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, 1998 COMMISSION FILE NUMBER: 0-13368
FIRST MID-ILLINOIS BANCSHARES, INC.
(Exact name of Company 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
(Company's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $4.00 PER SHARE
(Title of class)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of March 16, 1999, 2,017,513 common shares, $4.00 par value, were
outstanding, and the aggregate market value of common shares (based on the last
sale price of the Company's common shares on March 4, 1999) held by non-
affiliates was approximately $72,600,000.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT INTO FORM 10-K PART:
Portions of the Proxy Statement for 1999 Annual
Meeting of Shareholders to be held on May 19, 1999 III
FIRST MID-ILLINOIS BANCSHARES, INC.
FORM 10-K TABLE OF CONTENTS
PAGE
PART I
Item 1 Business 3
Item 2 Properties 11
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Security Holders 13
PART II
Item 5 Market for Company's Common Shares and Related
Shareholder Matters 14
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 7A Quantitative and Qualitative Disclosures About
Market Risk 36
Item 8 Financial Statements and Supplementary Data 38
Item 9 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosures 62
PART III
Item 10 Directors and Executive Officers of the Company 62
Item 11 Executive Compensation 62
Item 12 Security Ownership of Certain Beneficial Owners and
Management 62
Item 13 Certain Relationships and Related Transactions 62
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 62
SIGNATURES 64
Exhibit Index 65
PART I
ITEM 1. BUSINESS
COMPANY AND SUBSIDIARIES
First Mid-Illinois Bancshares, Inc. (the "Company") is a bank holding company
engaged in the business of banking through its wholly-owned subsidiary, First
Mid-Illinois Bank & Trust, N.A. ("First Mid Bank"). The Company provides data
processing services to First Mid Bank through another wholly-owned subsidiary,
Mid-Illinois Data Services, Inc. ("MIDS").
The Company, a Delaware corporation, was incorporated on September 8, 1981,
pursuant to the approval of the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") and became the holding company owning all
of the outstanding stock of First National Bank, Mattoon ("First National") on
June 1, 1982. The Company acquired all of the outstanding stock of a number of
community banks on the following dates: Mattoon Bank, Mattoon ("Mattoon Bank")
on April 2, 1984; State Bank of Sullivan ("Sullivan Bank") on April 1, 1985;
Cumberland County National Bank in Neoga ("Cumberland County") on December 31,
1985; First National Bank and Trust Company of Douglas County ("Douglas
County") on December 31, 1986; 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 Company acquired and re-capitalized Heartland Federal
Savings and Loan Association ("Heartland"), a $125 million thrift headquartered
in Mattoon with offices in Charleston, Sullivan and Urbana, Illinois. Under
the terms of the acquisition, Heartland converted from the mutual form of
organization into a federally-chartered, stock savings association and became a
100%-owned subsidiary of the Company. In connection with the Heartland
acquisition, $3.1 million of Series A perpetual, cumulative, non-voting,
convertible, preferred stock was issued to directors and certain senior
officers of the Company in a private placement.
On October 4, 1994, First Mid Bank acquired all of the outstanding stock of
Downstate Bancshares, Inc. ("DBI") which owned 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.
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 March 1997, First Mid Bank acquired the Charleston, Illinois branch
location and the customer base of First of America Bank. This cash acquisition
added approximately $28 million to total deposits, $.5 million to loans, $1.3
million to premises and equipment and $3.8 million to intangible assets.
In November 1997, Heartland merged with and into First Mid Bank with First
Mid Bank being the surviving entity.
In January 1999, First Mid Bank announced an agreement to acquire the
Monticello, Taylorville and Deland branch offices of Bank One Illinois, N.A.
The acquisitions are subject to regulatory approval and are anticipated to
close during the second quarter of 1999.
DESCRIPTION OF BUSINESS
First Mid Bank conducts 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 provided on either a secured or
unsecured basis to corporations, partnerships and individuals. Commercial
lending covers such categories as business, industry, capital, construction,
agriculture, inventory and real estate, with the latter including residential
properties. First Mid Bank's installment loan department makes direct loans to
consumers and some commercial customers, and purchases retail obligations from
retailers, primarily without recourse.
First Mid Bank conducts its business in the middle of some of the richest
farmland in the world. Accordingly, First Mid Bank provides a wide range of
financial services to farmers and agribusiness within their respective markets.
The farm management department, headquartered in Mattoon, Illinois, has
approximately 33,000 acres under management and is the largest management
operation in the area, ranking in the top 100 firms nationwide. First Mid Bank
is the largest supplier of farm credit in the Company's market area with $50.9
million in agriculture-related loans at December 31, 1998. The farm credit
products offered by First Mid Bank include not only real estate loans, but
machinery and equipment loans, production loans, inventory financing and lines
of credit.
Before intercompany eliminations, First Mid Bank had total assets of
$552,210,000 and stockholders' equity of $52,037,000 at December 31, 1998.
EMPLOYEES
The Company, MIDS and First Mid Bank, collectively, employed 250 people on a
full-time equivalent basis as of December 31, 1998. The Company places a high
priority on staff development which involves extensive training, including
customer service training. New employees are selected on the basis of both
technical skills and customer service capabilities. None of the employees are
covered by a collective bargaining agreement with the Company. The Company
offers a variety of employee benefits and management considers its employee
relations to be excellent.
COMPETITION
The Company actively competes in all areas in which First Mid Bank presently
does business. First Mid Bank competes for commercial and individual deposits,
loans, and trust business with many east central Illinois banks, savings and
loan associations, and credit unions. The principal methods of competition in
the banking and financial services industry are quality of services to
customers, ease of access to facilities, and pricing of services, including
interest rates paid on deposits, interest rates charged on loans, and fees
charged for fiduciary and other banking services.
First Mid Bank operates facilities in the Illinois counties of Champaign,
Coles, Cumberland, Douglas, Effingham and Moultrie. Each facility primarily
serves the community in which it is located. First Mid Bank serves nine
different communities with 15 separate locations in the towns of Mattoon,
Charleston, Neoga, Tuscola, Sullivan, Arcola, Effingham, Altamont, 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 Company can be affected not only by management decisions and general
economic conditions, but also by the requirements of applicable state and
federal statutes and regulations and the policies of various governmental
regulatory authorities including, but not limited to, the OCC, the Board of
Governors of the Federal Reserve System, the FDIC, the Internal Revenue Service
and state taxing authorities. Any change in applicable laws, regulations or
regulatory policies may have material effect on the business, operations and
prospects of the Company and First Mid Bank. The Company is unable to predict
the nature or extent of the effects that fiscal or monetary policies, economic
controls or new federal or state legislation may have on its business and
earnings in the future.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and its subsidiaries, regulate, among other
things, the scope of business, investments, reserves against deposits, capital
levels relative to operations, the nature and amount of collateral for loans,
the establishment of branches, mergers, consolidations and dividends. The
system of supervision and regulation applicable to the Company and its
subsidiaries establishes a comprehensive framework for their respective
operations and is intended primarily for the protection of the FDIC's deposit
insurance funds and the depositors, rather than the shareholders, of financial
institutions.
The following references to material statutes and regulations affecting the
Company and its subsidiaries are brief summaries thereof and do not purport to
be complete, and are qualified in their entirety by reference to such statutes
and regulations. Any change in applicable law or regulations may have a
material effect on the business of the Company and its subsidiaries.
THE COMPANY
GENERAL. The Company, as the sole shareholder of First Mid Bank, is a bank
holding company. As a bank holding company, the Company is registered with,
and is subject to regulation by, the Federal Reserve Board under the Bank
Holding Company Act, ("BHCA"). In accordance with Federal Reserve Board
policy, the Company is expected to act as a source of financial strength to
First Mid Bank and to commit resources to support First Mid Bank in
circumstances where the Company might not do so absent such policy. Under the
BHCA, the Company is subject to periodic examination by the Federal Reserve
Board and is required to file with the Federal Reserve Board periodic reports
of its operations and such additional information as the Federal Reserve Board
may require.
INVESTMENTS AND ACTIVITIES. Under the BHCA, a bank holding company must
obtain Federal Reserve Board 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 holding company. Subject
to certain conditions (including certain deposit concentration limits
established by the BHCA), the Federal Reserve Board 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 Federal Reserve Board 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 (provided that
those limits do not discriminate against out-of-state depository institutions
or their holding companies) or which require that the target bank has 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 Company 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 Federal Reserve Board to be "so closely related
to banking ... as to be a proper incident thereto." Under current regulations
of the Federal Reserve Board, the Company 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 domestic activities of non-bank subsidiaries of bank
holding companies.
Federal law also prohibits acquisition of "control" of a bank, such as First
Mid Bank, or bank holding company, such as the Company, 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 Federal Reserve Board 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 Federal Reserve Board's capital guidelines establish the following
minimum regulatory capital requirements for bank holding companies: a risk-
based requirement expressed as a percentage of total risk-weighted assets, and
a leverage requirement expressed as a percentage of total assets. The risk-
based requirement consists of a minimum ratio of total capital to total risk-
weighted assets of 8%, at least one-half of which must be Tier 1 capital. The
leverage requirement consists of a minimum ratio of Tier 1 capital to total
assets of 3% for the most highly rated companies, with minimum requirements of
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.
For example, the Federal Reserve Board's capital guidelines contemplate that
additional capital may be required to take adequate account of, among other
things, interest rate risk, or the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. Further, any
banking organization experiencing or anticipating significant growth would be
expected to maintain capital ratios, including tangible capital positions
(I.E., Tier 1 capital less all intangible assets), well above the minimum
levels.
As of December 31, 1998, the Company had regulatory capital, calculated on a
consolidated basis, in excess of the Federal Reserve Board's minimum
requirements, with a risk-based capital ratio of 13.89% and a leverage ratio of
7.90%.
DIVIDENDS. The Federal Reserve Board has issued a policy statement with
regard to the payment of cash dividends by bank holding companies. In the
policy statement, the Federal Reserve Board expressed its view that a bank
holding company should not pay cash dividends which exceed 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 Federal Reserve Board
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.
FIRST MID BANK
GENERAL. First Mid Bank is a national bank, chartered under the National
Bank Act. The deposit accounts of First Mid Bank are insured by the BIF of the
FDIC. As a national bank, First Mid Bank 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 primary federal regulator of national banks, and the FDIC, as administrator
of the BIF.
DEPOSIT INSURANCE. As an FDIC-insured institution, First Mid Bank is
required to pay deposit insurance premium assessments to the FDIC. The FDIC
has adopted a risk-based assessment system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their respective levels of capital and results of
supervisory evaluations. Institutions classified as well-capitalized (as
defined by the FDIC) and considered healthy pay the lowest premium while
institutions that are less than adequately-capitalized (as defined by the FDIC)
and considered of substantial supervisory concern pay the highest premium.
Risk classification of all insured institutions is made by the FDIC for each
semi-annual assessment period.
During the year ended December 31, 1998, FDIC assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 1999, FDIC assessment rates will continue to range from 0% of
deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or written agreement
with, the FDIC. The FDIC may also suspend deposit insurance temporarily during
the hearing process for a permanent termination of insurance if the institution
has no tangible capital. Management of the Company is not aware of any
activity or condition that could result in termination of the deposit insurance
of First Mid Bank.
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 Federal Savings and Loan Insurance Corporation, the
SAIF's predecessor insurance fund. Pursuant to federal legislation enacted
September 30, 1996, commencing January 1, 1997, both SAIF members and BIF
members became subject to assessments to cover the interest payments on
outstanding FICO obligations. Such FICO assessments are 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. 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. During the year ended December 31, 1998, the FICO assessment rate for
SAIF members was approximately 0.063% of deposits while the FICO assessment
rate for BIF members was approximately 0.013% of deposits. During the year
ended December 31, 1998, First Mid Bank paid FICO assessments totaling
$107,300.
OCC ASSESSMENTS. All national banks are required to pay supervisory fees to
the OCC to fund the operations of the OCC. The amount of such supervisory fees
is based upon each institution's total assets, including consolidated
subsidiaries, as reported to the OCC. During the year ended December 31, 1998,
First Mid Bank paid supervisory fees to the OCC totaling $115,500.
CAPITAL REQUIREMENTS. The OCC has established the following minimum capital
standards for national banks, such as First Mid Bank: a leverage requirement
consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the
most highly-rated banks with minimum requirements of 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 Federal Reserve Board's capital guidelines for bank
holding companies (SEE "--The Company--Capital Requirements").
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, the regulations of the
OCC provide that additional capital may be required to take adequate account
of, among other things, interest rate risk or the risks posed by concentrations
of credit, nontraditional activities or securities trading activities.
During the year ended December 31, 1998, First Mid Bank was not required by
the OCC to increase its capital to an amount in excess of the minimum
regulatory requirements. As of December 31, 1998, First Mid Bank exceeded its
minimum regulatory capital requirements with a leverage ratio of 8.20% and a
risk-based capital ratio of 14.46%.
Federal law provides the federal banking regulators with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well-capitalized," "adequately-capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Depending upon the capital category to which an institution
is assigned, the regulators' corrective powers include: requiring the
submission of a capital restoration plan; placing limits on asset growth and
restrictions on activities; requiring the institution to issue additional
capital stock (including additional voting stock) or to be acquired;
restricting transactions with affiliates; restricting the interest rate the
institution may pay on deposits; ordering a new election of directors of the
institution; requiring that senior executive officers or directors be
dismissed; prohibiting the institution from accepting deposits from
correspondent banks; requiring the institution to divest certain subsidiaries;
prohibiting the payment of principal or interest on subordinated debt; and
ultimately, appointing a receiver for the institution.
DIVIDENDS. The National Bank Act imposes limitations on the amount of
dividends that may be paid by a national bank, such as First Mid Bank.
Generally, a national bank may pay dividends out of its undivided profits, in
such amounts and at such times as the bank's board of directors deems prudent.
Without prior OCC approval, however, a national bank may not pay dividends in
any calendar year which, in the aggregate, exceed the bank's year-to-date net
income plus the bank's adjusted retained net income for the two preceding
years.
The payment of dividends by any financial institution or its holding company
is affected by the requirement to maintain adequate capital pursuant to
applicable capital adequacy guidelines and regulations, and a financial
institution generally is prohibited from paying any dividends if, following
payment thereof, the institution would be undercapitalized. As described
above, First Mid Bank exceeded its minimum capital requirements under
applicable guidelines as of December 31, 1998. As of December 31, 1998,
approximately $8.3 million was available to be paid as dividends to the Company
by First Mid Bank. Notwithstanding the availability of funds for dividends,
however, the OCC may prohibit the payment of any dividends by First Mid Bank if
the Federal Reserve Board determines such payment would constitute an unsafe or
unsound practice.
AFFILIATE AND INSIDER TRANSACTIONS. First Mid Bank is subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to the
Company and its subsidiaries, on investments in the stock or other securities
of the Company and its subsidiaries and the acceptance of the stock or other
securities of the Company or its subsidiaries as collateral for loans. Certain
limitations and reporting requirements are also placed on extensions of credit
by First Mid Bank to its directors and officers, to directors and officers of
the Company and its subsidiaries, to principal stockholders of the Company, and
to "related interests" of such directors, officers and principal stockholders.
In addition, federal law and regulations may affect the terms upon which any
person becoming a director or officer of the Company or one of its subsidiaries
or a principal stockholder of the Company may obtain credit from banks with
which First Mid Bank maintains a correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies have adopted
guidelines which establish operational and managerial standards to promote the
safety and soundness of federally-insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings. In general, the guidelines prescribe the goals to be achieved in
each area, and each institution is responsible for establishing its own
procedures to achieve those goals. If an institution fails to comply with any
of the standards set forth in the guidelines, the institution's primary federal
regulator may require the institution to submit a plan for achieving and
maintaining compliance. The preamble to the guidelines states that the
agencies expect to require a compliance plan from an institution whose failure
to meet one or more of the guidelines 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
appropriate federal regulator, would constitute grounds for further enforcement
action.
FEDERAL RESERVE SYSTEM. Federal Reserve Board 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 $46.5 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $46.5 million, the reserve
requirement is $1.395 million plus 10% of the aggregate amount of total
transaction accounts in excess of $46.5 million. The first $4.9 million of
otherwise reservable balances are exempted from the reserve requirements.
These reserve requirements are subject to annual adjustment by the Federal
Reserve Board. First Mid Bank is in compliance with the foregoing
requirements.
SUPPLEMENTAL ITEM -- EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are identified below. The executive
officers of the Company are elected annually by the Company's board of
directors.
Name (Age) Position With Company
Daniel E. Marvin, Jr. (61) Chairman of the Board of Directors,
President and Chief Executive Officer
William S. Rowland (52) Director, Executive Vice President, Chief
Financial Officer, Treasurer
John M. Remsen, Jr. (53) Executive Vice President
Laurel G. Allenbaugh (39) Vice President
Christie L. Burich (42) Vice President, Secretary
Stanley E. Gilliland (54) Vice President
John R. Kuczynski (46) Vice President
Daniel E. Marvin, Jr., age 61, has been Chairman of the Board of Directors,
President and Chief Executive Officer of the Company. Mr. Marvin has been the
Chairman of the Board of First Mid Bank since 1983.
William S. Rowland, age 51, has served as a director of the Company since 1991,
has been Chief Financial Officer since 1989 and has served as 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. Mr. Rowland was in
the Davenport, Iowa, office of KPMG LLP from 1975-1989.
John M. Remsen, Jr., age 53, has been Executive Vice President of the Company
and President and Chief Executive Officer of First Mid Bank since August, 1997.
Mr. Remsen was an Executive Vice President, Marketing for Busey Bank in Urbana,
Illinois from 1992 to 1997.
Laurel G. Allenbaugh, age 39, has been Vice President and Controller of the
Company and First Mid Bank since 1990 and President of MIDS since 1998. Ms.
Allenbaugh was with San Antonio Savings Association, San Antonio, Texas, from
1982-1990.
Christie L. Burich, age 42, has been Vice President of Investments since 1995
and Secretary since 1998. Ms. Burich was Controller of Heartland Savings Bank
from 1985-1993.
Stanley E. Gilliland, age 54, has been Vice President of Lending of the Company
since 1985, and has been Executive Vice President of Lending for First Mid Bank
since 1990.
John R. Kuczynski, age 46, has been Vice President of the Trust and Farm
Department of the Company since June, 1996. Mr. Kuczynski was a Sr. Vice
President and Trust Officer for the Amcore Trust Company in Sterling, Illinois,
from 1980-1996.
