth quarter of 2004, the Company revised its estimates for
deferred loan fees and costs, deferred compensation liabilities and accrued
income taxes and adjusted its 2004 earnings accordingly. The net effect of
these adjustments increased 2004 reported earnings by $147,000 and $.04 per
diluted share.
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 $0.49 $0.45 $0.51 $0.47
Diluted earnings per share $0.49 $0.45 $0.49 $0.45
Report of Independent Registered Public Accounting Firm
The Board of Directors
First Mid-Illinois Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of First
Mid-Illinois Bancshares, Inc. and subsidiaries (the Company) as of December 31,
2004 and 2003, 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, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of First Mid-Illinois
Bancshares, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of First
Mid-Illinois Bancshares, Inc.'s internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 9, 2005 expressed an
unqualified opinion on management's assessment of, and the effective operation
of, internal control over financial reporting.
/s/ KPMG LLP
Chicago, Illinois
March 9, 2005
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company's management carried out an evaluation, under the supervision and
with the participation of the chief executive officer and the chief financial
officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31,
2004. Based upon that evaluation, the chief executive officer along with the
chief financial officer concluded that the Company's disclosure controls and
procedures as of December 31, 2004, are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic filings under
the Exchange Act.
Management's Annual Report on Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. The
Company's internal control over financial reporting is a process designed under
the supervision of the Company's chief executive officer and chief financial
officer to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of the Company's financial statements for external
reporting purposes in accordance with U.S. generally accepted accounting
principles.
Management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2004 based on the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in
"Internal Control-Integrated Framework." Based on the assessment, management
determined that, as of December 31, 2004, the Company's internal control over
financial reporting is effective, based on those criteria. Management's
assessment of the effectiveness of the Company's internal control over financial
reporting as of December 31, 2004 has been audited by KPMG, LLP, an independent
registered public accounting firm, as stated in their report following.
/s/ William S. Rowland
William S. Rowland
President and Chief Executive Officer
/s/ Michael L. Taylor
Michael L. Taylor
Chief Financial Officer
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
First Mid-Illinois Bancshares, Inc.:
We have audited management's assessment, included in the accompanying
Managements' Report, that First Mid-Illinois Bancshares, Inc. (the Company)
maintained effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Also, in our opinion, First Mid-Illinois
Bancshares, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
First Mid-Illinois Bancshares, Inc. and subsidiaries as of December 31, 2004 and
2003, 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, 2004, and our report dated March 9, 2005 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Chicago, Illinois
March 9, 2005
Changes in Internal Controls
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's fourth fiscal quarter of 2004 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information called for by Item 10 with respect to directors and director
nominees is incorporated by reference to the Company's 2005 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 2005 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 2005 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
-------------------------------------------------------------------------------------
Number of securities
to be issued upon Weighted-average Number of securities remaining
exercise of exercise price of available for future issuance
outstanding options outstanding options under equity compensation plans
Plan category (a) (b) (c)
------------------------ ------------------------ -----------------------------------
Equity compensation plans approved by
security holders:
(1) Deferred Compensation Plan 159,544 $13.50 290,456
(2) Stock Incentive Plan 356,656 23.86 36,375
Equity compensation plans not approved
by security holders - - -
------------------------ ------------------------ -----------------------------------
Total 516,200 $20.66 326,831
======================== ======================== ===================================
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 14 - "Stock Option Plans" herein.
The information called for by Item 12 with respect to security ownership is
incorporated by reference to the Company's 2005 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 2005 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 2005 Proxy Statement under the caption "Fees of Independent Auditors."
PART IV
ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2) -- Financial Statements and Financial Statement Schedules
The following consolidated financial statements and financial statement
schedules of the Company are filed as part of this document under Item 8.
Financial Statements and Supplementary Data:
* Consolidated Balance Sheets -- December 31, 2004 and 2003
* Consolidated Statements of Income -- For the Years Ended December 31,
2004, 2003 and 2002
* Consolidated Statements of Changes in Stockholders' Equity -- For the
Years Ended December 31, 2004, 2003 and 2002
* Consolidated Statements of Cash Flows -- For the Years Ended December
31, 2004, 2003 and 2002.
(a)(3) -- Exhibits
The exhibits required by Item 601 of Regulation S-K and filed herewith are
listed in the Exhibit Index that follows the Signature Page and immediately
precedes the exhibits filed.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST MID-ILLINOIS BANCSHARES, INC.
(Company)
Dated: March 9, 2005
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 9th day of March, 2005, by the following persons on
behalf of the Company and in the capacities listed.
