[PERIOD-TYPE] 12-MOS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER: 0-13368
FIRST MID-ILLINOIS BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 37-1103704
(State or other jurisdiction of (I.R.S. employer identification No.)
incorporation or organization)
1515 CHARLESTON AVENUE, MATTOON, ILLINOIS 61938
(Address and Zip Code of Principal Executive Offices)
(217) 234-7454
(Registrant'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
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 18, 1997, 947,680 common shares, $4.00 par value, were
outstanding, and the aggregate market value of common shares (based on the
last sale price of the registrant's common shares on March 18, 1997) held by
non-affiliates was approximately $38,854,880.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT INTO FORM 10-K PART:
Portions of the Proxy Statement for 1997 Annual
Meeting of shareholders to be held on May 21, 1997 III
FIRST MID-ILLINOIS BANCSHARES, INC.
FORM 10-K TABLE OF CONTENTS
PART I
Item 1 Business 3
Item 2 Properties 15
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 17
PART II
Item 5 Market for Registrant's Common Shares and Related
Shareholder Matters 18
Item 6 Selected Financial Data 19
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 8 Financial Statements and Supplementary Data 37
Item 9 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosures 58
PART III
Item 10 Directors and Executive Officers of the Registrant 58
Item 11 Executive Compensation 59
Item 12 Security Ownership of Certain Beneficial Owners and
Management 59
Item 13 Certain Relationships and Related Transactions 59
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 59
SIGNATURES 60
Exhibit Index 61
PART I
ITEM 1. BUSINESS
REGISTRANT AND SUBSIDIARIES
First Mid-Illinois Bancshares, Inc. (the "Registrant") is a bank holding
company engaged in the business of banking through its wholly owned
subsidiaries, First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank") and
Heartland Savings Bank ("Heartland"). First Mid Bank and Heartland are
referred to as the "Bank Subsidiaries".
In addition to engaging in banking activities, the Registrant also engages in
certain other additional activities through Mid-Illinois Data Services, Inc.,
a wholly owned corporation organized on March 25, 1987, as a non-banking
subsidiary ("MIDS"). The primary business of MIDS is to provide financial
data processing services to the Registrant and the Bank Subsidiaries.
The Registrant, 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 Registrant 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; and 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 Registrant acquired and recapitalized 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 100% owned subsidiary of the Registrant.
Following that reorganization and immediately before the Heartland
acquisition, the reorganized banking subsidiary acquired certain assets and
deposit liabilities of Heartland. The acquisition was accounted for as a
purchase and, accordingly, the operating results of Heartland have been
consolidated with those of the Registrant since July 1, 1992. In accordance
with purchase accounting requirements, the assets and liabilities of Heartland
were accounted for at their fair market values as of the acquisition date.
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 Registrant pursuant to a private
placement. 620 shares of the preferred stock were sold at a stated value of
$5,000 per share with such shares bearing a dividend rate of 9.25%. The
preferred stock may be converted at any time, at the option of the preferred
stockholder, into common shares at the conversion ratio of 202.1 shares of
common stock for each share of preferred. The Registrant has the right at any
time after July 1, 1998, and upon giving at least thirty days prior notice, to
redeem all (but not less than all) of the preferred stock at a cash value of
$5,000 per share plus any accrued but unpaid dividends. The Registrant also
has the right at any time after July 1, 1998, and upon giving at least thirty
days prior notice to require the conversion of all (but not less than all) of
the preferred stock into common stock at the conversion ratio.
On October 4, 1994, First Mid Bank acquired all of the outstanding stock of
Downstate Bancshares, Inc. ("DBI") which owned 100% 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.
DBI was purchased for cash in the amount of $8.6 million with $5.6 million of
that amount being internally generated funds and $3 million from additional
long-term borrowings of the Registrant. The acquisition of DBI by First Mid
Bank was accounted for using the purchase method of accounting. Accordingly,
the assets and liabilities of DBI were recorded at their fair values as of the
acquisition date.
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.
In November 1996, First Mid Bank signed an agreement to purchase the assets
and assume the liabilities of First of America's Charleston, Illinois office.
As of March 4, 1997, total assets to be acquired were approximately $1,800,000
while liabilities totaled approximately $28,200,000. This transaction which
was completed on March 7, 1997 was accounted for as a purchase.
DESCRIPTION OF BUSINESS
The Bank Subsidiaries conduct a general banking business embracing 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 serviced 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, with the latter including residential
properties. The Bank Subsidiaries' installment loan departments make direct
loans to consumers and some commercial customers, and purchase retail
obligations from retailers, primarily without recourse.
The Bank Subsidiaries conduct their businesses in the middle of some of the
richest farmland in the world. Accordingly, the Bank Subsidiaries provide a
wide range of financial services to farmers and agribusiness within their
respective markets. The farm management department, headquartered in Mattoon,
Illinois, has approximately 32,000 acres under management and is the largest
management operation in the area, ranking in the top 100 firms nationwide. As
a group, the Bank Subsidiaries are the largest supplier of farm credit in the
Registrant's market area with $46.4 million in agriculture related loans at
December 31, 1996. The farm credit products offered by the Bank Subsidiaries
include not only real estate loans, but machinery and equipment loans,
production loans, inventory financing and lines of credit.
The following chart sets forth (in thousands) the assets, deposits and
stockholder's equity of the Bank Subsidiaries (before intercompany
eliminations) as of December 31, 1996, and the average deposits for the year
ended December 31, 1996:
STOCKHOLDER'S AVERAGE
ASSETS DEPOSITS EQUITY DEPOSITS
First Mid Bank $422,404 $341,147 $36,111 $328,673
Heartland 90,794 74,224 7,337 78,382
Total $513,198 $415,371 $43,448 $407,055
EMPLOYEES
The Registrant, MIDS and the Bank Subsidiaries employed 257 people on a
full-time equivalent basis as of December 31, 1996. The Registrant 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
Registrant. The Registrant offers a variety of employee benefits and
management considers its employee relations to be excellent.
COMPETITION
The Registrant, through its Bank Subsidiaries, actively competes in all areas
in which the Bank Subsidiaries presently do business. Each 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 charges on loans, and fees charged for fiduciary and other banking
services.
The Bank Subsidiaries operate facilities in the Illinois counties of
Champaign, Coles, Cumberland, Douglas, Effingham and Moultrie. Each facility
primarily serves the community in which it is located.
First Mid Bank serves eight different communities with 13 separate locations
in the towns of Mattoon, Charleston, Neoga, Tuscola, Sullivan, Arcola,
Effingham and Altamont, Illinois and Heartland serves the two communities of
Mattoon and Urbana, Illinois. Within the area of service there are numerous
competing financial institutions and financial services companies.
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively regulated
under federal and state law. As a result, the growth and earnings performance
of the Registrant 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 Board of Governors
of the Federal Reserve System (the "FRB"), the Office of the Comptroller of
the Currency (the "OCC"), the Illinois Commissioner of Banks and Real Estate
(the "Commissioner"), the Federal Deposit Insurance Corporation (the "FDIC"),
the Internal Revenue Service and state taxing authorities and the Securities
and Exchange Commission (the "SEC"). The effect of such statutes, regulations
and policies can be significant, and cannot be predicted with a high degree of
certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Registrant 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 Registrant 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 shareholders, of financial
institutions.
The following references to material statutes and regulations affecting the
Registrant 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 Registrant and its subsidiaries.
RECENT REGULATORY DEVELOPMENTS
On September 30, 1996, President Clinton signed into law the "Economic
Growth and Regulatory Paperwork Reduction Act of 1996" (the "Regulatory
Reduction Act"). Subtitle G of the Regulatory Reduction Act consists of the
"Deposit Insurance Funds Act of 1996" (the "DIFA"). The DIFA provides for a
one-time special assessment on each depository institution holding deposits
subject to assessment by the FDIC for the Savings Association Insurance Fund
(the "SAIF") in an amount which, in the aggregate, will increase the
designated reserve ratio of the SAIF (I.E., the ratio of the insurance
reserves of the SAIF to total SAIF-insured deposits) to 1.25% on October 1,
1996. Subject to certain exceptions, the special assessment was payable in
full on November 27, 1996. As a SAIF-member, Heartland was subject to the
special assessment. Additionally, First Mid Bank holds SAIF-assessable
deposits acquired from Heartland in 1992. Thus, First Mid Bank was subject to
the special assessment with respect to those deposits.
Under the DIFA, the amount of the special assessment payable by an
institution was determined on the basis of the amount of SAIF-assessable
deposits held by the institution on March 31, 1995, or acquired by the
institution after March 31, 1995 from another institution which held the
deposits on March 31, 1995, but was no longer in existence on November 27,
1996. The DIFA provides for a 20% discount in calculating the SAIF-assessable
deposits of certain "Oakar" banks (I.E., Bank Insurance Fund ("BIF") member
banks that hold deposits acquired from a SAIF member that remain SAIF insured)
and certain "Sasser" banks (I.E., institutions that converted from thrift to
bank charters but remain SAIF members). First Mid Bank qualified for the 20%
discount provided by the DIFA for "Oakar" banks. The DIFA also exempts
certain institutions from payment of the special assessment (including
institutions that are undercapitalized or that would become undercapitalized
as a result of payment of the special assessment), and allows an institution
to pay the special assessment in two installments if there is a significant
risk that by paying the special assessment in a lump sum, the institution or
its holding company would be in default under or in violation of terms or
conditions of debt obligations or preferred stock issued by the institution or
its holding company and outstanding on September 13, 1995.
On October 8, 1996, the FDIC adopted a final regulation implementing the SAIF
special assessment. In that regulation, the FDIC set the special assessment
rate at 0.657% of SAIF-assessable deposits held on March 31, 1995. The amount
of the special assessment paid by Heartland was $552,000, and after giving
effect to the 20% Oakar bank discount for which First Mid Bank qualified, the
amount of the special assessment paid by First Mid Bank with respect to its
SAIF-assessable deposits was $199,000. The full amount of the special
assessment paid by Heartland and First Mid Bank was recorded as a charge
against earnings for the quarter ended September 30, 1996. As discussed
below, however, the recapitalization of the SAIF resulting from the special
assessment should significantly reduce the deposit insurance expense incurred
by Heartland and by First Mid Bank with respect to the SAIF-assessable portion
of its deposit base.
In light of the recapitalization of the SAIF pursuant to the special
assessment authorized by the DIFA, the FDIC, on December 11, 1996, took action
to reduce regular semi-annual SAIF assessments from the range of 0.23% - 0.31%
of deposits to a range of 0% - 0.27% of deposits. The new rates were
effective October 1, 1996 for Oakar and Sasser banks, but did not take effect
for other SAIF-assessable institutions until January 1, 1997. From October 1,
1996 through December 31, 1996, assessments payable by SAIF-assessable
institutions other than Oakar and Sasser banks ranged from 0.18% to 0.27% of
deposits, which represents the amount the FDIC calculates as necessary to
cover the interest due for that period on outstanding obligations of the
Financing Corporation (the "FICO"), discussed below. Because SAIF-assessable
institutions were previously assessed at higher rates (I.E., 0.23% - 0.31% of
deposits) for the semi-annual period ending December 31, 1996, the FDIC will
refund or credit back the amount collected from such institutions for the
period from October 1, 1996 through December 31, 1996 which exceeds the amount
due for that period under the reduced assessment schedule. As a result of the
FDIC's action, the deposit insurance assessments payable by Heartland, and by
First Mid Bank with respect to its SAIF-assessable deposits, have been reduced
significantly.
Prior to the enactment of the DIFA, a substantial amount of the SAIF
assessment revenue was used to pay the interest due on bonds issued by the
FICO, the entity created in 1987 to finance the recapitalization of the
Federal Savings and Loan Insurance Corporation (the "FSLIC"), the SAIF's
predecessor insurance fund. Pursuant to the DIFA, the interest due on
outstanding FICO bonds will be covered by assessments against both SAIF and
BIF member institutions beginning January 1, 1997. Between January 1, 1997
and December 31, 1999, FICO assessments against BIF-member institutions cannot
exceed 20% of the FICO assessments charged SAIF-member institutions. From
January 1, 2000 until the FICO bonds mature in 2019, FICO assessments will be
shared by all FDIC-insured institutions on a PRO RATA basis. It has been
estimated that the FICO assessments for the period January 1, 1997 through
December 31, 1999 will be approximately 0.013% of deposits for BIF members
versus approximately 0.064% of deposits for SAIF members, and will be less
than 0.025% of deposits thereafter.
The DIFA also provides for a merger of the BIF and the SAIF on January 1,
1999, provided there are no state or federally chartered, FDIC-insured savings
associations existing on that date. To facilitate the merger of the BIF and
the SAIF, the DIFA directs the Treasury Department to conduct a study on the
development of a common charter and to submit a report, along with appropriate
legislative recommendations, to the Congress by March 31, 1997.
In addition to the DIFA, the Regulatory Reduction Act includes a number of
statutory changes designed to eliminate duplicative, redundant or unnecessary
regulatory requirements. Among other things, the Regulatory Reduction Act
establishes streamlined notice procedures for the commencement of new
nonbanking activities by bank holding companies, eliminates the need for
national banks to obtain OCC approval to establish off-site ATMs, excludes ATM
closures and certain branch office relocations from the prior notice
requirements applicable to branch closings, significantly expands the
authority of well-capitalized and well-managed national banks to invest in
office premises without prior regulatory approval, and establishes time frames
within which the FDIC must act on applications by state banks to engage in
activities which, although permitted for state banks under applicable state
law, are not permissible activities for national banks. The Regulatory
Reduction Act also clarifies the liability of a financial institution, when
acting as a lender or in a fiduciary capacity, under the federal environmental
laws. Although the full impact of the Regulatory Reduction Act on the
operations of the Registrant, Heartland and First Mid Bank cannot be
determined at this time, management believes that the legislation may reduce
compliance costs to some extent and allow the Registrant, Heartland and First
Mid Bank somewhat greater operating flexibility.
On August 10, 1996, President Clinton signed into law the Small Business Job
Protection Act of 1996 (the "Job Protection Act"). Among other things, the
Job Protection Act eliminates the percent-of-taxable-income ("PTI") method for
computing additions to a savings association's or savings bank's tax bad debt
reserves for tax years beginning after December 31, 1995, and requires all
savings associations or savings banks that have used the PTI method to
recapture, over a six year period, all or a portion of their tax bad debt
reserves added since the last taxable year beginning before January 1, 1988.
The Job Protection Act allows a savings association or savings bank to
postpone the recapture of bad debt reserves for up to two years if the
institution meets a minimum level of mortgage lending activity during those
years. Heartland believes that it will engage in sufficient mortgage lending
activity during 1996 and 1997 to be able to postpone any recapture of its bad
debt reserves until 1998. As a result of these provisions of the Job
Protection Act, Heartland will determine additions to its tax bad debt
reserves using the same method as a commercial bank of comparable size, and,
if Heartland were to decide to convert to a commercial bank charter, the
changes in the tax bad debt recapture rules enacted in the Job Protection Act
should make such conversion less costly.
THE REGISTRANT
GENERAL. The Registrant, as the sole stockholder of Heartland and First Mid
Bank, is a bank holding company. As a bank holding company, the Registrant is
registered with, and is subject to regulation by, the FRB under the Bank
Holding Act, as amended (the "BHCA"). In accordance with FRB policy, the
Registrant is expected to act as a source of financial strength to Heartland
and First Mid Bank and to commit resources to support Heartland and First Mid
Bank in circumstances where the Registrant might not do so absent such policy.
Under the BHCA, the Registrant is subject to periodic examination by the FRB
and is required to file with the FRB periodic reports of its operations and
such additional information as the FRB may require. As the sole stockholder
of Heartland, the Registrant is also subject to regulation by the Commissioner
under the Illinois Savings Bank Act, as amended (the "ISBA").
INVESTMENTS AND ACTIVITIES. Under the BHCA, a bank holding company must
obtain FRB approval before: (i) acquiring, directly or indirectly, ownership
or control of any voting shares of another bank or bank holding company if,
after such acquisition, it would own or control more than 5% of such shares
(unless it already owns or controls the majority of such shares);
(ii) acquiring all or substantially all of the assets of another bank; or
(iii) merging or consolidating with another bank or bank holding company.
Subject to certain conditions (including certain deposit concentration limits
established by the BHCA), the FRB may allow a bank holding company to acquire
banks located in any state of the United States without regard to whether the
acquisition is prohibited by the law of the state in which the target bank is
located. In approving interstate acquisitions, however, the FRB is required
to give effect to applicable state law limitations on the aggregate amount of
deposits that may be held by the acquiring bank holding company and its
insured depository institution affiliates in the state in which the target
bank is located or which require that the target bank have been in existence
for a minimum period of time (not to exceed five years) before being acquired
by an out-of-state bank holding company.
The BHCA also prohibits, with certain exceptions, the Registrant from
acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank and from engaging in any
business other than that of banking, managing and controlling banks or
furnishing services to banks and their subsidiaries. The principal exception
to this prohibition allows bank holding companies to engage in, and to own
shares of companies engaged in, certain businesses found by the FRB to be "so
closely related to banking ... as to be a proper incident thereto." Under
current regulations of the FRB, the Registrant and its non-bank subsidiaries
are permitted to engage in, among other activities, such banking-related
businesses as the operation of a thrift, sales and consumer finance, equipment
leasing, the operation of a computer service bureau, including software
development, and mortgage banking and brokerage. The BHCA generally does not
place territorial restrictions on the activities of non-bank subsidiaries of
bank holding companies.
Federal legislation also prohibits acquisition of "control" of a bank or bank
holding company, such as the Registrant, without prior notice to certain
federal bank regulators. "Control" is defined in certain cases as acquisition
of 10% of the outstanding shares of a bank or bank holding company.
CAPITAL REQUIREMENTS. Bank holding companies are required to maintain
minimum levels of capital in accordance with FRB capital adequacy guidelines.
If capital falls below minimum guideline levels, a bank holding company, among
other things, may be denied approval to acquire or establish additional banks
or non-bank businesses.
The FRB'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%, of which at least one-half 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
4% to 5% 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 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.
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, 1996, the Registrant had regulatory capital in excess of
the FRB's minimum requirements, with a risk-based capital ratio of 11.80% and
a leverage ratio of 6.81%.