In December 1998, Daniel E. Marvin, Jr., President and CEO of the Company,
announced plans to retire from active management during 1999. The Board of
Directors is currently conducting an open search for Mr. Marvin's successor and
expects to name a replacement by mid-1999.
ITEM 2. PROPERTIES
All of the following properties are owned by the Company or First Mid Bank
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 and eight
walk-in teller stations. Adjacent to this building is a parking lot with
parking for approximately seventy cars. A drive-up facility with ten drive-up
lanes, including a drive-up automated teller machine ("ATM"), is located across
the street from First Mid Bank's main office. During 1997, First Mid Bank
began a remodeling project of its main office which was completed in mid-1998.
Costs associated with this project totaled approximately $1.6 million.
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 Company and
First Mid Bank.
First Mid Bank owns a facility located at 1520 Charleston Avenue, Mattoon,
Illinois, which is used as the Corporate Headquarters of the Company. The
office building consists of a two-story structure which has approximately
20,000 square feet of office space.
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 an office in Tuscola, Illinois, which is located at
100 North Main Street. 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. In November, 1998, construction began
in a new Tuscola facility to be located at 410 South Main Street, the site of
the former branch facility which was closed in October, 1998. Following
completion in the second quarter of 1999, the office at 100 North Main Street
will be closed and the facility will be sold.
CHARLESTON
First Mid Bank has two offices in Charleston, Illinois. The main office,
acquired in March, 1997, is located at 500 West Lincoln Avenue, Charleston,
Illinois. This one-story facility contains approximately 8,400 square feet
with five teller stations, eight private offices and four drive-up lanes.
During 1996, land near this facility was purchased and is being held for future
parking.
A second facility is located at 701 Sixth Street, Charleston, Illinois. It
is a one-story facility with an attached two-bay drive-up structure and
consists of approximately 5,500 square feet of office space. Adequate parking
is available to serve its customers. The office space is comprised of three
teller stations, seven private offices and a night depository.
Four ATMs are located in Charleston. Two drive-up ATM's are located in the
parking lot of the facility at 500 West Lincoln Avenue and one in the parking
lot of Save-A-Lot at 1400 East Lincoln Avenue. The fourth is an off-site walk-
up ATM located in the student union at Eastern Illinois University.
In January, 1998, First Mid Bank sold a facility located at 580 West Lincoln
Avenue, Charleston, Illinois.
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 North Keller Drive, Effingham,
Illinois. The building is a two-story structure with approximately 4,000
square feet of office space. This office space consists of four teller
stations, three drive-up teller lanes, five private offices and a night
depository. Adequate parking is available to customers in front of the
facility.
First Mid Bank also owns property at 900 North Keller Drive, Effingham,
Illinois which provides 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.
URBANA
First Mid Bank owns a facility located at 601 South Vine Street, Urbana,
Illinois. Its office building consists of a one-story structure and contains
approximately 3,600 square feet. The office building provides space for three
tellers, two private offices and two drive-up lanes. An adequate customer
parking lot is located on the south side of the building.
COMPANY
The Company owns a single family residence at 1515 Wabash Avenue, Mattoon,
Illinois.
ITEM 3. LEGAL PROCEEDINGS
Since First Mid Bank acts as depositories of funds, it 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 First Mid Bank and
that such litigation will not materially adversely affect the Company's
consolidated financial condition.
In addition to the normal proceedings referred to above, Heartland Savings
Bank ("Heartland"), a subsidiary of the Company that merged with First Mid Bank
during 1997, 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. On August 6, 1998, First Mid Bank filed a
motion with the U.S. Court of Federal claims to grant summary judgement on
liability for breach of contract in this matter. On August 13, 1998, the U.S.
Government filed a motion to stay such proceedings. At this time, it is too
early to tell if First Mid Bank will prevail in its motion 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 COMPANY'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS
The Company's common stock was held by approximately 760 shareholders of
record as of December 31, 1998, and is traded in the over-the-counter market.
Effective May 22, 1997, the Company had a two-for-one stock split in the form
of a 100% stock dividend. All share and per share information has been
restated to reflect the split.
The following table shows, for the indicated periods, the range of reported
prices per share of the Company's common stock in the over-the-counter market.
These quotations represent inter-dealer prices without retail mark-ups,
mark-downs or commissions and do not necessarily represent actual transactions.
QUARTER HIGH LOW
1998
4th $ 36 1/2 $ 32 1/2
3rd 40 3/4 36 1/2
2nd 47 1/2 38 3/4
1st 42 3/4 33
1997
4th $ 37 $ 25 1/2
3rd 26 1/2 22 1/2
2nd 22 1/2 20 1/2
1st 21 1/4 20
The following table sets forth the cash dividends per share on the Company's
common stock for the last two years.
DIVIDEND
DATE DECLARED DATE PAID PER SHARE
5-21-1997 6-20-1997 $.20
12-16-1997 1- 2-1998 $.26
5-20-1998 6-19-1998 $.23
12-15-1998 1-05-1999 $.28
The Company'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 Company to pay dividends, as well as fund its
operations, is dependent upon receipt of dividends from First Mid Bank.
Regulatory authorities limit the amount of dividends which can be paid by First
Mid Bank without prior approval from such authorities. For further discussion
of First Mid Bank's dividend restrictions and capital requirements, see "Note
18" 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 Company semi-annually during the two years ended December 31, 1998.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth a five-year comparison of selected financial data.
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $37,451 $37,805 $35,559 $33,465 $26,428
Interest expense 18,626 19,131 17,805 16,725 11,918
Net interest income 18,825 18,674 17,754 16,740 14,510
Provision for loan losses 550 700 147 280 168
Other income 6,340 5,421 4,799 4,009 3,805
Other expense 17,119 16,039 15,977 14,715 13,263
Income before income taxes 7,496 7,356 6,429 5,754 4,884
Income tax expense 2,434 2,630 2,263 1,830 1,450
Net income $ 5,062 $ 4,726 $ 4,166 $ 3,924 $ 3,434
PER COMMON SHARE DATA
Basic earnings per share $2.39 $2.30 $2.11 $2.05 $1.79
Diluted earnings per share 2.24 2.17 1.99 1.94 1.71
Dividends per common share .51 .46 .43 .41 .38
Book value per common share 23.61 21.55 19.56 18.04 15.69
FINANCIAL RATIOS
Net interest margin (TE) 3.93% 3.96% 3.98% 3.98% 3.93%
Return on average assets .95% .90% .85% .84% .84%
Return on average equity 10.39% 11.08% 11.03% 11.76% 11.35%
Return on average common equity 10.47% 11.23% 11.18% 12.02% 11.59%
Dividend payout ratio 21.35% 19.99% 20.16% 19.76% 20.89%
Average total equity to average assets 9.16% 8.11% 7.69% 7.17% 7.38%
Total capital to risk-weighted assets 13.89% 12.20% 11.80% 11.51% 10.69%
YEAR END BALANCES
Total assets $554,663 $532,978 $515,397 $472,494 $451,158
Net loans 346,350 355,587 345,533 304,190 279,545
Total deposits 449,636 457,598 413,676 396,879 389,568
Total equity 50,480 45,576 39,904 35,309 30,600
AVERAGE BALANCES
Total assets $531,809 $525,751 $491,058 $465,287 $409,684
Net loans 345,254 352,495 323,540 294,220 243,166
Total deposits 445,048 443,399 405,223 395,580 356,833
Total equity 48,704 42,638 37,783 33,371 30,268
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is intended to provide a better
understanding of the consolidated financial condition and results of operations
of the Company and its subsidiaries for the years ended December 31, 1998, 1997
and 1996. This discussion and analysis should be read in conjunction with the
consolidated financial statements, related notes and selected financial data
appearing elsewhere in this report.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, such as, discussions of the
Company's pricing and fee trends, credit quality and outlook, new business
results, expansion plans, anticipated expenses and planned schedules and
projected costs for Year 2000 work. The Company intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995,
and is including this statement for purposes of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of the Company, are identified by use
of the words "believe," "expect," "intend," "anticipate," "estimate,"
"project," or similar expressions. Actual results could differ materially from
the results indicated by these statements because the realization of those
results is subject to many uncertainties including: changes in interest rates,
general economic conditions, legislative/regulatory changes, monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and the Federal Reserve Board, the quality or composition of the loan or
investment portfolios, demand for loan products, deposit flows, competition,
demand for financial services in the Company's market area and accounting
principles, policies and guidelines. With respect to the Company's Year 2000
work, such uncertainties also include the Company's ability to continue to fund
its Year 2000 renovation and to retain capable staff through the completion of
its Year 2000 renovation and the ability of its vendors, clients, counter
parties and customers to complete Year 2000 renovation efforts on a timely
basis and in a manner that allows them to continue normal business operations
or furnish products, services or data to the Company without disruption, as
well as the Company's ability to accurately evaluate their readiness in this
regard and, where necessary, develop and implement effective contingency plans.
These risks and uncertainties should be considered in evaluating forward-
looking statements and undue reliance should not be placed on such statements.
Further information concerning the Company and its business, including
additional factors that could materially affect the Company's financial
results, is included in the Company's filings with the Securities and Exchange
Commission.
OVERVIEW
In 1998, the Company achieved record net income and earnings per share. For
the year, net income was $5,062,000 up 7.1% from $4,726,000 in 1997. In 1997,
net income increased 13.4% from $4,166,000 in 1996. Diluted earnings per share
was $2.24 in 1998 compared with $2.17 in 1997 and $1.99 in 1996. A summary of
the factors which contributed to the changes in net income follows (in
thousands):
1998 VS 1997 1997 VS 1996
Net interest income $ 151 $ 920
Provision for loan losses 150 (553)
Other income, including securities transactions 919 622
Other expenses, excluding SAIF assessment (1,080) (813)
One-time SAIF assessment - 751
Income taxes 196 (367)
Increase in net income $ 336 $ 560
On March 7, 1997, the Company acquired the Charleston, Illinois branch
location and the deposit base of First of America Bank. This cash acquisition
added approximately $28 million to total deposits, $500,000 to loans, $1.3
million to premises and equipment and $3.8 million to intangible assets. The
acquisition of the branch was accounted for using the purchase method of
accounting whereby the acquired assets and deposits of the branch were recorded
at their fair values as of the acquisition date. The operating results have
been combined with those of the Company since March 7, 1997.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The largest source of operating revenue for the Company is net interest
income. Net interest income represents the difference between total interest
income earned on earning assets and total interest expense paid on interest-
bearing liabilities. The amount of interest income is dependent upon many
factors including the volume and mix of earning assets, the general level of
interest rates and the dynamics of changes in interest rates. The cost of
funds necessary to support earning assets varies with the volume and mix of
interest-bearing liabilities and the rates paid to attract and retain such
funds.
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 Company's average balances, interest income and expense
and rates earned or paid for major balance sheet categories are set forth in
the following table (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing $ 644 $ 33 5.12% $ 1,497 $ 75 5.01% $ 1,165 $ 55 4.72%
deposits
Federal funds sold 8,754 451 5.15% 4,254 230 5.41% 3,403 180 5.29
Investment securities
Taxable 114,831 7,052 6.14% 107,124 6,759 6.31% 111,739 6,868 6.15
Tax-exempt<F1> 17,501 1,278 7.30% 13,046 1,062 8.14% 11,442 953 8.33
Loans <F2><F3> 348,055 29,072 8.35% 355,167 30,040 8.46% 326,302 27,827 8.53
Total earning assets 489,785 37,886 7.73% 481,088 38,166 7.93% 454,051 35,883 7.90
Cash and due from banks 15,944 18,363 17,051
Premises and equipment 12,745 11,916 9,864
Other assets 16,136 17,056 12,854
Allowance for loan (2,801) (2,672) (2,762)
losses
Total assets $531,809 $525,751 $491,058
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing
Deposits
Demand deposits $125,586 3,675 2.93% $125,666 3,684 2.93% $110,708 $ 3,085 2.79%
Savings deposits 37,831 856 2.26% 38,642 999 2.59% 39,364 1,069 2.72
Time deposits 222,562 12,255 5.51% 226,431 12,464 5.50% 204,362 11,156 5.46
Securities sold under
agreements to 9,717 435 4.47% 10,806 488 4.52% 12,411 574 4.62
repurchase
FHLB advances 18,740 1,008 5.38% 17,221 1,018 5.91% 23,920 1,405 5.87
Federal funds purchased 364 19 5.19% 502 26 5.18% 800 44 5.50
Long-term debt 5,629 378 6.72% 6,584 452 6.87% 6,819 472 6.92
Total interest-bearing
liabilities 420,429 18,626 4.43% 425,852 19,131 4.49% 398,384 17,805 4.47
Demand deposits 59,069 52,660 50,789
Other liabilities 3,607 4,601 4,102
Stockholders' equity 48,704 42,638 37,783
Total liabilities & $531,809 $525,751 $491,058
equity
Net interest income (TE) $ 19,260 $ 19,035 $ 18,078
Net interest spread 3.30% 3.44% 3.43%
Impact of non-interest
bearing
funds .63% .52% .55%
Net yield on interest-
earning
assets (TE) 3.93% 3.96% 3.98%
<FN>
<F1> Interest income and rates are presented on a tax-equivalent basis ("TE") assuming a federal income tax
rate of 34%.
<F2> Loan fees are included in interest income and are not material.
<F3> Nonaccrual loans have been included in the average balances.
</FN>
</TABLE>
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>
<CAPTION>
1998 COMPARED TO 1997 1997 COMPARED TO 1996
INCREASE - (DECREASE) INCREASE - (DECREASE)
TOTAL RATE/ TOTAL RATE/
CHANGE VOLUME RATE VOLUME(4) CHANGE VOLUME RATE VOLUME(4)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Interest-bearing deposits $ (42) $ (42) $ 3 $ (3) $ 20 $ 16 $ 3 $ 1
Federal funds sold 221 243 (11) (11) 50 45 4 1
Investment securities:
Taxable 292 486 (181) (13) (109) (281) 181 (9)
Tax-exempt <F1> 216 363 (109) (38) 109 133 (21) (3)
Loans <F2><F3> (968) (602) (374) 8 2,213 2,460 (228) (19)
Total interest income (281) 448 (672) (57) 2,283 2,373 (61) (29)
Interest-Bearing
Liabilities
Interest-bearing deposits
Demand deposits (8) (2) (6) - 599 417 160 22
Savings deposits (143) (21) (125) 3 (70) (20) (51) 1
Time deposits (209) (213) 4 - 1,308 1,205 93 10
Securities sold under
agreements to repurchase (54) (49) (5) - (86) (74) (14) 2
FHLB advances (10) 90 (92) (8) (387) (393) 9 (3)
Federal funds purchased (7) (7) - - (18) (17) (2) 1
Long-term debt (74) (66) (9) 1 (20) (16) (4) -
Total interest expense (505) (268) (233) (4) 1,326 1,102 191 33
Net interest income $ 224 $ 716 $(439) $ (53) $ 957 $1,271 $(252) $ (62)
<FN>
<F1> Interest income and rates are presented on a tax-equivalent basis, assuming a federal income
tax rate of 34%.
<F2> Loan fees are included in interest income and are not material.
<F3> Nonaccrual loans are not material and have been included in the average balances.
<F4> The changes in rate/volume are computed on a consistent basis by multiplying the change
in rates with the change in volume.
</FN>
</TABLE>
On a tax equivalent basis, net interest income increased $224,000, or 1.2% in
1998, compared to an increase of $957,000, or 5.3% in 1997. The increase in net
interest income in 1998 was due primarily to the increases in the volume of
earning assets mixed with the lowering of interest rates. In 1997, the increase
in net interest income was due to the increase in the volume of earning assets
and interest-bearing liabilities.
In 1998, average earning assets increased by $8,697,000, or 1.8%, and average
interest-bearing liabilities decreased $5,432,000, or 1.3%, compared with 1997.
During 1998, average loan balances and interest income from loans both
declined. This was the result of low long-term interest rates which induced
many borrowers to refinance their home mortgages with lower rate, longer term
mortgages. Most of these refinanced mortgage loans were sold into the secondary
market and non interest income was recognized on these loan sales. Should long
term interest rates increase in the future, the volume of mortgage refinancings
will likely decline and with it, the amount of revenue from loan sales. In a
higher interest rate environment, management anticipates that a higher
percentage of mortgage originations would be held for the portfolio and interest
revenue from mortgage loans would increase. In the short-term however, the
increase in interest revenue would likely be by a smaller amount than the
decline in revenue from loan sales which would likely result from higher
interest rates. Average balances of noninterest bearing demand deposit accounts
increased in 1998 primarily as a result of business development efforts with
corporate customers. These additional funds were generally deployed into
investment securities. The higher volumes of earning assets and interest-
bearings liabilities in 1997 were primarily the result of strong loan growth and
the acquisition of a branch facility in Charleston, Illinois.
Changes in average balances, as a percent of average earnings assets, are
shown below:
* average loans (as a percent of average earnings assets) decreased 2.6%
to 71.2% at December 31, 1998 from 73.8% at December 31, 1997
* average securities (as a percent of average earnings assets) increased
2.0% to 27.0% at December 31, 1998 from 25.0% at December 31, 1997
* net interest margin has decreased slightly to 3.93% in 1998 from 3.96%
in 1997 and 3.98% in 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses in 1998 was $550,000 compared to $700,000 in
1997 and $147,000 in 1996. 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 Company's revenue is derived from other income.
The following table sets forth the major components of other income for the last
three years (in thousands):
<TABLE>
<CAPTION>
$ CHANGE
FROM PRIOR YEAR
1998 1997 1996 1998 1997
<S> <C> <C> <C> <C> <C>
Trust $ 1,746 $ 1,663 $ 1,293 $ 83 $ 370
Brokerage 304 464 386 (160) 78
Securities gains(losses) 154 (6) (9) 160 3
Service charges 1,919 1,804 1,728 115 76
Mortgage banking 1,121 491 428 630 63
Other 1,096 1,005 973 91 32
Total other income $ 6,340 $ 5,421 $ 4,799 $ 919 $ 622
</TABLE>
* Total non-interest income increased to $6,340,000 in 1998 as compared to
$5,421,000 in 1997 and $4,799,000 in 1996.