Signature and Title
/s/ William S. Rowland
William S. Rowland, Chairman of the Board,
President and Chief Executive Officer and Director
/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/ Joseph R. Dively
Joseph R. Dively, Director
/s/ Steven L. Grissom
Steven L. Grissom, 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
Incorporated by reference to Exhibit 10.1 to First Mid-Illinois
Bancshares, Inc.'s Report on Form 8-K filed with the SEC on December
16, 2004.
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 Supplemental Executive Retirement Plan
(Filed herewith)
10.6 Form of Employment Agreement between the Company and certain officers
of the Company, including Michael L. Taylor, Robert J. Swift, Jr.,
Stanley E. Gilliland and Laurel Allenbaugh
The agreements 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 of Chief Executive Officer pursuant to section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002
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
FIRST MID-ILLINOIS BANCSHARES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
PREAMBLE
First Mid-Illinois Bancshares, Inc. has adopted the Supplemental Executive
Retirement Plan, effective as of May 21, 1986, for a select group of executive
personnel to ensure that the overall effectiveness of the Company's executive
compensation program will attract, retain and motivate qualified senior
management personnel.
SECTION I
DEFINITIONS
When used herein, the following words shall have the meanings below unless the
context clearly indicates otherwise:
1.1 "Affiliated Company" means any trade or business entity (whether or not
incorporated), or a predecessor company of such entity, if any, which is a
member of a controlled group of corporations of which the Company is also a
member or which is under common control with the Company.
1.2 "Committee" means the Compensation Committee of the Board of Directors of
the Company.
1.3 "Company" means First Mid-Illinois Bancshares, Inc. and any successor
thereto.
1.4 "Designated Beneficiary" means any person or persons designated by a
Participant to receive any Supplemental Plan Benefit by reason of his death.
Such designation shall be made by written notice delivered to the Committee
prior to the date of the Participant's death.
1.5 "Participant" means any employee of the Company or an Affiliated Company who
is recommended and designated with respect to participation in the Plan as set
forth in Section II.
1.6 "Participation Agreement" means an agreement entered into between the
Company and a Participant that sets forth the amount, terms and conditions of a
Supplemental Plan Benefit payable to or with respect to a Participant.
1.7 "Plan" means the First Mid-Illinois Bancshares, Inc. Supplemental Executive
Retirement Plan.
1.8 "President" means the President of the Company.
1.9 "Supplemental Plan Benefit" means the annual benefit payable to or with
respect to a Participant in accordance with the Plan.
SECTION II
ELIGIBILITY TO PARTICIPATE
A senior management employee of the Company or an affiliated Company will become
a Participant in the Plan when such employee is recommended to the Committee as
a Participant in writing by the President and is designated as a Participant by
the Committee in writing. Once an employee becomes a Participant he shall remain
a Participant until his termination of employment with the Company and all
Affiliated Companies and thereafter until the Supplemental Plan Benefit to which
he or any Designated Beneficiary is entitled under the Plan has been paid in
full.
SECTION III
SUPPLEMENTAL PLAN BENEFIT
The amount, terms and conditions of a Supplemental Plan Benefit payable to or
with respect to a Participant shall be set forth in a separate Participation
Agreement entered into between the Company and the Participant within sixty (60)
days after the date on which the Participant is designated as such pursuant to
Section II.
SECTION IV
AMENDMENT AND TERMINATION
4.1 Amendment or Termination. The Company intends the Plan to be permanent but
reserves the right to amend or terminate the Plan or any Participation Agreement
when, in the sole opinion of the Company, such amendment or termination is
advisable. Any such amendment or termination shall be made pursuant to a
resolution of the Board of Directors of the Company and shall be effective as of
the date of such resolution. Notwithstanding the preceding sentence, no
amendment or termination of the Plan or any Participation Agreement shall
directly or indirectly deprive any Participant or Designated Beneficiary of all
or any portion of any Supplemental Plan Benefit the payment of which has
commenced prior to the effective date of the resolution amending or terminating
the Plan or Participation Agreement.
4.2 Termination Benefit. In the case of a Plan termination, each actively
employed Participant on the termination date shall become fully vested in his
Supplemental Plan benefit as of the termination date without regard to the
number of years of employment with the Company and all Affiliated Companies he
has then completed. Payment of a Participant's Supplemental Plan Benefit shall
not be dependent upon his continuation of employment with the Company or any
Affiliated Company following the Plan termination date, and such Benefit shall
be payable in the form and at the time set forth in his Participation Agreement.
4.3 Corporate Successors. The Plan shall not be automatically terminated by a
transfer or sale of assets of the Company, or by the merger or consolidation of
the Company into or with any other corporation or other entity, but the Plan
shall be continued after such sale, merger or consolidation only if and to the
extent that the transferee, purchaser or successor entity agrees to continue the
Plan. In the event the Plan is not continued by the transferee, purchaser or
successor entity, then the Plan shall terminate subject to the provisions of
Paragraph 4.2.