DIVIDENDS. The FRB has issued a policy statement with regard to the payment
of cash dividends by bank holding companies. In the policy statement, the FRB
expressed its view that a bank holding company should not pay cash dividends
exceeding its net income or which can only be funded in ways that weaken the
bank holding company's financial health, such as by borrowing. Additionally,
the FRB possesses enforcement powers over bank holding companies and their
non-bank subsidiaries to prevent or remedy actions that represent unsafe or
unsound practices or violations of applicable statutes and regulations. Among
these powers is the ability to proscribe the payment of dividends by banks and
bank holding companies. In addition to the restrictions on dividends that may
be imposed by the FRB, the Delaware General Corporation Law would allow the
Registrant to pay dividends only out of its surplus, or if the Registrant has
no such surplus, out of its net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year.
FEDERAL SECURITIES REGULATION. The Registrant's common stock is registered
with the SEC under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the
Registrant is subject to the information, proxy solicitation, insider trading
and other restrictions and requirements of the SEC under the Exchange Act.
THE BANK SUBSIDIARIES
GENERAL. First Mid Bank is a national bank, chartered by the OCC under the
National Bank Act. The deposit accounts of First Mid Bank are insured by the
BIF of the FDIC, and it is a member of the Federal Reserve System. As a BIF-
insured national bank, First Mid Bank is subject to the examination,
supervision, reporting and enforcement requirements of the OCC, as the
chartering authority for national banks, and the FDIC, as administrator of the
BIF.
Heartland is an Illinois-chartered savings bank, the deposits of which are
insured by the SAIF of the FDIC. As a SAIF-insured, Illinois-chartered
savings bank, Heartland is subject to the examination, supervision, reporting
and enforcement requirements of the Commissioner, as the chartering authority
for Illinois savings banks, and the FDIC, as administrator of the SAIF.
Heartland is also a member of the Federal Home Loan Bank System, which
provides a central credit facility primarily for member institutions.
DEPOSIT INSURANCE. As FDIC-insured institutions, First Mid Bank and
Heartland are 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
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. Risk classification of all insured institutions is made by the FDIC
for each semi-annual assessment period.
During the year ended December 31, 1996 assessments paid by First Mid Bank
with respect to the approximately 90% of its deposits that are BIF insured
ranged from 0% of deposits to 0.27% of deposits. The FDIC has announced that
for the semi-annual assessment period beginning January 1, 1997, BIF
assessment rates will continue to range from 0% of deposits to 0.27% of
deposits. During the period January 1, 1996 through September 30, 1996,
assessments paid by SAIF members, such as Heartland, and by First Mid Bank
with respect to the approximately 10% of its deposits that are SAIF insured
ranged from 0.23% of deposits to 0.31% of deposits. As a result of the
recapitalization of the SAIF on October 1, 1996, SAIF assessment rates payable
by Heartland were reduced, effective October 1, 1996, to a range of 0.18% of
deposits to 0.27% of deposits and were further reduced, effective January 1,
1997, to a range of 0% of deposits to 0.27% of deposits. The recapitalization
of the SAIF resulted in a reduction in the SAIF assessments paid by an Oakar
bank, such as First Mid Bank, to a range of 0% of deposits to 0.27% of
deposits effective October 1, 1996. SEE "--Recent Regulatory Developments."
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
Registrant is not aware of any activity or condition that could result in
termination of the deposit insurance of Heartland or First Mid Bank.
FICO ASSESSMENTS. Since 1987, a portion of the deposit insurance assessments
paid by SAIF members has been used to cover interest payments due on the
outstanding obligations of the FICO, the entity created to finance the
recapitalization of the FSLIC, the SAIF's predecessor insurance fund.
Pursuant to federal legislation enacted September 30, 1996, commencing January
1, 1997, both SAIF members and BIF members will be subject to assessments to
cover the interest payment on outstanding FICO obligations. Such FICO
assessments will be in addition to amounts assessed by the FDIC for deposit
insurance. Until January 1, 2000, the FICO assessments made against BIF
members may not exceed 20% of the amount of the FICO assessments made against
SAIF members. It is estimated that SAIF members will pay FICO assessments
equal to 0.064% of deposits while BIF members will pay FICO assessments equal
to 0.013% of deposits. Between January 1, 2000 and the maturity of the
outstanding FICO obligations in 2019, BIF members and SAIF members will share
the cost of the interest on the FICO bonds on a PRO RATA basis. It is
estimated that FICO assessments during this period will be less than 0.025% of
deposits.
SUPERVISORY ASSESSMENTS. Illinois savings banks such as Heartland, and
national banks, such as First Mid Bank, are required to pay supervisory fees
to the Commissioner and the OCC, respectively, to fund the operations of each
agency. The amount of such supervisory fees is based upon each institution's
total assets, including consolidated subsidiaries, as reported to the agency.
During the year ended December 31, 1996, First Mid Bank paid supervisory fees
to the OCC totaling $91,800 and Heartland paid supervisory fees to the
Commissioner totaling $14,700.
CAPITAL REQUIREMENTS. Under federal regulations, Heartland and First Mid
Bank are subject to the following minimum capital standards: 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 4% to 5% 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 consist of substantially the same components as Tier
1 capital and total capital under the FRB's capital guidelines for bank
holding companies (SEE "--The Registrant--Capital Requirements").
Additionally, under the ISBA and the regulations of the Commissioner, an
Illinois savings bank such as Heartland must maintain a minimum level of total
capital equal to the higher of 3% of total assets or the amount required to
maintain insurance of deposits by the FDIC. The Commissioner has the
authority to require an Illinois savings bank to maintain a higher level of
capital if the Commissioner deems necessary based on the savings bank's
financial condition, history, management or earnings prospects.
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, federal regulations
provide that additional capital may be required to take adequate account of
interest rate risk or the risks posed by concentrations of credit,
nontraditional activities or securities trading activities.
During the year ended December 31, 1996, neither First Mid Bank nor Heartland
was required by its primary federal regulator to increase its capital to an
amount in excess of the minimum regulatory requirements. As of December 31,
1996, First Mid Bank and Heartland each exceeded its minimum regulatory
capital requirements with leverage ratios of 7.65% and 7.01%, respectively,
risk-based capital ratios of 12.57% and 16.00%, respectively.
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.
Additionally, under Federal law, institutions insured by the FDIC may be
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC in connection with the default of commonly controlled FDIC insured
depository institutions or any assistance provided by the FDIC to commonly
controlled FDIC insured depository institutions in danger of default. For
purposes of this provision of Federal law, First Mid Bank and Heartland are
deemed to be commonly controlled.
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 board of directors of the bank deems
prudent. Without prior OCC approval, however, a national bank may not pay
dividends in any calendar year which exceed the bank's year-to-date net income
plus the bank's adjusted retained net income for the two preceding years.
Under the ISBA and the regulations of the Commissioner, dividends may be paid
by Heartland out of its net profits. In general, without the prior written
approval of the Commissioner, Heartland may not declare dividends in any
twelve-month period which, in the aggregate, exceed its net profits for that
twelve-month period. If, however, Heartland's capital falls below 6% of its
total assets, Heartland may not declare dividends in any twelve-month period
which, in the aggregate, exceed 50% of its net profits for that period,
without the prior written approval of the Commissioner.
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 and Heartland each exceeded its minimum capital
requirements under applicable guidelines as of December 31, 1996. As of
December 31, 1996, approximately $3.9 million was available to be paid as
dividends to the Registrant by First Mid Bank and Heartland. Notwithstanding
the availability of funds for dividends, however, the OCC or the FDIC may
prohibit the payment of any dividends by First Mid Bank or Heartland,
respectively, if the agency determines such payment would constitute an unsafe
or unsound practice.
INSIDER TRANSACTIONS. First Mid Bank and Heartland are subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to the
Registrant and its subsidiaries, on investments in the stock or other
securities of the Registrant and its subsidiaries and the acceptance of the
stock or other securities of the Registrant or its subsidiaries as collateral
for loans. Certain limitations and reporting requirements are also placed on
extensions of credit by each of First Mid Bank and Heartland to its respective
directors and officers, to directors and officers of the Registrant and its
subsidiaries, to principal stockholders of the Registrant, and to "related
interests" of such directors, officers and principal stockholders. In
addition, such legislation and regulations may affect the terms upon which any
person becoming a director or officer of the Registrant or one of its
subsidiaries or a principal stockholder of the Registrant may obtain credit
from banks with which First Mid Bank or Heartland maintains a correspondent
relationship.
SAFETY AND SOUNDNESS STANDARDS. The OCC and the FDIC have adopted guidelines
which establish operational and managerial standards to promote the safety and
soundness of national banks and state nonmember banks, respectively. 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 agency 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 is 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 agency, would constitute
grounds for further enforcement action.
BRANCHING AUTHORITY. Illinois savings banks, such as Heartland, have the
authority under Illinois law to establish branches anywhere in the State of
Illinois, subject to receipt of all required regulatory approvals. Under
federal law, First Mid Bank, has the same branching rights in Illinois.
Effective June 1, 1997 (or earlier if expressly authorized by applicable
state law), the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act") allows banks to establish interstate branch
networks through acquisitions of other banks, subject to certain conditions,
including certain limitations on the aggregate amount of deposits that may be
held by the surviving bank and all of its insured depository institution
affiliates. The establishment of DE NOVO interstate branches or the
acquisition of individual branches of a bank in another state (rather than the
acquisition of an out-of-state bank in its entirety) is allowed by the Riegle-
Neal Act only if specifically authorized by state law. The legislation allows
individual states to "opt-out" of certain provisions of the Riegle-Neal Act by
enacting appropriate legislation prior to June 1, 1997. Illinois has enacted
legislation permitting interstate mergers beginning on June 1, 1997.
STATE BANK ACTIVITIES. Under federal law and FDIC regulations, FDIC insured
state banks, such as Heartland, are prohibited, subject to certain exceptions,
from making or retaining equity investments of a type, or in an amount, that
are not permissible for a national bank. Federal law and FDIC regulations
also prohibit FDIC insured state banks and their subsidiaries, subject to
certain exceptions, from engaging as principal in any activity that is not
permitted for a national bank or its subsidiary, respectively, unless the bank
meets, and continues to meet, its minimum regulatory capital requirements and
the FDIC determines the activity would not pose a significant risk to the
deposit insurance fund of which the bank is a member. Impermissible
investments and activities must be divested or discontinued within certain
time frames set by the FDIC. These restrictions have not had, and are not
currently expected to have, a material impact on the operations of Heartland.
FEDERAL RESERVE SYSTEM. FRB regulations, as presently in effect, require
depository institutions to maintain non-interest earning reserves against
their transaction accounts (primarily NOW and regular checking accounts), as
follows: for transaction accounts aggregating $49.3 million or less, the
reserve requirement is 3% of total transaction accounts; and for transaction
accounts aggregating in excess of $49.3 million, the reserve requirement is
$1.479 million plus 10% of the aggregate amount of total transaction accounts
in excess of $49.3 million. The first $4.4 million of otherwise reservable
balances are exempted from the reserve requirements. These reserve
requirements are subject to annual adjustment by the FRB. Each of First Mid
Bank and Heartland is in compliance with the foregoing requirements.
ITEM 2. PROPERTIES
All of the following properties are owned by the Registrant or its Bank
Subsidiaries 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 which was
opened in 1965 with approximately 36,000 square feet of office space, eight
walk-in teller stations and a walk-up automated teller machine ("ATM").
Adjacent to this building is a parking lot with parking for approximately
seventy cars. A drive-up facility with ten drive-up lanes 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 which provides space for three tellers, two drive-up lanes and a
walk-up ATM.
First Mid Bank owns an office building located at 1701 Charleston Avenue,
Mattoon, Illinois and an adjacent parking lot. The building is used by MIDS
for its data processing center and back room operations for the Registrant and
its Bank Subsidiaries.
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. Adjacent to its main office is a parking lot used primarily by the
employees. 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.
NEOGA
First Mid Bank's office in Neoga, Illinois, is located at 102 East 6th
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 is being held for future expansion.
TUSCOLA
First Mid Bank operates two offices in Tuscola, Illinois. The main office is
located at 100 North Main Street, Tuscola, Illinois. The building consists of
a two-story structure with approximately 18,000 square feet of office space
with space for six tellers, five private offices and a night depository.
Adequate customer parking is available at the main office building. The
second facility is located at 410 South Main Street, Tuscola, Illinois. The
facility has a walk-in teller stations and two drive-up bay windows and
contains approximately 320 square feet of office space. A drive-up ATM is
located adjacent to this facility.
CHARLESTON
First Mid Bank has two offices in Charleston, Illinois. The main office 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, seven
private offices and a night depository. The second office is located at 580
West Lincoln Avenue, Charleston, Illinois. This office has three lobby
tellers, three drive-up lanes, a commercial night drop and one private office.
A drive-thru ATM is located in the parking lot of this facility. During 1996,
land adjacent to this facility was purchased and is being held for future
expansion.
First Mid-Bank will acquire a facility at 500 West Lincoln Avenue,
Charleston, Illinois, in connection with the purchase of First of America's
branch in Charleston. This facility contains approximately 8,400 square feet
with four teller stations, four private offices and four drive-up lanes. Two
ATM's are associated with this facility. A drive-up ATM is located in the
parking lot and an off-site ATM is located in the student union at Eastern
Illinois University.
ALTAMONT
First Mid Bank has a banking facility located at 101 West Washington Street,
Altamont, Illinois. This building is a one-story structure which 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.
EFFINGHAM
First Mid Bank operates a facility at 902 N 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 N Keller Drive, Effingham, Illinois
which is currently being renovated to provide additional customer parking
along with a drive-up ATM.
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.
HEARTLAND
MATTOON
The main office is located at 1520 Charleston Avenue, Mattoon, Illinois. The
office building consists of a two-story structure which has approximately
20,000 square feet of office space including six teller stations on the main
floor. A drive-up facility with eight drive-up lanes is located adjacent to
the main office. Adequate customer parking is available on two sides of the
building and in an adjacent parking lot.
URBANA
Heartland's Urbana facility is 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, one private office and two drive-up lanes. An adequate customer
parking lot is located on the south side of the building.
REGISTRANT
The Registrant owns a single family residence at 1515 Wabash Avenue, Mattoon,
Illinois which is being held for future expansion.
ITEM 3. LEGAL PROCEEDINGS
Since the Bank Subsidiaries act as depositories of funds, each is named from
time to time as a defendant in law suits (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
constitute ordinary routine litigation incidental to the business of the Bank
Subsidiaries and that such litigation will not materially adversely affect the
Registrant's consolidated financial condition.
In addition to the normal legal proceedings referred to above, the
Registrant, on behalf of Heartland, filed a complaint on December 5, 1995,
against the U.S. Government which is now pending in the U.S. Court of Federal
Claims in Washington D.C. This complaint relates to Heartland's interest as
successor to Mattoon Federal Savings and Loan Association which incurred a
significant amount of supervisory goodwill when it acquired Urbana Federal
Savings and Loan in 1982. The complaint alleges that the Government breached
its contractual obligations when, in 1989, it issued new rules which
eliminated supervisory goodwill from inclusion in regulatory capital. In
January 1997, the U.S. Court of Federal Claims denied the Government's motion
to dismiss this supervisory goodwill complaint. The Government had taken the
position that the complaint, as well as the complaints of a number of other
parties, should be prohibited from moving forward on statute of limitation
grounds. At this time it is too early to tell whether Heartland will
ultimately prevail in the suit and if so, what damages may be recovered.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS
The Registrant's common stock was held by approximately 742 shareholders of
record, as of December 31, 1996, and is traded in the over-the-counter market.
The following table shows, for the indicated periods, the range of reported
prices per share of the Registrant's common stock in the over-the-counter
market. These quotations represent interdealer prices without retail mark-ups,
mark-downs or commissions and do not necessarily represent actual
transactions.
QUARTER HIGH BID LOW ASK
1996
1st $ 35 $ 35
2nd 37 37
3rd 38 40
4th 39 41
QUARTER HIGH BID LOW ASK
1995
1st $ 27 $ 28
2nd 29 30
3rd 33 32
4th 33 34
The following table sets forth the cash dividends per share paid on the
Registrant's common stock for the past two years.
DATE PAID AMOUNT PER SHARE
June 20, 1995 $.34
January 3, 1996 $.47
June 20, 1996 $.38
January 3, 1997 $.47
The Registrant's shareholders are entitled to receive such dividends as are
declared by the board of directors, which considers payment of dividends
semiannually. The ability of the Registrant to pay dividends, as well as fund
its operations, is dependent upon receipt of dividends from the Bank
Subsidiaries. Regulatory authorities limit the amount of dividends which can
be paid by the Bank Subsidiaries without prior approval from such authorities.
For further discussion of the Bank Subsidiaries' dividend restrictions and
capital requirements, see "Note 16" of the Notes to the Consolidated Financial
Statements included under Item 8 of this document. Cash dividends have been
declared by the Board of Directors of the Registrant semi-annually during the
two years ended December 31, 1996.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth a five year comparison of selected financial data.
(Dollars in thousands)
1996 1995 1994 1993 1992
SUMMARY OF OPERATIONS
Interest income $35,559 $33,465 $26,428 $25,510 $24,589
Interest expense 17,805 16,725 11,918 11,935 12,839
Net interest income 17,754 16,740 14,510 13,575 11,750
Provision for loan losses 147 280 168 492 543
Other income 4,799 4,009 3,805 3,928 3,580
Other expense 15,977 14,715 13,263 12,713 10,823
Income before income taxes
and cumulative effect of
in accounting principle 6,429 5,754 4,884 4,298 3,964
Income tax expense 2,263 1,830 1,450 1,150 1,100
Net income before cumulative
effect of change in
accounting principle 4,166 3,924 3,434 3,148 2,864
Cumulative effect of change
in accounting principle - - - 155 -
Net income $ 4,166 $ 3,924 $ 3,434 $ 3,303 $ 2,864
PER COMMON SHARE DATA
Primary earnings per share
before cumulative effect of
change in accounting principle $ 4.22 $ 4.10 $ 3.59 $ 3.26 $ 3.10
Primary earnings per share 4.22 4.10 3.59 3.44 3.10
Fully diluted earnings per share
before cumulative effect of
change in accounting principle 3.98 3.88 3.43 3.14 3.05
Fully diluted earnings per share 3.98 3.88 3.43 3.30 3.05
Dividend per common share .85 .81 .75 .75 .75
Book value per common share 39.12 36.07 31.37 30.89 27.09
FINANCIAL RATIOS
Net interest margin (TE) 3.98% 3.98% 3.93% 3.85% 3.94%
Return on average assets .85 .84 .84 .85 .86
Return on average equity 11.03 11.76 11.35 11.80 11.80
Return on average common equty 11.18 12.02 11.59 12.12 11.98
Dividend payout ratio 20.16 19.76 20.89 21.40 24.18
Average total equity to average assets 7.69 7.17 7.38 7.17 7.31
Total capital to risk-weighted assets 11.80 11.51 10.69 13.10 12.54
YEAR END BALANCES
Total assets $515,397 $472,494 $451,158 $397,609 $395,127
Net loans 345,533 304,190 279,545 221,109 212,287
Total deposits 413,676 396,879 389,568 349,058 349,605
Total equity 39,904 35,309 30,600 30,184 26,850
AVERAGE BALANCES
Total assets 491,058 465,287 409,684 390,252 331,919
Net loans 323,540 294,220 243,166 214,408 178,919
Total deposits 405,223 395,580 356,833 344,226 283,882
Total equity 37,783 33,371 30,268 27,987 24,268
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 Registrant and its subsidiaries for the years ended
December 31, 1996, 1995 and 1994. 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.