* Trust revenues increased $83,000 or 5.0% to $1,746,000 in 1998 from
$1,663,000 in 1997 and $1,293,000 in 1996. This increase is the net effect
of increases in the fee structure for trust accounts and growth in employee
benefit accounts managed by the Trust Department partially offset by lower
farm management fees. Lower farm management fees are the result of both
lower commodity prices and the timing of grain sales. Trust assets increased
3.4% to $338.0 million at December 31, 1998 from $326.9 million at December
31, 1997 and $223.1 million at December 31, 1996. The increase in trust
assets was primarily due to the growth of the trust accounts under
management.
* Revenues from brokerage and annuity sales decreased $160,000 or 34.5% in 1998
primarily as a result of intense competition from local brokerage firms.
This competition is not expected to diminish and management does not
anticipate brokerage revenues returning to their 1997 levels. In 1997, the
fees had increased as the Company expanded its product line by offering full-
service brokerage services and increasing its marketing efforts in this area.
* Net securities gains in 1998 were $154,000 compared to net securities losses
of $6,000 in 1997 and $9,000 in 1996.
* Fees from service charges increased $115,000 or 6.4% to $1,919,000 in 1998
from $1,804,000 in 1997 and $1,728,000 in 1996. This increase was primarily
due to an increase in the number of savings and transaction accounts, an
increase in the service charges on ATM's.
* Mortgage banking income increased $630,000 or 128% to $1,121,000 in 1998 from
$491,000 in 1997 and $428,000 in 1996. This increase was attributed to the
volume of loans sold by First Mid Bank increasing to $69 million
(representing 825 loans) in 1998 from $29 million (representing 476 loans) in
1997 and $21 million (representing 339 loans) in 1996. Such sales resulted
in gains of $906,000 in 1998, compared to $390,000 and $322,000 in 1997 and
1996, respectively.
* Included in mortgage banking income are mortgage servicing rights capitalized
on loans originated and sold into the secondary market with servicing
retained. Such rights totaled $78,000 in 1998, $103,000 in 1997 and $196,000
in 1996. This reduction of recorded mortgage servicing rights was attributed
to an increase of $57.2 million (representing 605 loans) in 1998 versus $13.6
million (representing 160 loans) in 1997 of loans sold with servicing
released. Mortgage servicing rights are not recorded on such 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>
<CAPTION>
$ CHANGE
FROM PRIOR YEAR
1998 1997 1996 1998 1997
<S> <C> <C> <C> <C> <C>
Salaries and benefits $ 8,645 $ 7,922 $ 7,938 $ 723 $ (16)
Occupancy and equipment 2,947 2,782 2,345 165 437
FDIC premiums 107 40 275 67 (235)
One-time SAIF assessment - - 751 - (751)
Amortization of intangibles 764 709 547 55 162
Stationery and supplies 657 692 559 (35) 133
Legal and professional fees 920 890 795 30 95
Marketing and promotion 500 529 579 (29) (50)
Other operating expenses 2,579 2,475 2,188 104 287
Total other expense $17,119 $16,039 $15,977 $1,080 $ 62
</TABLE>
* Total non-interest expense increased to $17,119,000 in 1998 as compared to
$16,039,000 in 1997 and $15,977,000 in 1996.
* Salaries and employee benefits, the largest component of other expense,
increased $723,000 or 9.1% to $8,645,000 in 1998 from $7,922,000 in 1997.
This increase can be explained by:
* an increase of $134,000 in incentive compensation due to the increase in
the volume of mortgage loan originations
* an increase of $234,000 in employee group health insurance benefits, and
* merit increases for continuing employees
* Occupancy and equipment expense increased $165,000 or 5.9% to $2,947,000 in
1998 as compared to $2,782,000 in 1997 and $2,345,000 in 1996. This increase
included depreciation expense recorded on technology equipment placed in
service as well as the depreciation expense on the buildings located in
Mattoon and Charleston that were renovated during 1998.
* The net amount of insurance premiums assessed by the Federal Deposit
Insurance Corporation ("FDIC") was $107,000 in 1998, remaining fairly
constant with $109,000 in 1997. However, the first quarter of 1997, includes
a refund of $69,000 on the 1996 assessments of the Savings Association
Insurance Fund ("SAIF"). In 1996, the FDIC premium expense was $275,000. A
lower premium rate went into effect beginning in 1997 that helped to reduce
overall deposit insurance. Also, in 1996, a one-time assessment of $751,000
to re-capitalize the SAIF was paid.
* Amortization of intangible assets increased $55,000 or 7.8% to $764,000 in
1998 from $709,000 in 1997 and $547,000 in 1996. This increase is due to the
goodwill and core deposit intangibles associated with the purchase of the
Charleston branch in March, 1997.
* All other operating expenses increased $70,000 or 1.5% to $4,656,000 in 1998
from $4,586,000 in 1997 and $4,121,000 in 1996. This increase was due to net
losses on the sale of other real estate owned, repossessed assets and fixed
assets, start up costs associated with the implementation of the merchant
debit card program and costs associated with the Year 2000 issue.
INCOME TAXES
Total income tax expense amounted to $2,434,000 in 1998 as compared to
$2,630,000 in 1997 and $2,263,000 in 1996. Effective tax rates were 32.5%,
35.8% and 35.2% respectively, for 1998, 1997 and 1996. Decrease in the
effective tax rate in 1998 resulted primarily from increased tax exempt income.
ANALYSIS OF BALANCE SHEETS
LOANS
The loan portfolio (net of unearned discount) is the largest category of the
Company's earning assets. The following table summarizes the composition of the
loan portfolio for the last five years (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Real estate - mortgage $244,501 $252,312 $241,240 $211,147 $195,524
Commercial, financial
and agricultural 78,579 73,854 75,028 65,916 61,520
Installment 25,194 29,266 30,423 27,996 22,294
Other 791 2,791 1,526 1,945 2,815
Total loans $349,065 $358,223 $348,217 $307,004 $282,153
</TABLE>
At December 31, 1998, the Company had loan concentrations in agricultural
industries of $50.9 million, or 14.6%, of outstanding loans and $49.3 million,
or 13.8%, at December 31, 1997. The Company had no further industry loan
concentrations in excess of 10% of outstanding loans.
Real estate mortgage loans have averaged approximately 70% of the Company's
total loan portfolio for the past several years. This is the result of a strong
local housing market and the Company's long-term commitment to residential real
estate lending. The 3.1% decrease in the residential real estate loan category
in 1998 was primarily due to the origination and subsequent sale of certain
fixed rate mortgage loans. First Mid Bank originates residential real estate
loans for its own portfolio and for sale to others. In 1998, $69 million fixed
rate mortgage loans, as compared to $29 million in 1997, were sold by First Mid
Bank in the secondary market. This increase in the volume of fixed rate loan
originations is to a large degree the result of a flat yield curve that enabled
borrowers to lock in low long-term rates. If the yield curve were to return to
its historical norm, management anticipates that the volume of loan originations
(and therefore the amount of revenue recognized from the sale of loans) would
diminish.
The following table presents the balance of loans outstanding as of December
31, 1998, by maturities (dollars in thousands):
<TABLE>
<CAPTION>
MATURITY <F1>
OVER 1
ONE YEAR THROUGH OVER
OR LESS<F2> 5 YEARS 5 YEARS TOTAL
<S> <C> <C> <C> <C>
Real estate - mortgage $ 56,254 $143,831 $ 44,416 $244,501
Commercial, financial
and agricultural 51,310 24,150 3,119 78,579
Installment 6,260 18,386 548 25,194
Other 288 214 289 791
Total loans $114,112 $186,581 $48,372 $349,065
<FN>
<F1> Based on scheduled principal repayments.
<F2> Includes demand loans, past due loans and overdrafts.
</FN>
</TABLE>
As of December 31, 1998, loans with maturities over one year consisted of
$203,936,000 in fixed rate loans and $31,017,000 in variable rate loans. The
loan maturities noted above are based on the contractual provisions of the
individual loans. The Company has no general policy regarding rollovers and
borrower requests, which are handled on a case-by-case basis.
NONPERFORMING LOANS
Nonperforming loans include: (a) loans accounted for on a nonaccrual basis;
(b) accruing loans contractually past due ninety days or more as to interest or
principal payments; and loans not included in (a) and (b) above which are
defined as "renegotiated loans".
The following table presents information concerning the aggregate amount of
nonperforming loans (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $1,783 $1,194 $ 790 $ 636 $ 393
Loans past due ninety days
or more and still accruing 609 145 575 554 509
Renegotiated loans which are
performing in accordance
with revised terms 90 346 580 604 772
Total Nonperforming Loans $2,482 $1,685 $1,945 $1,794 $1,674
</TABLE>
The $.8 million increase in nonperforming loans was primarily the net result
of a $1.2 million commercial loan being transferred to nonaccrual status during
the third quarter of 1998 and a $.4 million loan being removed from the
nonaccrual list and transferred to other real estate owned. This property was
sold during the fourth quarter of 1998 at its carrying value.
At December 31, 1998, management has identified approximately $250,000
exposure associated with $1,783,000 nonaccrual loans. This exposure was
considered in determining the adequacy of the allowance for possible loan losses
as of December 31, 1998.
Interest income that would have been reported if nonaccrual and renegotiated
loans had been performing totaled $189,000, $162,000 and $143,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. Interest income that was
included in income totaled $7,000, $32,000 and $39,000 for the same periods.
The Company's policy generally is to discontinue the accrual of interest
income on any loan for which principal or interest is ninety days past due and
when, in the opinion of management, there is reasonable doubt as to the timely
collection of interest or principal. Nonaccrual loans are returned to accrual
status when, in the opinion of management, the financial position of the
borrower indicates there is no longer any reasonable doubt as to the timely
collection of interest or principal.
LOAN QUALITY AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's 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 Company's credit
exposure. The review process is directed by overall lending policy and is
intended to identify, at the earliest possible stage, borrowers who might be
facing financial difficulty. Once identified, the magnitude of exposure to
individual borrowers is quantified in the form of specific allocations of the
allowance for loan losses. 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 Company operates.
Management recognizes that there are risk factors which are inherent in the
Company's loan portfolio. All financial institutions face risk factors in their
loan portfolios because risk exposure is a function of the business. The
Company's operations (and therefore its loans) are concentrated in east central
Illinois, an area where agriculture is the dominant industry. Accordingly,
lending and other business relationships with agriculture-based businesses are
critical to the Company's success. At December 31, 1998, the Company's loan
portfolio included $50.9 million of loans to borrowers whose businesses are
directly related to agriculture. The balance increased $1.6 million from $49.3
million at December 31, 1997. During 1998, cash flows for many of the Company's
agricultural borrowers declined as a result of lower commodity prices. While
the Company adheres to sound underwriting practices including collateralization
of loans, an extended period of low commodity prices could nevertheless result
in an increase in the level of problem agriculture loans.
Loan loss experience for the years ending December 31, are summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Average loans outstanding,
net of unearned income $348,055 $355,167 $326,302 $294,220 $243,166
Allowance-beginning of year $ 2,636 $ 2,684 $ 2,814 $ 2,608 $ 2,110
Balance of
acquired subsidiary - - - - 343
Charge-offs:
Commercial, financial
and agricultural 382 588 238 18 29
Real estate-mortgage 21 69 6 111 28
Installment 152 145 131 57 120
Total charge-offs 555 802 375 186 177
Recoveries:
Commercial, financial
and agricultural 28 28 53 73 98
Real estate-mortgage 30 1 - - 21
Installment 26 25 45 39 45
Total recoveries 84 54 98 112 164
Net charge-offs 471 748 277 74 13
Provision for loan losses 550 700 147 280 168
Allowance-end of period $ 2,715 $ 2,636 $ 2,684 $ 2,814 $ 2,608
Ratio of net charge-offs to
average loans .14% .21% .08% .03% .01%
Ratio of allowance for loan
losses to loans outstanding
(less unearned interest
at end of period) .78% .74% .77% .90% .93%
Ratio of allowance for loan
losses to nonperforming loans 109.4% 156.4% 138.0% 156.8% 155.8%
</TABLE>
The Company 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 1998, the Company had net charge-offs of $471,000, compared to $748,000
in 1997 and $227,000 in 1996. At December 31, 1998, the allowance for loan
losses amounted to $2,715,000, or .78% of total loans, and 109.4% of
nonperforming loans. At December 31, 1997, the allowance was $2,636,000, or
.74% of total loans, and 156.4% 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>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
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
<S> <C> <C> <C> <C> <C> <C>
Real estate-mortgage $ 264 70.1% $ 245 70.4% $ 434 69.3%
Commercial, financial
and agricultural 1,961 22.5% 1,699 20.6% 1,854 21.5%
Installment 166 7.2% 192 8.2% 152 8.7%
Other - .2% - .8% - .5%
Total allocated 2,391 2,136 2,440
Unallocated 324 N/A 500 N/A 244 N/A
Allowance at end of
reported period $2,715 100.0% $2,636 100.0% $2,684 100.0%
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
ALLOWANCE % OF ALLOWANCE % OF
FOR LOANS FOR LOANS
LOAN TO TOTAL LOAN TO TOTAL
LOSSES LOANS LOSSES LOANS
<S> <C> <C> <C> <C>
Real estate-mortgage $ 314 68.8% $ 427 69.3%
Commercial, financial
and agricultural 1,554 21.5% 1,481 21.8%
Installment 131 9.1% 100 7.9%
Other - .6% - 1.0%
Total allocated 1,999 2,008
Unallocated 815 N/A 600 N/A
Allowance at end of
reported period $2,814 100.0% $2,608 100.0%
</TABLE>
The allowance is allocated to the individual loan categories by a specific
allocation for all classified loans plus a percentage of loans not classified
based on historical losses. Possible loan losses due to the Year 2000 issue
have been considered in this allocation calculation.
SECURITIES
The Company's overall investment goal is to maximize earnings while
maintaining liquidity in securities having minimal credit risk. The types and
maturities of securities purchased are primarily based on the Company's current
and projected liquidity and interest rate sensitivity positions.
The following table sets forth the year-end amortized cost of the securities
for the last three years (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997 1996
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 91,069 58% $ 80,509 67% $ 86,518 74%
Obligations of states and
political subdivisions 27,674 18 12,820 11 11,398 10
Mortgage-backed securities 35,209 22 23,272 20 15,283 13
Other securities 2,509 2 2,747 2 4,384 3
Total securities $156,461 100% $119,348 100% $117,583 100%
</TABLE>
At December 31, 1998, the Company's investment portfolio showed an increase in
mortgage-backed securities and obligations of states and political subdivisions,
while the percentage of U.S. Government agency securities decreased. This
change in the portfolio mix improved the repricing characteristics of the
portfolio, helped mollify the Company's exposure relating to interest rate risk
and improved 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, 1998 (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>
<CAPTION>
ONE AFTER 1 AFTER 5 AFTER
YEAR THROUGH THROUGH TEN
OR LESS 5 YEARS 10 YEARS YEARS TOTAL
<S> <C> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 2,352 $65,275 $23,442 $ - $ 91,069
Obligations of state and
political subdivisions 1,751 3,266 9,775 9,560 24,352
Mortgage-backed securities 3,389 20,338 5,441 6,041 35,209
Other securities - - - 2,509 2,509
Total Investments $ 7,492 $88,879 $38,658 $18,110 $153,139
Weighted average yield 5.70% 5.75% 5.51% 4.38% 5.63%
Full tax-equivalent yield 6.35% 5.85% 6.08% 5.64% 6.02%
Held-to-maturity:
Obligations of state and
political subdivisions $ 501 $ 1,464 $ 932 $ 425 $ 3,322
Weighted average yield 5.14% 5.15% 4.57% 5.74% 5.04%
Full tax-equivalent yield 7.79% 7.81% 6.92% 8.70% 7.64%
</TABLE>
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, 1998.
DEPOSITS
Funding the Company's earning assets is substantially provided by a
combination of consumer, commercial and public fund deposits. The Company
continues to focus its strategies and emphasis on retail core deposits, the
major component of funding sources. The following table sets forth the average
deposits and weighted average ratesat December 31, 1998, 1997 and 1996 (dollars
in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
Non-interest bearing $ 59,069 - $ 52,660 - $ 50,789 -
Interest bearing 125,586 2.93% 125,666 2.93% 110,708 2.79%
Savings 37,831 2.26% 38,642 2.59% 39,364 2.72%
Time deposits 222,562 5.51% 226,431 5.50% 204,362 5.46%
Total average deposits $445,048 3.77% $443,399 3.87% $405,223 3.78%
</TABLE>
The following table sets forth the maturity of time deposits of $100,000 or
more (in thousands):
December 31,
1998 1997 1996
3 months or less $ 21,510 $ 21,715 $ 20,658
Over 3 through 6 months 8,285 12,287 7,322
Over 6 through 12 months 4,608 6,438 6,897
Over 12 months 8,995 10,293 5,893
Total $ 43,398 $ 50,733 $ 40,770
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>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
At December 31:
Securities sold under agreements to repurchase $26,018 $10,780 $18,360
Federal Home Loan Bank advances:
Overnight - - 19,733
Fixed term - due in one year or less - - 11,693
Fixed term - due after one year 19,500 7,000 1,000
Federal funds purchased - - -
Total $45,518 $17,780 $50,786
Average interest rate at year end 4.51% 5.01% 5.91%
Maximum Outstanding at Any Month-end
Securities sold under agreements to repurchase $26,018 $17,710 $18,860
Federal Home Loan Bank advances:
Overnight 5,500 23,733 23,083
Fixed term - due in one year or less - 16,000 20,693
Fixed term - due after one year 20,500 9,000 7,500
Federal funds purchased 5,750 - 6,500
Total $57,767 $66,443 $76,636
Averages for the Year
Securities sold under agreements to repurchase $ 9,717 $10,806 $12,411
Federal Home Loan Bank advances:
Overnight 236 6,933 8,136
Fixed term - due in one year or less - 3,455 9,352
Fixed term - due after one year 18,504 6,833 6,432
Federal funds purchased 364 502 800
Total $28,821 $28,529 $37,131
Average interest rate during the year 5.07% 5.02% 5.45%
</TABLE>
Securities sold under agreements to repurchase are short-term obligations of
First Mid Bank. First Mid Bank pledges collateral, securing any obligation to
pay the amount due, certain government securities which are direct obligations
of the United States or one of its agencies. First Mid Bank offers these retail
repurchase agreements as a cash management service to its corporate customers.