SECTION V
MISCELLANEOUS
5.1 Forfeiture of Benefits. Notwithstanding any other provision of the Plan or
any Participation Agreement, future payment of a Supplemental Plan Benefit
hereunder to a Participant or Designated Beneficiary will, at the discretion of
the Committee, be discontinued and forfeited, and the Company will have no
further obligation hereunder to such Participant or Designated Beneficiary, if
any of the following circumstances occur:
(a) the Participant is discharged from employment with the Company or an
Affiliated Company for cause. For purposes of this clause, "cause"
shall be deemed to exist if, and only if, (i) the Participant
willfully refuses to perform services for the Company or an Affiliated
Company; (ii) the Participant engages in acts of dishonesty or fraud
in connection with his employment by the Company or an Affiliated
Company; or (iii) the Participant engages in other serious misconduct
of such a nature that the continued employment of the Participant may
reasonably be expected to adversely affect the business of the Company
or an Affiliated Company. The Company shall have the sole discretion,
which shall be exercised in a reasonable manner, to determine whether
the events referred to in (i), (ii) and (iii) above have occurred;
(b) the Participant engages in competition with the Company or any
Affiliated Company or interferes with the business relationships of
the Company or an Affiliated Company during his employment or during
the period commencing on the date of termination of his employment
with the Company and all Affiliated Companies and ending on the second
anniversary thereof;
(c) the Participant discloses any type of confidential information of the
Company or an Affiliated Company to any third party by any means,
other than as required in the performance of his duties for the
Company or an Affiliated Company, or refused to report to the Company
or an Affiliated Company any discoveries, inventions, or improvements
conceived by him during the course of his employment and in any way
applicable to the business of the Company or any Affiliated Company.
The Committee's exercise of its discretion under this Paragraph shall be
conclusive and binding upon the Participant, his Designated Beneficiary and all
other persons.
5.2 No Effect on Employment Rights. Nothing contained herein will confer any
Participant the right to be retained in the service of the Company or an
Affiliated Company nor limit the right of the Company or an Affiliated Company
to discharge or otherwise deal with any Participant without regard to the
existence of the Plan.
5.3 Funding. The Plan and all Participation Agreements shall at all times be
entirely unfunded and no provision shall at any time be made with respect to
segregating assets of the Company or any Affiliated Company for payment of any
Supplemental Plan Benefit hereunder. No Participant, Designated Beneficiary or
other person shall have any interest in any particular assets of the Company or
any Affiliated Company by reason of the right to receive a Supplemental Plan
Benefit under the Plan or under any Participation Agreement, and any such
Participant, Designated Beneficiary, or other person shall have only the rights
of a general unsecured creditor of the Company with respect to any rights under
the Plan or any Participation Agreement.
5.4 No Guaranty of Benefits. Nothing contained in the Plan or any Participation
Agreement shall constitute a guaranty by the Company, any Affiliated Company, or
any other entity or person that the assets of the Company will be sufficient to
pay any Supplemental Plan Benefit hereunder.
5.5 Spendthrift Provision. No Supplemental Plan Benefit payable under the Plan
or any Participation Agreement shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, or charge prior to
actual receipt thereof by the payee; and any attempt so to anticipate, alienate,
sell, transfer, assign, pledge, encumber or charge prior to such receipt shall
be void; and the Company shall not be liable in any manner for, or subject to,
the debts, contracts, liabilities, engagements or torts of any person entitled
to any Supplemental Plan Benefit under the Plan or any Participation Agreement.
5.6 Administration. The Committee shall be responsible for the general operation
and administration of the Plan and for carrying out the provisions thereof. The
Committee shall have all powers necessary to interpret and carry out the
provisions of the Plan and all Participation Agreements and may, from time to
time, establish rules for the administration of the Plan and the transaction of
the Plan's business. In making any such rule, the Committee shall pursue uniform
policies and shall not discriminate in favor of or against any Participant or
group of Participants. The Committee shall be entitled to rely conclusively upon
all tables, valuations, certificates, opinions and reports furnished by any
actuary, accountant, controller, counsel or other person employed or engaged by
the Company or the Committee with respect to the Plan.
5.7 Disclosure. Each Participant shall receive a copy of the Plan and the
Committee will make available for inspection by any Participant or Designated
Beneficiary a copy of any rules and regulations used by the Committee in
administering the Plan.
5.8 State Law. The Plan and all Participation Agreements are established under
and will be construed according to the laws of the State of Illinois, to the
extent that such laws are not preempted by the Employee Retirement Income
Security Act and valid regulations published thereunder.
5.9 Small Benefits. If the actuarial value of any Supplemental Plan Benefit is
less than $3,500, the Committee, in its discretion, may pay the actuarial value
of such Benefit to the Participant or Designated Beneficiary entitled thereto in
a single lump sum or in quarterly, semi-annual or annual installments in lieu of
any further benefit payments hereunder.