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. The Registrant intends
such forward-looking statements to be covered by the safe harbor provisions
for forward-looking statements contained in the Private Securities 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
Registrant, are generally identifiable by use of the words "believe,"
"expect," "intend," "anticipate," "estimate," "project," or similar
expressions. The Registrant's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse affect on the operations and future prospects
of the Registrant and the subsidiaries include, but are not limited to,
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
Registrant'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 Registrant and its business,
including additional factors that could materially affect the Registrant's
financial results, is included in the Registrant's filings with the
securities and Exchange Commission.
On October 4, 1994, the First Mid Bank acquired all of the outstanding stock
of Downstate Bancshares, Inc. ("DBI") which owned 100% of the stock of
Downstate National Bank ("DNB") for $8.6 million in cash. At the date of
the acquisition, DBI had total assets of $52 million. Immediately following
the acquisition, DBI was dissolved and DNB was merged with and into the
First Mid Bank with the First Mid Bank being the surviving entity. The
acquisition was accounted for as a purchase and, accordingly, DBI's results
of operations have been included in the consolidated statements of income
since that date.
OVERVIEW
In 1996, the Registrant achieved record net income and earnings per share.
For the year, net income was $4,166,000 up 6.2% from $3,924,000 in 1995. In
1995, net income increased 14.3% from $3,434,000 in 1994. Fully diluted net
income per share was $3.98 in 1996 compared with $3.88 in 1995 and $3.43 in
1994. A summary of the factors which contributed to the changes in net income
follows (in thousands):
TABLE 1 EFFECT ON EARNINGS
1996 VS 1995 1995 VS 1994
Net interest income $ 1,014 $ 2,230
Provision for loan losses 133 (112)
Other income, including securities transactions 790 204
Other expenses, excluding SAIF assessment (511) (1,452)
One-time SAIF assessment (751) -
Income taxes (433) (380)
Increase in net income $ 242 $ 490
The growth in earnings in 1996 was primarily due to an increase in net
interest income. The improvement in net interest income was attributable to
the increases in the volumes of earning assets and interest-bearing
liabilities, reflecting strong internal growth during the year. Negatively
impacting 1996 earnings was a one-time assessment ($751,000) to recapitalize
the Savings Association Insurance Fund ("SAIF"). Legislation to recapitalize
SAIF was signed into law by the President on September 30, 1996, and the
assessment was paid by the Registrant in December 1996. After taking into
account the decrease in income taxes resulting from this assessment, the
actual reduction in year-to-date income amounted to $496,000 ($.47 per fully
diluted share)
In 1995, the growth in net interest income and a reduction in FDIC deposit
insurance premiums were major factors contributing to the increase in net
income. The increase in net interest income was due to the growth in the
volumes of earning assets and interest-bearing liabilities.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The largest source of operating revenue for the Registrant is net interest
income. Net interest income represents the difference between total interest
income earned on earning assets and total interest expense paid on interest-
bearing liabilities. The amount of interest income is dependent upon many
factors including the volume and mix of earning assets, the general level of
interest rates and the dynamics of changes in interest rates. The cost of
funds necessary to support earning assets varies with the volume and mix of
interest-bearing liabilities and the rates paid to attract and retain such
funds.
For purposes of the following discussion and analysis, the interest earned on
tax-exempt securities is adjusted to an amount comparable to interest subject
to normal income taxes. The adjustment is referred to as the tax equivalent
("TE") adjustment. The Registrant's average balances, interest income and
expense and rates earned or paid for major balance sheet categories are set
forth in the following table (dollars in thousands):
TABLE 2 DISTRIBUTION OF CONSOLIDATED ASSETS, LIABILITIES AND STOCKHOLDERS'
EQUITY - INTEREST, RATES AND NET YIELDS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
ASSETS
Interest bearing $ 1,264 $ 65 5.14% $ 1,610 $ 94 5.84% $ 2,135 $ 73 3.42%
deposits
Federal funds sold 3,403 180 5.29 6,199 356 5.74 3,643 156 4.28
Investment securities
Taxable 111,640 6,858 6.14 115,725 7,068 6.11 117,285 5,772 4.92
Tax-exempt(1) 11,442 953 8.33 12,831 1,111 8.66 14,546 1,289 8.86
Loans (2)(3) 326,302 27,827 8.53 294,220 25,214 8.57 243,166 19,576 8.05
Total earning assets 454,051 35,883 7.90 430,585 33,843 7.86 380,775 26,866 7.06
Cash and due from banks 17,051 15,382 13,720
Premises and equipment 9,864 9,333 8,393
Other assets 12,854 12,699 9,150
Allowance for loan (2,762) (2,711) (2,354)
losses
Total assets $491,058 $465,288 $409,684
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Bearing
Deposits
Demand deposits $110,708 $ 3,085 2.79% $106,118 $ 2,823 2.66% $110,069 $ 2,764 2.51%
Savings deposits 39,364 1,069 2.72 40,920 1,107 2.71 38,985 1,009 2.59
Time deposits 204,362 11,156 5.46 202,305 10,958 5.42 170,252 7,298 4.29
Securities sold under
agreements to 12,411 574 4.62 16,481 777 4.71 9,697 310 3.20
repurchase
FHLB advances 23,920 1,405 5.87 7,633 487 6.39 2,696 135 5.01
Federal funds purchased 800 44 5.50 26 2 7.69 710 26 3.66
Long-term debt 6,819 472 6.92 7,636 571 7.48 5,579 376 6.74
Total interest-bearing
liabilities 398,384 17,805 4.47 381,119 16,725 4.39 337,988 11,918 3.53
Demand deposits 50,789 46,237 37,527
Other liabilities 4,102 4,561 3,901
Stockholders' equity 37,783 33,371 30,268
Total liabilities & $491,058 $465,288 $409,684
equity
Net interest income (TE) $ 18,078 $ 17,118 $ 14,948
Net interest spread 3.43% 3.47% 3.53%
Impact of non-interest
bearing
funds .55% .51% .40%
Net yield on interest
earning
assets (TE) 3.98% 3.98% 3.93%
(1) Interest income and rates are presented on a tax equivalent basis ("TE") assuming a federal income tax
rate of 34%.
(2) Loan fees are included in interest income and are not material.
(3) Nonaccrual loans have been included in the average balances.
Changes in net interest income may also be analyzed by segregating the volume
and rate components of interest income and interest expense. The following
table summarizes the approximate relative contribution of changes in average
volume and interest rates to changes in net interest income (TE) for the past
two years (in thousands):
TABLE 3 ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
1996 COMPARED TO 1995 1995 COMPARED TO 1994
INCREASE - (DECREASE) INCREASE - (DECREASE)
TOTAL RATE/ TOTAL RATE/
CHANGE VOLUME RATE VOLUME(4) CHANGE VOLUME RATE VOLUME(4)
EARNING ASSETS:
Interest bearing deposits $ (29) $ (20) $ (11) $ 2 $ 21 $ (18) $ 52 $ (13)
Federal funds sold (176) (161) (28) 13 200 110 53 37
Investment securities:
Taxable (210) (248) 38 - 1,296 (78) 1,391 (17)
Tax-exempt (1) (158) (120) (42) 4 (178) (152) (30) 4
Loans (2)(3) 2,613 2,749 (123) (13) 5,638 4,110 1,263 265
Total interest income 2,040 2,200 (166) 6 6,977 3,972 2,729 276
Interest-Bearing
Liabilities
Interest-bearing deposits
Demand deposits 262 122 134 6 59 (99) 164 (6)
Savings deposits (38) (42) 4 - 98 50 46 2
Time deposits 198 111 86 1 3,660 1,374 1,924 362
Securities sold under
agreements to repurchase (203) (192) (14) 3 467 217 147 103
FHLB advances 918 1,042 (39) (85) 352 247 37 68
Federal funds purchased 42 60 (1) (17) (24) (25) 29 (28)
Long-term debt (99) (61) (43) 5 195 139 41 15
Total interest expense 1,080 1,040 127 (87) 4,807 1,903 2,388 516
Net interest income $ 960 $1,160 $ (293) $ 93 $2,170 $2,069 $ 341 $ (240)
(1) Interest income and rates are presented on a tax equivalent basis, assuming a federal income
tax rate of 34%.
(2) Loan fees are included in interest income and are not material.
(3) Nonaccrual loans are not material and have been included in the average balances.
(4) The changes in rate / volume are computed on a consistent basis by multiplying the change
in rates with the change in volume.
On a tax equivalent basis, net interest income increased $960,000, or 5.6%
in 1996, compared to an increase of 2,170,000, or 14.5% in 1995. As set
forth in Table 3, the improvement in net interest income in 1996 was due to
the increase in the volume of earning assets and interest-bearing liabilities,
partially offset by the effect of changes in interest rates. In 1995, the
increase in net interest income was due to the increases in the volume of
earning assets and interest-bearing liabilities. To a lesser extent,
changes in interest rates in 1995 also contributed to the growth in net
interest income.
In 1996, average earning assets increased by $23,466,000, or 5.4%, and
average interest- bearing liabilities increased $17,265,000, or 4.5%,
compared with 1995 (Table 2). The higher volumes of earning assets and
interest-bearings liabilities were primarily the result of strong loan
growth in 1996. As a percentage of average earning assets, average loans
increased from 63.9% in 1994 to 71.9% in 1996 while average securities
decreased from 34.6% in 1994 to 27.1% in 1996.
Net interest margin remained constant at 3.98% in 1996 and 1995 and
increased slightly from 3.93% in 1994.
PROVISION FOR LOAN LOSSES
The provision for loan losses in 1996 was $147,000 compared to $280,000 in
1995 and $168,000 in 1994. For information on loan loss experience and
nonperforming loans, see the "Nonperforming Loans" and "Loan Quality and
Allowance for Loan Losses" sections later in this document.
OTHER INCOME
An important source of the Registrant'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):
TABLE 4 OTHER INCOME
$ CHANGE
FROM PRIOR YEAR
1996 1995 1994 1996 1995
Trust $ 1,293 $ 1,118 $ 1,118 $ 175 $ -
Brokerage 386 183 349 203 (166)
Securities losses (9) - (4) (9) 4
Service charges 1,728 1,574 1,456 154 118
Mortgage banking 428 273 158 155 115
Other 973 861 728 112 133
Total other income $ 4,799 $ 4,009 $ 3,805 $ 790 $ 204
The Registrant's other income increased to $4,799,000 as compared to
$4,009,000 in 1995 and $3,805,000 in 1994. The increase between 1994 and
1995 was primarily due to the acquisition of DBI in October, 1994.
Trust revenues increased to $1,293,000 in 1996 and $1,118,000 in 1995 and
1994. Trust assets increased to $223,117,000 at December 31, 1996 from
$215,903,000 at December 31, 1995 and $182,729,000 at December 31, 1994.
During 1996, increased revenues were primarily due to an increase in fees
generated on retirement plans under management and the increase in trust
assets. During 1995 the number of estates under management and therefore
executor fees on those accounts declined from the 1994 level.
Revenues from brokerage and annuity sales increased in 1996 as the
Registrant expanded its product line by offering full-service brokerage
services and increasing its marketing efforts in this area. During 1995,
brokerage and annuity sales decreased as consumer preference shifted away
from annuity products when interest rates on traditional deposit products
rose.
Net securities losses in 1996 were $9,000 compared to $0 in 1995 and $4,000
in 1994.
Service charges amounted to $1,728,000 in 1996 as compared to $1,574,000 in
1995 and $1,456,000 in 1994. The increase of $154,000 (9.8%) in service
charges in 1996 as compared to 1995 was primarily due to an increase in the
number of savings and transaction accounts and the volume associated with
these accounts. The $118,000 (8.1%) increase in service charges in 1995 as
compared to 1994 was primarily due to the addition of the Effingham and
Altamont business units associated with the acquisition of DBI. These two
business units added $104,000 to service charge income in 1995 as compared to
$21,000 in 1994 because of the timing of the acquisition.
Heartland originates loans for its own portfolio and for sale to others.
Mortgage banking income from loans originated and subsequently sold into
the secondary market amounted to $428,000 in 1996 as compared to $273,000
in 1995 and $158,000 in 1994. Included in 1996 mortgage banking income is
the amount of the mortgage servicing rights recorded on loans originated and
sold into the secondary market with servicing retained amounting to
$196,000. In 1996, the volume of loans sold by Heartland was $21 million
representing 339 loans as compared to $11 million in 1995 representing 189
loans.
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):
TABLE 5 OTHER EXPENSE
$ CHANGE
FROM PRIOR YEAR
1996 1995 1994 1996 1995
Salaries and benefits $ 7,938 $ 7,484 $ 6,964 $ 454 $ 520
Occupancy 1,098 1,021 937 77 84
Equipment 1,247 1,277 1,032 (30) 245
FDIC premiums 275 590 802 (315) (212)
One-time SAIF assessment 751 - - 751 -
Amortization of intangibles 547 608 358 (61) 250
Stationary and supplies 559 449 324 110 125
Legal and professional fees 795 699 737 96 (38)
Marketing and promotion 579 500 383 79 117
Other operating expenses 2,188 2,087 1,726 101 361
Total other expense $15,977 $14,715 $13,263 $ 1,262 $ 1,452
The Registrant's non-interest expense amounted to $15,977,000 in 1996 as
compared to $14,715,000 in 1995 and $13,263,000 in 1994.
Salaries and employee benefits, the largest component of other expense,
increased 6.1% in 1996 compared to 7.5% in 1995. At December 31, 1996, the
number of full-time equivalent ("FTE") employees totaled 257 compared to 254
and 247 at December 31, 1995 and 1994 respectively.
Occupancy expense increased 2.0% to $2,345,000 in 1996 as compared to
$2,298,000 in 1995. The 16.7% increase from $1,969,000 in 1994 to
$2,298,000 in 1995 was primarily due to the DBI acquisition.
The cost of insurance premiums assessed by the Federal Deposit Insurance
Corporation ("FDIC") was $275,000 in 1996, compared to $590,000 in 1995 and
$802,000 in 1994. The 1996 decrease of $315,000 was the result of reduced
FDIC insurance premiums paid by First Mid Bank during the year. The 1995
decrease was the result of a refund of FDIC premiums that First Mid Bank
received in the third quarter of 1995 in the amount of $170,000 and a
reduced assessment rate for the second half of 1995.
In 1997, the Registrant paid a one-time assessment of $751,000 to
recapitalize the Savings Association Insurance Fund ("SAIF"). Legislation
to recapitalize SAIF was signed into law by the President on September 30,
1996, as the assessment was paid by the Registrant in December 1996.
Amortization of intangible assets decreased 10% when comparing 1996 to 1995.
This decrease was the result of the Registrant's purchase mortgage servicing
rights from the Heartland acquisition being fully amortized in 1995. The
70% increase between 1995 and 1994 was the result of the additional
intangible amortization associated with the acquisition of DBI.
During 1996, various categories of other operating expenses were impacted by
the implementation of several large technology projects including imaging of
customer checks and statements and the establishment of a wide-area network,
along with new products being introduced such as telephone banking.
INCOME TAXES
Total income tax expense amounted to $2,263,000 in 1996 as compared to
$1,830,000 in 1995 and $1,450,000 in 1994. The 1996 tax expense includes
state income tax expense totaling $195,000. In past years, low loan to
deposit ratios and heavy reliance on interest income from state tax exempt
securities had combined to produced operating losses for state tax purposes.
These net operating loss carry forwards generated in past years have now
been exhausted. Effective tax rates were 35.2%, 31.8% and 29.7%
respectively, for 1996, 1995 and 1994, respectively. The effective tax rate
has continued to increase each year as the relative percentage of tax-exempt
income decreases.
ANALYSIS OF BALANCE SHEETS
SECURITIES
The Registrant'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
Registrant's current and projected liquidity and interest rate sensitivity
positions. The following table sets forth the year-end amortized cost of the
securities for the last three years (in thousands):
TABLE 6 INVESTMENT PORTFOLIO
DECEMBER 31,
1996 1995 1994
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
U.S. Treasury securities
and obligations of
U.S. Government Agencies
and corporations $ 86,518 74% $ 72,599 59% $ 76,670 58%
Obligations of states and
political subdivisions 11,398 10 12,009 10 13,664 10
Mortgage-backed securities 15,283 13 35,766 29 40,720 31
Other securities 4,285 3 2,105 2 1,888 1
Total securities $117,484 100% $122,479 100% $132,942 100%
At December 31, 1996 the Registrant's investment portfolio showed a decrease
in mortgage-backed securities and an increase in U. S. Government agency
securities. This change in the portfolio mix improves the repricing
characteristics of the portfolio, helps mollify the Registrant's total
exposure relating to real estate assets and improves the 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, 1996 (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.
TABLE 7 INVESTMENT MATURITY SCHEDULE
ONE AFTER 1 AFTER 5 AFTER
YEAR THROUGH THROUGH TEN
OR LESS 5 YEARS 10 YEARS YEARS TOTAL
Available-for-sale:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $11,628 $56,214 $18,179 $ 497 $ 86,518
Obligations of state and
political subdivisions 805 5,503 991 618 7,917
Mortgage-backed securities 2,545 9,682 564 2,492 15,283
Other securities - - - 4,285 4,285
Total Investments $14,978 $71,399 $19,734 $ 7,892 $114,003
Weighted average yield 5.45% 6.22% 6.39% 6.74% 6.18%
Full tax equivalent yield 5.60% 6.45% 6.54% 7.18% 6.39%
Held-to-maturity:
Obligations of state and
political subdivisions $ 620 $ 2,088 $ 308 $ 465 $ 3,481
Weighted average yield 5.51% 4.98% 5.96% 5.74% 5.26%
Full tax equivalent yield 8.35% 7.55% 9.03% 8.70% 7.98%
The weighted average yields are calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each security.