Federal Home Loan Bank advances represent borrowings by First Mid Bank to
economically fund agricultural loan demand. This loan demand was previously
funded primarily through deposits by the State of Illinois. The increase in
fixed term advances results primarily from $13.5 million in advances which First
Mid Bank is using to fund agricultural loans. $10.0 million is a 10-year
maturity with a one year call option by the Federal Home Loan Bank. The advance
bears interest at a rate of 4.85%. $3.5 million is a 10-year maturity which is
callable quarterly after one year. The advance bears interest at a rate of
5.00%. The remainder of the balance represents outstanding fixed term advances
due in 1 - 3 years.
INTEREST RATE SENSITIVITY
The Company 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 Company monitors its interest rate sensitivity position to maintain a
balance between rate sensitive assets and rate sensitive liabilities. This
balance serves to limit the adverse effects of changes in interest rates. The
Company's asset/liability management committee 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 Company's interest
rate repricing gaps for selected maturity periods at December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
NUMBER OF MONTHS UNTIL NEXT REPRICING OPPORTUNITY
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS: 0-1 1-3 3-6 6-12 12+
Deposits with other financial
institutions $ 103 $ - $ - $ - $ -
Federal funds sold 7,000 - - - -
Taxable investment securities 21,569 18,126 4,215 15,346 68,482
Nontaxable investment securities 60 603 165 1,867 26,423
Loans 33,496 35,467 31,216 35,641 213,243
Total $ 62,228 $ 54,196 $ 35,596 $ 52,854 $ 308,148
INTEREST BEARING LIABILITIES:
Savings and N.O.W. accounts 125,281 - - - -
Money market accounts 38,383 - - - -
Other time deposits 29,103 43,454 39,568 41,525 69,965
Other borrowings 26,017 - - 4,000 15,500
Long-term debt 4,700 - - - -
Total $ 223,484 $ 43,454 $ 43,568 $ 41,525 $ 85,465
Periodic GAP $(161,256) $ 10,742 $ (7,972) $ 11,329 $ 222,683
Cumulative GAP $(161,256) $(150,514) $(158,486) $(147,157) $ 75,526
GAP as a % of interest earning assets:
Periodic (31.4%) 2.1% (1.6%) 2.2% 43.4%
Cumulative (31.4%) (29.3%) (30.9%) (28.7%) 14.7%
</TABLE>
At December 31, 1998, the Company 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.
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 Company. Its actual usefulness in assessing the effect of
changes in interest rates varies with the constant changes which occur in the
composition of the Company's earning assets and interest-bearing liabilities.
For this reason, the Company uses financial models to project interest income
under various rate scenarios and assumptions relative to the prepayments,
reinvestment and roll overs of assets and liabilities, of which First Mid Bank
represents substantially all of the Company's rate sensitive assets and
liabilities.
CAPITAL RESOURCES
At December 31, 1998, the Company's stockholders' equity increased $4,904,000
or 10.8% to $50,480,000 from $45,576,000 as of December 31, 1997. During 1998,
net income contributed $5,062,000 to equity before the payment of dividends to
common and preferred stockholders. The change in net unrealized gain on
available-for-sale investment securities decreased stockholders' equity by
$39,000, net of tax.
STOCK PLANS
DEFERRED COMPENSATION PLAN
Effective September 30, 1998, the Company adopted the provisions of the
Emerging Issues Task Force Issue No. 97-14, "ACCOUNTING FOR DEFERRED
COMPENSATION ARRANGEMENTS WHERE AMOUNTS EARNED ARE HELD IN A RABBI TRUST AND
INVESTED" ("EITF 97-14") for purposes of the First Mid-Illinois Bancshares, Inc.
Deferred Compensation Plan ("DCP"). Upon adoption of EITF 97-14, the Company
has reclassified the cost basis of its common stock issued and held in trust in
connection with the DCP of approximately $950,000 to treasury stock. The
Company also reclassified the cost basis of its related deferred compensation
obligation of approximately $950,000 from other liabilities to an equity
instrument (deferred compensation).
The DCP was effective as of June, 1984, in which the purpose is to enable
directors, advisory directors, and key officers the opportunity to defer a
portion of the fees and cash compensation paid by the Company as a means of
maximizing the effectiveness and flexibility of compensation arrangements.
During 1996, the Company began issuing common stock for participants of the DCP.
The Company issued 4,677 common shares pursuant to the DCP during 1998 and
11,403 common shares during 1997.
FIRST RETIREMENT AND SAVINGS PLAN
The First Retirement and Savings Plan ("401k plan") was effective beginning in
1985. Employees are eligible to participate in the 401k plan after six months
of service to the Company. During 1996, the Company began issuing common stock
as an investment option for participants of the 401k plan. The Company issued
21,579 common shares pursuant to the 401k plan during 1998 and 44,893 common
shares during 1997.
DIVIDEND REINVESTMENT PLAN
The Dividend Reinvestment Plan ("DRIP") was effective as of October, 1994. The
purpose of the DRIP is to provide participating stockholders with a simple and
convenient method of investing cash dividends paid by the Company on its shares
of common and preferred shareholders into newly-issued common shares of the
Company. All holders of record of the Company's common or preferred stock are
eligible to voluntarily participate in the DRIP. The DRIP is administered by
Harris Trust and Savings Bank and offers a way to increase one's investment in
the Company. Of the $1,308,000 in common and preferred stock dividends paid
during 1998, $749,000 or 57.3% was reinvested into shares of common stock of the
Company through the DRIP. Three events occurred during 1998 that resulted in
common shares being reinvested in the DRIP:
* 1,000 common shares were issued from stock options that were issued during
the fourth quarter of 1997 and exercised in August, 1998
* 2,425 common shares were issued from converting 6 preferred shares
* 20,837 common shares were issued from common and preferred stock dividends
During 1997, 32,781 common shares were issued pursuant to the DRIP.
STOCK INCENTIVE PLAN
In December, 1997, the Company established a Stock Incentive Plan ("SI Plan")
intended to provide a means whereby directors and certain officers can acquire
shares of the Company's common stock. A maximum of 100,000 shares have been
authorized under the SI Plan. Options to acquire shares will be awarded at an
exercise price equal to the fair market value of the shares on the date of
grant. Options to acquire shares have a 10-year term. Options granted to
employees vest over a four year period and those options granted to directors
vest at the time they are issued. The following stock options have been awarded
by the Company:
* granted 19,500 options at an option price of $23.51 in October, 1997 (500
were exercised in August, 1998)
* granted 11,500 options at an option price of $33.73 in December, 1997 (500
were exercised in August, 1998)
* granted 11,500 options at an option price of $35.00 in December, 1998
The Company applied APB Opinion No. 25 in accounting for the SI Plan and,
accordingly, compensation cost based on fair value at grant date has not been
recognized for its stock options in the consolidated financial statements for
the years ended December 31, 1998 and 1997.
On August 5, 1998, the Company announced a stock repurchase program of up to
3% of its common stock. The shares will be repurchased at the most recent
market price of the stock. As of December 31, 1998, 13,539 shares (.7%) at a
total price of $507,000 were repurchased by the Company. Treasury Stock is
further affected by activity in the Deferred Compensation Plan.
The Company and First Mid Bank have capital ratios 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, 1998, the Company's leverage ratio was 7.90%.
A tabulation of the Company's and First Mid Bank's capital ratios as of
December 31, 1998 follows:
<TABLE>
<CAPTION>
TIER ONE CAPITAL TOTAL CAPITAL TIER ONE CAPITAL
TO RISK-WEIGHTED TO RISK-WEIGHTED TO AVERAGE
ASSETS ASSETS ASSETS
<S> <C> <C> <C>
First Mid-Illinois Bancshares, Inc.
(Consolidated) 13.06% 13.89% 7.90%
First Mid-Illinois Bank & Trust, N.A. 13.62% 14.46% 8.20%
</TABLE>
Banks and bank holding companies are generally expected to operate at or above
the minimum capital requirements. These ratios are in excess of regulatory
minimums and will allow the Company to operate without capital adequacy
concerns.
LIQUIDITY
Liquidity represents the ability of the Company and its subsidiaries to meet
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. Other sources for cash include deposits of the State of Illinois and
Federal Home Loan Bank advances. At December 31, 1998, the excess collateral at
the Federal Home Loan Bank will support approximately $71 million of additional
advances.
Management monitors its expected liquidity requirements carefully, focusing
primarily on cash flows from:
* lending activities, including loan commitments, letters of credit and
mortgage prepayment assumptions
* deposit activities, including seasonal demand of private and public funds
* investing activities, including prepayments of mortgage-backed securities
and call assumptions on U.S. Government Treasuries and Agencies
* operating activities, including schedule debt repayments and dividends to
shareholders
EFFECTS OF INFLATION
Unlike industrial companies, virtually all of the assets and liabilities of
the Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or experience the same magnitude of changes as goods and services,
since such prices are effected by inflation. In the current economic
environment, liquidity and interest rate adjustments are features of the
Company's assets and liabilities which are important to the maintenance of
acceptable performance levels. The Company attempts to maintain a balance
between monetary assets and monetary liabilities, over time, to offset these
potential effects.
FUTURE ACCOUNTING CHANGES
Statement of Financial Accounting Standards No. 133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," ("SFAS 133") was issued by the
FASB in June 1998. SFAS 133 standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts. Under the standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e., gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative instrument as a
hedge of exposures to changes in fair values, cash flows, or foreign currencies.
If the hedged exposure is a fair value exposure, the gain or loss on the
derivative instrument is recognized in earnings in the period of change together
with the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the effective
portion of the gain or loss on the derivative instrument is reported initially
as a component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amounts excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately.
Accounting for foreign currency hedges is similar to the accounting for fair
value and cash flow hedges. If the derivative instrument is not designated as a
hedge, the gain or loss is recognized in earnings in the period of change. The
Company has not determined the impact that SFAS 133 will have on its financial
statements and believes that such determination will not be meaningful until
closer to the date of initial adoption.
In October 1998, the FASB issued Statement of Financial Accounting Standards
No. 134, "ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED AFTER THE
SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE"
("SFAS 134"). SFAS 134 amends Statement No.65, "ACCOUNTING FOR CERTAIN MORTGAGE
BANKING ACTIVITIES" to conform the subsequent accounting for securities retained
after the securitization of mortgage loans by a mortgage banking enterprise with
the subsequent accounting for securities retained after the securitization of
other types of assets by a non-mortgage banking enterprise. SFAS 134 is
effective for the first quarter beginning after December 15, 1998 and
enterprises may reclassify mortgage-backed securities and other beneficial
interests retained after the securitization of mortgage loans held for sale from
the trading category, except for those with sales commitments in place. The
reclassification is to be done only by those enterprises covered by SFAS 134 and
is to be done when the statement is initially applied. The adoption of SFAS 134
is not expected to have a material impact on the Company.
THE YEAR 2000 ISSUE
Like other businesses dependent upon computerized information processing, the
Company must deal with "Year 2000" issues, which stem from using two digits to
reflect the year in many computer programs and data. Computer programmers and
other designers of equipment that use microprocessors have abbreviated dates by
eliminating the first two digits of the year. As the year 2000 approaches, many
systems may be unable to distinguish years beginning with 20 from years
beginning with 19, and so may not accurately process certain date-based
information, which could cause a variety of operational problems for businesses.
The Company's data processing software and hardware provide essential support
to virtually all of its businesses, so successfully addressing Year 2000 issues
is of the highest importance. Failure to complete renovation of the critical
systems used by the Company on a timely basis could have a materially adverse
affect on its operations and financial performance, as could Year 2000 problems
experienced by others with whom the Company does business. Because of the range
of possible issues and the large number of variables involved, it is impossible
to quantify the potential cost of problems should the Company's remediation
efforts or the efforts of those with whom it does business not be successful.
The Company has a dedicated Year 2000 project team whose members have
significant experience on the Company's applications which run on both main
frame and desk top applications. Virtually all applications used by the Company
were developed by third party vendors who have represented that their systems
were developed using four digit years.
The Company completed the information technology portion of the assessment and
inventory phases of its Year 2000 project in early 1998. Full time renovation
began in the first quarter of 1998. Testing and implementation activities have
been underway on mission critical applications since late 1997. The Company has
a highly centralized data processing environment, with the vast majority of its
data processing needs serviced out of a consolidated data center in Mattoon. As
of December 31, 1998, the Company had completed approximately 90% of its
renovation, testing and implementation for mission critical applications
(including vended and out-sourced applications). All implementation includes
testing with dates into the Year 2000 and internal user acceptance. The balance
of these applications are planned to be renovated, tested and implemented in
early 1999. With respect to non-mission critical applications, the Company's
target for completion of Year 2000 work is mid-1999.
The Year 2000 project team is also responsible for addressing issues that are
not directly related to data processing systems. The project team is
coordinating a review of various infrastructure issues, such as checking
elevators and heating, ventilation and air-conditioning equipment, some of which
include embedded systems, to verify that they will function in the Year 2000.
The project team is also coordinating a review of the Year 2000 status of power
and telecommunications providers at each important location, as these services
are critical to its business. Contingency plans are being developed for the
Company's important locations. The actions taken pursuant to these plans will
depend in part on the Company's assessment of the readiness of specific
providers in the power and telecommunications industries.
The project team is also monitoring programs to contact vendors and suppliers
to determine their Year 2000 readiness. Although the Company is attempting to
monitor and validate the efforts of other parties, it cannot control the success
of these efforts. Contingency plans are being developed where practical to
provide the Company with alternatives in situations where an entity furnishing a
critical product or service experiences significant Year 2000 difficulties that
will affect the Company. Contingency planning is expected to be completed by
mid-1999.
As part of its credit analysis process, the Company is assessing the Year 2000
readiness of its significant credit customers and is using this information in
the methodology of assessing the adequacy of the allowance for possible loan
losses. In addition, as part of its fiduciary activities, the Company has
developed and is implementing a plan for taking the Year 2000 issue into
consideration, and to evaluate and deal with Year 2000 issues associated with
property held in trust. The Company's personnel have also conducted several
workshops for its customers, as well as for the community as a whole, to explain
the Year 2000 issues and the Company's Year 2000 program.
The Company conducts an ongoing review of its estimated Year 2000 external
expenditures which are currently estimated to be approximately $125,000. This
estimate includes the cost of purchasing licenses for software programming tools
but does not reflect the cost of the time of internal staff. All Year 2000
costs are expensed as incurred. As of December 31, 1998, approximately 75% of
project costs have been incurred. The remaining costs are expected to be
incurred roughly evenly over the next 12 months.
The cost of the time of internal staff devoted to the Year 2000 project is
significant. This expense is not included in the above statement. Because of
the priority given to the Year 2000 work by the Company, some other technology-
related projects have been delayed. However, such delays are not expected to
have a material effect on the ongoing business operations of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk arises primarily from interest rate risk inherent in
its lending, investing and deposit taking activities. The Company does not
currently use derivatives to manage market or interest rate risks. For a
discussion of how management of the Company addresses and evaluates interest
rate risk see also "Item 7. Managements' Discussion and Analysis of Financial
Condition and Results of Operations - Interest Rate Sensitivity."
Based on the financial analysis performed as of December 31, 1998, which takes
into account how the specific interest rate scenario would be expected to impact
each interest-earning asset and each interest-bearing liability, the Company
estimates that changes in the prime interest rate would impact First Mid Bank's
performance as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
Increase (Decrease) In
Net Interest Net Interest Return On
Income Margin Equity
<S> <C> <C> <C>
12/31/98 prime rate is 7.75% (000) 1998=3.77% 1998=11.18%
Prime rate increase of:
200 basis points to 9.75% $ (395) (1.88)% (.71)%
100 basis points to 8.75% (175) (.83)% (.31)%
Prime rate decrease of:
200 basis points to 5.75% (191) (.91)% (.34)%
100 basis points to 6.75% (87) (.42)% (.16)%
</TABLE>
The following table shows the same analysis performed as of December 31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
Increase (Decrease) In
Net Interest Net Interest Return On
Income Margin Equity
<S> <C> <C> <C>
12/31/97 prime rate is 8.50% (000) 1997=3.97% 1997=11.67%
Prime rate increase of:
200 basis points to 10.50% $ (306) (1.46)% (.59)%
100 basis points to 9.50% (71) (.34)% (.14)%
Prime rate decrease of:
200 basis points to 6.50% (689) (3.27)% (1.35)%
100 basis points to 7.50% (341) (1.62)% (.66)%
</TABLE>
The First Mid Bank's board of directors has adopted an interest rate risk
policy which establishes maximum decreases in the percentage change in net
interest margin of 5% in a 100 basis point rate shift and 10% in a 200 basis
point rate shift.
No assurance can be given that the actual net interest margin (percentage) or
net interest income would increase or decrease by such amounts in response to a
100 or 200 basis point increase or decrease in the prime rate.
Interest rate sensitivity analysis is also used to measure the Company's
interest risk by computing estimated changes in net portfolio value ("NPV") of
its cash flows from assets, liabilities and off-balance sheet items in the event
of a range of assumed changes in market interest rates. NPV represents the
market value of portfolio equity and is equal to the market value of assets
minus the market value of liabilities, with adjustments made for off-balance
sheet items. This analysis assesses the risk of loss in market risk sensitive
instruments in the event of a sudden and sustained two percent increase or
decrease in market interest rates. The following tables present, in thousands,
First Mid Bank's projected change in NPV for the various rate shock levels at
December 31, 1998 and December 31, 1997. All market risk sensitive instruments
presented in the tables are held-to-maturity or available-for-sale. First Mid
Bank has no trading securities.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
Estimated
Changes In NPV As A
Interest Rates Estimated % of PV Amount Percent
(basis points) NPV of Assets of Change of Change
<S> <C> <C> <C> <C>
+200 bp $47,822 8.66% $(4,215) (8.10)%
0 bp 52,037 9.42%
-200 bp 55,376 10.03% 3,339 6.42%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
Estimated
Changes In NPV As A
Interest Rates Estimated % of PV Amount Percent
(basis points) NPV of Assets of Change of Change
<S> <C> <C> <C> <C>
+200 bp $45,026 8.83% $(3,310) (6.85)%
0 bp 48,336 9.13%
-200 bp 50,118 9.13% 1,782 3.67%
</TABLE>
As indicated above, at December 31, 1998, in the event of a sudden and
sustained increase in prevailing market interest rates, First Mid Bank's NPV
would be expected to decrease, and that in the event of a sudden and sustained
decrease in prevailing market interest rates, First Mid Bank's NPV would be
expected to increase. At December 31, 1998, First Mid Bank's estimated changes
in NPV were within the industry guidelines which normally allow a change in
capital of +/-10% from the base case scenario.