5.10 Incapacity of Recipient. In the event a Participant or Designated
Beneficiary is declared incompetent and a conservator or other person legally
charged with the care of his person or of his estate is appointed, any
Supplemental Plan Benefit to which such Participant or Designated Beneficiary is
entitled shall be paid to such conservator or other person legally charged with
the care of his person or his estate. Except as provided above in this
paragraph, when the Committee, in its sole discretion, determines that a
Participant or Designated Beneficiary is unable to manage his financial affairs,
the Committee may provide for any Supplemental Plan Benefit Payment, or any part
thereof, to be made to any other person or institution then contributing toward
or providing for the care and maintenance of such Participant or Designated
Beneficiary. Any such payment shall be for the benefit of such Participant or
Designated Beneficiary and a complete discharge of any obligation of the Company
and the Plan with respect thereto.
5.11 Unclaimed Benefit. Each Participant shall keep the Committee informed of
his current address and the current address of his Designated Beneficiary. The
Committee shall not be obligated to search for the whereabouts of any person. If
the location of a Participant is not made known to the Committee within three
(3) years after the date on which any payment of the Participant's Supplemental
Plan Benefit may be made, payment may be made as though the Participant had died
at the end of the three-year period. If, within one additional year after such
three-year period has elapsed, or, within three years after the actual death of
a Participant, the Committee is unable to locate any Designated Beneficiary of
the Participant, then the Committee shall have no further obligation to pay any
Supplemental Plan Benefit hereunder to such Participant or Designated
Beneficiary or any other person and such Benefit shall be irrevocably forfeited.
5.12 Limitations on Liability. Notwithstanding any of the preceding provisions
of the Plan, no individual acting as an employee or agent of the Company or an
Affiliated Company or any member of the Committee, shall be liable to any
Participant, former Participant, Designated Beneficiary, or any other person for
any claim, loss, liability or expense incurred in connection with the Plan or
any Participation Agreement.
5.13 Gender and Number. In the Plan, where the context admits, words in the
masculine gender include the feminine and neuter genders, words in the singular
include the plural, and the plural includes the singular.
Exhibit 10.6
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into this ____
day of _____________, _____, 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
_________, ____ and shall continue until ___________, ____. 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, 2004, 2003, and 2002 are as follows:
2004 2003 2002
------------ ------------ ------------
Basic Earnings per Share:
Net income available to common stockholders $9,751,000 $9,093,000 $8,034,000
============ ============ ============
Weighted average common shares outstanding 4,499,092 4,743,210 5,036,357
============ ============ ============
Basic earnings per common share $2.17 $1.92 $1.60
============ ============ ============
Diluted Earnings per Share:
Net income available to common stockholders $9,751,000 $9,093,000 $8,034,000
============ ============ ============
Weighted average common shares outstanding 4,499,092 4,743,210 5,036,357
Assumed conversion of stock options 88,967 85,935 36,249
------------ ------------ ------------
Diluted weighted average common shares outstanding 4,588,059 4,829,145 5,072,606
============ ============ ============
Diluted earnings per common share $2.13 $1.88 $1.58
============ ============ ============
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)
First Mid-Illinois Insurance Services, Inc. (an Illinois corporation; 100% owned
by First Mid Bank)
The Checkley Agency, Inc. (an Illinois corporation)
First Mid-Illinois Statutory Trust I (a business trust)
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
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 reports dated March 9,
2005, relating to the consolidated balance sheets of First Mid-Illinois
Bancshares, Inc. and subsidiaries as of December 31, 2004 and 2003, 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,
2004, and management's assessment of the effectiveness of internal control over
financial reporting as of December 31, 2004 and the effectiveness of internal
control over financial reporting as of December 31, 2004, which reports appears
in the December 31, 2004 annual report on Form 10-K of First Mid-Illinois
Bancshares, Inc.
/s/ KPMG LLP
Chicago, Illinois
March 9, 2005
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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
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 9, 2005
/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)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth 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 9, 2005
/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, 2004 (the "Report"),
I, William S. Rowland, as President and Chief Executive Officer of the Company
certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 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 9, 2005
/s/ William S. Rowland
William S. Rowland
President and Chief Executive Officer
Exhibit 32.2
Certification pursuant to
18 U.S.C. section 1350,
as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of First Mid-Illinois Bancshares, Inc. (the
"Company") on Form 10-K for the period ended December 31, 2004 (the "Report"), I
Michael L. Taylor, as Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. section 1350, as adopted pursuant to section 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 9, 2005
/s/ Michael L. Taylor
Michael L. Taylor
Chief Financial Officer