Full tax equivalent yields have been calculated using a 34% tax rate.
The maturities of, and yields on, mortgage backed securities have been
calculated using actual repayment history. However, where securities have
call features, and have a market value in excess of par value, the call date
has been used to determine the expected maturity.
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, 1996.
In December 1995, the Registrant reclassified certain investment securities
between held-to- maturity and available-for-sale in accordance with
guidelines issued by the Financial Accounting Standards Board ("FASB")
permitting a one-time change in classification. Based on discussion and
analysis, the Registrant decided that only local, non-rated municipal
securities would be classified as held-to-maturity and the remaining
portfolio would be designated as available-for-sale. The book value and
gross unrealized loss of securities transferred from held-to-maturity to
available-for-sale amounted to $52,536,000 and $445,000, respectively.
LOANS
The loan portfolio (net of unearned discount) is the largest category of the
Registrant's earning assets. The following table summarizes the composition
of the loan portfolio for the last five years (in thousands):
TABLE 8 COMPOSITION OF LOANS
1996 1995 1994 1993 1992
Commercial, financial
and agricultural $ 75,028 $ 65,916 $ 61,520 $ 50,353 $ 46,464
Real estate - mortgage 241,240 211,147 195,524 151,916 146,333
Installment 30,423 27,996 22,294 16,360 16,316
Other 1,526 1,945 2,815 4,590 5,080
Total loans $348,217 $307,004 $282,153 $223,219 $214,193
At December 31, 1996, the Registrant had loan concentrations in agricultural
industries of 13.3% of outstanding loans at December 31, 1996 and 12.9% at
December 31, 1995. The Registrant had no further industry loan
concentrations in excess of 10% of outstanding loans.
TABLE 9 LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY
The following table presents the balance of loans outstanding as of December
31, 1996, by maturities (dollars in thousands):
MATURITY (1)
OVER 1
ONE YEAR THROUGH OVER
OR LESS(2) 5 YEARS 5 YEARS TOTAL
Commercial, financial
and agricultural $ 50,439 $ 22,482 $ 2,107 $ 75,028
Real estate - mortgage 46,255 124,797 70,188 241,240
Installment 7,154 22,024 1,245 30,423
Other 231 735 560 1,526
Total loans $ 104,079 $170,038 $ 74,100 $348,217
(1) Based on scheduled principal repayments.
(2) Includes demand loans, past due loans and overdrafts.
As of December 31, 1996, loans with maturities over one year consisted of
$198,993,000 in fixed rate loans and $45,145,000 in variable rate loans.
The loan maturities noted above are based on the contractual provisions of
the individual loans. The Registrant 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 90 days or more as to interest or
principal payments; and loans not included in (a) and (b) above which are
defined as "troubled debt restructurings".
The following table presents information concerning the aggregate amount of
nonperforming loans (in thousands):
TABLE 10 NONPERFORMING LOANS
DECEMBER 31,
1996 1995 1994 1993 1992
Nonaccrual loans $ 790 $ 636 $ 393 $ 497 $ 685
Loans past due ninety days
or more and still accruing 575 554 509 248 585
Restructured loans which are
performing in accordance
with revised terms 580 604 772 307 383
Interest income that would have been reported if nonaccrual and restructured
loans had been performing totaled $143,000, $143,000 and $100,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. Interest income
that was included in income totaled $39,000, $56,000 and $37,000 for the
same periods.
The Registrant's policy generally is to discontinue the accrual of interest
income on any loan for which principal or interest is 90 days past due and
when, in the opinion of management, there is reasonable doubt as to the
timely collectibility of interest or principal. Nonaccrual loans are
returned to accrual status when, in the opinion of management, the financial
position of the borrower indicates there is no longer any reasonable doubt
as to the timely collectibility of interest or principal.
LOAN QUALITY AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's best estimate of the
reserve necessary to adequately cover 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 which extends to the
full range of the Registrant'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. Collateral values are considered by management 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 and anticipated economic conditions in
the region where the Registrant operates. In addition to the aforementioned
considerations, management also considers the loan loss experience of other
banks, thrifts and financial services holding companies.
Management recognizes that there are risk factors which are inherent in the
Registrant's loan portfolio. All financial institutions face risk factors
in their loan portfolios because risk exposure is a function of the
business. The Registrant'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 Registrant's success.
At December 31, 1996, the Registrant's loan portfolio included $46.4 million
of loans to borrowers whose businesses are directly related to agriculture.
The balance increased $6.6 million from $39.7 million at December 31, 1995.
In addition to agricultural lending, the Registrant has historically had
substantial residential mortgage lending activity in and around east central
Illinois. At December 31, 1996, these loans amounted to $172.3 million or
49.5% of total loans. Residential mortgage loans amounted to $153.6 million
or 50.0% of total loans at December 31, 1995.
TABLE 11 ALLOWANCE FOR LOAN LOSSES
Loan loss experience for the years ending December 31, are summarized as
follows (dollars in thousands):
1996 1995 1994 1993 1992
Average loans outstanding,
net of unearned income $326,302 $294,220 $243,166 $214,408 $178,919
Allowance-beginning of year 2,814 2,608 2,110 1,906 1,566
Balance of
acquired subsidiary - - 343 - 350
Charge-offs:
Commercial, financial
and agricultural 238 18 29 140 298
Real estate-mortgage 6 111 28 241 350
Installment 131 57 120 86 139
Total charge-offs 375 186 177 467 787
Recoveries:
Commercial, financial
and agricultural 53 73 98 150 167
Real estate-mortgage - - 21 3 18
Installment 45 39 45 26 49
Total recoveries 98 112 164 179 234
Net charge-offs 277 74 13 288 553
Provision for loan losses 147 280 168 492 543
Allowance-end of period $ 2,684 $ 2,814 $ 2,608 $ 2,110 $ 1,906
Ratio of net charge-offs to
average loans .08% .03% .01% .13% .31%
Ratio of allowance for loan
losses to loans outstanding
(less unearned interest
at end of period) .77% .90% .93% .95% .89%
Ratio of allowance for loan
losses to nonperforming
loans 138.0% 156.8% 155.8% 200.6% 115.3%
The Registrant minimizes credit risk by adhering to sound underwriting and
credit review policies. These policies are reviewed at least annually, and
changes are approved by the board of directors. 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 1996, the Registrant had net charge-offs of $277,000, a significant
increase from 1995 and 1994 net charge-offs of $74,000 and $13,000
respectively. $151,000 (55%) of the 1996 charge-offs related to three
specific loans for which management does not anticipate any significant
future recoveries. While management believes that these losses represented
isolated events and do not reflect on the overall quality of the loan
portfolio, management is also aware of the increasing rate of personal
bankruptcies both nationally and in the Registrant's service area.
Accordingly, management believes that its provision for loan losses will
need to increase in 1997. On December 31, 1996, the allowance for loan
losses amounted to $2,684,000, or .77% of total loans, and 138.0% of
nonperforming loans. At December 31, 1995, the allowance was $2,814,000, or
.92% of total loans, and 156.8% of nonperforming loans.
The allowance for loan losses, in management's judgment, would be allocated
as follows to cover potential loan losses (in thousands):
TABLE 12 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
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
Commercial, financial
and agricultural $ 1,854 21.5% $ 1,554 21.5% $ 1,481 21.8%
Real estate-mortgage 434 69.3 314 68.8% 427 69.3%
Installment 152 8.7 131 9.1% 100 7.9%
Other - .5 - .6% - 1.0%
Total allocated 2,440 1,999 2,008
Unallocated 244 N/A 815 N/A 600 N/A
Allowance at end of
reported period $ 2,684 100.0% $ 2,814 100.0% $ 2,608 100.0%
DECEMBER 31, 1993 DECEMBER 31, 1992
ALLOWANCE % OF ALLOWANCE % OF
FOR LOANS FOR LOANS
LOAN TO TOTAL LOAN TO TOTAL
LOSSES LOANS LOSSES LOANS
Commercial, financial
and agricultural $ 1,351 22.5% $ 1,045 21.7%
Real estate-mortgage 330 68.1% 325 68.3%
Installment 78 7.3% 183 7.6%
Other - 2.1% - 2.4%
Total allocated 1,759 1,553
Unallocated 351 N/A 353 N/A
Allowance at end of
reported period $ 2,110 100.0% $ 1,906 100.0%
The allowance is allocated to the individual loan categories by a specific
reserve for all classified loans plus a percentage of loans not classified
based on historical losses.
DEPOSITS
Funding the Registrant's earning assets is substantially provided by a
combination of consumer, commercial and public fund deposits. The
Registrant 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, 1996,
1995 and 1994 (dollars in thousands):
TABLE 13 COMPOSITION OF DEPOSITS
1996 1995 1994
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
Demand deposits:
Non-interest bearing $ 50,789 - $ 46,237 - $ 37,527 -
Interest bearing 110,708 2.79% 106,118 2.66% 110,069 2.51%
Savings 39,364 2.72% 40,920 2.71% 38,985 2.59%
Time deposits 204,362 5.46% 202,305 5.42% 170,252 4.29%
Total average deposits $405,223 3.78% $395,580 3.76% $356,833 3.10%
The following table sets forth the maturity of time deposits of $100,000 or
more (in thousands):
TABLE 14 MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31,
1996 1995 1994
3 months or less $ 20,658 $ 17,167 $ 12,124
Over 3 through 6 months 7,322 6,451 4,525
Over 6 through 12 months 6,897 7,495 5,998
Over 12 months 5,893 6,217 6,807
Total $ 40,770 $ 37,330 $ 29,454
OTHER BORROWINGS
Other borrowings consist of securities sold under agreements to repurchase,
Federal Home Loan Bank (FHLB) advances, and federal funds purchased.
Information relating to other borrowings for the last three years is
presented below (in thousands):
TABLE 15 SCHEDULE OF OTHER BORROWINGS
1996 1995 1994
At December 31:
Securities sold under agreements to repurchase $18,360 $16,815 $15,590
Federal Home Loan Bank advances:
Overnight 19,733 2,200 3,500
Fixed term - due in one year or less 11,693 6,000 -
Fixed term - due after one year 1,000 3,500 -
Federal funds purchased - - 500
Total $50,786 $28,515 $19,590
Average interest rate at year end 5.91% 5.11% 3.55%
Maximum Outstanding at Any Month-end
Securities sold under agreements to repurchase $18,860 $21,200 $15,980
Federal Home Loan Bank advances:
Overnight 23,083 5,000 8,250
Fixed term - due in one year or less 20,693 5,000 -
Fixed term - due after one year 7,500 6,500 -
Federal funds purchased 6,500 - 5,000
Total $76,636 $37,700 $29,230
Averages for the Year
Securities sold under agreements to repurchase $12,411 $16,481 $9,697
Federal Home Loan Bank advances:
Overnight 8,136 1,104 2,803
Fixed term - due in one year or less 9,352 2,905 -
Fixed term - due after one year 6,432 3,598 -
Federal funds purchased 800 26 603
Total $37,131 $24,114 $13,103
Average interest rate during the year 5.45% 5.24% 3.59%
Securities sold under agreements to repurchase primarily represent
borrowings originated as part of cash management services offered to
corporate customers. The remaining balance of securities sold under
agreements to repurchase represents term repurchase agreements with the
State of Illinois.
Federal Home Loan Bank advances represent borrowings by the Bank
Subsidiaries to fund loan demand.
INTEREST RATE SENSITIVITY
The Registrant seeks to maximize its net interest margin within an
acceptable level of interest rate risk. Interest rate risk can be defined
as the amount of forecasted net interest income that may be gained or lost
due to favorable or unfavorable movements in interest rates. Interest rate
risk, or sensitivity, arises when the maturity or repricing characteristics
of assets differ significantly from the maturity or repricing
characteristics of liabilities.
The Registrant 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 Registrant's asset/liability management committee oversees the interest
rate sensitivity position and directs the overall allocation of funds in an
effort to maintain a cumulative one-year gap to earning assets ratio of less
than 30% of total earning assets.
In the banking industry, a traditional measurement of interest rate
sensitivity is known as "gap" analysis, which measures the cumulative
differences between the amounts of assets and liabilities maturing or
repricing at various intervals. The following table sets forth the
Registrant's interest rate repricing gaps for selected maturity periods at
December 31, 1996 (in thousands):
TABLE 16 GAP TABLE
NUMBER OF MONTHS UNTIL NEXT REPRICING OPPORTUNITY
INTEREST EARNING ASSETS: 0-1 1-3 3-6 6-12 12+
Deposits with other financial
institutions $ 453 $ - $ - $ - $ 99
Federal funds sold 6,500 - - - -
Taxable investment securities 23,861 11,450 6,947 3,912 59,693
Nontaxable investment securities 460 249 327 1,876 8,733
Loans 47,121 25,712 21,060 30,897 223,427
Total $ 78,395 $ 37,411 $ 28,334 $ 36,685 $ 291,952
INTEREST BEARING LIABILITIES:
Savings and N.O.W. accounts (1) 5,361 10,722 16,084 32,167 58,191
Money market accounts 35,837 - - - -
Other time deposits 14,903 41,207 37,556 43,975 62,629
Other borrowings 44,686 1,600 3,500 - 1,000
Long-term debt 6,200 - - - -
Total $ 106,987 $ 53,529 $ 57,140 $ 76,142 $ 121,820
Periodic GAP $ (28,592) $ (16,118) $ (28,806) $ (39,457) $ 170,132
Cumulative GAP $ (28,592) $ (44,710) $ (73,516) $(112,973) $ 57,159
GAP as a % of interest earning assets:
Periodic (6.0%) (3.4%) (6.1%) (8.3%) 36.0%
Cumulative (6.0%) (9.5%) (15.6%) (23.9%) 12.1%
(1) Historically the Registrant's NOW accounts and savings deposits have been relatively
insensitive to interest rate changes. However, the Registrant considers a portion of
these deposits to be rate sensitive based on historical trends and management's
expectations.
At December 31, 1996, the Registrant was liability sensitive on a cumulative
basis through the twelve-month time horizon. Accordingly, future increases
in interest rates, if any, could have an unfavorable effect on the net
interest margin. However, the Registrant's historical repricing of N.O.W.
and savings accounts has not, and is not expected to change on a frequent
basis and this would mitigate to some extent the negative effect of an
upturn in rates. Management has, over the past year, placed an emphasis on
growing core deposits, which are considered to be less sensitive to changes
in interest rates. This strategy, among other actions contributed to the
reduction of the one-year gap from (29.7%) at December 31, 1995 to (23.9%)
at December 31, 1996.
Interest rate sensitivity using a static GAP analysis basis is only one of
several measurements of the impact of interest rate changes on net interest
income used by the Registrant. Its actual usefulness in assessing the
effect of changes in interest rates varies with the constant changes which
occur in the composition of the Registrant's earning assets and interest
bearing liabilities. For this reason, the Registrant uses financial models
to project interest income under various rate scenarios and various
assumptions relative to the prepayments, reinvestment and roll overs of
assets and liabilities.
CAPITAL RESOURCES
At December 31, 1996, the Registrant's stockholders' equity amounted to
$39,904,000, a $4,595,000 or 13.0% increase from the $35,309,000 balance as
of December 31, 1995. During the year, net income contributed $4,166,000 to
equity before the payment of dividends to common and preferred stockholders
amounting to $1,081,000. The change in net unrealized gain on
available-for-sale investment securities decreased stockholders' equity by
$175,000, net of tax.
During 1996, the Registrant began issuing Company common stock as part of a
deferred compensation plan for its directors and certain senior officers and
as an investment option under the Registrant's 401-K (First Retirement and
Savings Plan) for its employees. During 1996, 15,248 shares were issued
pursuant to the Deferred Compensation Plan and 15,734 shares were issued
pursuant to the First Retirement and Savings Plan.
In late 1994, the Registrant implemented a Dividend Reinvestment Plan
whereby common and preferred shareholders could elect to have their cash
dividends automatically reinvested into newly-issued common shares of the
Registrant. This plan became effective with the January, 1995 common stock
dividend. Of the $1,081,000 in common and preferred stock dividends paid
during 1996, $592,000 or 54.8% was reinvested into shares of common stock of
the Registrant through the Dividend Reinvestment Plan. This resulted in an
additional 16,843 shares of common stock being issued during 1996.
The Registrant and its subsidiaries have capital ratios which are above the
regulatory capital requirements. These requirements call for a minimum
total risk-based capital ratio of 8% and a minimum leverage ratio of 3% for
the most highly rated banks that do not expect significant growth. All
other institutions are required to maintain a ratio of Tier 1 capital to
total risk-weighted assets of 4% to 5% depending on their particular
circumstances and risk profiles. At December 31, 1996, the Registrant's
leverage ratio was 6.81%.
A tabulation of the Registrant's and its subsidiaries' risk-based capital
ratios as of December 31, 1996 follows:
TABLE 17 RISK-BASED CAPITAL RATIOS
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) 10.95% 11.80% 6.81%
First Mid-Illinois Bank & Trust, N.A. 11.70 12.57 7.65
Heartland Savings Bank 15.20 16.00 7.01
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 Registrant to operate without capital
adequacy concerns.
LIQUIDITY
Liquidity represents the ability of the Registrant and its subsidiaries to
meet the requirements of customers for loans and deposit withdrawals.
Liquidity management focuses on the ability to obtain funds economically for
these purposes and to maintain assets which may be converted into cash at
minimal costs. Management monitors its expected liquidity requirements
carefully, focusing primarily on cash flows from operating, investing and
financing activities.
EFFECTS OF INFLATION
Unlike industrial companies, virtually all of the assets and liabilities of
the Registrant are monetary in nature. As a result, interest rates have a
more significant impact on the Registrant'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 Registrant's assets and liabilities which are important to the
maintenance of acceptable performance levels. The Registrant attempts to
maintain a balance between monetary assets and monetary liabilities, over
time, to offset these potential effects.