The NPV calculation is based on the net present value of discounted cash flows
utilizing market prepayment assumptions and market rates of interest provided by
Bloomberg quotations.
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions First Mid Bank may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in the
computation of NPV. Actual values may differ from those projections set forth
in the table, should market conditions vary from assumptions used in the
preparation of the table. Certain assets, such as adjustable-rate loans, which
represent First Mid Bank's primary loan product, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
In addition, the proportion of adjustable-rate loans in First Mid Bank's
portfolio could decrease in future periods if market rates remain at or decrease
below current levels due to refinance activity. Further, in the event of a
change in interest rates, prepayment and early withdrawal, levels would likely
deviate significantly from those assumed in the table. Finally, the ability of
many borrowers to repay their adjustable-rate debt may decrease in the event of
an interest rate increase.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(In thousands, except share data) 1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks (note 4):
Non-interest bearing $ 14,669 $ 20,486
Interest bearing 103 250
Federal funds sold 7,000 5,925
Cash and cash equivalents 21,772 26,661
Investment securities (note 5):
Available-for-sale, at fair value 153,534 116,782
Held-to-maturity, at amortized cost (estimated fair value of
$3,389 and $3,057 at December 31, 1998 and 1997, respectively) 3,322 3,020
Loans (note 6) 349,065 358,223
Less allowance for loan losses (note 7) 2,715 2,636
Net loans 346,350 355,587
Premises and equipment, net (note 8) 13,226 12,356
Accrued interest receivable 5,742 5,367
Intangible assets, net (notes 3 and 9) 7,787 8,550
Other assets (note 17) 2,930 4,655
TOTAL ASSETS $554,663 $532,978
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 10):
Non-interest bearing $ 62,357 $ 53,599
Interest bearing 387,279 403,999
Total deposits 449,636 457,598
Accrued interest payable 2,091 2,229
Securities sold under agreements to repurchase (notes 5 and 11) 26,018 10,780
Federal Home Loan Bank advances (note 11) 19,500 7,000
Long-term debt (note 12) 4,700 6,200
Other liabilities (note 17) 2,238 3,595
TOTAL LIABILITIES 504,183 487,402
Stockholders' Equity
Series A convertible preferred stock; no par value; authorized
1,000,000 shares; issued 614 shares in 1998 and 620 shares
in 1997 with stated value of $5,000 per share 3,070 3,100
Common stock, $4 par value; authorized 6,000,000 shares;
issued 2,023,227 shares in 1998 and 1,972,709 shares in 1997 8,093 7,891
Additional paid-in-capital 8,562 7,038
Retained earnings 31,025 27,271
Deferred compensation 950 -
Accumulated other comprehensive income 261 300
Less treasury stock at cost, 15,539 shares
in 1998 and 2,000 shares in 1997 (1,481) (24)
TOTAL STOCKHOLDERS' EQUITY 50,480 45,576
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $554,663 $532,978
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1998, 1997 and 1996
(In thousands, except per share data)
1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $29,072 $30,040 $ 27,827
Interest on investment securities:
Taxable 7,052 6,759 6,868
Exempt from federal income tax 843 701 629
Interest on federal funds sold 451 230 180
Interest on deposits with other financial institutions 33 75 55
Total interest income 37,451 37,805 35,559
INTEREST EXPENSE:
Interest on deposits (note 10) 16,786 17,147 15,310
Interest on securities sold under agreements
to repurchase 1,008 488 574
Interest on Federal Home Loan Bank advances 435 1,018 1,405
Interest on Federal funds purchased 19 26 44
Interest on long-term debt (note 12) 378 452 472
Total interest expense 18,626 19,131 17,805
Net interest income 18,825 18,674 17,754
Provision for loan losses (note 7) 550 700 147
Net interest income after provision for loan losses 18,275 17,974 17,607
OTHER INCOME:
Trust revenues 1,746 1,663 1,293
Brokerage revenues 304 464 386
Service charges 1,919 1,804 1,728
Securities gains(losses), net (note 5) 154 (6) (9)
Mortgage banking income 1,121 491 428
Other 1,096 1,005 973
Total other income 6,340 5,421 4,799
OTHER EXPENSE:
Salaries and employee benefits (note 15) 8,645 7,922 7,938
Net occupancy expense 1,179 1,116 1,098
Equipment rentals, depreciation and maintenance 1,768 1,666 1,247
Federal deposit insurance premiums 107 40 275
Savings Association Insurance Fund
recapitalization assessment - - 751
Amortization of intangible assets (note 9) 764 709 547
Stationary and supplies 657 692 559
Legal and professional 920 890 795
Marketing and promotion 500 529 579
Other 2,579 2,475 2,188
Total other expense 17,119 16,039 15,977
Income before income taxes 7,496 7,356 6,429
Income taxes (note 17) 2,434 2,630 2,263
Net income $ 5,062 $ 4,726 $ 4,166
Per common share data:
Basic earnings per share $ 2.39 $ 2.30 $ 2.11
Diluted earnings per share $ 2.24 2.17 1.99
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
(In thousands, except share and per share data)
ACCUMULATED
ADDITIONAL OTHER
PREFERRED COMMON PAID-IN- RETAINED DEFERRED COMPREHENSIVE TREASURY
STOCK STOCK CAPITAL EARNINGS COMPENSATION INCOME STOCK TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995 $3,100 $3,580 $3,969 $24,493 $ - $191 $(24) $35,309
Comprehensive income:
Net income - - - 4,166 - - - 4,166
Net unrealized change in available-
for-sale investment securities - - - - - (175) - (175)
Total Comprehensive Income 3,991
Cash dividends on preferred
stock ($462.50 per share) - - - (286) - - - (286)
Cash dividends on common
stock ($.425 per share) - - - (795) - - - (795)
Issuance of 33,686 common shares pursuant
to the Dividend Reinvestment Plan - 67 525 - - - - 592
Issuance of 30,496 common shares pursuant
to the Deferred Compensation Plan - 61 476 - - - - 537
Issuance of 31,468 common shares pursuant
to the First Retirement & Savings Plan - 63 493 - - - - 556
DECEMBER 31, 1996 3,100 3,771 5,463 27,578 - 16 (24) 39,904
Comprehensive income:
Net income - - - 4,726 - - - 4,726
Net unrealized change in available-
for-sale investment securities - - - - - 284 - 284
Total Comprehensive Income 5,010
Cash dividends on preferred
stock ($462.50 per share) - - - (286) - - - (286)
Cash dividends on common
stock ($.46 per share) - - - (895) - - - (895)
Issuance of 32,781 common shares pursuant
to the Dividend Reinvestment Plan - 96 559 - - - - 655
Issuance of 11,403 common shares pursuant
to the Deferred Compensation Plan - 34 206 - - - - 240
Issuance of 44,893 common shares pursuant
to the First Retirement & Savings Plan - 138 810 - - - - 948
Stock split in the form of a 100%
stock dividend (2-for-1) - 3,852 - (3,852) - - - -
December 31, 1997 3,100 7,891 7,038 27,271 - 300 (24) 45,576
Comprehensive income:
Net income - - - 5,062 - - - 5,062
Net unrealized change in available-
for-sale investment securities - - - - - (39) - (39)
Total Comprehensive Income 5,023
Cash dividends on preferred
stock ($462.50 per share) - - - (285) - - - (285)
Cash dividends on common
stock ($.51 per share) - - - (1,023) - - - (1,023)
Issuance of 20,837 common shares pursuant
to the Dividend Reinvestment Plan - 83 666 - - - - 749
Issuance of 4,677 common shares pursuant
to the Deferred Compensation Plan - 19 150 - - - - 169
Issuance of 21,579 common shares pursuant
to the First Retirement & Savings Plan - 86 663 - - - - 749
Conversion of 6 preferred shares into
2,425 common shares (30) 10 20 - - - - -
Purchase of 13,539 treasury shares - - - - - - (507) (507)
Deferred compensation - - - - 950 - (950) -
Issuance of 1,000 common shares pursuant
to the exercise of stock options - 4 25 - - - - 29
December 31, 1998 $ 3,070 $ 8,093 $ 8,562 $31,025 $ 950 $ 261 $(1,481) $50,480
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,062 $ 4,726 $ 4,166
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 550 700 147
Depreciation, amortization and accretion, net 2,072 1,864 1,251
(Gain) loss on sale of securities, net (154) 6 9
(Gain) loss on sale of other real property owned, net 172 199 (72)
Gain on sale of mortgage loans held for sale, net (906) (390) (322)
Deferred income taxes (92) (495) (77)
Increase in accrued interest receivable (375) (138) (832)
Increase (decrease) in accrued interest payable (138) 573 76
Origination of mortgage loans held for sale (76,000) (30,531) (21,139)
Proceeds from sale of mortgage loans held for sale 70,164 29,605 21,113
(Increase) decrease in other assets 1,626 (1,077) (1,228)
Increase (decrease) in other liabilities (1,298) 461 309
Net cash provided by operating activities 683 5,503 3,401
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of mortgage servicing rights (78) (103) (196)
Purchases of premises and equipment (2,091) (1,458) (2,036)
Net (increase) decrease in loans 15,429 (8,978) (41,142)
Proceeds from sales of:
Securities available-for-sale 10,485 9,983 31,667
Proceeds from maturities of:
Securities available-for-sale 63,718 31,463 32,894
Securities held-to-maturity 728 723 580
Purchases of:
Securities available-for-sale (111,174) (43,718) (59,366)
Securities held-to-maturity (799) (170) (680)
Purchase of financial organization, net of cash received - 22,416 -
Net cash provided by (used in) investing activities (23,782) 10,158 (38,279)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (7,962) 16,166 16,797
Increase(decrease) in repurchase agreements 15,238 (7,580) 1,545
Increase(decrease) in short-term FHLB advances 12,500 (31,426) 23,226
Repayment of long-term debt (1,500) (1,000) (3,500)
Proceeds from issuance of long-term debt - 7,000 -
Proceeds from issuance of common stock 947 1,188 1,094
Purchase of treasury stock (507) - -
Dividends paid on preferred stock (32) (32) (32)
Dividends paid on common stock (474) (427) (436)
Net cash provided by (used in) financing activities 18,210 (16,111) 38,694
Increase (decrease) in cash and cash equivalents (4,889) (450) 3,816
Cash and cash equivalents at beginning of year 26,661 27,111 23,295
Cash and cash equivalents at end of year $21,772 $26,661 $27,111
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $18,488 $19,704 $17,969
Income taxes 2,918 3,000 2,080
Loans transferred to real estate owned 506 578 290
Dividends reinvested in common shares 749 655 592
See accompanying notes to consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING AND CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
First Mid-Illinois Bancshares, Inc. ("Company") and its wholly-owned
subsidiaries: Mid-Illinois Data Services, Inc. ("MIDS") and First Mid-Illinois
Bank & Trust, N.A. ("First Mid Bank") and its wholly-owned subsidiary First Mid-
Illinois Insurance Services, Inc. ("First Mid Insurance"). All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain amounts in the 1997 and 1996 consolidated financial statements have been
reclassified to conform with the 1998 presentation. The accounting and
reporting policies of the Company 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 Company classifies its debt securities into one or more of three
categories: held-to-maturity, available-for-sale, or trading. Held-to-maturity
securities are those which management has the positive intent and ability to
hold to maturity. Available-for-sale securities are those securities which
management may sell prior to maturity as a result of changes in interest rates,
prepayment factors, or as part of the Company's overall asset and liability
strategy. Trading securities are those securities bought and held principally
for the purpose of selling them in the near term. The Company 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 Company's policy is to generally discontinue the accrual of interest
income on any loan for which principal or interest is ninety days past due and
when, in the opinion of management, there is reasonable doubt as to the timely
collectibility of interest or principal. Nonaccrual loans are returned to
accrual status when, in the opinion of management, the financial position of the
borrower indicates there is no longer any reasonable doubt as to the timely
collectibility of interest or principal.
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.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a loan to be impaired
when it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the note agreement, including principal
and interest. The amount of the impairment is measured based on the fair value
of the collateral, if the loan is collateral dependent, or alternatively, at the
present value of expected future cash flows discounted at the loan's effective
interest rate. 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 Company
accounted for as purchases. Such assets consist of the excess of the purchase
price over the fair market value of net assets acquired, with 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 fifteen years. The Company 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 Company's acquisition of Heartland Savings Bank
("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 Company 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 404.2 shares of common stock for each share of
preferred. The Company 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 Company 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
First Mid Bank originates residential mortgage loans both for its portfolio
and for sale into the secondary market. Included in mortgage banking income are
gains or losses on the sale of loans and servicing fee income. 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.
The Company recognizes 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.
For the year ended 1998 1997 1996
Capitalized mortgage servicing rights $78,000 $103,000 $196,000
Amortization expense $75,000 $65,000 $50,000
The balance of mortgage servicing rights was $214,000 and $211,000 at December
31, 1998 and 1997, respectively.
INCOME TAXES
The Company and its subsidiaries file consolidated Federal and State income
tax returns with each organization computing its taxes on a separate company
basis. Amounts provided for income tax expense are based on income reported for
financial statement purposes rather than amounts currently payable under tax
laws.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to the temporary differences existing between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases, as well as operating loss and tax credit 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 Company or its subsidiaries.
STOCK SPLIT
On May 22, 1997, the Company declared a two-for-one stock split in the form of
a 100% stock dividend. Par value remained at $4 per share. The stock split
increased the Company's outstanding common shares from 2,000,000 to 4,000,000
shares. All references in the consolidated financial statements and notes
thereto as to the number of common shares, per common share amounts and market
prices of the Company's common stock have been restated giving retroactive
recognition to the stock split.
COMPREHENSIVE INCOME
In 1998, the Company adapted Financial Accounting Standards Board's Statement
No. 130, "REPORTING COMPREHENSIVE INCOME" ("SFAS 130"). This statement
establishes standards for the reporting and display of comprehensive income and
its components in a full set of financial statements. Comprehensive income
consists of net income and net unrealized gains (losses) on available-for-sale
investment securities and is presented in the consolidated statements of changes
in stockholders' equity. SFAS 130 requires only additional disclosures in the
financial statements; it does not affect the Company's financial position or
results of operations. Prior year financial statements have been reclassified
to conform to the requirements of SFAS 130. The Company's comprehensive income
for the years ended December 31, 1998, 1997 and 1996 is as follows:
(in thousands) 1998 1997 1996
Net income $5,062 $4,726 $4,166
Other comprehensive income:
Unrealized gains(losses) during the period 95 424 (274)
Reclassification adjustment for net
(gains)losses realized in net income (154) 6 9
Tax effect 20 (146) 90
Comprehensive income $5,023 $5,010 $3,991
In June, 1997, the FASB issued Statement of financial Accounting Standards No.
131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION"
("SFAS 131"). SFAS 131 establishes standards for the way public business
enterprises report information about operating segments in annual financial
statements. Operating segments are components of an enterprise for which
separate financial information is available, and is evaluated regularly by
management in deciding how to allocate resources and in assessing performance.
SFAS 131 establishes standards for related disclosures about products, services,
geographic areas, and major customers. The Company operates as a single
segment.
NOTE 2 - EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Financial Accounting
Standards Board's Statement No. 128, "EARNINGS PER SHARE" ("SFAS 128"). Income
for Basic Earnings per Share ("EPS") is adjusted for dividends attributable to
preferred stock and is based on the weighted average number of common shares
outstanding. Diluted EPS is computed by using the weighted average number of
common shares outstanding, increased by the assumed conversion of the
convertible preferred stock and the assumed conversion of the stock options.
The components of basic and diluted earnings per common share for the years
ended December 31, 1998, 1997, and 1996 are as follows:
1998 1997 1996
BASIC EARNINGS PER SHARE:
Net income $5,062,000 $4,726,000 $4,166,000
Less preferred stock dividends (285,000) (286,000) (286,000)
Net income available to common stockholders $4,777,000 $4,440,000 $3,880,000
Weighted average common shares outstanding 1,999,767 1,928,727 1,840,921
Basic Earnings per Common Share $2.39 $2.30 $2.11
DILUTED EARNINGS PER SHARE:
Net income available to common stockholders $4,777,000 $4,440,000 $3,880,000
Assumed conversion of preferred stock 285,000 286,000 286,000
Net income available to common stock-
holders after assumed conversion $5,062,000 $4,726,000 $4,166,000
Weighted average common shares outstanding 1,999,767 1,928,727 1,840,921
Assumed conversion of stock options 8,149 447 -
Assumed conversion of preferred stock 249,122 250,604 250,604
Diluted weighted average common
shares outstanding 2,257,038 2,179,778 2,091,525
Diluted Earnings per Common Share $2.24 $2.17 $1.99
NOTE 3 - MERGERS AND ACQUISITIONs
In November, 1997, Heartland merged with and into First Mid Bank. Prior to
the merger, Heartland was a wholly-owned subsidiary of the Company. Therefore,
the merger had no effect on the Company's financial position and results of its
operations.
On March 7, 1997, the Company acquired the Charleston, Illinois branch
location and the deposit base of First of America Bank. This cash acquisition
added approximately $28 million to total deposits, $500,000 to loans, $1.3
million to premises and equipment and $3.8 million to intangible assets.
The acquisition of the branch was accounted for using the purchase method of
accounting whereby the acquired assets and deposits of the branch were recorded
at their fair values as of the acquisition date. The operating results have
been combined with those of the Company since March 7, 1997.
NOTE 4 - CASH AND DUE FROM BANKS
Aggregate cash and due from bank balances of $236,000 and $8,724,000 at
December 31, 1998 and 1997, respectively, were maintained in satisfaction of
statutory reserve requirements of the Federal Reserve Bank.