FUTURE ACCOUNTING CHANGES
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" ("SFAS 125"). SFAS 125, among other things, applies a
"financial-components approach" that focuses on control, whereby an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes assets when control has been
surrendered, and derecognizes liabilities when extinguished. SFAS 125
provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. SFAS 125
is effective for transactions occurring after December 31, 1996; however
SFAS 127, issued in December 1996, defers the effective date of certain
elements of SFAS 125 for one year. The Registrant does not expect these
pronouncements to have a significant impact on its consolidated financial
condition or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(In thousands, except share data) 1996 1995
ASSETS
Cash and due from banks (note 3):
Non-interest bearing $ 20,158 $ 17,536
Interest bearing 453 784
Federal funds sold 6,500 4,975
Cash and cash equivalents 27,111 23,295
Interest bearing deposits with other financial institutions 99 99
Investment securities:
Available-for-sale, at fair value (note 4) 114,027 119,388
Held-to-maturity, at amortized cost
(estimated fair value of $3,491 and $3,409 at
December 31, 1996 and 1995, respectively) (note 4) 3,481 3,381
Loans (note 5) 348,217 307,004
Less allowance for loan losses (note 6) 2,684 2,814
Net loans 345,533 304,190
Premises and equipment, net (note 7) 10,735 9,487
Accrued interest receivable 5,229 4,397
Intangible assets (notes 2 and 8) 5,472 6,019
Other assets (note 15) 3,710 2,238
TOTAL ASSETS $515,397 $472,494
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 55,044 $ 51,017
Interest bearing (note 9) 358,632 345,862
Total deposits 413,676 396,879
Accrued interest payable 1,656 1,580
Securities sold under agreements to repurchase (notes 4 and 10) 18,360 16,815
Federal Home Loan Bank advances (note 10) 32,426 11,700
Long-term debt (note 11) 6,200 7,200
Other liabilities (note 15) 3,175 3,011
TOTAL LIABILITIES 475,493 437,185
Stockholders' Equity
Series A convertible preferred stock; no par value;
authorized 1,000,000 shares; issued 620 shares with
stated value of $5,000 per share 3,100 3,100
Common stock, $4 par value; authorized 2,000,000 shares;
issued 942,816 shares in 1996 and 894,991 shares in 1995 3,771 3,580
Additional paid-in-capital 5,463 3,969
Retained earnings 27,578 24,493
Net unrealized gain on available-for-sale
investment securities, net of tax (note 4) 16 191
Less treasury stock at cost, 2,000 shares 24 24
TOTAL STOCKHOLDERS' EQUITY 39,904 35,309
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $515,397 $472,494
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1996, 1995 and 1994
(In thousands, except per share data)
1996 1995 1994
INTEREST INCOME:
Interest and fees on loans (note 5) $27,827 $ 25,214 $ 19,576
Interest on investment securities:
Taxable 6,858 7,068 5,772
Exempt from federal income tax 629 733 851
Interest on federal funds sold 180 356 156
Interest on deposits with other financial institutions 65 94 73
Total interest income 35,559 33,465 26,428
INTEREST EXPENSE:
Interest on deposits (note 9) 15,310 14,888 11,071
Interest on securities sold under agreements
to repurchase (note 10) 574 777 310
Interest on Federal Home Loan Bank advances (note 10) 1,405 487 135
Interest on Federal funds purchased (note 10) 44 2 26
Interest on long-term debt (note 11) 472 571 376
Total interest expense 17,805 16,725 11,918
Net interest income 17,754 16,740 14,510
Provision for loan losses (note 6) 147 280 168
Net interest income after provision for loan losses 17,607 16,460 14,342
OTHER INCOME:
Trust revenues 1,293 1,118 1,118
Brokerage revenues 386 183 349
Service charges 1,728 1,574 1,456
Securities (losses), net (note 4) (9) - (4)
Mortgage banking income 428 273 158
Other 973 861 728
Total other income 4,799 4,009 3,805
OTHER EXPENSE:
Salaries and employee benefits (note 14) 7,938 7,484 6,964
Net occupancy expense 1,098 1,021 937
Equipment rentals, depreciation and maintenance 1,247 1,277 1,032
Federal deposit insurance premiums 275 590 802
Savings Association Insurance Fund
recapitalization assessment 751 - -
Amortization of intangible assets (note 8) 547 608 358
Stationary and supplies 559 449 324
Legal and professional 795 699 737
Marketing and promotion 579 500 383
Other 2,188 2,087 1,726
Total other expense 15,977 14,715 13,263
Income before income taxes 6,429 5,754 4,884
Income taxes (note 15) 2,263 1,830 1,450
Net income $ 4,166 $ 3,924 $ 3,434
Per common share data:
Primary earnings per share $ 4.22 $ 4.10 $ 3.59
Fully diluted earnings per share 3.98 3.88 3.43
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
(In thousands, except per share data)
NET
UNREALIZED
GAIN(LOSS)
ON
AVAILABLE-
ADDITIONAL FOR-SALE
PREFERRED COMMON PAID-IN- RETAINED INVESTMENT TREASURY
STOCK STOCK CAPITAL EARNINGS SECURITIES STOCK TOTAL
DECEMBER 31, 1993 $ 3,100 $ 3,515 $ 3,531 $ 19,087 $ 975 $ (24) $ 30,184
Net income - - - 3,434 - - 3,434
Cash dividends on preferred
stock ($462.50 per share) - - - (286) - - (286)
Cash dividends on common
stock ($.75 per share) - - - (658) - - (658)
Change in net unrealized
gain/(loss) on available-
for-sale investment
securities, net of tax - - - - (2,074) - (2,074)
DECEMBER 31, 1994 3,100 3,515 3,531 21,577 (1,099) (24) 30,600
Net income - - - 3,924 - - 3,924
Cash dividends on preferred
stock ($462.50 per share) - - - (286) - - (286)
Cash dividends on common
stock ($.81 per share) - - - (722) - - (722)
Issuance of 16,222 common
shares pursuant to the
Dividend Reinvestment Plan - 65 438 - - - 503
Change in net unrealized
gain/(loss) on available-
for-sale investment
securities, net of tax - - - - 1,290 - 1,290
DECEMBER 31, 1995 3,100 3,580 3,969 24,493 191 (24) 35,309
Net income - - - 4,166 - - 4,166
Cash dividends on preferred
stock ($462.50 per share) - - - (286) - - (286)
Cash dividends on common
stock ($.85 per share) - - - (795) - - (795)
Issuance of 16,843 common
shares pursuant to the
Dividend Reinvestment Plan - 67 525 - - - 592
Issuance of 15,248 common
shares pursuant to the
Deferred Compensation Plan - 61 476 - - - 537
Issuance of 15,734 common
shares pursuant to the
First Retirement & Savings
Plan - 63 493 - - - 556
Change in net unrealized
gain on available-for-
sale investment
securities, net of tax - - - - (175) - (175)
DECEMBER 31, 1996 $ 3,100 $ 3,771 $ 5,463 $ 27,578 $ 16 $ (24) $ 39,904
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995 and 1994
(In thousands) 1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,166 $ 3,924 $ 3,434
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 147 280 168
Depreciation, amortization and accretion, net 1,251 1,231 1,503
Loss on sales of securities, net 9 - 4
Gain on sale of loans held for sale, net (322) (126) (22)
Deferred income taxes (77) (110) 158
(Increase) decrease in accrued interest receivable (832) (468) 158
Increase in accrued interest payable 76 566 170
Origination of mortgage loans held for sale (21,139) (10,592) (4,307)
Proceeds from sale of mortgage loans held for sale 21,113 11,055 5,021
(Increase) decrease in other assets (1,300) 394 365
Increase (decrease) in other liabilities 310 (290) (946)
Net cash provided by operating activities 3,402 5,864 5,706
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of mortgage servicing rights (196) - -
Purchases of premises and equipment (2,036) (891) (455)
Net increase in loans (41,142) (25,262) (29,438)
Proceeds from sales of:
Securities available-for-sale 31,667 487 21,232
Proceeds from maturities of:
Securities available-for-sale 32,894 19,905 4,274
Securities held-to-maturity 580 12,549 31,631
Purchases of:
Securities available-for-sale (59,366) (16,200) (22,636)
Securities held-to-maturity (680) (6,161) (14,975)
Net decrease in interest bearing deposits - - 2,776
Purchase of financial organization, net of cash received - - (6,706)
Net cash used in investing activities (38,279) (15,573) (14,297)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 16,797 7,311 (6,829)
Increase in securities sold under agreements to repurchase 1,545 1,225 9,960
Increase in Federal Home Loan Bank advances 20,726 8,200 -
(Decrease) in federal funds purchased - (500) -
Repayment of long-term debt (1,000) (500) (300)
Proceeds from long-term debt - - 3,000
Proceeds from issuance of common stock 1,093 - -
Dividends paid on preferred stock (32) (58) (286)
Dividends paid on common stock (436) (387) (658)
Net cash provided by financing activities 38,693 15,291 4,887
Increase (decrease) in cash and cash equivalents 3,816 5,582 (3,704)
Cash and cash equivalents at beginning of year 23,295 17,713 21,417
Cash and cash equivalents at end of year $27,111 $23,295 $17,713
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest paid $17,969 $17,291 $12,306
Income taxes 2,080 1,900 1,400
Loans transferred to real estate owned 290 182 264
Dividends reinvested in common shares 592 503 -
See accompanying notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
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. ("Registrant") and its wholly owned
subsidiaries: First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank");
Heartland Savings Bank ("Heartland"); and Mid-Illinois Data Services, Inc.
("MIDS"). All significant intercompany balances and transactions have been
eliminated in consolidation. Certain amounts in the 1995 and 1994
consolidated financial statements have been reclassified to conform with the
1996 presentation. The accounting and reporting policies of the Registrant
conform to generally accepted accounting principles and to general practices
within the banking industry. The following is a description of the more
significant of these policies.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 Registrant 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
Registrant'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 Registrant has no securities designated as trading.
Held-to-maturity securities are recorded at cost adjusted for amortization
of premium and accretion of discount 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 market 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.
Realized gains and losses on the sale of investment securities are recorded
using the specific identification method.
LOANS
Loans are stated at the principal amount outstanding less unearned discount,
net of the allowance for loan losses. Interest on substantially all loans
is credited to income based on the principal amount outstanding.
The Registrant's policy is to generally discontinue the accrual of interest
income on any loan for which principal or interest is 90 days past due and
when, in the opinion of management, there is reasonable doubt as to the
timely collectibility of interest or principal. Nonaccrual loans are
returned to accrual status when, in the opinion of management, the financial
position of the borrower indicates there is no longer any reasonable doubt
as to the timely collectibility of interest or principal.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level deemed appropriate by
management to provide for known and inherent risks 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 which are deemed to be
uncollectible are charged to the allowance. The provision for loan losses
and recoveries are credited to the allowance.
The Registrant adopted Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan", as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosure", on January 1, 1995. Management, considering current
information and events regarding the borrower's ability to repay their
obligations, considers a loan to be impaired when it is probable that the
Registrant 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. 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.
INTANGIBLE ASSETS
Intangible assets generally arise from business combinations which the
Registrant accounted for as purchases. Such assets consist of the excess of
the purchase price over the fair market value of net assets acquired,
specific amounts assigned to core deposit relationships of acquired
businesses. Intangible assets are amortized by the straight-line and
accelerated methods over various periods of up to 15 years. The Registrant
assesses the recoverability of its intangible assets through reviews of
various economic factors on a periodic basis in determining whether
impairment, if any, exists.
PREFERRED STOCK
In connection with the Registrant's acquisition of Heartland in 1992, $3.1
million of Series A perpetual, cumulative, non-voting, convertible,
preferred stock was issued to directors and certain senior officers of the
Registrant pursuant to a private placement. 620 shares of the preferred
stock were sold at a stated value of $5,000 per share with such shares
bearing a dividend rate of 9.25%. The preferred stock may be converted at
any time, at the option of the preferred stockholder, into common shares at
the conversion ratio of 202.1 shares of common stock for each share of
preferred. The Registrant also has the right, any time after July 1, 1998,
and upon giving at least thirty days prior notice, to redeem all (but not
less than all) of the preferred stock at a cash value of $5,000 per share
plus any accrued but unpaid dividends. The Registrant also has the right at
any time after July 1, 1998, and upon giving at least thirty days prior
notice, to require the conversion of all (but not less than all) of the
preferred stock into common stock at the conversion ratio.
MORTGAGE BANKING ACTIVITIES
Heartland originates residential mortgage loans both for its portfolio and
for sale into the secondary market, generally with servicing rights
retained. Included in mortgage banking income are gains or losses on the
sale of loans and servicing fee income. Origination costs for loans sold
are expensed as incurred. Loans that are originated and held for sale are
carried at the lower of aggregate amortized cost or estimated market value.
Gains or losses from loan sales are computed using the specific
identification method and are included in mortgage banking income in the
Consolidated Statements of Income.
Effective January 1, 1996, the Registrant adopted Financial Accounting
Standards Board's Statement No. 122, "ACCOUNTING FOR MORTGAGE SERVICING
RIGHTS AN AMENDMENT OF FASB STATEMENT NO. 65," ("SFAS 122") which requires
the recognition as separate assets the rights to service mortgage loans for
others, however those rights are acquired. Originated Mortgage Servicing
Rights ("OMSRs") are amortized in proportion to and over the period of
estimated net servicing income. During 1996, $196,000 of mortgage servicing
rights were capitalized with $50,000 of amortization expense being incurred.
INCOME TAXES
The Registrant 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
carryforwards. 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 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 Registrant or its subsidiaries.
EARNINGS PER SHARE
Income for primary earnings per common share is adjusted for dividends
attributable to preferred stock. Primary earnings per common share is based
on the weighted average number of common shares outstanding. Fully diluted
earnings per share data is computed by using the weighted average number of
common shares outstanding, increased by the assumed conversion of the
convertible preferred stock.
The weighted average number of common equivalent shares used in calculating
earnings per share were as follows:
1996 1995 1994
Primary 920,460 887,370 876,769
Fully diluted 1,045,762 1,012,672 1,002,071
NOTE 2 - ACQUISITION
On October 4, 1994, the First Mid Bank acquired all of the outstanding stock
of Downstate Bancshares, Inc. ("DBI") which owned 100% of the stock of
Downstate National Bank ("DNB"). DNB had locations in Altamont and
Effingham, Illinois. Immediately following the acquisition, DBI was
dissolved and DNB was merged with and into the First Mid Bank with the
First Mid Bank being the surviving entity.
DBI was purchased for cash of $8,570,0000, with $5,570,000 of that amount
being internally generated funds and $3,000,000 resulting from additional
long-term borrowings of the Registrant.
The acquisition of DBI by the First Mid Bank was accounted for using the
purchase method of accounting whereby the assets and liabilities of DBI were
recorded at their fair values as of the acquisition date and the operating
results of DBI operations have been combined with those of the Registrant
since October 4, 1994.
NOTE 3 - CASH AND DUE FROM BANKS
Aggregate cash and due from bank balances of $8,263,000 and $5,881,000 at
December 31, 1996 and 1995, respectively, 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 for available-for-sale and held-to-maturity securities by major
security type at December 31, 1996 and 1995 were as follows (in thousands):
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1996 COST GAINS LOSSES VALUE
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $ 86,518 $ 342 $ (585) $ 86,275
Obligations of states and political
subdivisions 7,917 249 (3) 8,163
Mortgage-backed securities 15,283 103 (82) 15,304
Federal Home Loan Bank stock 3,878 - - 3,878
Other securities 407 - - 407
Total available-for-sale $114,003 $ 694 $ (670) $114,027
Held-to-maturity:
Obligations of states and political
subdivisions $ 3,481 $ 28 $ (18) $ 3,491
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1995 COST GAINS LOSSES VALUE
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $ 72,599 $ 481 $ (683) $ 72,397
Obligations of states and political
subdivisions 8,628 440 (7) 9,061
Mortgage-backed securities 35,766 222 (163) 35,825
Federal Home Loan Bank stock 1,699 - - 1,699
Other securities 406 - - 406
Total available-for-sale $ 119,098 $ 1,143 $ (853) $ 119,388
Held-to-maturity:
Obligations of states and political
Subdivisions $ 3,381 $ 43 $ (15) $ 3,409
Proceeds from sales of investment securities and realized gains and losses
were as follows during the three years ended December 31, 1996, 1995 and
1994 (in thousands):
1996 1995 1994
Proceeds from sales $ 31,667 $ 487 $ 21,232
Gains 155 - 157
Losses 164 - 161
Maturities of investment securities were as follows at December 31, 1996 (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 $ 12,433 $ 12,390
Due after one-five years 61,717 61,965
Due after five-ten years 19,170 18,962
Due after ten years 5,400 5,405
98,720 98,722
Mortgage-backed securities 15,283 15,304
Total available-for-sale $114,003 $114,027
Held-to-maturity:
Due in one year or less $ 620 $ 623
Due after one-five years 2,088 2,088
Due after five-ten years 308 315
Due after ten-years 465 465
Total held-to-maturity $ 3,481 $ 3,491
Total $117,484 $117,518
Investment securities carried at approximately $90,523,000 and $88,030,000
at December 31, 1996 and 1995 respectively, were pledged to secure public
deposits and repurchase agreements and for other purposes as permitted or
required by law.
In December 1995, the Registrant reclassified certain investment securities
between held-to-maturity and available-for-sale in accordance with
guidelines issued by the Financial Accounting Standards Board ("FASB")
permitting a one-time change in classification. Based on discussion and
analysis, the Registrant decided that only local, non-rated municipal
securities would be classified as held-to-maturity and the remaining
portfolio would be designated as available-for-sale. The book value and
gross unrealized loss of securities transferred from held-to-maturity to
available-for-sale amounted to $52,536,000 and $445,000, respectively.
NOTE 5 - LOANS
A summary of loans at December 31, 1996 and 1995 follows (in thousands):
1996 1995
Commercial, financial and agricultural $ 75,097 $ 66,027
Real estate-mortgage 241,240 211,147
Installment 31,546 28,985
Other 1,526 1,945
Total gross loans 349,409 308,104
Less unearned discount 1,192 1,100
Net loans $348,217 $307,004
Certain officers, directors and principal stockholders of the Registrant 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 which exceeded $60,000 in the aggregate totaled
$7,852,000 at December 31, 1996 and $10,060,000 at December 31, 1995.
Activity during 1996 was as follows (in thousands):
Balance at December 31, 1995 $10,060
New loans 3,588
Loan repayments (5,796)
Balance at December 31, 1996 $ 7,852
The aggregate principal balances of nonaccrual, past due and renegotiated
loans were as follows at December 31, 1996 and 1995(in thousands):
1996 1995
Nonaccrual loans $790 $636
Loans past due ninety days or more and still accruing 575 554
Renegotiated loans which are performing
in accordance with revised terms 580 604
The interest income which would have been recorded under the original terms
of such nonaccrual or renegotiated loans totaled $143,000, $143,000 and
$100,000 in 1996, 1995 and 1994, respectively. The amount of interest
income which was recorded amounted to $39,000 in 1996, $56,000 in 1995 and
$37,000 in 1994.
Impaired loans are defined as those loans where it is probable that amounts
due according to contractual terms, including principal and interest, will
not be collected. Both nonaccrual and restructured loans meet this
definition. Impaired loans are measured by the Registrant at the present
value of expected future cash flows or, alternatively if the loan is
collateral dependant, at the fair value of the collateral. Known losses of
principal on these loans have been charged off. Interest income on
nonaccrual loans is recognized only at the time cash is received. Interest
income on restructured loans is accrued according to the most recently
agreed upon contractual terms.
The recorded investment of impaired loans totaled $1,370,000 at December 31,
1996 and $1,240,000 at December 31, 1995. There was no related allowance
for these impaired loans at December 31, 1996 or 1995. The average recorded
investment in impaired loans during the year was $1,105,000 in 1996 and
$1,076,000 for 1995. Total interest income which would have been recorded
under the original terms of the impaired loans was $143,000 in 1996 and
$143,000 in 1995. Total interest income recorded on a cash basis was
$39,000 and $56,000 for 1996 and 1995, respectively.
The Bank Subsidiaries enter into financial instruments with off-balance
sheet risk to meet the financing needs of their customers. These financial
instruments include commitments to extend credit in accordance with line of
credit agreements and/or mortgage commitments and standby letters of credit.
Standby letters of credit are conditional commitments issued by a bank to
guarantee the performance of a customer to a third-party. The subsidiaries
evaluate each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the subsidiaries upon
an extension of credit, is based on management's evaluation of the credit
worthiness of the borrower. Collateral varies but generally includes assets
such as property, equipment and receivables. At December 31, 1996 and 1995,
respectively, the Registrant had $34,620,000 and $29,070,000 of outstanding
commitments to extend credit and $1,182,000 and $1,242,000 of standby
letters of credit. Management does not believe that any significant losses
will be incurred in connection with such instruments.
Most of the Registrant's business activities are with customers located
within east central Illinois. At December 31, 1996 and 1995, the
Registrant's loan portfolio included $46,366,000 and $39,720,000,
respectively, of loans to borrowers directly related to the agricultural
industry.
Mortgage loans serviced for others by Heartland are not included in the
accompanying consolidated balance sheets. The unpaid principal balances of
these loans at December 31, 1996, 1995 and 1994 was approximately
$57,031,000, $43,622,000 and $39,193,000, 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, 1996 (in thousands):
1996 1995 1994
Balance, beginning of year $2,814 $2,608 $2,110
Allowance of purchased subsidiary
at date of acquisition - - 343
Provision for loan losses 147 280 168
Recoveries 98 112 164
Charge offs (375) (186) (177)
Balance, end of year $2,684 $2,814 $2,608
NOTE 7 - PREMISES AND EQUIPMENT, NET
Premises and equipment at December 31, 1996 and 1995 consisted of (in
thousands):
1996 1995
Land $ 2,555 $ 2,489
Buildings and improvements 7,738 7,679
Furniture and equipment 6,302 4,881
Leasehold improvements 353 340
Construction in progress 137 78
Subtotal 17,085 15,467
Accumulated depreciation and amortization 6,350 5,980
Total $10,735 $ 9,487
Depreciation expense was $788,000, $740,000 and $672,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
NOTE 8 - INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, at December 31, 1996 and
1995 consisted of (in thousands):
1996 1995
Excess of cost over fair market value of
acquired subsidiaries $ 4,391 $ 4,742
Core deposit premium of acquired subsidiaries 1,081 1,277
Total $ 5,472 $ 6,019
Amortization expense was $547,000, $608,000 and $358,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
NOTE 9 - DEPOSITS
Total interest expense on deposits for the years ended December 31, 1996,
1995 and 1994 was as follows (in thousands):
1996 1995 1994
Interest-bearing demand $ 3,085 $ 2,823 $ 2,764
Savings 1,069 1,107 1,009
Time 11,156 10,958 7,298
Total $15,310 $14,888 $11,071
As of December 31, 1996, 1995 and 1994, 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):
1996 1995 1994
Outstanding $36,746 $35,002 $26,451
Interest expense for the year 2,108 1,963 963
NOTE 10 - OTHER BORROWINGS
As of December 31, 1996 and 1995 other borrowings consisted of (in thousands):
1996 1995
Securities sold under agreements to repurchase $18,360 $16,815
Federal Home Loan Bank advances:
Overnight advances 19,733 2,200
Fixed term advances due in one year or less 11,693 6,000
Fixed term advances due after one year 1,000 3,500
Federal funds purchased - -
$50,786 $28,515
1996 1995 1994
Securities sold under agreements to repurchase:
Maximum outstanding at any month-end $18,860 $21,200 $15,980
Average amount outstanding for the year 12,411 16,481 9,697
The First Mid Bank and Heartland have collateral pledge agreements whereby
they have agreed to keep on hand at all time, free of all other pledges,
liens, and encumbrances, whole first mortgages on improved residential
property with unpaid principal balances aggregating no less than 167% of the
outstanding advances from the Federal Home Loan Bank. The securities
underlying the repurchase agreements are under the Registrant's control.
NOTE 11 - LONG-TERM DEBT
A summary of long-term debt at December 31, 1996 and 1995 was as follows (in
thousands):
1996 1995
Floating rate loan at 1.5% over the Federal funds rate.
Interest due quarterly. Principal payments due quarterly
in various amounts beginning September 30, 1995.
The debt matures September 30, 1999.
Effective interest rate of 7.27% at December 31, 1996. $6,200 $ 7,200
The loan is secured by all of the common stock of the Bank Subsidiaries.
The borrowing agreement contains requirements for the Registrant and the
Bank Subsidiaries 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 Registrant and the subsidiaries were in compliance with
the existing covenants a December 31, 1996. The scheduled principal
payments on the outstanding long-term debt are as follows (in thousands):
1997 1,125
1998 1,500
1999 3,575
NOTE 12 - REGULATORY CAPITAL
The Registrant 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 Office of the Comptroller of the Currency and
Heartland is regulated by the FDIC and the Office of the Commissioner of
Banks & Real Estate. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary action by
regulators that, if undertaken, could have a direct material effect on the
Registrant'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, 1996, that all capital adequacy
requirements have been met.
As of December 31, 1996, the most recent notification from the primary
regulators categorized the Registrant, First Mid Bank and Heartland as well
capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios must be maintained as set forth in the
table. There are no conditions or events since that notification that
management believes have changed these categories.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
DECEMBER 31, 1996
Total Capital
(to risk-weighted assets)
Registrant $ 37,106 11.80% $ 25,156 > 8.00% $ 31,433 > 10.00%
First Mid Bank 33,670 12.57 21,427 > 8.00 26,783 > 10.00
Heartland 6,957 16.00 3,479 > 8.00 4,348 > 10.00
Tier 1 Capital
(to risk-weighted assets)
Registrant 34,422 10.95 12,573 > 4.00 18,860 > 6.00
First Mid Bank 31,335 11.70 10,713 > 4.00 16,070 > 6.00
Heartland 6,608 15.20 1,739 > 4.00 2,609 > 6.00
Tier 1 Capital
(to average assets)
Registrant 34,422 6.81 20,213 > 4.00 25,267 > 5.00
First Mid Bank 31,335 7.65 16,380 > 4.00 20,475 > 5.00
Heartland 6,608 7.01 3,772 > 4.00 4,715 > 5.00
NOTE 13 - DISCLOSURE OF FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures
about Fair Value of Financial Instruments", requires the disclosure of the
estimated fair value of financial instrument assets and liabilities. For
the Registrant, as for most financial institutions, most of the assets and
liabilities are considered financial instruments as defined in SFAS 107.
However, many of the Registrant's financial instruments lack an available
trading market as characterized by a willing buyer and seller engaging in an
exchange transaction. Additionally, the Registrant's general practice and
intent is to hold its financial instruments until maturity and not to engage
in trading or sales activity. Accordingly, significant assumptions and
estimations as well as present value calculations were used by the
Registrant for purposes of the SFAS 107 disclosure. Future changes in these
assumptions or methodologies may have a material effect on estimated fair
values.
Estimated fair values have been determined by the Registrant 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, 1996 and 1995
were as follows (in thousands):
Financial instruments for which an active secondary market exists have been
valued using quoted available market prices.
1996 1996 1995 1995
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
Cash and cash equivalents $ 27,111 $ 27,111 $ 23,295 $ 23,295
Interest bearing deposits
with financial institutions 99 99 99 99
Investments available-for-sale 114,027 114,027 119,388 119,388
Investments held-to-maturity 3,491 3,481 3,409 3,381
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.
1996 1996 1995 1995
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
Deposits with stated maturities $200,401 $200,270 $206,062 $204,844
Securities sold under agreements
to repurchase 18,319 18,360 16,839 16,815
Federal Home Loan Bank advances 32,364 32,426 11,717 11,700
Financial instrument liabilities without stated maturities and floating rate
long-term debt have estimated fair values equal to both the amount payable
on demand and the carrying amount.
1996 1996 1995 1995
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
Deposits with no stated
maturity $213,406 $213,406 $192,035 $192,035
Floating rate long-term debt 6,200 6,200 7,200 7,200
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.
1996 1996 1995 1995
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
Net loan portfolio $345,216 $345,533 $304,038 $304,190
The notional amount of off-balance sheet items such as unfunded loan
commitments and stand-by letters of credit generally approximate their
estimated fair values.
NOTE 14 - RETIREMENT PLAN
The Registrant 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 Registrant 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 $309,000, $285,000 and $270,000 in 1996, 1995 and 1994, respectively.
NOTE 15 - INCOME TAXES
The components of Federal and State income taxes (benefit) for the years
ended December 31, 1996, 1995 and 1994 were as follows (in thousands):
1996 1995 1994
Current
Federal $2,134 $1,940 $1,292
State 206 - -
Total Current 2,340 1,940 1,292
Deferred
Federal (66) (110) 158
State (11) - -
Total Deferred (77) (110) 158
Total $2,263 $1,830 $1,450
Recorded income tax expense differs from the expected tax expense (computed
by applying the applicable statutory U.S. Federal tax rate of 34% to income
before income taxes). The principle reasons for this difference are as
follows (in thousands):
1996 1995 1994
Expected income taxes $2,186 $1,956 $1,661
Effects of:
Tax-exempt income (235) (276) (317)
Nondeductible interest expense 28 29 28
Goodwill amortization 120 120 35
State deduction, net of federal taxes 129 - -
Other items, net 35 1 43
Total $2,263 $1,830 $1,450
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, 1996 and 1995 are presented below (in thousands):
1996 1995
Deferred tax assets:
Allowance for loan losses $ 423 $ 479
Employee benefits 114 166
Other, net 316 193
Total gross deferred tax assets 853 838
Less valuation allowance - (149)
Net deferred tax assets $ 853 $ 689
Deferred tax liabilities:
Depreciation $ 469 $ 415
Available-for-sale investment securities 8 99
Purchase accounting 144 160
Other, net 147 70
Total gross deferred tax liabilities $ 768 $ 744
Net deferred tax assets (liabilities) $ 85 $ (55)
Deferred tax assets and deferred tax liabilities are recorded in other
assets and other liabilities, respectively, on the consolidated balance
sheets. The valuation allowance was eliminated at December 31, 1996 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 the Banking
Subsidiaries to pay dividends to the Registrant. At December 31, 1996,
regulatory approval would have been required for aggregate dividends from
the Bank Subsidiaries to the Registrant in excess of approximately $3.9
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
In the normal course of business, there are various outstanding commitments
and contingent liabilities such as guarantees, commitments to extend credit,
claims and legal actions which are not reflected in the accompanying
consolidated financial statements. In the opinion of management, no
significant losses are anticipated as a result of these matters.
NOTE 18 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
FIRST MID-ILLINOIS BANCSHARES, INC. (PARENT COMPANY)
Presented below are condensed balance sheets, statements of income and
cash flows for the Parent Company (in thousands):
BALANCE SHEETS:
DECEMBER 31, 1996 1995
Assets
Cash $ 786 $ 724
Premises and equipment, net 62 68
Investment in subsidiaries 43,956 42,045
Other assets 2,445 927
Total assets $47,249 $43,764
Liabilities and stockholders' equity
Liabilities:
Dividends payable $ 442 $ 420
Long-term debt 6,200 7,200
Other liabilities 703 835
Total liabilities 7,345 8,455
Stockholders' equity 39,904 35,309
Total liabilities and stockholders' equity $47,249 $43,764
STATEMENTS OF INCOME:
YEARS ENDED DECEMBER 31, 1996 1995 1994
Income:
Dividends from subsidiaries $ 2,737 $ 1,369 $ 1,825
Other income 48 25 62
2,785 1,394 1,887
Operating expenses 1,037 1,266 1,127
Income before income taxes and equity in
undistributed earnings of subsidiaries 1,748 128 760
Income tax benefit 332 402 342
Income before equity in undistributed
earnings of subsidiaries 2,080 530 1,102
Equity in undistributed earnings of subsidiaries 2,086 3,394 2,332
Net income $ 4,166 $ 3,924 $ 3,434
STATEMENTS OF CASH FLOWS:
YEARS ENDED DECEMBER 31, 1996 1995 1994
Cash flows from operating activities:
Net income $ 4,166 $ 3,924 $ 3,434
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization and accretion, net 8 5 33
Equity in undistributed earnings of
subsidiaries (2,086) (3,394) (2,332)
(Increase) decrease in other assets (1,515) (93) 305
Increase (decrease) in other liabilities (132) 331 2
Net cash provided by operating activities 441 773 1,442
Cash flows from investing activities:
Investment in subsidiaries - - (3,000)
(Purchases) sales of equipment (6) (18) 27
Net cash used in investment activities (6) (18) (2,973)
Cash flows from financing activities:
Repayment of long-term debt (1,000) (500) (300)
Proceeds from long-term borrowings - - 3,000
Proceeds from issuance of common stock 1,095 - -
Dividends paid on preferred stock (32) (58) (286)
Dividends paid on common stock (436) (387) (658)
Net cash provided by (used in) financing
activities (373) (945) 1,756
Increase (decrease) in cash 62 (190) 225
Cash at beginning of year 724 914 689
Cash at end of year $ 786 $ 724 $ 914
STATEMENT OF RESPONSIBILITY FOR FINANCIAL DATA
Management is responsible for the integrity of all the financial data
included in this Annual Report. The financial statements and related notes
are prepared in accordance with generally accepted accounting principles,
which in the judgement of management are appropriate in the circumstances.
Financial information elsewhere in this Report is consistent with that in
the financial statements.
Management maintains a system of internal accounting control, including an
internal audit program, which provides reasonable assurance that assets are
safeguarded against loss from unauthorized use or disposition, transactions
are properly authorized and accounting records are reliable for the
preparation of financial statements. The foundation of the system of
internal accounting control rests upon careful selection and training of
personnel, segregation of responsibilities and application of formal
policies and procedures that are consistent with the highest standards of
business conduct. The system of internal accounting control is being
continuously modified and improved in response to changes in business
conditions and operations.
The Board of Directors has an Audit Committee comprised of six outside
directors. The Committee meets periodically with the independent auditors,
the internal auditors and management to ensure that the system of internal
accounting control is being properly administered and that financial data is
being properly reported. The Committee reviews the scope and timing of both
the internal and external audits, including recommendations made with
respect to the system of internal accounting control by the independent
auditors.
The consolidated financial statements, as identified in the accompanying
Independent Auditors' Report, have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The audits were conducted in
accordance with generally accepted auditing standards, which included tests
of the accounting records and other auditing procedures considered necessary
to formulate an opinion as to the fairness, in all material respects, of the
consolidated financial statements.
Daniel E. Marvin, Jr. William S. Rowland
Chairman and Chief Chief Financial Officer
Executive Officer
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Mid-Illinois Bancshares, Inc.
Mattoon, Illinois:
We have audited the accompanying consolidated balance sheets of First
Mid-Illinois Bancshares, Inc. and subsidiaries as of December 31, 1996 and
1995, 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, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Mid-Illinois Bancshares, Inc. and subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1996 in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 24, 1997
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
"Election of Directors" on pages 2 through 3 of the 1997 Proxy Statement is
incorporated by reference.
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Registrant's executive officers and directors and persons who own more than
10% of the Registrant's Common Stock file reports of ownership and changes
in ownership with the Securities and Exchange Commission and with the
exchange on which the Registrant's shares of Common Stock are traded. Such
persons are also required to furnish the Registrant with copies of all
Section 16(a) forms they file. Based solely on the Registrant's review of
the copies of such forms, the Registrant is not aware that any of its
directors and executive officers or 10% stockholders failed to comply with
the filing requirements of Section 16(a) during the period commencing
January 1, 1996 and ending December 31, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Registrant are identified below. The
executive officers of the Registrant are elected annually by the
Registrant's Board of Directors.
Name (Age) Position With Registrant
Daniel E. Marvin, Jr. (57) Chairman of the Board of Directors,
President and Chief Executive Officer
William S. Rowland (50) Director, Chief Financial Officer,
Secretary and Treasurer
John R. Kuczynski (43) Vice President, Trust and Farm
Stanley E. Gilliland (52) Vice President, Lending
Alfred M. Wooleyhan, Jr. (49) Vice President, Development
Daniel E. Marvin, Jr., age 57, has been Chairman of the Board of Directors,
President and Chief Executive Officer of the Registrant and the First Mid
Bank since 1983, and has been Vice Chairman of the Board of Directors of
Heartland since 1992. He was appointed president of Heartland in 1994.
William S. Rowland, age 50, has served as a director of the Registrant since
1991, has been Chief Financial Officer since 1989 and has served as
Secretary/Treasurer since 1991. Since 1989 Mr. Rowland has been Executive
Vice President, Finance of First Mid Bank and has also served as a director
of MIDS since 1989, and as a director of Heartland since 1992. Mr. Rowland
was in the Davenport, Iowa, office of KPMG Peat Marwick from 1975-1989.
John R. Kuczynski, age 43, has been Vice President of the Trust and Farm
Department of the Registrant since June 1996. Mr. Kuczynski was a Sr. Vice
President and Trust Officer for the Amcore Trust Company in Sterling,
Illinois, from 1980 - 1996.
Stanley E. Gilliland, age 52, has been Vice President of Lending of the
Registrant since 1985, and has been Executive Vice President of Lending for
First Mid Bank since 1990. Mr. Gilliland is also a director and member of
the Loan Committee of Heartland.
Alfred M. Wooleyhan, Jr., age 49, has been Vice President of Development of
the Registrant since the beginning of 1995. Mr. Wooleyhan was the President
of the Charleston Business Unit of First Mid Bank from 1989-1995.