NOTE 5 - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and estimated fair
values for available-for-sale and held-to-maturity securities by major security
type at December 31, 1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1998 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $ 91,069 $ 333 $ (413) $ 90,989
Obligations of states and political
subdivisions 24,352 481 (48) 24,785
Mortgage-backed securities 35,209 142 (100) 35,251
Federal Home Loan Bank stock 1,843 - - 1,843
Other securities 666 - - 666
Total available-for-sale $153,139 $ 956 $ (561) $153,534
Held-to-maturity:
Obligations of states and political
subdivisions $ 3,322 $ 67 - $ 3,389
1997
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $ 80,509 $ 198 $ (256) $ 80,451
Obligations of states and political
subdivisions 9,800 373 - 10,173
Mortgage-backed securities 23,272 195 (56) 23,411
Federal Home Loan Bank stock 2,115 - - 2,115
Other securities 632 - - 632
Total available-for-sale $116,328 $ 766 $ (312) $116,782
Held-to-maturity:
Obligations of states and political
subdivisions $ 3,020 $ 41 $ (4) $ 3,057
</TABLE>
Proceeds from sales of investment securities and realized gains and losses
were as follows during the years ended December 31, 1998, 1997 and 1996 (in
thousands):
1998 1997 1996
Proceeds from sales $ 10,485 $ 9,983 $ 31,667
Gross gains 157 20 155
Gross losses 3 26 164
Maturities of investment securities were as follows at December 31, 1998 (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 $ 4,103 $ 4,132
Due after one-five years 68,541 68,439
Due after five-ten years 33,217 33,479
Due after ten years 12,069 12,233
117,930 118,283
Mortgage-backed securities 35,209 35,251
Total available-for-sale $153,139 $153,534
Held-to-maturity:
Due in one year or less $ 501 $ 507
Due after one-five years 1,464 1,504
Due after five-ten years 932 948
Due after ten-years 425 430
Total held-to-maturity $ 3,322 $ 3,389
Total investment securities $156,461 $156,923
Investment securities carried at approximately $93,947,000 and $93,182,000 at
December 31, 1998 and 1997 respectively, were pledged to secure public deposits
and repurchase agreements and for other purposes as permitted or required by
law.
NOTE 6 - LOANS
A summary of loans at December 31, 1998 and 1997 follows (in thousands):
1998 1997
Commercial, financial and agricultural $ 78,617 $ 73,920
Real estate-mortgage 244,501 252,312
Installment 25,573 30,109
Other 791 2,791
Total gross loans 349,482 359,132
Less unearned discount 417 909
Net loans $349,065 $358,223
The real estate mortgage loan balance in the above table includes loans held
for sale of $8,743,000 and $2,001,000 at December 31, 1998 and 1997,
respectively. Certain officers, directors and principal stockholders of the
Company and its subsidiaries, their immediate families or their affiliated
companies have loans with one or more of the subsidiaries. These loans are made
in the ordinary course of business on substantially the same terms, including
interest and collateral, as those prevailing for comparable transactions with
others and do not involve more than the normal risk of collectibility. Loans to
related parties totaled approximately $12,959,000 at December 31, 1998 and
$7,758,000 at December 31, 1997.
Activity during 1998 was as follows (in thousands):
Balance at December 31, 1997 $ 7,758
New loans 7,683
Loan repayments (2,482)
Balance at December 31, 1998 $12,959
The aggregate principal balances of nonaccrual, past due and renegotiated
loans were as follows at December 31, 1998 and 1997 (in thousands):
1998 1997
Nonaccrual loans $1,783 $1,194
Loans past due ninety days or more and still accruing 609 145
Renegotiated loans which are performing
in accordance with revised terms 90 346
Interest income which would have been recorded under the original terms of
such nonaccrual or renegotiated loans totaled $159,000, $162,000 and $143,000 in
1998, 1997 and 1996, respectively. The amount of interest income which was
recorded amounted to $7,000 in 1998, $32,000 in 1997 and $39,000 in 1996.
Impaired loans are defined as those loans where it is probable that amounts
due according to contractual terms, including principal and interest, will not
be collected. Both nonaccrual and renegotiated loans meet this definition. The
Company evaluates all individual loans on nonaccrual or renegotiated with a
balance over $100,000 for impairment. Impaired loans are measured by the
Company at the present value of expected future cash flows or, alternatively, if
the loan is collateral dependant, at the fair value of the collateral. Known
losses of principal on these loans have been charged off. Interest income on
nonaccrual loans is recognized only at the time cash is received. Interest
income on renegotiated loans is recorded according to the most recently agreed
upon contractual terms. The following table presents information on impaired
loans (in thousands).
At December 31, 1998 1997
Impaired loans for which an allowance has
been provided $1,043 $ 438
Impaired loans for which no allowance has
been provided 830 1,102
Total loans determined to be impaired $1,873 $1,540
Allowance on impaired loans $ 250 $ 50
For the year ended December 31, 1998 1997 1996
Average recorded investment in impaired loans $2,002 $1,131 $1,105
Cash basis interest income recognized from
impaired loans 7 32 39
First Mid Bank enters into financial instruments with off-balance sheet risk
to meet the financing needs of its 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. First Mid Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by First Mid Bank 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, 1998 and 1997, respectively, the Company had
$53,349,000 and $43,533,000 of outstanding commitments to extend credit and
$750,000 and $855,000 of standby letters of credit. Management does not believe
that any significant losses will be incurred in connection with such
instruments.
Most of the Company's business activities are with customers located within
east central Illinois. At December 31, 1998 and 1997, the Company's loan
portfolio included approximately $50,888,000 and $49,309,000, respectively, of
loans to borrowers directly related to the agricultural industry.
Mortgage loans serviced for others by First Mid Bank are not included in the
accompanying consolidated balance sheets. The unpaid principal balances of
these loans at December 31, 1998, 1997 and 1996 was approximately $55,452,000,
$62,784,000 and $57,031,000, respectively.
NOTE 7 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows during the three year
period ended December 31,1998 (in thousands):
1998 1997 1996
Balance, beginning of year $2,636 $2,684 $2,814
Provision for loan losses 550 700 147
Recoveries 84 54 98
Charge offs (555) (802) (375)
Balance, end of year $2,715 $2,636 $2,684
NOTE 8 - PREMISES AND EQUIPMENT, NET
Premises and equipment at December 31, 1998 and 1997 consisted of (in
thousands):
1998 1997
Land $ 2,781 $ 2,950
Buildings and improvements 10,317 8,549
Furniture and equipment 6,911 6,137
Leasehold improvements 353 353
Construction in progress 362 1,015
Subtotal 20,724 19,004
Accumulated depreciation and amortization 7,498 6,648
Total $13,226 $12,356
Depreciation expense was $1,221,000, $1,168,000 and $788,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
NOTE 9 - INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, at December 31, 1998 and
1997 consisted of (in thousands):
1998 1997
Excess of cost over fair market value of
acquired subsidiaries $ 6,348 $ 6,901
Core deposit premium of acquired subsidiaries 1,439 1,649
Total $ 7,787 $ 8,550
Amortization expense was $764,000, $709,000 and $547,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
NOTE 10 - DEPOSITS
As of December 31, 1998 and 1997, deposits consisted of (in thousands):
1998 1997
Demand deposits:
Non-interest bearing $ 62,357 $ 53,599
Interest bearing 88,191 82,479
Savings 36,532 36,861
Money market 38,383 49,341
Time deposits 224,173 235,318
Total deposits $449,636 $457,598
Total interest expense on deposits for the years ended December 31, 1998, 1997
and 1996 was as follows (in thousands):
1998 1997 1996
Interest-bearing demand $ 2,189 $ 2,210 $ 1,931
Savings 856 999 1,069
Money market 1,486 1,474 1,154
Time deposits 12,255 12,464 11,156
Total $16,786 $17,147 $15,310
As of December 31, 1998, 1997 and 1996, 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):
1998 1997 1996
Outstanding $43,398 $50,733 $36,746
Interest expense for the year 2,397 2,676 2,108
The following table shows the amount of maturities for all time deposits as of
December 31, 1998 (in thousands):
less than 1 year $157,570
1 year to 2 years 52,485
2 years to 3 years 7,593
3 years to 4 years 3,474
over 4 years 3,051
total $224,173
NOTE 11 - OTHER BORROWINGS
As of December 31, 1998 and 1997 other borrowings consisted of (in thousands):
1998 1997
Securities sold under agreements to repurchase $26,018 $10,780
Federal Home Loan Bank advances:
Fixed term advances 19,500 7,000
Total $45,518 $17,780
$10.0 million is a 10-year maturity with a one year call option by the Federal
Home Loan Bank. The advance bears interest at a rate of 4.85%. $3.5 million is
a 10-year maturity which is callable quarterly after one year. The advance
bears interest at a rate of 5.00%. The remainder of the balance represents
outstanding fixed term advances maturing in one to three years. The following
table shows the amount of maturities at December 31, 1998, for the Federal Home
Loan Bank advances that have fixed terms (in thousands):
less than 1 year $ 4,000
1 year to 3 years 2,000
over 3 years 13,500
Total $19,500
1998 1997 1996
Securities sold under agreements to repurchase:
Maximum outstanding at any month-end $26,018 $17,710 $18,860
Average amount outstanding for the year 9,717 10,806 12,411
First Mid Bank has collateral pledge agreements whereby it has 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
Company's control.
NOTE 12 - LONG-TERM DEBT
A summary of long-term debt at December 31, 1998 and 1997 was as follows (in
thousands):
1998 1997
Floating rate loan at 1.25% in 1998 and 1997 over the
Federal funds rate. Interest due quarterly. Principal
payments due quarterly in various amounts. The debt
matures September 30, 2000. Effective interest rate of
6.13% at December 31, 1998 and 6.82% at December 31, 1997. $ 4,700 $ 6,200
The loan is secured by all of the common stock of First Mid Bank. The
borrowing agreement contains requirements for the Company and First Mid Bank to
maintain various operating and capital ratios and also contains requirements for
prior lender approval for certain sales of assets, merger activity, the
acquisition or issuance of debt and the acquisition of treasury stock. The
Company and First Mid Bank were in compliance with the existing covenants at
December 31, 1998 and 1997. The scheduled principal payments on the outstanding
long-term debt is $1.5 million during 1999 and the remaining balance in 2000.
NOTE 13 - REGULATORY CAPITAL
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Bank holding companies follow minimum
regulatory requirements established by the Federal Reserve Board, First Mid Bank
follows similar minimum regulatory requirements established for national banks
by the Office of the Comptroller of the Currency. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary action by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements.
Quantitative measures established by each regulatory agency to ensure capital
adequacy require the reporting institutions to maintain 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, 1998 and 1997, that all capital adequacy requirements have
been met.
As of December 31, 1998 and 1997, the most recent notification from the
primary regulators categorized the Company and First Mid Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, minimum total risk-based, Tier 1 risk-based and
Tier 1 leverage ratios must be maintained as set forth in the table. There are
no conditions or events since that notification that management believes have
changed these categories.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <S><C> <C> <S><C>
DECEMBER 31, 1998
Total Capital
(to risk-weighted assets)
Company $ 45,218 13.89% $ 26,036 > 8.00% $ 32,545 > 10.00%
First Mid Bank 46,704 14.46 25,831 > 8.00 32,289 > 10.00
Tier 1 Capital
(to risk-weighted assets)
Company 42,503 13.06 13,018 > 4.00 19,527 > 6.00
First Mid Bank 43,989 13.62 12,916 > 4.00 19,373 > 6.00
Tier 1 Capital
(to average assets)
Company 42,503 7.90 21,528 > 4.00 26,910 > 5.00
First Mid Bank 43,989 8.20 21,448 > 4.00 26,810 > 5.00
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <S><C> <C> <S><C>
DECEMBER 31, 1997
Total Capital
(to risk-weighted assets)
Company $ 39,416 12.20% $ 25,842 > 8.00% $ 32,303 > 10.00%
First Mid Bank 42,105 13.17 25,584 > 8.00 31,980 > 10.00
Tier 1 Capital
(to risk-weighted assets)
Company 36,780 11.39 12,921 > 4.00 19,382 > 6.00
First Mid Bank 39,469 12.34 12,792 > 4.00 19,188 > 6.00
Tier 1 Capital
(to average assets)
Company 36,780 7.05 20,879 > 4.00 26,099 > 5.00
First Mid Bank 39,469 7.59 20,807 > 4.00 26,009 > 5.00
</TABLE>
NOTE 14 - DISCLOSURE OF FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS," ("SFAS 107"), requires the disclosure of the
estimated fair value of financial instrument assets and liabilities. For the
Company, as for most financial institutions, most of the assets and liabilities
are considered financial instruments as defined in SFAS 107. However, many of
the Company's financial instruments lack an available trading market as
characterized by a willing buyer and seller engaging in an exchange transaction.
Additionally, the Company's general practice and intent is to hold its financial
instruments until maturity and not to engage in trading or sales activity.
Accordingly, significant assumptions and estimations as well as present value
calculations were used by the Company 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 Company 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, 1998 and 1997 were as follows (in
thousands):
Financial instruments for which an active secondary market exists have been
valued using quoted available market prices.
1998 1997
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
Cash and cash equivalents $ 21,772 $ 21,772 $ 26,661 $ 26,661
Investments available-for-sale 153,534 153,534 116,782 116,782
Investments held-to-maturity 3,389 3,322 3,057 3,020
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.
1998 1997
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
Deposits with stated maturities $224,951 $223,616 $235,283 $235,318
Securities sold under agreements
to repurchase 25,973 26,018 10,761 10,780
Federal Home Loan Bank advances 19,040 19,500 6,974 7,000
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.
1998 1997
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
Deposits with no stated maturity $226,387 $226,387 $222,280 $222,280
Floating rate long-term debt 4,700 4,700 6,200 6,200
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.
1998 1997
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
Net loan portfolio $348,460 $346,350 $357,218 $355,587
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 15 - RETIREMENT PLAN
The Company has a defined contribution retirement plan which covers
substantially all employees and which provides for base contributions of 4% of
compensation and a matching contribution by the Company of up to 50% of the
first 4% of voluntary employee contributions. Employee contributions are
limited to 15% of compensation. The total expense for the plan amounted to
$369,000, $352,000 and $309,000 in 1998, 1997 and 1996, respectively.
NOTE 16 - STOCK OPTION PLAN
The Company established a Stock Incentive Plan ("SI Plan") intended to provide
a means whereby directors and certain officers can acquire shares of the
Company's common stock. A maximum of 100,000 shares have been authorized under
the SI Plan. Options to acquire shares will be awarded at an exercise price
equal to the fair market value of the shares on the date of grant. Options to
acquire shares have a 10-year term. Options granted to employees vest over a
four year period and those options granted to directors vest at the time they
are issued.
A summary of the status of stock options under the SI plan at December 31,
1998 and 1997 and changes during the years then ended are presented in the
following table:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
Outstanding at December 31, 1996 - $ -
Granted 31,000 27.30
Outstanding at December 31, 1997 31,000 27.30
Granted 11,500 35.00
Exercised (1,000) 28.62
Outstanding at December 31, 1998 41,500 $ 29.40
The Company applies APB Opinion No. 25 in accounting for the SI Plan and,
accordingly, compensation cost based on fair value at grant date has not been
recognized for its stock options in the consolidated financial statements for
the years ended December 31, 1998 and 1997. The Company has presented pro forma
compensation cost based on the fair value at grant date for its stock options
under Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION" in the following table:
For the years ended December 31,
(in thousands) 1998 1997
Net income:
As reported $5,062 $4,726
Pro forma 5,030 4,713
Basic Earnings Per Share:
As reported $ 2.39 $ 2.30
Pro forma $ 2.37 $ 2.30
Diluted Earnings Per Share:
As reported $ 2.24 $ 2.17
Pro forma $ 2.23 $ 2.16
The fair value of options granted is estimated on the grant date using the
Black-Scholes option-pricing model. The following assumptions were used in
estimating the fair value for options granted in 1998 and 1997.
1998 1997
Dividend yield 1.3% 1.9%
Risk free interest rate 5.25% 5.22%
Weighted average expected life 6.5 yrs 5.9 yrs
Expected volatility 20% 35%
The weighted average per share fair values of options granted in 1998 was
$9.22 and was $2.67 in 1997.
NOTE 17 - INCOME TAXES
The components of Federal and State income tax expense (benefit) for the years
ended December 31, 1998, 1997 and 1996 were as follows (in thousands):
1998 1997 1996
Current
Federal $2,369 $2,845 $2,134
State 157 280 206
Total Current 2,926 3,125 2,340
Deferred
Federal (81) (434) (66)
State (11) (61) (11)
Total Deferred (92) (495) (77)
Total $2,434 $2,630 $2,263
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 principal reasons for this difference are as follows (in
thousands):
1998 1997 1996
Expected income taxes $2,549 $2,501 $2,186
Effects of:
Tax-exempt income (348) (263) (235)
Nondeductible interest expense 38 31 28
Goodwill amortization 120 120 120
State deduction, net of federal taxes 96 137 129
Other items, net (21) 104 35
Total $2,434 $2,630 $2,263
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,
1998 and 1997 are presented below (in thousands):
1998 1997
Deferred tax assets:
Allowance for loan losses $ 848 $ 623
Capital loss 43 -
Deferred Compensation 399 616
Other, net 151 92
Total gross deferred tax assets $ 1,441 $ 1,331
Deferred tax liabilities:
Depreciation $ 589 $ 291
Available-for-sale investment securities 134 154
Purchase accounting 57 319
Other, net 134 133
Total gross deferred tax liabilities $ 914 $ 897
Net deferred tax assets $ 527 $ 434
Deferred tax assets and deferred tax liabilities are recorded in other assets
and other liabilities, respectively, on the consolidated balance sheets. No
valuation allowance related to deferred tax assets has been recorded at December
31, 1998 and 1997 as management believes it is more likely than not that the
deferred tax assets will be fully realized.
NOTE 18 - DIVIDEND RESTRICTIONS
Banking regulations impose restrictions on the ability of First Mid Bank to
pay dividends to the Company. At December 31, 1998, regulatory approval would
have been required for aggregate dividends from First Mid Bank to the Company in
excess of approximately $8.3 million. The amount of such dividends that could
be paid is further restricted by the limitations of sound and prudent banking
principles.
NOTE 19 - 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 20 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
Presented below are condensed balance sheets, statements of income and cash
flows for the Parent Company (in thousands):
FIRST MID-ILLINOIS BANCSHARES, INC. (PARENT COMPANY)
BALANCE SHEETS:
December 31, 1998 1997
Assets
Cash $ 1,121 $ 1,055
Premises and equipment, net 42 49
Investment in subsidiaries 52,693 48,907
Other Assets 2,000 2,910
Total Assets $55,856 $52,921
Liabilities and Stockholders' equity
Liabilities
Dividends payable $ 633 $ 581
Long-term debt 4,700 6,200
Other liabilities 43 564
Total Liabilities 5,376 7,345
Stockholders' equity 50,480 45,576
Total Liabilities and Stockholders' equity $55,856 $52,921
<TABLE>
<CAPTION>
FIRST MID-ILLINOIS BANCSHARES, INC. (PARENT COMPANY)
STATEMENTS OF INCOME:
YEARS ENDED DECEMBER 31, 1998 1997 1996
<S> <C> <C> <C>
Income:
Dividends from subsidiaries $1,875 $ 756 $ 2,737
Other income 111 120 48
1,986 876 2,785
Operating expenses 1,203 1,203 1,037
Income (loss) before income taxes and equity
in undistributed earnings of subsidiaries 783 (327) 1,748
Income tax benefit 454 385 332
Income before equity in undistributed
earnings of subsidiaries 1,237 58 2,080
Equity in undistributed earnings of subsidiaries 3,825 4,668 2,086
Net income $5,062 $4,726 $4,166
</TABLE>
<TABLE>
<CAPTION>
FIRST MID-ILLINOIS BANCSHARES, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS:
YEARS ENDED DECEMBER 31, 1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $5,062 $4,726 $4,166
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation, amortization, accretion, net 7 7 8
Equity in undistributed earnings of
subsidiaries (3,825) (4,668) (2,086)
(Increase) decrease in other assets 910 (445) (1,515)
Decrease in other liabilities (522) (67) (131)
Net cash provided by (used in) operating
activities 1,632 (447) 442
Net cash used in investing activities:
Purchases of equipment - (13) (6)
Net cash used in investing activities - (13) (6)
Cash flows from financing activities:
Repayment of long-term debt (1,500) (1,000) (1,000)
Proceeds from issuance of long-term debt - 1,000 -
Proceeds from issuance of common stock 947 1,188 1,094
Purchase of treasury stock (507) - -
Dividends paid on preferred stock (32) (32) (32)
Dividends paid on common stock (474) (427) (436)
Net cash provided by (used in) financing
activities (1,566) 729 (374)
Increase in cash 66 269 62
Cash at beginning of year 1,055 786 724
Cash at end of year $1,121 $1,055 $ 786
</TABLE>
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 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
Executive Officer 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, 1998 and 1997,
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, 1998. 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, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
January 22, 1999
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information called for by Item 10 with respect to directors and director
nominees is incorporated by reference to the Company's 1999 Proxy Statement
under the caption's "Proposal 1 - Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance."
The information called for by Item 10 with respect to executive officers is
incorporated by reference to Part I hereof under the caption "Supplemental
Item - Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference to the
Company's 1999 Proxy Statement under the caption "Executive Compensation,"
"Common Stock Price Performance Graph" and "Director's Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated by reference to the
Company's 1999 Proxy Statement under the caption "Voting Securities and
Principal Holders Thereof."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated by reference to the
Company's 1999 Proxy Statement under the caption "Transactions with Management."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) -- Financial Statements and Financial Statement Schedules
The following consolidated financial statements and financial statement
schedules of the Company are filed as part of this document under Item 8.
Financial Statements and Supplementary Data:
* Consolidated Balance Sheets -- December 31, 1998 and 1997
* Consolidated Statements of Income -- For the Years Ended December 31, 1998,
1997 and 1996
* Consolidated Statements of Changes in Stockholders' Equity -- For the Years
Ended December 31, 1998, 1997 and 1996
* Consolidated Statements of Cash Flows -- For the Years Ended December 31,
1998, 1997 and 1996
(a)(3) -- Exhibits
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
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized on this 16th day of March, 1999.
FIRST MID-ILLINOIS BANCSHARES, INC.
(Company)
By: /s/ Daniel E. Marvin, Jr.
*-------------------------------------*
Daniel E. Marvin, Jr.
President and Chief Executive Officer
Dated: March 16, 1999
*---------------------*
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 16th day of March, 1999, by the following
persons on behalf of the Company and in the capacities listed.
SIGNATURE AND TITLE
by /s/ Daniel E. Marvin, Jr.
Daniel E. Marvin, Jr.
Chairman of the Board, President and Chief Executive
Officer (Principal Executive Officer and Director
by /s/ William S. Rowland
William S. Rowland
Executive Vice President, Chief Financial Officer and
Treasurer (Principal Financial and Accounting 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
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.
Incorporated by reference to, Exhibit 3(a) to First Mid-Illinois
Bancshares, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1987 (File No. 0-13688)
3.2 RESTATED BYLAWS OF FIRST MID-ILLINOIS BANCSHARES, INC.
Incorporated by reference to, 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)
10.1 EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND WILLIAM S. ROWLAND
Incorporated by reference to, Exhibit 10.1 to First Mid-Illinois
Bancshares, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 0-13368)
10.2 EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND DANIEL E. MARVIN, JR.
Incorporated by reference to, Exhibit 10.2 to First Mid-Illinois
Bancshares, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 0-13368)
10.3 EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND JOHN M. REMSEN, JR.
Incorporated by reference to, Exhibit 10.3 to First Mid-Illinois
Bancshares, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 0-13368)
10.4 DEFERRED COMPENSATION PLAN
(Filed herewith)
10.5 1997 STOCK INCENTIVE PLAN
(Filed herewith)
11.1 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(Filed herewith)
21.1 SUBSIDIARIES OF THE COMPANY
(Filed herewith)
23.1 CONSENT OF KPMG LLP
(Filed herewith)
27.1 FINANCIAL DATA SCHEDULE
(Filed herewith)
EXHIBIT 10.4
FIRST MID-ILLINOIS BANCSHARES, INC.
AMENDED AND RESTATED DEFERRED COMPENSATION PLAN
1. PURPOSE
The purpose of the First Mid-Illinois Bancshares, Inc. Deferred
Compensation Plan (the "Plan") is to enable First Mid-Illinois Bancshares, Inc.
(the "Company") directors, advisory directors and key officers to elect to defer
a portion of the fees and cash compensation payable by the Company and any
affiliates on account of service as a director or employee. The Plan is intended
as a means of maximizing the effectiveness and flexibility of the compensation
arrangements to directors and a select group of management or highly compensated
employees of the Company and affiliates, and as an aid in attracting and
retaining individuals of outstanding abilities and specialized skills for
service.
2. EFFECTIVE DATE
The Plan was effective as of June 14, 1984. Amended September 15, 1998.
3. PLAN ADMINISTRATION
The Plan shall be administered by the First Mid-Illinois Bancshares, Inc.
Deferred Compensation Plan Committee (hereinafter referred to as the
"Committee") which shall be comprised of at least three (3) non-employee
disinterested directors appointed by the Board of Directors of the Company
(hereinafter referred to as the "Board"). A disinterested director is any
member of the Board who within the prior year has not been, and is not being,
granted any awards under the Plan or any other plan of the Company or any
related corporation except for awards which: (i) are calculated in accordance
with a formula; or (ii) arise from an election by a director to receive all or
part of his Board fees in securities. All directors, advisory directors and
employees who are also directors, in both capacities, shall be eligible to
participate under the Plan. The Committee shall have sole authority to select
the employees from among those eligible who may participate under the Plan and
to prescribe the legend to be affixed to any certificate representing Plan
benefits. The Committee is authorized, subject to Board approval, to interpret
the Plan and may from time to time adopt such rules, regulations, forms and
agreements, not inconsistent with the provisions of the Plan, as it may deem
advisable to carry out the Plan. All decisions made by the Committee in
administering the Plan shall be subject to Board review.
4. ELIGIBILITY
Any director, advisory director or key officer of the Company or any
affiliate designated by the Board is eligible to participate in the Plan;
provided, however, that officers or employees so designated shall be limited to
a select group of management or highly compensated employees within the meaning
of Section 201(2) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). Any such director, advisory director or key officer shall be
a "Participant" as of the date designated by the Board, and his or her status as
a Participant shall continue until the date of the first payment pursuant to
Section 8 hereof.
5. SHARES SUBJECT TO THE PLAN
Upon receipt of stockholder approval, the aggregate number of shares of
common stock of the Company (hereafter referred to as "Shares") which may be
distributed to directors and employees under the Plan shall be 100,000 Shares.
Any Shares that remain unissued at the termination of the Plan shall cease to be
subject to the Plan, but until termination of the Plan, the Company shall at all
times make available sufficient Shares to meet the requirements of the Plan. The
aggregate number of Shares which may be sold under the Plan shall be adjusted to
reflect a change in capitalization of the Company, such as a stock dividend or
stock split.
6. ELECTION TO DEFER PAY
(a) IN GENERAL. Each Participant shall be entitled to make an annual
irrevocable election to defer receipt of all or a part of the fees or
compensation payable to him or her in cash ("Pay"). Such election shall
continue in effect until the beginning of the subsequent calendar year. Pay
with respect to which a deferral election has been made shall be referred to
hereinafter as "Deferred Pay."
(b) MANNER OF ELECTION. Elections to defer receipt of Pay shall be made in
writing in accordance with such rules and procedures as the Board may prescribe,
provided that: (i) each such election to defer cash compensation shall include
the percentage to be deferred, either five (5), ten (10) or fifteen (15) percent
of base salary or twenty-five percent (25%) increments of incentive
compensation, of the Pay from the Company or affiliate which becomes payable;
and (ii) each such election to defer fees shall include all fees receivable.
Elections to defer receipt of base salary or fees must be made at least two
(2) months before the beginning of the calendar year for which such amounts will
be paid, elections to defer receipt of incentive compensation must be made at
least two (2) months before the incentive compensation is determined.
7. RECORD AND CREDITING OF DEFERRED AMOUNTS
(a) DEFERRED PAY. The Company shall credit the amount of any Deferred Pay
to a memorandum account for the benefit of the Participant (the "Deferred Pay
Account") no later than the last day of the calendar quarter in which such Pay
would otherwise have been paid to the Participant. The amount of Deferred Pay
credited each quarter will be deemed to be applied to purchase Shares. The
price at which any Shares will be deemed purchased with Deferred Pay shall be
the actual purchase price or the price as determined by the Board in accordance
with the other equity based stock purchase programs of the Company.
(b) EARNINGS CREDIT. At the end of each calendar quarter, the Company
shall credit earnings for the Participant's benefit to his or her Deferred Pay
Account. Upon the receipt of stockholder approval, these earnings shall be
based on the aggregate number of Shares deemed purchased under the Deferred Pay
Account and the amount of dividends which would have been paid on such Shares
for the quarter. The earnings credited each quarter will be deemed to be
applied to purchase additional Shares, at the price determined under Section
7(a). Until complete distribution of the balance of the Deferred Pay Account
has been made, the unpaid balance shall continue to be credited with earnings in
accordance with this paragraph.
(c) VALUE AND STATEMENT OF ACCOUNT. The Company shall provide each
Participant with a statement of the value of his or her Deferred Pay Account,
including the amount of Deferred Pay and income thereon, at least annually.
8. PAYMENT OF DEFERRED ACCOUNT
(a) IN GENERAL. No withdrawals or payment shall be made from the
Participant's Deferred Pay Account except as provided in this Section 8. All
withdrawals and payments hereunder, and under any trust established pursuant to
the last sentence of Section 10 below, shall be made solely in Shares except for
cash payments with respect to fractional Shares, if any.
(b) PAYMENT EVENT. The value of a Participant's Deferred Pay Account shall
be payable in five (5) annual installments commencing on the March 15 following
the date he or she terminates service with the Company.
(c) SINGLE SUM PAYMENT. The Board in its sole discretion may elect to pay
the value of a Participant's Deferred Pay Account in a single payment.
(d) ACCELERATION FOR HARDSHIP. The Board, in its sole discretion, may
accelerate payment of amounts credited to a Participant's Deferred Pay Account
if requested to do so and if the requirements of this paragraph (d) are met.
Such acceleration may occur only in the event of unforeseeable financial
emergency or severe hardship from one or more recent events beyond the control
of the Participant and is limited to the amount deemed reasonably necessary to
satisfy the emergency or hardship.
(e) DEATH OF PARTICIPANT. In the event that a Participant shall die at any
time prior to complete distribution of all amounts payable to him or her under
the provisions of the Plan, the unpaid balance of the Participant's Deferred Pay
Account shall be determined as of the valuation date immediately following
death, and such amount shall be paid in a single payment on the March 15
following such valuation date, or as soon as reasonably possible thereafter, to
the Participant's beneficiary or beneficiaries.
9. DESIGNATION OF BENEFICIARY
Participants shall designate in writing, in accordance with such rules and
procedures as the Committee may prescribe, the beneficiary or beneficiaries who
are to receive the Participant's Deferred Pay Account in the event of the
Participant's death.
10. UNSECURED OBLIGATIONS
The obligation of the Company to make payments under the Plan shall be a
general obligation of the Company, and such payments shall be made in Shares
(other than cash payments with respect to fractional Shares), and such Shares
(and cash) shall at all times constitute a part of the general assets and
property of the Company. The Participant's relationship to the Company under
the Plan shall be only that of a general unsecured creditor and neither this
Plan nor any agreement entered into hereunder or action taken pursuant hereto
shall create or be construed to create a trust or fiduciary relationship of any
kind. The Company may establish an irrevocable grantor trust for purposes of
holding and investing the Deferred Pay Account balances but such establishment
shall not create any rights in or against any amount so held, except that the
trustee of such trust may vote any Shares thereunder in accordance with the
direction of the Participants.
11. AMENDMENT AND TERMINATION
The Board may amend, suspend or terminate the Plan or any portion thereof
at any time, but (except as provided in Section 5 hereof) no amendment shall be
made without approval of the stockholders of the Company which shall: (i)
materially increase the aggregate number of Shares with respect to which
distributions may be made under the Plan; (ii) materially increase the benefits
which may be provided to individuals under the Plan; or (iii) change the class
of persons eligible to participate in the Plan; provided, however, that no such
amendment, suspension or termination shall impair the rights of any individuals,
without his consent, in any award theretofore made pursuant to the Plan.
12. EFFECT OF TRANSFER
In the event that all or substantially all of the assets of the Company
shall be transferred by way of a sale, merger, consolidation or other means, the
entire unpaid balance of each Deferred Pay Account shall be paid in a lump sum
to the Participant as of the effective date thereof.
13. NON-ASSIGNABILITY
No right to receive payments under the provisions of this Plan shall be
transferable or assignable by a Participant, except by will or by the laws of
descent and distribution, and during his or her lifetime payment may only be
received by the Participant or his or her legal representative or guardian.
14. DELIVERY AND REGISTRATION OF STOCK
The Company's obligation to deliver Shares with respect to an award, if
any, shall, if the Committee so requests, be conditioned upon the receipt of a
representation as to the investment intention of the individual to whom such
Shares are to be delivered, in such form as the Committee shall determine to be
necessary or advisable to comply with the provisions of the Securities Act of
1933 or any other federal, state or local securities legislation or regulation.
It may be provided that any representation requirement shall become inoperative
upon a registration of the Shares or other action eliminating the necessity of
such representation under securities legislation. The Company shall not be
required to deliver any Shares under the Plan prior to (i) the admission of such
Shares to listing on any stock exchange on which Shares may then be listed, and
(ii) the completion of such registration or other qualification of such Shares
under any state or federal law, rule or regulation, as the Committee shall
determine to be necessary or advisable.
This Plan is intended to comply with Rule 16b-3. Any provision of the Plan
which is inconsistent with said rule shall, to the extent of such inconsistency,
be inoperative and shall not affect the validity of the remaining provisions of
the Plan.
15. BINDING PROVISIONS
All of the provisions of this Plan shall be binding upon all persons who
shall be entitled to any benefits hereunder and their heirs and personal
representatives.
16. CLAIMS PROCEDURE
The procedures applicable to claims for benefits and review thereof set
forth in the Company sponsored qualified cash or deferred (401(k)) plan shall
apply to any claims for benefits hereunder. For purposes of applying such
procedures, the Board shall be deemed the plan administrator of this Plan.
Exhibit 10.5
FIRST MID-ILLINOIS BANCSHARES, INC.
1997 STOCK INCENTIVE PLAN
1. PURPOSE OF THE PLAN
The FIRST MID-ILLINOIS BANCSHARES, INC., 1997 STOCK INCENTIVE PLAN (hereinafter
referred to as the "Plan") is intended to provide a means whereby directors,
employees, consultants and advisors of FIRST MID-ILLINOIS BANCSHARES, INC., and
its Related Corporations may sustain a sense of proprietorship and personal
involvement in the continued development and financial success of the Company,
and to encourage them to remain with and devote their best efforts to the
business of the Company, thereby advancing the interests of the Company and its
shareholders. Accordingly, the Company may permit certain directors, employees,
consultants and advisors to acquire Shares or otherwise participate in the
financial success of the Company, on the terms and conditions established
herein.
2. DEFINITIONS
The following terms shall be defined as set forth below:
a. BOARD. Shall mean the Board of Directors of the Company.
b. CAUSE. Shall mean the commitment of fraud, the misappropriation of or
intentional material damage to the property or business of the Company, the
substantial failure to fulfill the duties and responsibilities of a regular
position and/or comply with Company policies, rules or regulations, or the
conviction of a felony.
c. CHANGE OF CONTROL. Shall mean:
* the consummation of the acquisition by any person (as such term is defined
in Section 13(d) or 14(d) of the `34 Act) of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the `34 Act) of fifty percent (50%) or
more of the combined voting power of the then outstanding voting securities of
the Company other than through the receipt of Shares pursuant to the Plan or the
First Mid-Illinois Bancshares, Inc. Dividend Reinvestment Plan; or
* the individuals who, as of the date hereof, are members of the Board cease
for any reason to constitute a majority of the Board, unless the election, or
nomination for election by the stockholders of the Company, of any new director
was approved by a vote of a majority of the Board, and such new director shall,
for purposes of this Agreement, be considered as a member of the Board; or
* approval by stockholders of the Company of: (1) a merger or consolidation
if the stockholders, immediately before such merger or consolidation, do not, as
a result of such merger or consolidation, own, directly or indirectly, more than
fifty percent (50%) of the combined voting power of the then outstanding voting
securities of the entity resulting from such merger or consolidation in
substantially the same proportion as their ownership of the combined voting
power of the voting securities of the Company outstanding immediately before
such merger or consolidation; or (2) a complete liquidation or dissolution or an
agreement for the sale or other disposition of all or substantially all of the
assets of the Company. Notwithstanding the foregoing, a Change in Control shall
not be deemed to occur solely because fifty percent (50%) or more of the
combined voting power of the then outstanding securities of the Company are
acquired by: (1) a trustee or other fiduciary holding securities under one or
more employee benefit plans maintained for employees of the entity; or (2) any
corporation which, immediately prior to such acquisition, is owned directly or
indirectly by the stockholders in the same proportion as their ownership of
stock immediately prior to such acquisition.
d. CODE. Shall mean the Internal Revenue Code of 1986, and any amendments
thereto.
e. COMMITTEE. Shall mean the committee appointed by the Board in accordance
with Section 3 hereof.
f. COMPANY. Shall mean FIRST MID-ILLINOIS BANCSHARES, INC.
g. COMPETE. Shall mean within a period of one (1) year after the
termination of service, the direct or indirect competition with the business of
the Company and its Related Corporations, including, but not by way of
limitation, the direct or indirect owning, managing, operating, controlling,
financing or serving as an officer, employee, director or consultant to, or by
soliciting or inducing, or attempting to solicit or induce, any employee or
agent of the Company or a Related Corporation to terminate employment and become
employed by any person, firm, partnership, corporation, trust or other entity
which owns or operates, a business similar to that of the Company and its
Related Corporations, within the counties in which the Company and its Related
Corporations is operating, except with the express prior written consent of the
Company.
h. DISABILITY. Shall mean a physical or mental disability (within the
meaning of Section 22(e)(3) of the Code) which impairs the individual's ability
to substantially perform his or her current duties for a period of at least
twelve (12) consecutive months, as determined by the Committee.
i. ERISA. Shall mean the Employee Retirement Income Security Act of 1974,
and any amendment thereto.
j. INCENTIVE STOCK OPTION. Shall mean an award under the Plan that
satisfies the general requirements of Code Section 422, namely: (i) grantees
must be employees; (ii) the exercise price may not be less than the fair market
value of the underlying Shares at the date of grant; (iii) no more than $100,000
worth of Shares may become exercisable in any year; (iv) the maximum duration of
an award may be ten (10) years; (v) awards must be exercised within three (3)
months after termination of employment, except in the event of Disability or
death; and (vi) Shares received upon exercise must be retained for the greater
of two (2) years from the date of grant or one (1) year from the date of
exercise.
k. NONQUALIFIED OPTIONS. Shall mean an option award under the Plan that is
not an Incentive Stock Option.
l. RELATED CORPORATION. Shall mean a corporation which would be a parent or
subsidiary corporation with respect to the Company as defined in Section 424(e)
or (f), respectively, of the Code.
m. RETIREMENT. Shall have the same meaning as is provided under the Company
sponsored qualified retirement plan for employees, and shall mean termination of
service, other than for Cause, after attainment of age sixty (60) for directors,
consultants and advisors.
n. RESTRICTED STOCK. Shall mean an award of Shares under the Plan that are
restricted as to transfer and subject to forfeiture.
o. RULE 16B-3. Shall mean Rule 16b-3 promulgated under the `34 Act, and any
amendments thereto.
p. SHARES. Shall mean common stock of the Company.
q. STOCK APPRECIATION RIGHTS. Shall mean rights entitling the grantee to
receive the appreciation in the market value of a stated number of Shares.
r. '33 ACT. Shall mean the Securities Act of 1933, and any amendments
thereto.
s. '34 ACT. Shall mean the Securities Exchange Act of 1934, and any
amendments thereto.
3. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee which shall be comprised solely
of two (2) or more directors which are "outside directors" (within the meaning
of Section 162(m) of the Code) and "non-employee directors" (within the meaning
of Rule 16b-3) appointed by the Board. The Committee shall have sole authority
to:
i. select the directors, employees, consultants and advisors to whom
awards shall be granted under the Plan;
ii. establish the amount and conditions of each such award;
iii. prescribe any legend to be affixed to certificates representing such
awards;
* interpret the Plan; and
* adopt such rules, regulations, forms and agreements, not inconsistent
with the provisions of the Plan, as it may deem advisable to carry
out the Plan. All decisions made by the Committee in administering
the Plan shall be final.
4. SHARES SUBJECT TO THE PLAN
The aggregate number of Shares that may be obtained by directors, employees,
consultants and advisors under the Plan shall be 100,000 Shares. Any Shares
that remain unissued at the termination of the Plan shall cease to be subject to
the Plan, but until termination of the Plan, the Company shall at all times make
available sufficient Shares to meet the requirements of the Plan. The maximum
number of Shares that may be granted to an employee pursuant to an award for any
calendar year may not exceed 50,000 Shares.
5. STOCK OPTIONS
a. TYPE OF OPTIONS. The Company may issue options that constitute Incentive
Stock Options to employees and Nonqualified Options to directors, employees,
consultants and advisors under the Plan. The grant of each option shall be
confirmed by a stock option agreement that shall be executed by the Company and
the optionee as soon as practicable after such grant. The stock option agreement
shall expressly state or incorporate by reference the provisions of the Plan and
state whether the option is an Incentive Option or a Nonqualified Option.
b. TERMS OF OPTIONS. Except as provided in Subparagraphs (c) and (d) below,
each option granted under the Plan shall be subject to the terms and conditions
set forth by the Committee in the stock option agreement including, but not
limited to, option price and option term.
c. ADDITIONAL TERMS APPLICABLE TO ALL OPTIONS. Each option shall be subject
to the following terms and conditions:
i. WRITTEN NOTICE. An option may be exercised only by giving written
notice to the Company specifying the number of Shares to be purchased.
ii. METHOD OF EXERCISE. The aggregate option price may be paid in any one
or a combination of cash, personal check, Shares already owned or Plan
awards which the optionee has an immediate right to exercise, as
provided by the Committee.
iii. TERM OF OPTION. No option may be exercised more than ten (10) years
after the date of grant or six (6) months after the optionee terminates
service with the Company, except as may otherwise be provided under the
Plan or by the Committee.
iv. DISABILITY OR DEATH OF OPTIONEE. If an optionee terminates service due
to Retirement, Disability or death prior to exercise in full of any
options, he or she or his or her beneficiary, executor, administrator
or personal representative shall have the right to exercise the options
within a period of twelve (12) months after the date of such
termination to the extent that the right was exercisable at the date of
such termination as provided in the stock option agreement, or as may
otherwise be provided by the Committee.
v. TRANSFERABILITY. No option may be transferred, assigned or encumbered
by an optionee, except: (A) by will or the laws of descent and
distribution; (B) by gifting for the benefit of descendants for estate
planning purposes; or (C) pursuant to a certified domestic relations
order.
d. ADDITIONAL TERMS APPLICABLE TO INCENTIVE OPTIONS. Each Incentive Option
shall be subject to the following terms and conditions:
i. OPTION PRICE. The option price per Share shall be 100% of the fair
market value of a Share on the date the option is granted.
Notwithstanding the preceding sentence, the option price per Share
granted to an individual who, at the time such option is granted, owns
stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company (hereinafter referred to as a "10%
Shareholder") shall not be less than 110% of the fair market value of a
Share on the date the option is granted.
ii. TERM OF OPTION. No option granted to a 10% Shareholder may be
exercised more than five (5) years after the date of grant.
Notwithstanding any other provisions hereof, no option may be
exercised more than three (3) months after the optionee terminates
employment with the Company, except as otherwise provided under the
Plan. In the event an Optionee should decide to delay the exercise of
the option beyond three (3) months after Retirement pursuant to
Subparagraph (c)(iv) above, the option shall be treated as a
Nonqualified Option under the Plan.
iii. ANNUAL EXERCISE LIMIT. The aggregate fair market value of Shares which
first become exercisable during any calendar year shall not exceed
$100,000. For purposes of the preceding sentence, the fair market
value of each Share shall be determined on the date the option with
respect to such Share is granted.
iv. TRANSFERABILITY. No option may be transferred, assigned or encumbered
by an optionee, except by will or the laws of descent and distribution,
and during the optionee's lifetime an option may only be exercised by
him or her.
6. RESTRICTED STOCK AWARDS
a. GRANTS. Restricted Stock Awards ("RSAs") under the Plan shall be
evidenced by restricted stock agreements in such form and consistent with the
Plan as the Committee shall approve from time to time.
b. RESTRICTION PERIOD. RSAs awarded under the Plan shall be subject to such
terms, conditions, and restrictions, including without limitation: prohibitions
against transfer; substantial risks of forfeiture; attainment of performance
objectives; repurchase by the Company or right of first refusal for such period
or periods as shall be determined by the Committee at the time of grant. The
Committee shall have the power to permit, in its discretion, an acceleration
of the expiration of the applicable restriction period with respect to any part
or all of the RSAs awarded to a grantee.
c. RESTRICTIONS UPON TRANSFER. RSAs awarded, and the right to vote
underlying Shares and to receive dividends thereon, may not be sold, assigned,
transferred, exchanged, pledged, hypothecated, or otherwise encumbered during
the restriction period applicable to such Shares, except: (i) by will or the
laws of descent and distribution; (ii) by gifting for the benefit of descendants
for estate planning purposes; or (iii) pursuant to a certified domestic
relations order. Subject to the foregoing, and except as otherwise provided in
the Plan, the grantee shall have all the other rights of a stockholder
including, but not limited to, the right to receive dividends and the right to
vote such Shares.
d. CERTIFICATES. Each certificate issued in respect of RSAs awarded to a
grantee shall be deposited with the Company, or its designee, and shall bear the
following legend: "This certificate and the shares represented hereby are
subject to the terms and conditions (including forfeiture and restrictions
against transfer) contained in the First Mid-Illinois Bancshares, Inc., 1997
Stock Incentive Plan and an Agreement entered into by the registered owner.
Release from such terms and conditions shall be obtained only in accordance with
the provisions of the Plan and Agreement, a copy of each of which is on file in
the office of the Secretary of said Company."
e. LAPSE OF RESTRICTIONS. The Agreement shall specify the terms and
conditions upon which any restrictions upon Shares awarded under the Plan shall
lapse, as determined by the Committee. Upon the lapse of such restrictions,
Shares, free of the foregoing restrictive legend, shall be issued to the grantee
or his or her legal representative.
f. TERMINATION PRIOR TO LAPSE OF RESTRICTIONS. In the event of a grantee's
termination of service prior to the lapse of restrictions applicable to any RSAs
awarded to such grantee, all Shares as to which there still remain restrictions
shall be forfeited by such grantee without payment of any consideration to the
grantee, and neither the grantee nor any successors, heirs, assigns, or personal
representatives of such grantee shall thereafter have any further rights or
interest in such Shares or certificates.
7. STOCK APPRECIATION RIGHTS
a. GRANTS. Stock Appreciation Rights ("SARs") may be granted separately or
in tandem with or by reference to an option granted prior to or simultaneously
with the grant of such rights, to such eligible directors, employees,
consultants and advisors as may be selected by the Committee.
b. TERMS OF GRANT. SARs may be granted in tandem with or with reference to a
related option, in which event the grantee may elect to exercise either the
option or the SAR, but not both, as to the same Share subject to the option and
the SAR, or the SAR may be granted independently of a related option. SARs
shall not be transferable, except: (i) by will or the laws of descent and
distribution; (ii) by gifting for the benefit of descendants for estate planning
purposes; or (iii) pursuant to a certified domestic relations order.
c. PAYMENT ON EXERCISE. Upon exercise of a SAR, the grantee shall be paid
the excess of the then fair market value of the number of Shares to which the
SAR relates over the fair market value of such number of Shares at the date of
grant of the SAR or of the related option, as the case may be. Such excess
shall be paid in cash or in Shares having a fair market value equal to such
excess or in such combination thereof as the Committee shall determine.
8. RIGHT OF FIRST REFUSAL
If an owner wishes to sell Shares issued under the Plan, such owner shall first
offer such Shares to the Company for purchase, indicating the desired purchase
price, and the Company shall have thirty (30) days to exercise its right to
purchase such Shares. If the Company shall decide not to purchase such Shares
and the owner receives a bona fide offer for the purchase of such Shares, the
owner shall give written notice to the Company stating that he or she has a bona
fide offer for the purchase of such Shares, stating the number of Shares to be
sold, the name and address of the person(s) offering to purchase the Shares and
the purchase price and terms of payment of such sale. The Company will then
have thirty (30) days to purchase such Shares at the same purchase price offered
by such person(s) offering to purchase such Shares. Payment may be in a lump
sum or, if the lump sum exceeds $100,000, in substantially equal annual or more
frequent installments over a period not exceeding five (5) years in the
discretion of the Committee. If a method of deferred payments is selected, the
unpaid balance shall earn interest at a rate that is substantially equal to the
rate at which the Company could borrow the amount due and shall be secured by a
pledge of the Shares purchased or such other adequate security as agreed to by
the Company and the owner. For purposes of this Section, an owner shall include
any person who acquires Shares from any other person and for any reason;
including, but not limited to, by gift, death or sale. If applicable under the
provisions of this Section, each certificate issued under the Plan shall bear
the legend provided under Subparagraph 6 (d).
9. AMENDMENT OR TERMINATION OF THE PLAN
The Board may amend, suspend or terminate the Plan or any portion thereof at any
time, but (except as provided in Section 13 hereof) no amendment shall be made
without approval of the stockholders of the Company which shall: (i) materially
increase the aggregate number of Shares with respect to which Incentive Stock
Option awards may be made under the Plan; or (ii) change the class of persons
eligible to receive Incentive Stock Option awards under the Plan; provided,
however, that no amendment, suspension or termination shall impair the rights of
any individual, without his or her consent, in any award theretofore made
pursuant to the Plan.
10. TERM OF PLAN
The Plan shall be effective upon the date of its adoption by the Board; provided
that, Incentive Options may be granted only if the Plan is approved by the
shareholders within twelve (12) months before or after the date of adoption.
Unless sooner terminated under the provisions of Section 9, Shares and SARs
shall not be granted under the Plan after the expiration of ten (10) years from
the effective date of the Plan. However, awards may be exercisable after the
end of the term of the Plan.
11. RIGHTS AS SHAREHOLDER
Upon delivery of any Share to a director, employee, consultant or advisor, such
person shall have all of the rights of a shareholder of the Company with respect
to such Share, including the right to vote such Share and to receive all
dividends or other distributions paid with respect to such Share.
12. MERGER OR CONSOLIDATION
In the event the Company is merged or consolidated with another corporation and
the Company is not the surviving corporation, the surviving corporation may
agree to exchange options and SARs issued under this Plan for options and SARs
(with the same aggregate option price) to acquire and participate in that number
of shares in the surviving corporation that have a fair market value equal to
the fair market value (determined on the date of such merger or consolidation)
of Shares that the grantee is entitled to acquire and participate in under this
Plan on the date of such merger or consolidation. In the event of a Change of
Control, options, Restricted Stock and SARs shall become immediately and fully
exercisable.
13. CHANGES IN CAPITAL AND CORPORATE STRUCTURE
The aggregate number of Shares and interests awarded and which may be awarded
under the Plan shall be adjusted to reflect a change in the outstanding Shares
of the Company by reason of a recapitalization, reclassification,
reorganization, stock split, reverse stock split, combination of shares, stock
dividend or similar transaction. The adjustment shall be made in an equitable
manner which will cause the awards to remain unchanged as a result of the
applicable transaction.
14. SERVICE
An individual shall be considered to be in the service of the Company or a
Related Corporation as long as he or she remains a director, employee,
consultant or advisor of the Company or such Related Corporation. Nothing
herein shall confer on any individual the right to continued service with the
Company or a Related Corporation or affect the right of the Company or such
Related Corporation to terminate such service.
15. WITHHOLDING OF TAX
To the extent the award, issuance or exercise of Shares or SARs results in the
receipt of compensation by a director, employee, consultant or advisor, the
Company is authorized to withhold a portion of such Shares receivable or any
cash compensation then or thereafter payable to such person to pay any tax
required to be withheld by reason of the receipt of the compensation.
Alternatively, the director, employee, consultant or advisor may tender Shares
with a value equal to, or a personal check in the amount of, the tax required to
be withheld.
16. DELIVERY AND REGISTRATION OF STOCK
The Company's obligation to deliver Shares with respect to an award shall, if
the Committee so requests, be conditioned upon the receipt of a representation
as to the investment intention of the individual to whom such Shares are to be
delivered, in such form as the Committee shall determine to be necessary or
advisable to comply with the provisions of the `33 Act or any other federal,
state or local securities legislation or regulation. It may be provided that
any representation requirement shall become inoperative upon a registration of
the Shares or other action eliminating the necessity of such representation
under securities legislation. The Company shall not be required to deliver any
Shares under the Plan prior to (i) the admission of such Shares to listing on
any stock exchange on which Shares may then be listed, and (ii) the completion
of such registration or other qualification of such Shares under any state or
federal law, rule or regulation, as the Committee shall determine to be
necessary or advisable. The Plan is intended to comply with Rule 16b-3, if
applicable. Any provision of the Plan which is inconsistent with said rule
should to the extent of such inconsistency, be inoperative and shall not affect
the validity of the remaining provisions of the Plan.
TABLE OF CONTENTS
Purpose of the Plan.................................1
Definitions.........................................1
Administration of the Plan..........................3
Shares Subject to the Plan..........................4
Stock Options.......................................4
Restricted Stock Awards.............................5
Grants..............................................6
Restriction Period..................................6
Restrictions Upon Transfer..........................6
Certificates........................................6
Lapse of Restrictions...............................6
Termination Prior to Lapse of Restrictions..........6
Stock Appreciation Rights...........................6
Right of First Refusal..............................7
Amendment or Termination of the Plan................7
Term of Plan........................................7
Rights as Shareholder...............................8
Merger or Consolidation.............................8
Changes in Capital and Corporate Structure..........8
Service.............................................8
Withholding of Tax..................................8
Delivery and Registration of Stock..................9
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
First Mid-Illinois Bancshares, Inc.:
RE: Registration Statements
Registration No. 033-84404 on Form S-3
Registration No. 033-64061 on Form S-8
Registration No. 033-64139 on Form S-8
Registration No. 333-69673 on Form S-8
We consent to incorporation by reference in the subject Registration Statements
on Forms S-3 and S-8 of First Mid-Illinois Bancshares, Inc. of our report dated
January 22, 1999, relating to the consolidated balance sheets of First Mid-
Illinois Bancshares, Inc. and subsidiaries as of December 31, 1998 and 1997, 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,
1998, which report appears in the December 31, 1998 annual report on Form 10-K
of First Mid-Illinois Bancshares, Inc.
/s/ KPMG LLP
Chicago, Illinois
March 22, 1999
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