ITEM 11. EXECUTIVE COMPENSATION
"Remuneration of Executive Officers," "Retirement Benefits" and
"Transactions with Management" on pages 4 through 6 of the 1997 Proxy
Statement are incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Security Ownership of Certain Beneficial Owners" and "Security Ownership of
Management" on pages 8 through 9 of the 1997 Proxy Statement are
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
"Transactions with Management" on page 4 of the 1997 Proxy Statement is
incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2) -- Financial Statements and Financial Statement Schedules
The following consolidated financial statements and financial statement
schedules of the Registrant are filed as part of this document under Item 8.
Financial Statements and Supplementary Data:
Consolidated Balance Sheets -- December 31, 1996 and 1995
Consolidated Statements of Income -- For the Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity -- For the
Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows -- For the Years Ended
December 31, 1996, 1995 and 1994
(a)(3) -- Exhibits
(a)(3) -- The exhibits required by Item 601 of Regulation S-K and filed
herewith are listed in the exhibit Index which follows the Signature Page
and immediately precedes the exhibits filed.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the quarter
ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized on this 18
day of March 1997.
FIRST MID-ILLINOIS BANCSHARES, INC.
(Registrant)
/s/ Daniel E. Marvin, Jr.
*-------------------------------------*
Daniel E. Marvin, Jr.
President and Chief Executive Officer
/s/ William S. Rowland
*-------------------------------------*
William S. Rowland
Chief Financial Officer
Dated: March 18, 1997
*---------------------*
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 18th day of March by the following
persons on behalf of the Registrant and in the capacities.
SIGNATURE AND TITLE
by /s/ Daniel E. Marvin, Jr.
Daniel E. Marvin, Jr.
(Principal Executive Officer) and Director
by /s/ William S. Rowland
William S. Rowland
(Principal Financial Officer) and Director
by /s/ Charles A. Adams
Charles A. Adams
Director
by
Kenneth R. Diepholz
Director
by
Richard A. Lumpkin
Director
by /s/ Gary W. Melvin
Gary W. Melvin
Director
by /s/ William G. Roley
William G. Roley
Director
by /s/ Ray A. Sparks
Ray A. Sparks
Director
EXHIBIT INDEX TO FORM 10-K REGISTRATION STATEMENT
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.
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. 0-13688)
3.2 RESTATED BYLAWS OF FIRST MID-ILLINOIS BANCSHARES, INC.
Exhibit 3(b) to First Mid-Illinois Bancshares, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1987 (File No 0-13368)
11.1 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(Filed herewith)
21.1 SUBSIDIARIES OF THE REGISTRANT
(Filed herewith)
23.1 CONSENT OF KPMG PEAT MARWICK LLP
(Filed herewith)
27.1 FINANCIAL DATA SCHEDULE
(Filed herewith)
99.1 PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF STOCKHOLDERS
(Filed herewith)
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
First Mid-Illinois Bancshares, Inc.
RE: Registration Statements
Registration No. 33-84404 on Form S-3
Registration No. 33-64061 on Form S-8
Registration No. 33-64139 on Form S-8
We consent to incorporation by reference in the subject Registration
Statements on Forms S-3 and S-8 of First Mid-Illinois Bancshares, Inc. of
our report dated January 24, 1997, relating to the consolidated balance
sheets of First Mid-Illinois Bancshares, Inc. and subsidiaries as of
December 31, 1996 and 1995, 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, 1996, which report is
incorporated by reference in the December 31, 1996 annual report on Form
10-K of First Mid-Illinois Bancshares, Inc.
KPMG Peat Marwick LLP
Chicago, Illinois
March 20, 1997
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities and Exchange
Act of 1934
Filed by the Registrant {X}
Filed by a Party other than the Registrant { }
Check the appropriate box:
{X} Preliminary Proxy Statement
{ } Confidential, for use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
{ } Definitive Proxy Statement
{ } Definitive Additional Materials
{ } Soliticiting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
First Mid-Illinois Bancshares, Inc.
(Name of Registrant as specified in its Charter)
Not applicable
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box)
{X} No fee required
{ } Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transactions applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
{ } Fee paid previously with preliminary materials
{ } Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identifying the filing for which the offsetting fee
was paid previously. Identiry the previous filing by registration
statement number, or the form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
First Mid-Illinois Bancshares, Inc.
April 16, 1997
Dear Fellow Stockholder:
On behalf of the Board of Directors and management of First Mid-Illinois
Bancshares, Inc., I cordially invite you to attend the Annual Meeting of
Stockholders of First Mid-Illinois Bancshares, Inc. to be held at 11:00 a.m.
on May 21, 1997, at the Ramada Inn located at 300 Broadway Avenue, Mattoon,
Illinois. The accompanying Notice of Annual Meeting of Stockholders and Proxy
Statement discuss the business to be conducted at the meeting. We have also
enclosed a copy of the Company's 1996 Annual Report to Stockholders. At the
meeting we shall report on Company operations and the outlook for the year
ahead.
Your Board of Directors has also nominated three persons to serve as
Class II directors. Each of the nominees are incumbent directors. In
addition, the Company's management has selected and recommends that you ratify
the selection of KPMG Peat Marwick LLP to continue as the Company's
independent public accountants for the year ending December 31, 1997.
We are also pleased to announce that the Company's Board of Directors has
put forth a special matter for consideration at this year's annual meeting.
As a result of the Company's continued growth, the Board has announced its
intention to declare a two-for-one stock split in the form of a stock
dividend. In order to have sufficient shares of common stock available for
the special stock dividend, the Board has proposed increasing the number of
authorized shares of common stock of the Company. The proposal to amend the
Company's Restated Certificate of Incorporation in this regard is described in
the accompanying Proxy Statement. The Board is very proud of the Company's
performance and recommends that stockholders vote in favor of the proposed
amendment.
We recommend that you vote your shares for the director nominees and in
favor of the proposals.
I encourage you to attend the meeting in person. WHETHER OR NOT YOU PLAN
TO ATTEND, HOWEVER, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND
RETURN IT IN THE ACCOMPANYING POSTPAID RETURN ENVELOPE AS PROMPTLY AS
POSSIBLE. This will ensure that your shares are represented at the meeting.
If you have any questions concerning these matters, please do not
hesitate to contact me at (217) 234-7454. We look forward with pleasure to
seeing and visiting with you at the meeting.
Very truly yours,
FIRST MID-ILLINOIS BANCSHARES, INC.
Daniel E. Marvin, Jr.
CHAIRMAN
NOTICE OF
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 21, 1997
FIRST MID-ILLINOIS BANCSHARES, INC.
1515 CHARLESTON AVENUE
P.O. BOX 499
MATTOON, ILLINOIS 61938
(217) 234-7454
To the stockholders of
FIRST MID-ILLINOIS BANCSHARES, INC.
The Annual Meeting of the Stockholders of First Mid-Illinois Bancshares,
Inc., a Delaware corporation (the "Company"), will be held at the RAMADA INN,
300 BROADWAY AVENUE, EAST IN ROOMS A, B AND C, Mattoon, Illinois, on
Wednesday, May 21, 1997, at 11:00 a.m., local time, for the following
purposes:
1. to elect three Class II directors for a term of three years.
2. to amend Article IV of the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of Common
Stock, $4.00 par value per share, from 2,000,000 to 6,000,000
shares.
3. to approve the appointment of KPMG Peat Marwick LLP as independent
public accountants for the Company for the fiscal year ending
December 31, 1997.
4. to transact such other business as may properly be brought before
the meeting and any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on April 1, 1997,
as the record date for the determination of stockholders entitled to notice
of, and to vote at, the meeting.
By order of the Board of Directors
Daniel E. Marvin, Jr.
Chairman
Mattoon, Illinois
April 16, 1997
FIRST MID-ILLINOIS BANCSHARES, INC.
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of First Mid-Illinois Bancshares, Inc. (the "Company")
of proxies to be voted at the Annual Meeting of Stockholders to be held at the
RAMADA INN, 300 BROADWAY AVENUE, EAST IN ROOMS A, B AND C, Mattoon, Illinois,
on Wednesday, May 21, 1997, at 11:00 a.m., local time, and at any adjournments
or postponements thereof.
The Board of Directors would like to have all stockholders represented at
the meeting. If you do not expect to be present, please sign and mail your
proxy card in the enclosed self-addressed, stamped envelope to First
Mid-Illinois Bancshares, Inc., 1515 Charleston Avenue, P.O. Box 499, Mattoon,
Illinois 61938, Attention: Mr. William S. Rowland. You have the power to
revoke your proxy at any time before it is voted, and the giving of a proxy
will not affect your right to vote in person if you attend the meeting.
The mailing address of the Company's principal executive offices is 1515
Charleston Avenue, P.O. Box 499, Mattoon, Illinois 61938. This Proxy
Statement and the accompanying proxy card are being mailed to stockholders on
or about April 16, 1997. The 1996 Annual Report of the Company, which
includes consolidated financial statements of the Company, is enclosed.
The Company is a diversified financial services company which serves the
financial needs of east central Illinois. It is the parent company of First
Mid-Illinois Bank & Trust, N.A. (the "Bank"), a regional banking entity which
has locations in Mattoon, Altamont, Arcola, Effingham, Charleston, Sullivan,
Tuscola and Neoga, Illinois. The Company is also the holding company for
Heartland Savings Bank, an Illinois savings bank located in Mattoon and
Urbana, Illinois ("Heartland"). Mid-Illinois Data Services, Inc., a data
processing company ("MIDS"), is a wholly owned nonbanking subsidiary of the
Company. The Bank, Heartland and MIDS are sometimes referred to as the
"Subsidiaries."
Only holders of record of the Company's Common Stock, par value $4.00 per
share (the "Common Stock"), at the close of business on April 1, 1997 will be
entitled to vote at the annual meeting or any adjournments or postponements of
such meeting. On April 1, 1997, the Company had 947,680 shares of Common
Stock, and 620 shares of Preferred Stock, no par value (the "Preferred
Stock"), issued and outstanding. In the election of directors, and for all
other matters to be voted upon at the annual meeting, each issued and
outstanding share of Common Stock is entitled to one vote. Stockholders voting
FOR the election of directors on the enclosed proxy will be deemed to have
given their proxy to vote for the election of all directors except as
otherwise noted on the proxy. Holders of the Preferred Stock are not
entitled to vote their Preferred Stock at the annual meeting. All shares of
Common Stock represented at the annual meeting by properly executed proxies
received prior to or at the annual meeting, and not revoked, will be voted
at the meeting in accordance with the instructions thereon. If no
instructions are indicated, properly executed proxies will be voted for the
nominees and for adoption of the proposals set forth in this Proxy Statement.
A majority of the shares of the Common Stock, present in person or
represented by proxy, shall constitute a quorum for purposes of the annual
meeting. Abstentions and broker non-votes will be counted for purposes of
determining a quorum. Directors shall be elected by a plurality of the votes
present in person or represented by proxy. Approval of the amendment to the
Company's Restated Certificate of Incorporation requires the approval of a
majority of the outstanding shares of Common Stock. In all other matters, the
affirmative vote of the majority of shares present in person or represented by
proxy at the annual meeting and entitled to vote on the subject matter shall
be required to constitute stockholder approval. Abstentions will be treated
as votes against a proposal and broker non-votes will have no effect on the
vote.
ELECTION OF DIRECTORS
At the Annual Meeting of the Stockholders to be held on May 21, 1997, the
stockholders will be entitled to elect three (3) Class II directors for a term
expiring in 2000. The directors of the Company are divided into three classes
having staggered terms of three years. Each of the nominees for election as
Class II directors are incumbent directors. The Company has no knowledge that
any of the nominees will refuse or be unable to serve, but if any of the
nominees becomes unavailable for election, the holders of the proxies reserve
the right to substitute another person of their choice as a nominee when
voting at the meeting. Set forth below is information, as of April 1, 1997,
concerning the nominees for election and for the other persons whose terms of
office will continue after the meeting, including age, year first elected a
director of the Company and business experience during the previous five years
of each. The three nominees, if elected at the annual meeting, will serve as
Class II directors for three year terms expiring in 2000.
NOMINEES
Position with the Company and
Name Director the Subsidiaries and Occupation
(AGE) SINCE FOR THE LAST FIVE YEARS
CLASS II
(TERM EXPIRES 2000)
Richard Anthony Lumpkin 1982 Director of the Bank (since 1966) and
(Age 62) of the Company; Chairman of the Board
of Consolidated Communications Inc.,
Director CIPSCO Incorporated (since
1995).
William G. Roley 1985 Director of the Bank (since 1992) and
(Age 67) of the Company; retired, former owner
of Roley Real Estate.
William S. Rowland 1991 Chief Financial Officer, Secretary
(Age 50) (since 1991), Treasurer (since 1989)
and Director of the Company; Director
of MIDS (since 1989) and of Heartland
(since 1992); Executive Vice President
of the Bank (since 1989).
CONTINUING DIRECTORS
CLASS III
(TERM EXPIRES 1998)
Charles A. Adams 1984 Director of the Bank (since 1989), of
(Age 55) MIDS (since 1987) and of the Company;
Vice President, Howell Asphalt Company
and President, Howell Paving, Inc.
Daniel E. Marvin, Jr. 1982 Chairman, President, Chief Executive
(Age 58) Officer and Director of the Company;
Director (since 1980), Chairman,
President and Chief Executive Officer
(since 1983) of the Bank; Director of
MIDS (1987-1992); Director, Chairman
(since 1992) of Heartland
Ray Anthony Sparks 1994 Director of the Company; Director of
(Age 40) Heartland (since 1992); Director of
MIDS (since 1996); President of Elasco
Agency Sales, Inc. and Electrical
Laboratories and Sales Corporation.
CLASS I
(TERM EXPIRES 1999)
Kenneth R. Diepholz 1990 Director of the Bank (since 1984) and
(Age 58) of the Company; President, Diepholz
Chevrolet, Oldsmobile, Cadillac and Geo
and Owner, D-Co Coin Laundry and
Diepholz Rentals.
Gary W. Melvin 1990 Director of the Bank (since 1984) and
(Age 47) of the Company; Director of MIDS (since
1987); Co-Owner, Rural King Stores.
ALL OF THE COMPANY'S DIRECTORS WILL HOLD OFFICE FOR THE TERMS INDICATED,
OR UNTIL THEIR RESPECTIVE SUCCESSORS ARE DULY ELECTED AND QUALIFIED, AND ALL
EXECUTIVE OFFICERS HOLD OFFICE FOR A TERM OF ONE YEAR. THERE ARE NO
ARRANGEMENTS OR UNDERSTANDINGS BETWEEN ANY OF THE DIRECTORS, EXECUTIVE
OFFICERS OR ANY OTHER PERSON PURSUANT TO WHICH ANY OF THE COMPANY'S DIRECTORS
OR EXECUTIVE OFFICERS HAVE BEEN SELECTED FOR THEIR RESPECTIVE POSITIONS.
DIRECTORS OF THE COMPANY RECEIVED A $1,800 QUARTERLY RETAINER FOR SERVING
ON THE BOARD OF DIRECTORS IN 1996, EXCEPT MR. ROWLAND WHO IS NOT SEPARATELY
COMPENSATED FOR HIS SERVICES ON THE BOARD. ADDITIONALLY, THE BANK PROVIDES A
PENSION TO CERTAIN BANK DIRECTORS WHO HAVE SERVED FOR A MINIMUM OF TEN YEARS
AND HAVE ATTAINED THE AGE OF 65 OR OLDER AND WHO WERE NOT SERVING AS AN
OFFICER OF THE BANK UPON RETIREMENT. THE PENSION IS EQUAL TO 75% OF THE
REGULAR DIRECTORS' MEETING FEES PAID TO CURRENT DIRECTORS, BASED UPON FOURTEEN
REGULAR MEETINGS IN EACH FISCAL YEAR.
BOARD COMMITTEES AND MEETINGS
The Board of Directors of the Company has established an audit committee
and a compensation committee. These committees are composed entirely of
outside directors. The Board has also created other company-wide committees
composed of officers of the Company and the Subsidiaries.
Members of the audit committee are Messrs. Adams, Diepholz, Lumpkin,
Melvin, Roley and Sparks. The audit committee reports to the Board of
Directors and has the responsibility to review and approve internal control
procedures, accounting practices and reporting activities of the Subsidiaries.
The committee also has the responsibility for establishing and maintaining
communications between the Board and the independent auditors and regulatory
agencies. The audit committee reviews with the independent auditors the scope
of their examinations, with particular emphasis on the areas to which either
the audit committee or the auditors believe special attention should be
directed. It also reviews the examination reports of regulatory agencies and
reports to the full Board regarding matters discussed therein. Finally, it
oversees the establishment and maintenance of effective controls over the
business operations of the Subsidiaries. The Audit Committee met four times
in 1996.
The members of the compensation committee are Messrs. Adams, Diepholz,
Lumpkin, Melvin, Roley and Sparks. The compensation committee reports to the
Board of Directors and has responsibility for all matters related to
compensation of executive officers of the Company, including review and
approval of base salaries, conducting a review of salaries of executive
officers compared to other financial services holding companies in the region,
fringe benefits, including modification of the retirement plan, and incentive
compensation. The compensation committee met two times in 1996.
A total of 12 regularly scheduled and special meetings were held by the
Board of Directors of the Company during 1996. During 1996, all directors
attended at least 75 percent of the meetings of the Board and the committees
on which they served.
TRANSACTIONS WITH MANAGEMENT
Directors and officers of the Company and the Subsidiaries and their
associates, were customers of and had transactions with the Company and the
Subsidiaries during 1996. Additional transactions may be expected to take
place in the future. All outstanding loans, commitments to loan, transactions
in repurchase agreements and certificates of deposit and depository
relationships, in the opinion of management, were made in the ordinary course
of business, on substantially the same terms, including interest rates and
collateral, as those prevailing at the time or comparable transactions with
other persons and did not involve more than the normal risk of collectibility
or present other unfavorable features.
EXECUTIVE COMPENSATION
The following table shows the compensation earned for the last three
fiscal years by the Chief Executive Officer and those executive officers of
the Company and the Subsidiaries whose 1996 salary and bonus exceeded
$100,000:
SUMMARY COMPENSATION TABLE
Annual Compensation
(a) (b) (c) (D) (H)
Fiscal
Year ALL OTHER
Name and Ended COMPENSATION
Principal Position December 31st Salary($){(1)} BONUS ($) ($)
Daniel E. Marvin, Jr., 1996 $ 170,338 $ 54,848 $ 26,792{(2)}
President & 1995 164,000 48,163 26,001{(2)}
Chief Executive Officer 1994 160,255 35,040 23,048{(2)}
William S. Rowland, 1996 $ 105,338 $ 23,570 $ 12,018{(3)}
Chief Financial Officer 1995 101,000 21,651 11,940{(3)}
1994 96,000 13,590 11,971{(3)}
Stanley E. Gilliland, 1996 $ 91,338 $ 15,435 $ 6,407{(4)}
Vice President 1995 86,000 15,738 6,103{(4)}
1994 82,620 12,636 5,477{(4)}
(1) Includes deferred amounts.
(2) Represents the Company's contributions to its retirement plan for 1996,
1995 and 1994 of $13,511, $12,720 and $10,874, respectively, and premium
payments for an insurance policy purchased to fund a supplemental
retirement and death benefit for Mr. Marvin in the amount of $13,281 for
1996, $13,281 for 1995 and $12,174 for 1994.
(3) Represents the Company's contributions to its retirement plan for 1996,
1995 and 1994 of $6,120, $6,060 and $6,091, respectively, and an annual
premium payment for an insurance policy purchased to fund a supplemental
retirement and death benefit for Mr. Rowland in the amount of $5,898 in
1996 and $5,880 for 1995 and 1994.
(4) Represents the Company's contributions to its retirement plan.
THE COMPENSATION COMMITTEE HAS FURNISHED THE FOLLOWING REPORT ON
EXECUTIVE COMPENSATION. THE INCORPORATION BY REFERENCE OF THIS PROXY
STATEMENT INTO ANY DOCUMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
BY THE COMPANY SHALL NOT BE DEEMED TO INCLUDE SUCH REPORT UNLESS SUCH REPORT
IS SPECIFICALLY STATED TO BE INCORPORATED BY REFERENCE INTO SUCH DOCUMENT.
COMPENSATION COMMITTEE REPORT
As members of the Compensation Committee, it is our duty to evaluate the
performance of management, review total management compensation levels and
consider management succession and other related matters. The Committee
reviews and approves in detail all aspects of compensation for the nine
highest paid officers within the Company and uses state, regional and national
salary studies to ascertain existing market conditions for personnel. No
member of the Committee is a former or current officer or employee of the
Company or any of the Subsidiaries.
The compensation philosophy of the Company is that a portion of the
annual compensation of each officer relates to and must be contingent upon the
performance of the Company, as well as the individual contribution of each
officer. As a result, a portion of each executive officer's annual
compensation is based upon the officer's performance, the performance of the
operating unit for which the officer has primary responsibility and the
performance of the Company as a whole. In 1993, the formulas for measuring
performance and awarding bonuses were refined and improved so as to more
objectively link financial and individual performance with bonus amounts.
During 1996, the Company's net income amounted to $4,166,000, a $242,000
(6.2%) improvement from 1995's comparable earnings level. In addition, the
Company's market share increased significantly and various other improvements
were made in the Company's operating and administrative functions.
Accordingly, Messrs. Marvin, Rowland and Gilliland were awarded incentive
bonuses of $54,848, $23,570 and $15,435, respectively. The relationships
between the base salaries and incentive compensation of Messrs. Marvin,
Rowland and Gilliland for 1996, 1995 and 1994 were as follows:
INCENTIVE COMPENSATION AS A % OF BASE SALARY
1996 1995 1994
Mr. Marvin 32% 29% 22%
Mr. Rowland 22% 21% 15%
Mr. Gilliland 17% 18% 15%
SUBMITTED BY THE COMPENSATION COMMITTEE MEMBERS
Charles A. Adams
Kenneth R. Diepholz
Richard A. Lumpkin
Gary W. Melvin
William G. Roley
Ray Anthony Sparks
THE INCORPORATION BY REFERENCE OF THIS PROXY STATEMENT INTO ANY DOCUMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE COMPANY SHALL NOT BE
DEEMED TO INCLUDE THE FOLLOWING PERFORMANCE GRAPH UNLESS SUCH GRAPH IS
SPECIFICALLY STATED TO BE INCORPORATED BY REFERENCE INTO SUCH DOCUMENT.
PERFORMANCE GRAPH
The line graph below compares the cumulative total stockholder return on
a $100 investment in the Company's Common Stock to the cumulative total return
of the S & P 500 Index and the Nasdaq Bank Stock Index for the period December
31, 1991 through December 31, 1996. The S&P 500 Index and the Nasdaq Bank
Stock Index were calculated at the Company's request by Research Data Group,
San Francisco, California.
CUMULATIVE TOTAL RETURN{*}
* Total return assumes reinvestment of dividends
12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
First Mid-Illinois Bancshares, Inc $100 $138 $180 $186 $245 $299
Nasdaq Bank Stocks $100 $146 $166 $165 $246 $326
S&P 500 $100 $108 $118 $120 $165 $203
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the
Company's Common Stock beneficially owned on February 28, 1997 with respect to
all persons known to the Company to be the beneficial owner of more than five
percent of the Company Common Stock, each director and nominee, each executive
officer named in the Summary Compensation Table and all directors and
executive officers of the Company as a group.
NAME OF INDIVIDUAL AND AMOUNT AND NATURE OF PERCENT
NUMBER OF PERSONS IN GROUP BENEFICIAL OWNERSHIP{(1)} OF CLASS
5% STOCKHOLDERS
Margaret Lumpkin Keon 66,800{(2)} 7.0%
16 Miller Avenue
Suite 203
Mill Valley, California 94941
Mary Lumpkin Sparks 94,245{(3)} 9.8%
2438 Campbell Road, N.W.
Albuquerque, New Mexico 87104
DIRECTORS
Charles A. Adams 62,412{(4)} 6.3%
Kenneth R. Diepholz 15,481{(5)} 1.6%
Richard Anthony Lumpkin 196,975{(6)} 20.1%
Daniel E. Marvin, Jr. 13,719{(7)} 1.4%
Gary W. Melvin 43,476{(8)} 4.5%
William G. Roley 19,296{(9)} 2.0%
William S. Rowland 4,628{(10)} *
Ray Anthony Sparks 10,984{(11)} 1.2%
OTHER EXECUTIVE OFFICERS
Stanley E. Gilliland 3,244{(12)} *
All directors and executive
officers as a group
(13 persons) 370,680{(13)} 35.1%
_____________
* Less than one percent.
(1) The information contained in this column is based upon information
furnished to the Company by the persons named above and the members of
the designated group. The nature of beneficial ownership for shares
shown in this column is sole voting and investment power, except as set
forth in the footnotes below.
(2) The above amount includes 10,105 shares obtainable through the conversion
of Preferred Stock held by Ms. Keon and 56,695 shares held under the
Margaret L. Keon Trust, established under Article 5 of the Mary G.
Lumpkin Trust dated January 31, 1984, of which trust Ms. Keon is trustee
and beneficiary.
(3) The above amount includes 10,105 shares obtainable through the conversion
of Preferred Stock and 56,695 shares held under the Mary L. Sparks Trust,
established under Article 5 of the Mary G. Lumpkin Trust dated January
31, 1984, with respect to which shares Mrs. Sparks has no voting or
investment power. The shares held by this trust are also included in the
number of shares reported as beneficially owned by Mr. Richard A. Lumpkin
in this table. The above amount also includes 585 shares held directly
by Mrs. Sparks and 26,860 shares held in trust for the benefit of Richard
Anthony Lumpkin's adult children for which Mrs. Sparks serves as trustee
and of which shares Mrs. Sparks disclaims beneficial ownership.
(4) The above amount includes 5,706 shares of Common Stock and 40,420 shares
obtainable through the conversion of Preferred Stock held by a
corporation over which Mr. Adams is deemed to control. The above amount
also includes 1,010 shares held by Mr. Adams' spouse, over which shares
Mr. Adams has no voting and investment power. The above amount does not
include 797 shares held by adult children of Mr. Adams.
(5) The above amount includes 7,074 shares obtainable through the conversion
of Preferred Stock held by Mr. Diepholz.
(6) The above amount includes 20,210 shares obtainable through the conversion
of Preferred Stock held by Mr. Lumpkin and by the Richard A. Lumpkin
Trust, of which Mr. Lumpkin is trustee and beneficiary, 26,023 shares
held directly by Mr. Lumpkin and 4,816 shares held by The Lumpkin
Foundation, of which Mr. Lumpkin serves as a director. The above amount
also includes 56,695 shares held under the Richard A. Lumpkin Trust, and
further includes 10,105 shares obtainable through the conversion of
Preferred Stock and 56,695 shares held under the Mary Lee Sparks Trust,
of which Mr. Lumpkin is trustee. Each such trust has been established
under Article 5 of the Mary G. Lumpkin Trust dated January 31, 1984. The
above amount also includes 22,431 shares held by Consolidated
Communications Inc., of which Mr. Lumpkin is Chairman of the Board, and
of which shares beneficial ownership is disclaimed. The above amount
does not include 32,173 shares held by adult children of Mr. Lumpkin and
26,860 shares held in trust for the benefit of Mr. Lumpkin's adult
children of which trust Mr. Lumpkin is not a trustee and of which shares
beneficial ownership is also disclaimed.
(7) The above amount includes 2,425 shares obtainable through the conversion
of Preferred Stock held by Mr. Marvin. The above amount also includes
1,530 shares held by Mr. Marvin's spouse, over which shares Mr. Marvin
has no voting or investment power and of which Mr. Marvin disclaims
beneficial ownership.
(8) The above amount includes 20,210 shares obtainable through the conversion
of Preferred Stock held by Mr. Melvin.
(9) The above amount includes 2,021 shares obtainable through the conversion
of Preferred Stock held by Mr. Roley. The above amount also includes
2,021 shares obtainable through the conversion of Preferred Stock and
12,750 shares held in trust for the benefit of Mr. Roley's spouse, over
which shares Mr. Roley has shared voting and investment power and of
which Mr. Roley disclaims beneficial ownership.
(10) The above amount includes 2,425 shares obtainable through the conversion
of Preferred Stock held by Mr. Rowland.
(11) The above amount includes 3,531 shares held by Mr. Sparks' children, over
which Mr. Sparks shares voting and investment power.
(12) The above amount includes 1,011 shares obtainable through the conversion
of Preferred Stock held by Mr. Gilliland.
(13) Includes an aggregate of 107,921 shares obtainable through conversion of
Preferred Stock.
As of February 28, 1997, the Bank acted as sole or co-fiduciary with
respect to trusts and other fiduciary accounts which own or hold 51,014 shares
or 5.38% of the outstanding Common Stock of the Company, over which the Bank
has sole voting and investment power with respect to 42,964 shares or 4.53% of
the outstanding Common Stock and shared voting and investment power with
respect to 8,050 shares or .85% of the outstanding Common Stock.
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's directors, executive officers and persons who own more than 10% of
the Company's Common Stock file reports of ownership and changes in ownership
with the Securities and Exchange Commission. Such persons are also required
to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on the Company's review of the copies of such forms, the Company
is not aware that any of its directors and executive officers or 10%
stockholders failed to comply with the filing requirements of Section 16(a)
during the period commencing January 1, 1996 through December 31, 1996.
PROPOSED AMENDMENT TO THE CERTIFICATE OF INCORPORATION
The Board of Directors of the Company has unanimously approved an
amendment (the "Amendment") to Article IV of the Company's Certificate of
Incorporation (the "Certificate") that would increase the number of authorized
shares of the Company's Common Stock, $4.00 par value per share, from
2,000,000 shares to 6,000,000 shares. The Board of Directors has also
approved a resolution providing for a two-for-one stock split of the Common
Stock in the form of a stock dividend if the Amendment is approved. It is
anticipated that the distribution date for the proposed stock split will be
shortly after the annual meeting. As of April 1, 1997, the Company had
947,680 shares of Common Stock issued and outstanding.
The Board of Directors has proposed adoption of the Amendment for several
reasons, including those set forth below. First, the Amendment will provide
for the additional shares of Common Stock necessary to effectuate the proposed
stock split. As a result of the stock split, the number of shares of Common
Stock owned by each of the Company's stockholders as of the record date for
the stock split will double, and each such share will have approximately half
of the per share value of Common Stock prior to the stock split. The decrease
in the per share value of Common Stock should also lead to a commensurate
decrease in the per share market price, thus making an investment in Common
Stock by existing or potential stockholders of the Company more readily
possible.
Second, the additional shares authorized by the Amendment will provide
management with enough shares of Common Stock to enter into certain
transactions involving the use of Common Stock that may be advisable from time
to time. Such transactions could include, but are not limited to, the
acquisition by the Company of additional branch locations, subsidiaries or
bank or thrift holding companies. Although no such transactions are planned
for the immediate future, management and the Board of Directors believe that
it is in the Company's best interests to have available a sufficient number of
authorized shares of Common Stock if such transactions become advisable.
Third, the additional shares of Common Stock authorized by the Amendment
could be used to raise additional working capital for the Company or the
Subsidiaries. The Board of Directors does not currently have any plans to
raise capital through the issuance of additional shares or otherwise, but
these shares would be available for that purpose.
The increase in the number of shares of Common Stock authorized by the
Amendment will allow for the possibility of substantial dilution of the voting
power of current stockholders of the Company, although no dilution will occur
as a direct result of the proposed stock split. The degree of any such
dilution which would occur following the issuance of any additional shares of
Common Stock, including any newly authorized Common Stock, would depend upon
the number of shares of Common Stock that are actually issued in the future,
which number cannot be determined at this time. Issuance of a large number of
such shares could significantly dilute the voting power of existing
stockholders.
The existence of a substantial number of authorized and unissued shares
of Common Stock could also impede an attempt to acquire control of the Company
because the Company would have the ability to issue additional shares of
Common Stock in response to any such attempt. The Company is not aware of any
such attempt to acquire control at this time, and no decision has been made as
to whether any or all newly authorized but unissued shares of Common Stock
would be issued in response to any such attempt.
To be approved by the Company's stockholders, the Amendment must receive
the affirmative vote of a majority of the outstanding shares of Common Stock.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE YOUR SHARES FOR THE AMENDMENT.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
Stockholders will be asked to approve the appointment of KPMG Peat
Marwick LLP as the Company's independent public accountants for the year
ending December 31, 1997. A proposal will be presented at the annual meeting
to ratify the appointment of KPMG Peat Marwick LLP. If the appointment of
KPMG Peat Marwick LLP is not ratified, the matter of the appointment of
independent public accountants will be considered by the Board of Directors.
Representatives of KPMG Peat Marwick LLP are expected to be present at the
meeting and will be given the opportunity to make a statement if they desire
to do so and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR RATIFICATION OF
THIS APPOINTMENT.
STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
For inclusion in the Company's Proxy Statement and form of proxy relating
to the 1998 Annual Meeting of Stockholders, stockholder proposals must be
received by the Company on or before December 17, 1997 and must otherwise
comply with the Company's bylaws.
GENERAL
Your proxy is solicited by the Board of Directors and the cost of
solicitation will be paid by the Company. In addition to the solicitation of
proxies by use of the mails, officers, directors and regular employees of the
Company or the Subsidiaries, acting on the Company's behalf, may solicit
proxies by telephone, telegraph or personal interview. The Company will, at
its expense, upon the receipt of a request from brokers and other custodians,
nominees and fiduciaries, forward proxy soliciting material to the beneficial
owners of shares held of record by such persons.
OTHER BUSINESS
It is not anticipated that any action will be asked of the stockholders
other than that set forth above, but if other matters properly are brought
before the meeting, the persons named in the proxy will vote in accordance
with their best judgment.
FAILURE TO INDICATE CHOICE
If any stockholder fails to indicate a choice in items (1), (2) or (3) on
the proxy card, the shares of such stockholder shall be voted (FOR) in each
instance.
REPORT ON FORM 10-K
THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH PERSON REPRESENTING THAT
HE OR SHE WAS A BENEFICIAL OWNER OF THE COMPANY'S COMMON STOCK AS OF THE
RECORD DATE FOR THE MEETING, UPON WRITTEN REQUEST, A COPY OF THE COMPANY'S
ANNUAL REPORT ON FORM 10-K. SUCH WRITTEN REQUEST SHOULD BE SENT TO MR.
WILLIAM S. ROWLAND, FIRST MID-ILLINOIS BANCSHARES, INC., 1515 CHARLESTON
AVENUE, P.O. BOX 499, MATTOON, ILLINOIS 61938.
By order of the Board of Directors
Daniel E. Marvin, Jr.
Chairman
Mattoon, Illinois
April 16, 1997
ALL STOCKHOLDERS ARE URGED TO SIGN
AND MAIL THEIR PROXIES PROMPTLY
PROXY FIRST MID-ILLINOIS BANCSHARES, INC. PROXY
PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS -- MAY 21, 1997
The undersigned hereby appoints Dan R. Cunningham, Stanley E. Gilliland
and Alfred M. Wooleyhan, Jr., or any of them acting in the absence of the
others, with power of substitution, attorneys and proxies, for and in the name
and place of the undersigned, to vote the number of shares of Common Stock
that the undersigned would be entitled to vote if then personally present at
the Annual Meeting of the Stockholders of First Mid-Illinois Bancshares, Inc.,
to be held at the Ramada Inn, 300 Broadway Avenue, East in Rooms A B and C,
Mattoon, Illinois 61938, on Wednesday, May 21, 1997, at 11:00 a.m., local
time, or any adjournments or postponements thereof, upon the matters set forth
in the Notice of Annual Meeting and Proxy Statement (receipt of which is
hereby acknowledged) as designated on the reverse side, and in their
discretion, the proxies are authorized to vote upon such other business as may
come before the meeting:
{ } Check here for address change.
New address:
{ } Check here if you plan to attend the meeting.
(Continued and to be signed on reverse side.)
FIRST MID-ILLINOIS BANCSHARES, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY
1. Election of Directors
Richard Anthony Lumpkin,
William G. Roley, and
William S. Rowland
2. To amend the Certificate of Incorporation to increase the number of
authorized shares of Common Stock.
3. To ratify the selection of KPMG Peat Marwick LLP as auditors for the
Company for 1997.
The Board of Directors recommends a vote FOR all proposals.
To ratify the selection of KPMG Peat Marwick LLP as auditors for the
Company for 1997.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH
SPECIFICATION MADE. IF NO CHOICES ARE
INDICATED, THIS PROXY WILL BE VOTED FOR ALL
PROPOSALS.
Dated: , 1997
NOTE: Please sign exactly as your name(s) appears. For joint accounts, each
owner should sign. When signing as executor, administrator, attorney, trustee
or guardian, etc., please give your full title.
Signatures: