UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission file number: 0-13368
FIRST MID-ILLINOIS BANCSHARES, INC.
(Exact name of Company as specified in its charter)
Delaware 37-1103704
(State of incorporation) (I.R.S. employer identification No.)
1515 Charleston Avenue, Mattoon, Illinois 61938
(Address and Zip Code of Principal Executive Offices)
(217) 234-7454
(Company's telephone number, including area code)
Securities registered pursuant to Section 12(b) of
the Act:
NONE
Securities registered pursuant to Section 12(g) of
the Act: Common stock, par value $4.00
per share, and related Common Stock
Purchase Rights
(Title of class)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 26, 2003, 3,162,384 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 26, 2003) held by
non-affiliates was approximately $92,342,000.
DOCUMENTS INCORPORATED BY REFERENCE
Document Into Form 10-K Part:
Portions of the Proxy Statement for 2003 Annual
Meeting of Shareholders to be held on May 28, 2003 III
First Mid-Illinois Bancshares, Inc.
Form 10-K Table of Contents
Page
Part I
Item 1 Business 3
Item 2 Properties 13
Item 3 Legal Proceedings 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Part II
Item 5 Market for Company's Common Shares and Related
Shareholder Matters 17
Item 6 Selected Financial Data 18
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 7A Quantitative and Qualitative Disclosures About
Market Risk 43
Item 8 Financial Statements and Supplementary Data 45
Item 9 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosures 76
Part III
Item 10 Directors and Executive Officers of the Company 76
Item 11 Executive Compensation 76
Item 12 Security Ownership of Certain Beneficial Owners and
Management 76
Item 13 Certain Relationships and Related Transactions 77
Item 14 Controls and Procedures 77
Part IV
Item 15 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 78
Signatures 79
Certifications 80
Exhibit Index 82
PART I
ITEM 1. BUSINESS
Company and Subsidiaries
First Mid-Illinois Bancshares, Inc. (the "Company") is a financial holding
company. The Company is engaged in the business of banking through its wholly
owned subsidiary, First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank"). The
Company provides data processing services to affiliates through another wholly
owned subsidiary, Mid-Illinois Data Services, Inc. ("MIDS"). The Company offers
insurance products and services to customers through its wholly owned
subsidiary, The Checkley Agency, Inc. ("Checkley"). First Mid Bank also provides
insurance services to customers through its wholly owned subsidiary First
Mid-Illinois Insurance Services, Inc. ("First Mid Insurance").
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:
o Mattoon Bank, Mattoon ("Mattoon Bank") on April 2, 1984
o State Bank of Sullivan ("Sullivan Bank") on April 1, 1985
o Cumberland County National Bank in Neoga ("Cumberland County") on
December 31, 1985
o First National Bank and Trust Company of Douglas County ("Douglas
County") on December 31, 1986
o Charleston Community Bank ("Charleston Bank") on December 30, 1987.
In April 1989, a purchase and assumption agreement was executed between
First National and Mattoon Bank whereby First National purchased substantially
all of the assets and assumed all of the liabilities of Mattoon Bank. On May 31,
1992, the Company merged Sullivan Bank, Cumberland County, Douglas County and
Charleston Bank into First National. First National changed its name at that
time to First Mid-Illinois Bank & Trust, N.A.
On July 1, 1992, the Company acquired and re-capitalized Heartland
Federal Savings and Loan Association ("Heartland"), a $125 million thrift
headquartered in Mattoon with offices in Charleston, Sullivan and Urbana,
Illinois. Under the terms of the acquisition, Heartland converted from the
mutual form of organization into a federally chartered, stock savings
association and became a wholly owned subsidiary of the Company. In connection
with the Heartland acquisition, $3.1 million of Series A perpetual, cumulative,
non-voting, convertible, preferred stock was issued to directors and certain
senior officers of the Company in a private placement. Refer to note #1 of Notes
to the Consolidated Financial Statements.
On October 4, 1994, First Mid Bank acquired all of the outstanding
stock of Downstate Bancshares, Inc. ("DBI"), which owned all of the stock of
Downstate National Bank ("DNB"). DNB operated branch locations in Altamont and
Effingham, Illinois. Immediately following the acquisition, DBI was dissolved
and DNB was merged with and into First Mid Bank with First Mid Bank being the
surviving entity.
In December 1994, Heartland (formerly known as Heartland Federal
Savings and Loan Association) converted from a federally chartered stock savings
association to a state-chartered savings bank and changed its name to Heartland
Savings Bank.
On March 7, 1997, First Mid Bank acquired the Charleston, Illinois
branch location and the customer base of First of America Bank. This cash
acquisition added approximately $28 million to total deposits, $.5 million to
loans, $1.3 million to premises and equipment and $3.8 million to intangible
assets.
In November 1997, Heartland merged with and into First Mid Bank with
First Mid Bank being the surviving entity.
On May 7, 1999, the Company acquired the Monticello, Taylorville and
DeLand branch offices and deposit base of Bank One Illinois, N.A. This cash
acquisition added approximately $64 million to total deposits, $10 million to
loans, $1.7 million to premises and equipment and $6.5 million to intangible
assets. This acquisition was accounted for using the purchase method of
accounting whereby the acquired assets and deposits of the branches were
recorded at their fair values as of the acquisition date.
On April 17, 2000, the Company opened a de novo branch in Decatur,
Illinois.
On September 5, 2000, the Company opened a banking center in the
Student Union of Eastern Illinois University in Charleston, Illinois.
On April 20, 2001, First Mid Bank acquired all of the outstanding stock
of American Bank of Illinois in Highland ("American Bank") and merged American
Bank with and into First Mid Bank with First Mid Bank being the surviving
entity.
On January 29, 2002, the Company acquired all of the outstanding stock
of Checkley, an insurance agency located in Mattoon.
On November 13, 2002, the Company opened a de novo branch in Champaign,
Illinois.
On November 15, 2002, the Company opened a de novo branch in Maryville,
Illinois.
Description of Business
First Mid Bank conducts a general banking business encompassing most of
the services, both consumer and commercial, which banks may lawfully provide,
including the following principal services: the acceptance of deposits to
demand, savings and time accounts and the servicing of such accounts;
commercial, industrial, agricultural, consumer and real estate lending,
including installment, credit card, personal lines of credit and overdraft
protection; safe deposit box operations; and an extensive variety of additional
services tailored to the needs of customers, such as traveler's checks and
cashiers' checks, foreign currency, and other special services. First Mid Bank
also provides services to its customers through its trust department and
investment center.
Loans, both commercial and consumer, are provided on either a secured
or unsecured basis to corporations, partnerships and individuals. Commercial
lending covers such categories as business, industry, capital, construction,
agriculture, inventory and real estate. First Mid Bank's retail loan department
makes direct loans to consumers and some commercial customers, and purchases
retail obligations from retailers, primarily without recourse. Retail lending
covers such categories as residential real estate, automobile, and debt
consolidation loans.
First Mid Bank conducts its business in the middle of some of the
richest farmland in the world. Accordingly, First Mid Bank provides a wide range
of financial services to farmers and agribusiness within their respective
markets. The farm management department, headquartered in Mattoon, Illinois, has
approximately 33,000 acres under management and is the largest management
operation in the area, ranking in the top 100 firms nationwide. First Mid Bank
is the largest supplier of farm credit in the Company's market area with $90.7
million in agriculture-related loans at December 31, 2002. The farm credit
products offered by First Mid Bank include real estate loans, as well as
machinery and equipment loans, production loans, inventory financing and lines
of credit.
First Mid Bank had total assets of $770,325,000 and stockholders'
equity of $70,173,000 at December 31, 2002.
Employees
The Company, MIDS and First Mid Bank, collectively, employed 319 people
on a full-time equivalent basis as of December 31, 2002. The Company places a
high priority on staff development, which involves extensive training, including
customer service training. New employees are selected on the basis of both
technical skills and customer service capabilities. None of the employees are
covered by a collective bargaining agreement with the Company. The Company
offers a variety of employee benefits and management considers its employee
relations to be excellent.
The Company actively competes in all areas in which First Mid Bank
presently does business. First Mid Bank competes for commercial and individual
deposits, loans, and trust business with many east central Illinois banks,
savings and loan associations, and credit unions. The principal methods of
competition in the banking and financial services industry are quality of
services to customers, ease of access to facilities, and pricing of services,
including interest rates paid on deposits, interest rates charged on loans, and
fees charged for fiduciary and other banking services.
First Mid Bank operates facilities in the Illinois counties of Bond,
Champaign, Christian, Coles, Cumberland, Douglas, Effingham, Macon, Madison,
Moultrie, and Piatt. Each facility primarily serves the community in which it is
located. First Mid Bank serves seventeen different communities with 24 separate
locations in the towns of Altamont, Arcola, Champaign, Charleston, Decatur,
DeLand, Effingham, Highland, Maryville, Mattoon, Monticello, Neoga, Pocahontas,
Sullivan, Taylorville, Tuscola, and Urbana, Illinois. Within the areas of
service, there are numerous competing financial institutions and financial
services companies.
Website
The Company maintains a website at www.firstmid.com. All periodic and
current reports of the Company and amendments to these reports filed with the
Securities and Exchange Commission ("SEC") can be accessed, free of charge,
through this website as soon as reasonably practicable after these materials are
filed with the SEC.
SUPERVISION AND REGULATION
General
Financial institutions, financial services companies, and their holding
companies are extensively regulated under federal and state law. As a result,
the growth and earnings performance of the Company can be affected not only by
management decisions and general economic conditions, but also by the
requirements of applicable state and federal statutes and regulations and the
policies of various governmental regulatory authorities including, but not
limited to, the Office of the Comptroller of the Currency (the "OCC"), the
Federal Reserve Board, the Federal Deposit Insurance Corporation (the "FDIC"),
the Internal Revenue Service and state taxing authorities. Any change in
applicable laws, regulations or regulatory policies may have material effect on
the business, operations and prospects of the Company and First Mid Bank. The
Company is unable to predict the nature or extent of the effects that fiscal or
monetary policies, economic controls or new federal or state legislation may
have on its business and earnings in the future.
Federal and state laws and regulations generally applicable to
financial institutions and financial services companies, such as the Company and
its subsidiaries, regulate, among other things, the scope of business,
investments, reserves against deposits, capital levels relative to operations,
the nature and amount of collateral for loans, the establishment of branches,
mergers, consolidations and dividends. The system of supervision and regulation
applicable to the Company and its subsidiaries establishes a comprehensive
framework for their respective operations and is intended primarily for the
protection of the FDIC's deposit insurance funds and the depositors, rather than
the stockholders, of financial institutions.
The following references to material statutes and regulations affecting
the Company and its subsidiaries are brief summaries thereof and do not purport
to be complete, and are qualified in their entirety by reference to such
statutes and regulations. Any change in applicable law or regulations may have a
material effect on the business of the Company and its subsidiaries.
Financial Modernization Legislation
On November 12, 1999, the President signed into law the
Gramm-Leach-Bliley Act (the "GLB Act"). The GLB Act significantly changes
financial services regulation by expanding permissible non-banking activities of
bank holding companies and removing certain barriers to affiliations among
banks, insurance companies, securities firms and other financial services
entities. These activities and affiliations can be structured through a holding
company structure or, in the case of many of the activities, through a financial
subsidiary of a bank. The GLB Act also establishes a system of federal and state
regulation based on functional regulation, meaning that primary regulatory
oversight for a particular activity generally resides with the federal or state
regulator having the greatest expertise in the area. Banking is supervised by
banking regulators, insurance by state insurance regulators and securities
activities by the SEC and state securities regulators. In addition, the GLB Act
establishes a minimum federal standard of financial privacy by, among other
provisions, requiring banks to adopt and disclose privacy policies with respect
to consumer information and setting forth certain rules with respect to consumer
information and setting forth certain rules with respect to the disclosure to
third parties of consumer information. The GLB Act also requires the disclosure
of agreements reached with community groups that relate to the Community
Reinvestment Act, and contains various other provisions designed to improve the
delivery of financial services to consumers while maintaining an appropriate
level of safety in the financial services industry.
The GLB Act repeals the anti-affiliation provisions of the
Glass-Steagall Act and revises the Bank Holding Company Act of 1956 (the "BHCA")
to permit qualifying holding companies, called "financial holding companies," to
engage in, or to affiliate with companies engaged in, a full range of financial
activities, including banking, insurance activities (including insurance
portfolio investing), securities activities, merchant banking and additional
activities that are "financial in nature," incidental to financial activities
or, in certain circumstances, complementary to financial activities. A bank
holding company's subsidiary banks must be "well-capitalized" and "well-managed"
and have at least a "satisfactory" Community Reinvestment Act rating for the
bank holding company to elect status as a financial holding company.
A significant component of the GLB Act's focus on functional regulation
relates to the application of federal securities laws and SEC oversight of some
bank securities activities previously exempt from broker-dealer registration.
Among other things, the GLB Act amends the definitions of "broker" and "dealer"
under the Securities Exchange Act of 1934 to remove the blanket exemption for
banks. Banks now may conduct securities activities without broker-dealer
registration only if the activities fall within a set of activity-based
exemptions designed to allow banks to conduct only those activities
traditionally considered to be primarily banking or trust activities. Securities
activities outside these exemptions, as a practical matter, need to be conducted
by registered broker-dealer affiliate. The SEC issued interim final rules to
define certain terms in, and grant additional exemptions from, the provisions of
the GLB Act in May 2001. By order, the SEC has extended the blanket exemption
for banks from the definition of "dealer" until September 30, 2003 and from the
definition of "broker" until May 12, 2003. The SEC expects to amend its interim
final rules and extend the temporary exemptions as appropriate. On February 13,
2003, the SEC adopted amendments to its rules relating to the "dealer" exemption
for banks, which have a compliance date of September 30, 2003. The GLB Act also
amends the Investment Advisers Act of 1940 to require the registration of banks
that act as investment advisers for mutual funds.
Anti-Terrorism Legislation
On October 26, 2001, the President signed into law the USA Patriot Act
of 2001, which contains the International Money Laundering Abatement and
Anti-Terrorist Financing Act of 2001 (the "IMLAFA"). The IMLAFA contains
anti-money laundering measures affecting insured depository institutions,
broker-dealers, and certain other financial institutions. The IMLAFA requires
U.S. financial institutions to adopt policies and procedures to combat money
laundering and grants the Secretary of the Treasury broad authority to establish
regulations and to impose requirements and restrictions on financial
institutions' operations. The Company has established policies and procedures to
ensure compliance with the IMLAFA and the related regulations. The Company has
designated an officer solely responsible for ensuring compliance with existing
regulations and monitoring changes to the regulations as they occur.
The Company
General. As a registered bank holding company under the BHCA and as a
registered financial holding company under that GLB Act, the Company is subject
to regulation by the Federal Reserve Board. In accordance with Federal Reserve
Board policy, the Company is expected to act as a source of financial strength
to First Mid Bank and to commit resources to support First Mid Bank in
circumstances where the Company might not do so absent such policy. The Company
is subject to inspection, examination, and supervision by the Federal Reserve
Board.
Activities. As a bank holding company that has elected to become a
financial holding company, the Company may affiliate with securities firms and
insurance companies and engage in other activities that are financial in nature
or incidental or complementary to activities that are financial in nature. A
bank holding company that is not also a financial holding company is limited to
engaging in banking and such other activities as determined by the Federal
Reserve Board to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto.
No Federal Reserve Board approval is required for the Company to
acquire a company (other than a bank holding company, bank, or savings
association) engaged in activities that are financial in nature or incidental to
activities that are financial in nature, as determined by the Federal Reserve
Board. However, the Company generally must give the Federal Reserve Board
after-the-fact notice of these activities. Prior Federal Reserve Board approval
is required before the Company may acquire beneficial ownership or control of
more than 5% of the voting shares of substantially all of the assets of a bank
holding company, bank, or savings association.
If any subsidiary bank of the Company ceases to be "well-capitalized"
or "well-managed" under applicable regulatory standards, the Federal Reserve
Board may, among other actions, order the Company to divest its depository
institution. Alternatively, the Company may elect to conform its activities to
those permissible for a bank holding company that is not also a financial
holding company.
If any subsidiary bank of the Company receives a rating under the
Community Reinvestment Act of less than satisfactory, the Company will be
prohibited, until the rating is raised to satisfactory or better, from engaging
in new activities or acquiring companies other than bank holding companies,
banks, or savings associations.
The Company became a financial holding company effective December 14,
2001. It continues to maintain its status as a bank holding company for purposes
of other Federal Reserve Board regulations.
Capital Requirements. Bank holding companies are required to maintain
minimum levels of capital in accordance with Federal Reserve Board capital
adequacy guidelines. The Federal Reserve Board's capital guidelines establish
the following minimum regulatory capital requirements for bank holding
companies: a risk-based requirement expressed as a percentage of total
risk-weighted assets, and a leverage requirement expressed as a percentage of
total assets. The risk-based requirement consists of a minimum ratio of total
capital to total risk-weighted assets of 8%, at least one-half of which must be
Tier 1 capital. The leverage requirement consists of a minimum ratio of Tier 1
capital to total assets of 3% for the most highly rated companies, with minimum
requirements of at least 4% for all others. For purposes of these capital
standards, Tier 1 capital consists primarily of permanent stockholders' equity
less intangible assets (other than certain mortgage servicing rights and
purchased credit card relationships), and total capital means Tier 1 capital
plus certain other debt and equity instruments which do not qualify as Tier 1
capital, limited amounts of unrealized gains on equity securities and a portion
of the Company's allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum
requirements, and higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual banking organizations.
For example, the Federal Reserve Board's capital guidelines contemplate that
additional capital may be required to take adequate account of, among other
things, interest rate risk, or the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. Further, any banking
organization experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions (i.e., Tier 1
capital less all intangible assets), well above the minimum levels.
As of December 31, 2002, the Company had regulatory capital, calculated
on a consolidated basis, in excess of the Federal Reserve Board's minimum
requirements, with a risk-based capital ratio of 10.35% and a leverage ratio of
6.62%.
First Mid Bank
General. First Mid Bank is a national bank, chartered under the
National Bank Act. The FDIC insures the deposit accounts of First Mid Bank. As a
national bank, First Mid Bank is a member of the Federal Reserve System and is
subject to the examination, supervision, reporting and enforcement requirements
of the OCC, as the primary federal regulator of national banks, and the FDIC, as
administrator of the deposit insurance fund.
Deposit Insurance. As an FDIC-insured institution, First Mid Bank is
required to pay deposit insurance premium assessments to the FDIC. The FDIC has
adopted a risk-based assessment system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their respective levels of capital and results of
supervisory evaluations. Institutions classified as well capitalized (as defined
by the FDIC) and considered healthy pay the lowest premium while institutions
that are less than adequately capitalized (as defined by the FDIC) and
considered of substantial supervisory concern pay the highest premium. The FDIC
makes risk classification of all insured institutions for each semi-annual
assessment period.
During the year ended December 31, 2002, FDIC assessments ranged from
0% of deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 2003, FDIC assessment rates will continue to range from 0%
of deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or written agreement
with, the FDIC. The FDIC may also suspend deposit insurance temporarily during
the hearing process for a permanent termination of insurance if the institution
has no tangible capital. Management of the Company is not aware of any activity
or condition that could result in termination of the deposit insurance of First
Mid Bank.
In addition to its insurance assessment, each insured bank is subject,
in 2003, to quarterly debt service assessments in connection with bonds issued
by a government corporation that financed the federal savings and loan bailout.
The first quarter 2003 debt service assessment was .0168%.
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, 2002, First Mid Bank paid supervisory fees to the OCC totaling
$156,000.
Capital Requirements. The OCC has established the following minimum
capital standards for national banks, such as First Mid Bank: a leverage
requirement consisting of a minimum ratio of Tier 1 capital to total assets of
3% for the most highly-rated banks with minimum requirements of at least 4% for
all others, and a risk-based capital requirement consisting of a minimum ratio
of total capital to total risk-weighted assets of 8%, at least one-half of which
must be Tier 1 capital. For purposes of these capital standards, Tier 1 capital
and total capital consists of substantially the same components as Tier 1
capital and total capital under the Federal Reserve Board's capital guidelines
for bank holding companies (See "The Company--Capital Requirements").
The capital requirements described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual institutions. For example, the
regulations of the OCC provide that additional capital may be required to take
adequate account of, among other things, interest rate risk or the risks posed
by concentrations of credit, nontraditional activities or securities trading
activities.
During the year ended December 31, 2002, 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, 2002, First Mid Bank
exceeded its minimum regulatory capital requirements with a leverage ratio of
7.39% and a risk-based capital ratio of 11.42%.
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, 2002. As of December 31, 2002, approximately $12.0
million was available to be paid as dividends to the Company by First Mid Bank.
Notwithstanding the availability of funds for dividends, however, the OCC may
prohibit the payment of any dividends by First Mid Bank if the Federal Reserve
Board determines that such payment would constitute an unsafe or unsound
practice.
Affiliate and Insider Transactions. First Mid Bank is subject to
certain restrictions 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.
In addition, Regulation W, which implements Sections 23A and 23B of the Federal
Reserve Act, has an effective date of April 1, 2003. Certain limitations and
reporting requirements are also placed on extensions of credit by First Mid Bank
to its directors and officers, to directors and officers of the Company and its
subsidiaries, to principal stockholders of the Company, and to "related
interests" of such directors, officers and principal stockholders.
The Bank is subject to restrictions under federal law that limit
certain transactions with the Corporation, including loans, other extensions of
credit, investments or asset purchases. Such transactions by a banking
subsidiary with any one affiliate are limited in amount to 10 percent of the
bank's capital and surplus and, with all affiliates together, to an aggregate of
20 percent of the bank's capital and surplus. Furthermore, such loans and
extensions of credit, as well as certain other transactions, are required to be
secured in specified amounts. These and certain other transactions, including
any payment of money to the Corporation, must be on terms and conditions that
are or in good faith would be offered to nonaffiliated companies.
In addition, federal law and regulations may affect the terms upon
which any person becoming a director or officer of the Company or one of its
subsidiaries or a principal stockholder of the Company may obtain credit from
banks with which First Mid Bank maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have
adopted guidelines that establish operational and managerial standards to
promote the safety and soundness of federally insured depository institutions.
The guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings. In general, the guidelines prescribe the goals to be achieved in each
area, and each institution is responsible for establishing its own procedures to
achieve those goals. If an institution fails to comply with any of the standards
set forth in the guidelines, the institution's primary federal regulator may
require the institution to submit a plan for achieving and maintaining
compliance. The preamble to the guidelines states that the agencies expect to
require a compliance plan from an institution whose failure to meet one or more
of the guidelines are of such severity that it could threaten the safety and
soundness of the institution. Failure to submit an acceptable plan, or failure
to comply with a plan that has been accepted by the appropriate federal
regulator, would constitute grounds for further enforcement action.
Supplemental Item -- Executive Officers of the Company
The executive officers of the Company are elected annually by the
Company's board of directors and are identified below.
Name (Age) Position With Company
--------------------------------------------------------------------------
William S. Rowland (56) Chairman of the Board of Directors,
President and Chief Executive Officer
Michael L. Taylor (34) Vice President and Chief Financial Officer
John W. Hedges (55) President, First Mid Bank
Laurel G. Allenbaugh (43) Vice President
Christie L. Burich (46) Vice President, Secretary/Treasurer
Stanley E. Gilliland (58) Vice President
Robert J. Swift, Jr. (51) Vice President
William S. Rowland, age 56, has been Chairman of the Board of
Directors, President and Chief Executive Officer of the Company since May 1999.
He served as Executive Vice President of the Company from 1997 to 1999 and as
Treasurer and Chief Financial Officer from 1989 to 1999. He also serves as
Chairman of the Board of Directors and Chief Executive Officer of First Mid
Bank.
Michael L. Taylor, age 34, has been the Vice President and Chief
Financial Officer of the Company since May 2000. He was with AMCORE Bank in
Rockford, Illinois from 1996 to 2000.
John W. Hedges, age 55, has been the President of First Mid Bank since
September 1999. He was with National City Bank in Decatur, Illinois from 1976 to
1999.
Laurel G. Allenbaugh, age 43, has been Vice President of Operations
since February 2000. She served as Controller of the Company and First Mid Bank
from 1990 to February 2000 and has been President of MIDS since 1998.
Christie L. Burich, age 46, has been Vice President of Investments
since 1995 and Secretary since 1998.
Stanley E. Gilliland, age 58, has been Vice President of Lending of the
Company since 1985, and has been Executive Vice President of Lending for First
Mid Bank since 1990.
Robert J. Swift, Jr., age 51, has been Vice President of the Trust and
Financial Services Department of the Company since August 2000. He was with
Central Trust Bank in Jefferson City, Missouri from 1989 to 2000.
ITEM 2. PROPERTIES
The Company or First Mid Bank own all of the following properties
except those specifically identified as being leased.
First Mid Bank
Mattoon
First Mid Bank's main office is located at 1515 Charleston Avenue,
Mattoon, Illinois. The office building consists of a one-story structure with
occupied basement, which was opened in 1965 with approximately 36,000 square
feet of office space, four walk-in teller stations, and three sit-down teller
stations. Adjacent to this building is a parking lot with parking for
approximately one hundred cars. A drive-up facility with nine drive-up lanes,
including a drive-up automated teller machine ("ATM"), is located across the
street from First Mid Bank's main office.
First Mid Bank has a facility at 333 Broadway Avenue East, Mattoon,
Illinois. The one-story office building contains approximately 7,600 square feet
of office space. The main floor provides space for five teller windows, two
private offices, a safe deposit vault and four drive-up lanes. There is adequate
parking located adjacent to the building. A drive-up ATM is located adjacent to
the building.
First Mid Bank leases a facility at 1504-A Lakeland Boulevard, Mattoon,
Illinois that provides space for three tellers, two drive-up lanes and a walk-up
ATM.
First Mid Bank owns a facility located at 1520 Charleston Avenue,
Mattoon, Illinois, which is used as the Corporate Headquarters of the Company
and is used by MIDS for its data processing and back room operations for the
Company and First Mid Bank. The office building consists of a two-story
structure with an occupied basement that has approximately 20,000 square feet of
office space.
First Mid Bank leases a facility at 1500 Wabash Avenue, Mattoon,
Illinois, which is used by the deposit services department of First Mid Bank.
The office building consists of a two-story structure with an occupied basement
that has approximately 11,200 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.
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 410 South Main Street. The all brick building consists of a one-story
structure with approximately 4,000 square feet of office space. This main office
building provides for four lobby tellers, two drive-up tellers, four private
offices, a conference room, four drive-through lanes, including one with a
drive-up ATM and one with a drive-up night depository. Adequate customer parking
is available outside the main entrance.
Charleston
First Mid Bank has three offices in Charleston, Illinois. The main
office, acquired in March 1997, is located at 500 West Lincoln Avenue,
Charleston, Illinois. This one-story facility contains approximately 8,400
square feet with five teller stations, eight private offices and four drive-up
lanes.
A second facility is located at 701 Sixth Street, Charleston, Illinois.
It is a one-story facility with an attached two-bay drive-up structure and
consists of approximately 5,500 square feet of office space. Adequate parking is
available to serve its customers. The office space is comprised of three teller
stations, three private offices, storage area, and a night depository.
Approximately 2,200 square feet of this building is rented out to non-affiliated
companies.
The third facility consists of approximately 400 square feet of leased
space at the Martin Luther King Student Union on the Eastern Illinois University
campus. The facility has two walk-up teller stations and two sit-down teller/CSR
stations.
Seven ATMs are located in Charleston. One drive-up ATM is located in
the parking lot of the facility at 500 West Lincoln Avenue, one in the parking
lot of Save-A-Lot at 1400 East Lincoln Avenue, and one drive-up ATM is located
in the parking lot of the 6th Street facility. The fourth is an off-site walk-up
ATM located in the student union at Eastern Illinois University and the fifth is
a walk-up ATM located in Lantz Arena at Eastern Illinois University. The sixth
ATM is a drive-up unit located on the Eastern Illinois University campus in a
parking lot at the corner of 9th Street and Roosevelt and the seventh is a
drive-up unit located on the Eastern Illinois University campus in a parking lot
at the corner of 4th Street and Roosevelt.
Champaign
First Mid Bank leases a facility at 2229 South Neil Street, Champaign,
Illinois. The office space, comprised of approximately 3,496 square feet,
contains six lobby teller windows, two drive-up lanes, one drive-up ATM, a night
depository, four private offices, and a conference room. Adequate customer
parking is available to serve customers.
Urbana
First Mid Bank owns a facility located at 601 South Vine Street,
Urbana, Illinois. Its office building consists of a one-story structure and
contains approximately 3,600 square feet. The office building provides space for
three tellers, two private offices and two drive-up lanes. An ATM machine is
located in front of the building. An adequate customer parking lot is located on
the south side of the building.
Effingham
First Mid Bank operates a facility at 902 North Keller Drive,
Effingham, Illinois. The building is a two-story structure with approximately
4,000 square feet of office space. This office space consists of four teller
stations, three drive-up teller lanes, five private offices and a night
depository. Adequate parking is available to customers in front of the facility.
First Mid Bank also owns property at 900 North Keller Drive, Effingham,
Illinois that provides additional customer parking along with a drive-up ATM.
Altamont
First Mid Bank has a banking facility located at 101 West Washington
Street, Altamont, Illinois. This building is a one-story structure that has
approximately 4,300 square feet of office space. The office space consists of
nine teller windows, three drive-up teller lanes (one of which facilitates an
ATM), seven private offices, one conference room and a night depository.
Adequate parking is available on three sides of the building.
Arcola
First Mid Bank leases a facility at 324 South Chestnut Street, Arcola,
Illinois. This building is a one-story structure with approximately 1,140 square
feet of office space. This office space consists of two lobby teller stations,
one loan station, two drive-up teller lanes, one private office and a night
depository. A drive-up ATM lane is available adjacent to the teller lanes.
Adequate parking is available to customers in front of the facility.
Monticello
First Mid Bank has two offices in Monticello. The main facility is
located on the northeast corner of the historic town square at 100 West
Washington Street. This building is a two-story structure that has 8,000 square
feet of office space consisting of five teller stations, seven private offices,
and a night depository. The second floor is furnished and is currently being
leased to a wholesale pharmacy company and the basement is used for storage.
Adequate parking is available to customers in back of the facility.
A second facility is located at 219 West Center Street, Monticello,
Illinois. It is a one-story facility with two lobby teller stations and an
attached two-bay drive-up structure with a drive-up ATM and a night depository.
Adequate parking is available to serve its customers.
DeLand
First Mid Bank has an office at 220 North Highway Ave, DeLand,
Illinois. It is a one-story structure with one private office, three teller
stations and a night depository. Adequate parking is available in front of the
building.
Taylorville
First Mid Bank has a banking facility located at 200 N. Main Street,
Taylorville, Illinois. This one-story building has approximately 3,700 square
feet with five teller stations, three private offices, one drive-up lane, and a
finished basement. A drive-up ATM is located in the parking lot and adequate
customer parking is available adjacent to the building.
Decatur
First Mid Bank leases a facility at 111 E. Main Street, Decatur,
Illinois. The office space comprised of 4,340 square feet contains three lobby
teller windows, two drive-up lanes, a night depository, three private offices,
safe deposit and loan vaults, and a conference room. Customer parking is
available adjacent to the building.
Highland
First Mid Bank owns a facility located at 12616 State Route 143,
Highland, Illinois. The building is a two-story structure with approximately
6,720 square feet of office space. This office space consists of a customer
service area and teller windows, three drive-up teller lanes and four private
offices. Adequate parking is available to serve customers.
Pocahontas
First Mid Bank owns a facility located at 103 Park Street, Pocahontas,
Illinois. The building is a one-story brick structure with approximately 3,360
square feet of office space. This office space consists of a customer processing
room, three private offices and three bank vaults. Adequate parking is available
to serve customers.
Maryville
First Mid leases a facility at 2930 North Center, Maryville, Illinois.
The office space, comprised of approximately 6,684 square feet, contains four
lobby teller windows, including one sit-down teller, two drive-up lanes, one
drive-up ATM, a night depository, three private offices, a vault, and a
conference room. Adequate customer parking is available to serve customers.
ITEM 3. LEGAL PROCEEDINGS
Since First Mid Bank acts as a depository of funds, it is named from
time to time as a defendant in lawsuits (such as garnishment proceedings)
involving claims to the ownership of funds in particular accounts. Management
believes that all such litigation as well as other pending legal proceedings, in
which the Company is involved, constitute ordinary routine litigation incidental
to the business of the Company and that such litigation will not materially
adversely affect the Company's consolidated financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON SHARES AND RELATED
SHAREHOLDER MATTERS
The Company's common stock was held by approximately 703 shareholders
of record as of December 31, 2002, and is included for quotation on the
over-the-counter electronic bulletin board.
The following table shows, for the indicated periods, the range of
reported prices per share of the Company's common stock. These quotations
represent inter-dealer prices without retail mark-ups, mark-downs or commissions
and do not necessarily represent actual transactions.
Quarter High Low
---------------------- --------------- ---------------
2002
4th 28 1/2 26 1/2
3rd 27 1/2 26 1/3
2nd 27 25 1/3
1st 25 1/3 23 3/4
2001
4th 24 2/3 22 2/3
3rd 24 21 1/6
2nd 23 1/3 21 1/2
1st 21 1/2 18 3/4
The following table sets forth the cash dividends per share on the
Company's common stock for the last two years.
Dividend
Date Declared Date Paid per Share
-------------------- ------------------- ------------------
5-22-2002 6-14-2002 $.23
12-26-2002 1-06-2003 $.27
5-23-2001 6-15-2001 $.19
12-19-2001 1-04-2002 $.24
On November 16, 2001, the Registrant effected a three-for-two stock
split in the form of a 50 percent stock dividend. All share and per share
information has been restated to reflect the split.
The Company's shareholders are entitled to receive such dividends as
are declared by the board of directors, which considers payment of dividends
semi-annually. The ability of the Company to pay dividends, as well as fund its
operations, is dependent upon receipt of dividends from First Mid Bank.
Regulatory authorities limit the amount of dividends that can be paid by First
Mid Bank without prior approval from such authorities. For further discussion of
First Mid Bank's dividend restrictions and capital requirements, see "Note 17"
of the Notes to the Consolidated Financial Statements included under Item 8 of
this document. The Board of Directors of the Company has declared cash dividends
semi-annually during the two years ended December 31, 2002. The Company expects
comparable cash dividends to be paid in the future.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth a five-year comparison of selected financial data.
(Dollars in thousands, except per share data)
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ -------------
Summary of Operations
Interest income $41,387 $45,506 $44,191 $39,168 $37,451
Interest expense 14,661 21,590 22,573 18,415 18,626
------------ ------------ ------------ ------------ -------------
Net interest income 26,726 23,916 21,618 20,753 18,825
Provision for loan losses 1,075 600 550 600 550
Other income 10,898 8,758 6,768 6,765 6,415
Other expense 24,510 22,518 20,141 19,449 17,194
------------ ------------ ------------ ------------ -------------
Income before income taxes 12,039 9,556 7,695 7,469 7,496
Income tax expense 4,005 3,040 2,035 2,237 2,434
------------ ------------ ------------ ------------ -------------
Net income $ 8,034 $ 6,516 $ 5,660 $ 5,232 $ 5,062
============ ============ ============ ============ =============
Per Common Share Data (1)
Basic earnings per share $ 2.39 $ 1.93 $1.67 $1.60 $1.59
Diluted earnings per share 2.38 1.92 1.67 1.53 1.49
Dividends per common share .50 .43 .39 .37 .34
Book value per common share 20.95 18.96 17.18 15.09 15.74
Financial Ratios
Net interest margin (TE) 4.09% 3.99% 3.97% 4.09% 3.93%
Return on average assets 1.11% .97% .92% .91% .95%
Return on average equity 11.82% 10.56% 10.55% 10.14% 10.39%
Return on average common equity 11.82% 10.56% 10.55% 10.08% 10.47%
Dividend payout ratio 19.67% 22.28% 23.53% 22.95% 21.35%
Average equity to average assets 9.36% 9.20% 8.70% 8.96% 9.16%
Capital to risk-weighted assets 11.23% 11.23% 11.74% 11.98% 13.89%
Year End Balances
Total assets $776,240 $705,979 $642,999 $601,103 $554,663
Net loans 496,141 469,541 426,026 385,380 346,350
Total deposits 613,452 559,420 503,985 485,011 449,636
Total equity 66,807 63,925 57,727 51,518 50,480
Average Balances
Total assets $727,986 $670,890 $616,855 $575,903 $531,809
Net loans 479,957 450,466 406,505 356,031 345,254
Total deposits 573,670 540,209 491,584 474,636 445,048
Total equity 67,989 61,714 53,674 51,577 48,704
(1) All share and per share data have been restated to reflect the 3-for-2 stock
split effective November 16, 2001.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis is intended to provide a better
understanding of the consolidated financial condition and results of operations
of the Company and its subsidiaries for the years ended December 31, 2002, 2001
and 2000. This discussion and analysis should be read in conjunction with the
consolidated financial statements, related notes and selected financial data
appearing elsewhere in this report.
Forward-Looking Statements
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, such as discussions of
the Company's pricing and fee trends, credit quality and outlook, liquidity, new
business results, expansion plans, anticipated expenses and planned schedules.
The Company intends such forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and is including this statement for
purposes of these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies and
expectations of the Company, are identified by use of the words "believe,"
"expect," "intend," "anticipate," "estimate," "project," or similar expressions.
Actual results could differ materially from the results indicated by these
statements because the realization of those results is subject to many
uncertainties including: changes in interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
Mergers and Acquisitions
On April 20, 2001, First Mid Bank acquired all the outstanding stock of
American Bank of Illinois in Highland for $3.7 million in cash. This acquisition
added approximately $30.8 million to total deposits, $24.9 million to loans, $2
million to securities, $1.7 million to premises and equipment and $1.4 million
to intangible assets. The acquisition was accounted for using the purchase
method of accounting whereby the acquired assets and liabilities were recorded
at fair value as of the acquisition date and the excess cost over fair value of
net assets was recorded as goodwill. The consolidated financial statements
include the results of operations of American Bank of Illinois since the
acquisition date.
On January 29, 2002, the Company acquired all of the issued and
outstanding stock of Checkley, an insurance agency headquartered in Mattoon,
Illinois. Checkley was purchased for cash with a portion ($750,000) paid at
closing and the remainder ($1,000,000) to be paid pursuant to a promissory note
over a five-year period ending January 2007. Checkley operates as a separate
subsidiary of the Company and provides customers with commercial property,
casualty, life, auto and home insurance. In order to facilitate this
acquisition, the Company became a financial holding company under the GLB Act on
December 14, 2001. The results of Check ley's operations are included in the
consolidated financial statements since the acquisition date.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition (in thousands):
At January 29, 2002:
---------------------------------------------------
Current assets $643
Property and equipment 76
Intangible assets 1,904
--------------
Total assets acquired 2,623
--------------
Current liabilities (771)
Debt (20)
--------------
Total liabilities (791)
--------------
Net assets acquired $1,832
==============
The Company recorded $1,904,000 of acquired intangible assets. The
identified intangible assets were allocated to customer lists and are being
amortized over a period of ten years.
Overview
In 2002, the Company had net income of $8,034,000, up 23.3% from
$6,516,000 in 2001. In 2001, net income increased 15.1% from $5,660,000 in 2000.
Diluted earnings per share was $2.38 in 2002 compared with $1.92 in 2001 and
$1.67 in 2000. A summary of the factors that contributed to the changes in net
income follows (in thousands):
2002 vs 2001 2001 vs 2000
------------- -------------
Net interest income $2,810 $2,298
Provision for loan losses (475) (50)
Other income, including securities transactions 2,160 1,983
Goodwill expense (due to adoption of SFAS 142 & 147) (704) -
Other expenses (1,308) (2,370)
Income taxes (965) (1,005)
------------- -------------
Increase in net income $1,518 $ 856
============= =============
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):
Year Ended Year Ended Year Ended
December 31, 2002 December 31, 2001 December 31, 2000
------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------
ASSETS
Interest-bearing deposits $9,933 $ 137 1.38% $3,621 $ 81 2.23% $ 102 $ 6 6.35%
Federal funds sold 13,164 199 1.51% 10,410 335 3.22% 1,994 121 6.09%
Investment securities
Taxable 134,118 6,014 4.48% 119,245 6,820 5.72% 121,390 7,721 6.36%
Tax-exempt(1) 28,894 1,986 6.87% 30,643 2,110 6.89% 30,402 2,196 7.22%
Loans (2)(3) 483,764 33,726 6.97% 454,108 36,877 8.12% 409,649 34,893 8.52%
------------------------------------------------------------------------------------
Total earning assets 669,873 42,062 6.28% 618,027 46,223 7.48% 563,537 44,937 7.97%
------------------------------------------------------------------------------------
Cash and due from banks 18,450 17,125 16,628
Premises and equipment 16,498 16,385 15,807
Other assets 26,972 22,995 24,026
Allowance for loan losses (3,807) (3,642) (3,143)
---------- ---------- ----------
Total assets $727,986 $670,890 $616,855
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
Demand deposits $200,653 2,667 1.33% $182,404 4,374 2.40% $163,531 5,112 3.13%
Savings deposits 51,634 799 1.55% 41,437 923 2.23% 39,215 952 2.43%
Time deposits 242,301 8,787 3.63% 247,348 13,476 5.40% 226,259 12,348 5.42%
Securities sold under
agreements to repurchase 34,389 345 1.00% 29,547 915 3.10% 24,576 1,357 5.52%
FHLB advances 36,974 1,863 5.04% 28,866 1,664 5.76% 36,979 2,409 6.51%
Federal funds purchased 299 6 2.01% 236 12 5.09% 1,047 66 6.34%
Other debt 6,088 194 3.19% 4,325 226 5.23% 4,325 329 7.61%
------------------------------------------------------------------------------------
Total interest-bearing
liabilities 572,338 14,661 2.56% 534,163 21,590 4.04% 495,932 22,573 4.55%
------------------------------------------------------------------------------------
Demand deposits 79,082 69,020 62,579
Other liabilities 8,577 5,993 4,670
Stockholders' equity 67,989 61,714 53,674
---------- ---------- ----------
Total liabilities & equity $727,986 $670,890 $616,855
========== ========== ==========
et interest income (TE) $27,401 $24,633 $ 22,364
========= ========= =========
Net interest spread 3.72% 3.44% 3.42%
Impact of non-interest bearing
funds .37% .55% .55%
---------- ---------- -----------
Net yield on interest-earning
assets (TE) 4.09% 3.99% 3.97%
========== ========== ===========
(1) Interest income and rates are presented on a tax-equivalent basis ("TE")
assuming a federal income tax rate of 34%.
(2) Loan fees are included in interest income and are not material.
(3) Nonaccrual loans have been included in the average balances.
Changes in net interest income may also be analyzed by segregating the volume
and rate components of interest income and interest expense. The following table
summarizes the approximate relative contribution of changes in average volume
and interest rates to changes in net interest income (TE) for the past two years
(in thousands):
2002 Compared to 2001 2001 Compared to 2000
Increase - (Decrease) Increase - (Decrease)
---------------------------------------------------------------------------------
Total Rate/ Total Rate/
---------------------------------------------------------------------------------
Change Volume Rate Volume(4) Change Volume Rate Volume(4)
---------------------------------------------------------------------------------
Earning Assets:
Interest-bearing deposits $ 56 $ 141 $(31) $ (54) $ 75 $ 223 $(4) $ (144)
Federal funds sold (136) 89 (178) (47) 214 513 (57) (242)
Investment securities:
Taxable (806) 851 (1,479) (178) (901) (136) (778) 13
Tax-exempt (1) (124) (120) (4) - (86) 17 (102) (1)
Loans (2)(3) (3,151) 2,408 (5,222) (337) 1,984 3,788 (1,635) (169)
---------------------------------------------------------------------------------
Total interest income (4,161) 3,369 (6,914) (616) 1,286 4,405 (2,576) (543)
---------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Interest-bearing deposits
Demand deposits (1,707) 438 (1,952) (193) (738) 590 (1,191) (137)
Savings deposits (124) 227 (282) (69) (29) 54 (79) (4)
Time deposits (4,689) (275) (4,502) 88 1,128 1,151 (21) (2)
Securities sold under
agreements to repurchase (570) 150 (620) (100) (442) 275 (596) (121)
FHLB advances 199 467 (208) (60) (745) (528) (278) 61
Federal funds purchased (6) 3 (7) (2) (54) (51) (13) 10
Other debt (32) 92 (88) (36) (103) - (103) -
---------------------------------------------------------------------------------
Total interest expense (6,929) 1,102 (7,659) (372) (983) 1,491 (3,281) (193)
---------------------------------------------------------------------------------
Net interest income $2,768 $2,267 $ 745 $ (244) $2,269 $2,914 $(295) $ (350)
=================================================================================
(1) Interest income and rates are presented on a tax-equivalent basis, assuming
a federal income tax rate of 34%.
(2) Loan fees are included in interest income and are not material.
(3) Nonaccrual loans are not material and have been included in the average
balances.
(4) The changes in rate/volume are computed on a consistent basis by
multiplying the change in rates with the change in volume.
On a tax equivalent basis, net interest income increased $2,768,000, or
11.2% in 2002, compared to an increase of $2,269,000, or 10.1% in 2001. The
increase in net interest income in 2002 was due primarily to growth in net
interest earning assets and an increase in net interest spread. In 2001, the
increase in net interest income was due primarily to increased loan volumes,
including acquisitions, and a decrease in deposit rates.
In 2002, average earning assets increased by $51,846,000, or 8.4%, and
average interest-bearing liabilities increased $38,175,000 or 7.1% compared with
2001. In 2001, average earning assets increased by $54,490,000, or 9.7%, and
average interest-bearing liabilities increased $38,231,000, or 7.7%, compared
with 2000. Changes in average balances are shown below:
>> Average loans increased by $29.7 million or 6.5% in 2002 as compared
to 2001. In 2001, average loans increased by $44.5 million or 10.9% as
compared to 2000.
>> Average securities increased by $13.1 million or 8.8% in 2002 as
compared to 2001. In 2001, average securities decreased by $1.9
million or 1.3% as compared to 2000.
>> Average interest-bearing deposits increased by $23.4 million or 5.0%
in 2002 as compared to 2001. In 2001, average interest-bearing
deposits increased by $42.2 million or 9.8% as compared to 2000.
>> Average securities sold under agreements to repurchase increased by
$4.8 million or 16.3% in 2002 as compared to 2001. In 2001, average
securities sold under agreements to repurchase increased by $5.0
million or 20.4% as compared to 2000.
>> Average borrowings and other debt increased by $9.9 million or 29.8%
in 2002 as compared to 2001. In 2001, average borrowings and other
debt decreased by $8.1 million or 19.6% as compared to 2000.
>> Federal funds rate declined to 1.25% at December 31, 2002 from 1.75%
at December 31, 2001 and from 6.50% at December 31, 2000. This decline
in interest rates was a primary contributor to the decline in asset
yields of 120 basis points and interest-bearing liabilities of 148
basis points.
>> Net interest margin has increased to 4.09% in 2002 from 3.99% in 2001
and from 3.97% in 2000.
Provision for Loan Losses
The provision for loan losses in 2002 was $1,075,000 compared to
$600,000 in 2001 and $550,000 in 2000. The increase in the provision was a
result of an increased risk in the loan portfolio, uncertain economic
conditions, and an increase in charge-offs. Net charge-offs were $1,054,000
during 2002, $435,000 during 2001, and $227,000 during 2000. For information on
loan loss experience and nonperforming loans, see the "Nonperforming Loans" and
"Loan Quality and Allowance for Loan Losses" sections below.
Other Income
An important source of the Company's revenue is derived from other
income. The following table sets forth the major components of other income for
the last three years (in thousands):
$ Change
From Prior Year
--------- ---------
2002 2001 2000 2002 2001
-------- -------- --------- --------- ---------
Trust $1,855 $1,924 $ 2,010 $ (69) $ (86)
Brokerage 265 234 347 31 (113)
Insurance commissions 1,182 122 90 1,060 32
Service charges 3,799 3,122 2,592 677 530
Securities gains (losses) 223 208 (3) 15 211
Mortgage banking 1,514 1,156 383 358 773
Other 2,060 1,992 1,349 68 643
-------- -------- --------- --------- ---------
Total other income $10,898 $8,758 $ 6,768 $2,140 $1,990
======== ======== ========= ========= =========
Total non-interest income increased to $10,898,000 in 2002 as compared
to $8,758,000 in 2001 and $6,768,000 in 2000. The primary reasons for the more
significant year-to-year changes in other income components are as follows:
>> Trust revenues decreased $69,000 or 3.6% to $1,855,000 in 2002 from
$1,924,000 in 2001 and $2,010,000 in 2000. Approximately 50 percent of
trust revenue is market value dependent. The overall decline in equity
prices in the United States has resulted in reduced levels of trust
revenue. Absent an increase in overall equity prices, management does
not expect increases in trust revenue other than that generated
through new business.
>> Revenues from brokerage and annuity sales decreased $31,000 or 13.2%
to $265,000 in 2002 from $234,000 in 2001 and $347,000 in 2000 as a
result of decreased sales with the decline in the stock market.
>> Insurance commissions increased $1,060,000 or 868.9% to $1,182,000 in
2002 from $122,000 in 2001 and $90,000 in 2000. This increase is due
to the acquisition of Checkley in January 2002.
>> Fees from service charges increased $677,000 or 21.7% to $3,799,000 in
2002 from $3,122,000 in 2001 and $2,592,000 in 2000. In 2002, this was
primarily the result of increased overdraft fees after implementation
of a new program called Payment Privilege. Under Payment Privilege,
overdrafts up to a limit of $500 are automatically paid for qualifying
customers in exchange for a fee. A greater number of overdrafts paid
has resulted in an increase in fee income. In 2001, the increase was
primarily due to the acquisition of the Highland and Pocahontas
branches and an increase in the amount charged for overdraft and club
fees.
>> Net securities gains in 2002 were $223,000 compared to net securities
gains of $208,000 in 2001, and net losses of $3,000 in 2000. Several
securities in the available-for-sale portfolio were sold to improve
the overall portfolio mix and the margin in 2002 and 2001.
>> Mortgage banking income increased $358,000 or 31.0% to $1,514,000 in
2002 from $1,156,000 in 2001 and $383,000 in 2000. This increase was
due to the volume of fixed rate loans originated and sold by First Mid
Bank. The increase in volume is largely attributed to the decrease in
mortgage lending rates in 2002 and 2001. Loan sold balances are as
follows:
>> $105 million (representing 1,116 loans) in 2002
>> $71 million (representing 801 loans) in 2001
>> $15 million (representing 203 loans) in 2000.
>> Other income increased $68,000 or 3.4% to $2,060,000 in 2002 from
$1,992,000 in 2001 and $1,349,000 in 2000. In 2002, the increase was
primarily due to fees from ATM usage and placement of additional ATMs
during 2002. In 2001, the increase was due to an increase in ATM fee
income due to the addition of several ATMs in late 2000. Also, the
acquisition of American Bank of Illinois in Highland provided
additional fee income.
Other Expense
The major categories of other expense include salaries and employee
benefits, occupancy and equipment expenses and other operating expenses
associated with day-to-day operations. The following table sets forth the major
components of other expense for the last three years (in thousands):
$ Change
From Prior Year
-------------------
2002 2001 2000 2002 2001
--------- --------- --------- --------- ---------
Salaries and benefits $12,732 $11,116 $10,104 $ 1,616 $ 1,012
Occupancy and equipment 4,055 3,909 3,563 146 346
Amortization of goodwill - 704 639 (704) 65
Amortization of other
intangibles 742 610 630 132 (20)
Stationery and supplies 679 671 534 8 137
Legal and professional fees 1,027 1,033 941 (6) 92
Marketing and promotion 738 789 769 (51) 20
Other 4,537 3,368 2,961 851 725
--------- --------- --------- --------- ---------
Total other expense $24,510 $22,518 $20,141 $ 1,992 $ 2,377
========= ========= ========= ========= =========
Total non-interest expense increased to $24,510,000 in 2002 from
$22,518,000 in 2001 and $20,141,000 in 2000. The primary reasons for the more
significant year-to-year changes in other expense components are as follows:
>> Salaries and employee benefits, the largest component of other
expense, increased $1,616,000 or 14.5% to $12,732,000 in 2002 from
$11,116,000 in 2001 and $10,104,000 in 2000. This increase can be
explained by merit and incentive increases for continuing employees
and an increase in the number of employees due to the acquisitions of
Checkley in January 2002 and American Bank of Illinois in April 2001
and the establishment of de novo branches in Champaign and Maryville
in November 2002.
>> Occupancy and equipment expense increased $146,000 or 3.7% to
$4,055,000 in 2002 from $3,909,000 in 2001 and $3,563,000 in 2000.
This increase is due to the acquisition of Checkley and opening of new
branches in Champaign and Maryville, Illinois, as well as building
maintenance, utilities and depreciation expense for all buildings.
>> Amortization of goodwill expense decreased due to the adoption of SFAS
No. 142, "Goodwill and Other Intangible Assets," and SFAS No. 147,
"Acquisitions of Certain Financial Institutions," effective January 1,
2002. Goodwill totaling $9 million at January 1, 2002 is no longer
being amortized. However, the Company continues to amortize goodwill
for acquisition of branches whereby the fair value of liabilities
assumed were greater than the assets obtained, which totaled $2.1
million at January 1, 2002. Amortization of other intangibles expense
increased $132,000 as a result of the acquisition of Checkley of
$175,000, partially offset by the reduction of core deposit intangible
expense of $23,000 and the decrease in mortgage servicing rights
amortization expense of $20,000.
>> Other operating expenses increased $851,000 or 23.1% to 4,537,000 in
2002 from $3,686,000 in 2001 and $2,961,000 in 2000. The increase in
2002 is partially the result of a $250,000 write-off of an investment
in a venture capital fund. During the second quarter, management
determined that the probability of recovery of the investment was
remote and, accordingly, charged off the investment through a direct
charge to earnings. The Company has no other such investments. The
increase is also due to $305,000 of consulting fees related to the
Payment Privilege program implemented in June of 2002. In 2001, the
increase was largely attributed to additional ATM network charges from
new ATMs installed in 2000.
>> All other categories of operating expenses decreased a net of $49,000
or 2.0% to $2,444,000 from $2,493,000 in 2001 and $2,244,000 in 2000.
This decrease is due to expenses in 2001 resulting from the
acquisition of American Bank of Illinois in April 2001, which were
higher than expenses incurred in 2002 resulting from the acquisition
of Checkley in January 2002 and opening of two de novo branches in
Champaign and Maryville in November 2002. The increase in 2001
resulted from legal fees and increases in stationery and supplies due
to the acquisition of American Bank of Illinois in April 2001.
Income Taxes
Income tax expense amounted to $4,005,000 in 2002 as compared to
$3,040,000 in 2001 and $2,035,000 in 2000. Effective tax rates were 33.3%, 31.8%
and 26.4%, respectively, for 2002, 2001 and 2000. The increase in the effective
tax rate in 2002 compared to 2001 is due to increased loan interest income, a
decrease in deductible goodwill expense as a result of adoption of SFAS 142 and
SFAS 147, and an increase in state income tax expense to $608,600 in 2002 versus
$308,300 in 2001. The increase in state tax is primarily due to a decrease in
interest income from U.S. Treasury securities. The increase in effective tax
rate in 2001 compared to 2000 resulted primarily from an increase in federal and
state income taxes due to a large charitable contribution in 2000.
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):
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Real estate - mortgage $340,033 $331,873 $299,252 $273,293 $244,501
Commercial & agricultural 127,065 107,620 100,201 89,176 78,579
Installment 31,119 32,522 28,674 24,501 25,194
Other 1,647 1,228 1,161 1,349 791
--------- --------- --------- --------- ---------
Total loans $499,864 $473,243 $429,288 $388,319 $349,065
========= ========= ========= ========= =========
At December 31, 2002, the Company had loan concentrations in
agricultural industries of $90.7 million, or 18.1%, of outstanding loans and
$82.6 million, or 17.5%, at December 31, 2001. 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 2.5% increase in the real estate loan
category in 2002 was primarily due to an increase in the volume of loans secured
by commercial real estate. The balance of real estate loans held for sale
amounted to $7,070,000 and $5,571,000 as of December 31, 2002 and 2001,
respectively.
The following table presents the balance of loans outstanding as of
December 31, 2002, by maturities (dollars in thousands):
Maturity (1)
----------------------------------------------
Over 1
One year through Over
or less(2) 5 years 5 years Total
----------------------------------------------
Real estate - mortgage $ 97,942 $209,047 $ 33,040 $340,033
Commercial & agricultural 90,523 33,860 2,682 127,065
Installment 16,579 14,492 48 31,119
Other 284 751 612 1,647
----------------------------------------------
Total loans $205,328 $258,150 $36,386 $499,864
==============================================
(1) Based upon remaining maturity.
(2) Includes demand loans, past due loans and overdrafts.
As of December 31, 2002, loans with maturities over one year consisted
of $264,369,000 in fixed rate loans and $30,167,000 in variable rate loans. The
loan maturities noted above are based on the contractual provisions of the
individual loans. The Company has no general policy regarding rollovers and
borrower requests, which are handled on a case-by-case basis.
Nonperforming Loans
Nonperforming loans include: (a) loans accounted for on a nonaccrual
basis; (b) accruing loans contractually past due ninety days or more as to
interest or principal payments; and (c) loans not included in (a) and (b) above
which are defined as "renegotiated loans".
The following table presents information concerning the aggregate
amount of nonperforming loans (in thousands):
December 31,
-----------------------------------------------
2002 2001 2000 1999 1998
-----------------------------------------------
Nonaccrual loans $2,961 $3,419 $2,982 $1,430 $1,783
Loans past due ninety days
or more and still accruing -- -- 245 366 609
Renegotiated loans which are
performing in accordance
with revised terms 188 188 232 81 90
-----------------------------------------------
Total nonperforming loans $3,149 $3,607 $3,459 $1,877 $2,482
===============================================
At December 31, 2002, $1,429,000 of the nonperforming loans resulted
from a collateral-dependent loan to one borrower. The $458,000 decrease in
nonaccrual loans during the year resulted from the net of $769,000 loans
transferred to other real estate owned, $2,156,000 of loans becoming current or
paid-off, offset by $2,467,000 of loans put on nonaccrual status.
Interest income that would have been reported if nonaccrual and
renegotiated loans had been performing totaled $164,000, $247,000 and $154,000
for the years ended December 31, 2002, 2001 and 2000, respectively. Interest
income that was included in income totaled $2,000, $16,000 and $20,000 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 estimate of the
reserve necessary to adequately cover probable losses that could ultimately be
realized from current loan exposures. The provision for loan losses is the
charge against current earnings that is determined by management as the amount
needed to maintain an adequate allowance for loan losses. In determining the
adequacy of the allowance for loan losses, and therefore the provision to be
charged to current earnings, management relies predominantly on a disciplined
credit review and approval process that extends to the full range of the
Company's credit exposure. The review process is directed by overall lending
policy and is intended to identify, at the earliest possible stage, borrowers
who might be facing financial difficulty. Once identified, the magnitude of
exposure to individual borrowers is quantified in the form of specific
allocations of the allowance for loan losses. Management considers collateral
values in the determination of such specific allocations. Additional factors
considered by management in evaluating the overall adequacy of the allowance
include historical net loan losses, the level and composition of nonaccrual,
past due and renegotiated loans and the current economic conditions in the
region where the Company operates. Management considers the allowance for loan
losses a critical accounting policy.
Management recognizes that there are risk factors that are inherent in
the Company's loan portfolio. All financial institutions face risk factors in
their loan portfolios because risk exposure is a function of the business. The
Company's operations (and therefore its loans) are concentrated in east central
Illinois, an area where agriculture is the dominant industry. Accordingly,
lending and other business relationships with agriculture-based businesses are
critical to the Company's success. At December 31, 2002, the Company's loan
portfolio included $90.7 million of loans to borrowers whose businesses are
directly related to agriculture. The balance increased $8.1 million from $82.6
million at December 31, 2001. While the Company adheres to sound underwriting
practices, including collateralization of loans, an extended period of low
commodity prices or changes in government programs relating to agriculture 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):
2002 2001 2000 1999 1998
------------------------------------------------------------
Average loans outstanding,
net of unearned income $483,764 $454,108 $409,648 $358,948 $348,055
Allowance-beginning of year $3,702 $3,262 $2,939 $2,715 $2,636
Balance added through acquisitions - 275 - 150 -
Charge-offs:
Commercial, financial and agricultural 673 244 57 511 382
Real estate-mortgage 200 86 47 17 21
Installment 255 171 183 98 152
------------------------------------------------------------
Total charge-offs 1,128 501 287 626 555
Recoveries:
Commercial, financial and agricultural 12 22 26 69 28
Real estate-mortgage 17 - 1 3 30
Installment 45 44 33 28 26
------------------------------------------------------------
Total recoveries 74 66 60 100 84
Net charge-offs 1,054 435 227 526 471
------------------------------------------------------------
Provision for loan losses 1,075 600 550 600 550
------------------------------------------------------------
Allowance-end of year $ 3,723 $ 3,702 $ 3,262 $2,939 $2,715
============================================================
Ratio of net charge-offs to
average loans .22% .10% .06% .15% .14%
============================================================
Ratio of allowance for loan losses to
loans outstanding (at end of year) .74% .79% .76% .76% .78%
============================================================
Ratio of allowance for loan
losses to nonperforming loans 118.2% 102.6% 94.3% 156.6% 109.4%
============================================================
The Company minimizes credit risk by adhering to sound underwriting and
credit review policies. These policies are reviewed at least annually, and the
board of directors approves all changes. Senior management is actively involved
in business development efforts and the maintenance and monitoring of credit
underwriting and approval. The loan review system and controls are designed to
identify, monitor and address asset quality problems in an accurate and timely
manner. On a monthly basis, the board of directors reviews the status of problem
loans. In addition to internal policies and controls, regulatory authorities
periodically review asset quality and the overall adequacy of the allowance for
loan losses.
During 2002, the Company had net charge-offs of $1,054,000, compared to
$435,000 in 2001 and $227,000 in 2000. At December 31, 2002, the allowance for
loan losses amounted to $3,723,000, or .74% of total loans, and 118.2% of
nonperforming loans. At December 31, 2001, the allowance was $3,702,000, or .79%
of total loans, and 102.6% of nonperforming loans.
During 2002, the Company had net charge-offs of $1,054,000 compared to
$435,000 in 2001 and $227,000 in 2000. The increase in net charge-offs in 2002
was primarily due to an increase of $429,000 in commercial and agricultural
operating loan charge-offs to $673,000 from $244,000 in 2001. The Company had
two agricultural loan charge-offs totaling $306,000 in 2002. Agricultural
conditions including weather and crop prices and poor cash flow contributed to
the losses. In addition, the Company had one commercial borrower with a loss of
$169,000. The borrower was in the leasing business and insufficient cash flow
contributed to the loss. The increase in net charge-offs in 2001 was also
primarily due to greater charge-offs on commercial operating loans than in 2000.
Commercial and agricultural operating loan charge-offs were $244,000 in 2001
compared to $57,000 in 2000. The Company had a charge-off for one commercial
borrower operating a retail business. Declines in consumer spending and
insufficient cash flow contributed to the loss.
The allowance for loan losses, in management's judgment, is allocated
as follows to cover probable loan losses (in thousands):
December 31, 2002 December 31, 2001 December 31, 2000
------------------------- -------------------------- -------------------------
Allowance % of Allowance % of Allowance % of
for loans for loans for loans
loan to total loan to total loan to total
losses loans losses loans losses loans
------------------------- -------------------------- -------------------------
Real estate-mortgage $ 241 68.1% $ 282 70.1% $ 257 69.7%
Commercial, financial
and agricultural 2,856 25.4% 2,524 22.7% 2,107 23.3%
Installment 190 6.2% 207 6.9% 182 6.7%
Other - .3% - .3% - .3%
------------------------- -------------------------- -------------------------
Total allocated 3,287 3,013 2,546
Unallocated 436 N/A 689 N/A 716 N/A
------------------------- -------------------------- -------------------------
Allowance at end of
year $3,723 100.0% $3,702 100.0% $3,262 100.0%
========================= ========================== =========================
December 31, 1999 December 31, 1998
------------------------- --------------------------
Allowance % of Allowance % of
for loans for loans
loan to total loan to total
losses loans losses loans
------------------------- --------------------------
Real estate-mortgage $227 70.4% $ 230 70.1%
Commercial, financial
and agricultural 1,685 23.0% 1,725 22.5%
Installment 181 6.3% 166 7.2%
Other - .3% - .2%
------------------------- --------------------------
Total allocated 2,093 2,121
Unallocated 846 N/A 594 N/A
------------------------- --------------------------
Allowance at end of
year $2,939 100.0% $2,715 100.0%
========================= ==========================
The allowance is allocated to the individual loan categories by a specific
allocation for all classified loans plus a percentage of loans not classified
based on historical losses and other factors.
Securities
The Company's overall investment goal is to maximize earnings while
maintaining liquidity in securities having minimal credit risk. The types and
maturities of securities purchased are primarily based on the Company's current
and projected liquidity and interest rate sensitivity positions.
The following table sets forth the year-end amortized cost of the
Company's securities for the last three years (in thousands):
December 31,
-----------------------------------------------------------
2002 2001 2000
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Amount Yield Amount Yield Amount Yield
---------- -------- --------- --------- --------- ---------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 76,342 3.80% $ 60,852 4.75% $ 89,202 5.98%
Obligations of states and
political subdivisions 27,597 4.63 29,211 4.61 30,434 4.61
Mortgage-backed securities 44,697 3.72 54,306 5.06 27,750 6.83
Other securities 15,807 5.86 16,591 6.45 5,873 8.40
---------- -------- --------- --------- --------- ---------
Total securities $164,443 4.12% $160,960 5.01% $153,259 5.96%
========== ======== ========= ========= ========= =========
At December 31, 2002, the investment portfolio showed a decrease in
mortgage-backed securities and an increase in obligations of U.S. government
corporations and agencies. This change in the portfolio mix improved the
characteristics of the portfolio relating to interest rate risk exposure and
portfolio yield.
The following table indicates the expected maturities of investment
securities classified as available-for-sale and held-to-maturity, presented at
amortized cost, at December 31, 2002 (dollars in thousands) and the weighted
average yield for each range of maturities. Mortgage-backed securities are aged
according to their weighted average life. All other securities are shown at
their contractual maturity.
One After 1 After 5 After
year through through ten
or less 5 years 10 years years Total
--------- --------- ---------- -------- ---------
Available-for-sale:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 32,867 $37,506 $ 1,000 $4,969 $ 76,342
Obligations of state and
political subdivisions - 7,038 11,763 6,894 25,695
Mortgage-backed securities 22,162 22,535 - - 44,697
Other securities - - - 15,807 15,807
--------- --------- ---------- -------- ---------
Total investments $55,029 $ 67,079 $12,763 $27,670 $162,541
========= ========= ========== ======== =========
Weighted average yield 3.31% 4.13% 4.72% 5.31% 4.10%
Full tax-equivalent yield 3.31% 4.32% 6.53% 5.86% 4.42%
========= ========= ========== ======== =========
Held-to-maturity:
Obligations of state and
political subdivisions $225 $ 585 $ 535 $ 557 $ 1,902
========= ========= ========== ======== =========
Weighted average yield 5.49% 5.26% 5.56% 5.40% 5.41%
Full tax-equivalent yield 7.96% 7.61% 8.06% 7.82% 7.84%
========= ========= ========== ======== =========
The weighted average yields are calculated on the basis of the
amortized cost and effective yields weighted for the scheduled maturity of each
security. Full tax-equivalent yields have been calculated using a 34% tax rate.
With the exception of obligations of the U.S. Treasury and other U.S. Government
agencies and corporations, there were no investment securities of any single
issuer the book value of which exceeded 10% of stockholders' equity at December
31, 2002.
Investment securities carried at approximately $141,462,000 and
$133,208,000 at December 31, 2002 and 2001, respectively, were pledged to secure
public deposits and repurchase agreements and for other purposes as permitted or
required by law.
Deposits
Funding of the Company's earning assets is substantially provided by a
combination of consumer, commercial and public fund deposits. The Company
continues to focus its strategies and emphasis on retail core deposits, the
major component of funding sources. The following table sets forth the average
deposits and weighted average rates at December 31, 2002, 2001 and 2000 (dollars
in thousands):
2002 2001 2000
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
-------- -------- -------- -------- -------- --------
Demand deposits:
Non-interest bearing $ 79,082 - $ 69,020 - $ 62,579 -
Interest bearing 200,653 1.33% 182,404 2.40% 163,531 3.13%
Savings 51,634 1.55% 41,437 2.23% 39,215 2.43%
Time deposits 242,301 3.63% 247,348 5.45% 226,259 5.42%
-------- -------- -------- -------- -------- --------
Total average deposits $573,670 2.14% $540,209 3.48% $491,584 3.73%
======== ======== ======== ======== ======== ========
The following table sets forth the maturity of time deposits of
$100,000 or more (in thousands):
December 31,
-----------------------------------
2002 2001 2000
----------- ----------- -----------
3 months or less $ 29,085 $ 25,503 $ 15,413
Over 3 through 6 months 18,926 20,228 20,283
Over 6 through 12 months 13,715 10,913 18,668
Over 12 months 32,225 4,794 8,558
----------- ----------- -----------
Total $ 93,951 $ 61,438 $ 62,922
=========== =========== ===========
Repurchase Agreements and Other Borrowings
Securities sold under agreements to repurchase are short-term
obligations of First Mid Bank. First Mid Bank collateralizes these obligations
with certain government securities that are direct obligations of the United
States or one of its agencies. First Mid Bank offers these retail repurchase
agreements as a cash management service to its corporate customers. Other
borrowings consist of Federal Home Loan Bank ("FHLB") advances, federal funds
purchased, and loans (short-term or long-term debt) that the Company has
outstanding.
Information relating to securities sold under agreements to repurchase
and other borrowings for the last three years is presented below (in thousands):
2002 2001 2000
--------- --------- ---------
At December 31:
Securities sold under agreements to repurchase $44,184 $38,879 $ 31,096
Federal Home Loan Bank advances:
Overnight 5,000 - 20,000
Fixed term - due after one year 30,300 33,300 20,300
Debt:
Loans due in one year or less 8,525 4,325 -
Loans due after one year 800 - 4,325
--------- --------- ---------
Total $88,809 $76,504 $ 75,721
========= ========= =========
Average interest rate at year end 2.53% 3.15% 6.15%
Maximum Outstanding at Any Month-end
Securities sold under agreements to repurchase $44,588 $40,646 $ 34,546
Federal Home Loan Bank advances:
Overnight 400 12,800 44,000
Fixed term - due in one year or less 8,000 5,000 -
Fixed term - due after one year 30,300 28,300 20,300
Federal funds purchased 3,250 2,850 1,000
Debt:
Loans due in one year or less 9,525 4,325 -
Loans due after one year 800 - 4,325
--------- --------- ---------
Total $96,863 $93,921 $104,171
========= ========= =========
Averages for the Year
Securities sold under agreements to repurchase $34,389 $29,547 $24,576
Federal Home Loan Bank advances:
Overnight 521 2,161 25,216
Fixed term - due in one year or less 6,153 3,356 -
Fixed term - due after one year 30,300 23,349 11,763
Federal funds purchased 299 236 1,047
Debt:
Loans due in one year or less 5,350 4,325 -
Loans due after one year 738 - 4,325
--------- --------- ---------
Total $77,750 $62,974 $66,927
========= ========= =========
Average interest rate during the year 3.10% 4.47% 6.22%
FHLB advances represent borrowings by First Mid Bank to economically
fund loan demand. The fixed term advances consists of $35.3 million as follows:
>> $5 million advance at 2.54% with a 1-year maturity, due 2/28/03
>> $5 million advance at 3.45% with a 2-year maturity, due 2/28/04
>> $5 million advance at 6.16% with a 5-year maturity, due 3/20/05
>> $2.3 million advance at 6.10% with a 5-year maturity, due 4/7/05
>> $5 million advance at 6.12% with a 5-year maturity, due 9/6/05
>> $5 million advance at 5.34% with a 5-year maturity, due 12/14/05
>> $3 million advance at 5.98% with a 10-year maturity, due 3/1/11
>> $5 million advance at 4.33% with a 10-year maturity, due
11/23/11.
Debt, both short-term and long-term, represents the outstanding loan
balances for the Company. At December 31, 2002, outstanding loan balances
include $8,325,000 on a revolving credit agreement with The Northern Trust
Company with a floating interest rate of 1.25% over the Federal funds rate
(2.53% as of December 31, 2002) and set to mature October 24, 2003. This loan
was renegotiated on October 25, 2002, and replaced the Company's previous loan
balance set to mature November 19, 2002. The loan has a maximum available
balance of $15 million. The loan is secured by all of the common stock of First
Mid Bank. The borrowing agreement contains requirements for the Company and
First Mid Bank to maintain various operating and capital ratios and also
contains requirements for prior lender approval for certain sales of assets,
merger activity, the acquisition or issuance of debt and the acquisition of
treasury stock. The Company and First Mid Bank were in compliance with the
existing covenants at December 31, 2002 and 2001. The balance also includes a $1
million promissory note resulting from the acquisition of Checkley with an
annual interest rate equal to the prime rate listed in the money rate section of
the Wall Street Journal (4.25% as of December 31, 2002) and principal payable in
the amount of $200,000 annually over five years, with a final maturity of
January 2007.
Interest Rate Sensitivity
The Company seeks to maximize its net interest margin while
maintaining an acceptable level of interest rate risk. Interest rate risk can be
defined as the amount of forecasted net interest income that may be gained or
lost due to changes in the interest rate environment, a variable over which
management has no control. Interest rate risk, or sensitivity, arises when the
maturity or repricing characteristics of assets differ significantly from the
maturity or repricing characteristics of liabilities.
The Company monitors its interest rate sensitivity position to
maintain a balance between rate-sensitive assets and rate-sensitive liabilities.
This balance serves to limit the adverse effects of changes in interest rates.
The Company's asset/liability management committee oversees the interest rate
sensitivity position and directs the overall allocation of funds.
In the banking industry, a traditional way to measure potential net
interest income exposure to changes in interest rates is through a technique
known as "static GAP" analysis which measures the cumulative differences between
the amounts of assets and liabilities maturing or repricing at various
intervals. By comparing the volumes of interest bearing assets and liabilities
that have contractual maturities and repricing points at various times in the
future, management can gain insight into the amount of interest rate risk
embedded in the balance sheet.
The following table sets forth the Company's interest rate repricing
gaps for selected maturity periods at December 31, 2002 (in thousands):
Number of Months Until Next Repricing Opportunity
Interest earning assets: 0-1 1-3 3-6 6-12 12+
---------- ---------- --------- --------- ---------
Federal funds sold $ 47,220 $ - $ - $ - $ -
Taxable investment securities 44,010 19,816 5,348 20,057 50,258
Nontaxable investment securities - 210 1,250 91 27,277
Loans 83,215 35,061 36,788 49,791 295,008
---------- ---------- --------- --------- ---------
Total $174,445 $ 55,087 $43,386 $69,939 $372,543
---------- ---------- --------- --------- ---------
Interest bearing liabilities:
Savings and N.O.W. accounts 20,349 1,213 1,781 5,020 169,810
Money market accounts 26,991 777 1,165 2,209 38,186
Other time deposits 26,559 36,661 43,192 51,550 104,201
Short-term borrowings/debt 44,184 5,000 - 8,525 -
Long-term borrowings/debt - - - - 31,100
---------- ---------- --------- --------- ---------
Total $118,083 $ 43,651 $46,138 $67,304 $343,297
---------- ---------- --------- --------- ---------
Periodic GAP $ 56,362 $ 11,436 $(2,752) $ 2,635 $ 29,246
---------- ---------- --------- --------- ---------
Cumulative GAP $ 56,362 $ 67,798 $65,046 $67,681 $ 96,927
========== ========== ========= ========= =========
GAP as a % of interest earning assets:
Periodic 7.9% 1.6% (0.4%) 0.4% 4.1%
Cumulative 7.9% 9.5% 9.1% 9.5% 13.5%
========== ========== ========= ========= =========
The static GAP analysis shows that at December 31, 2002, the Company
was asset sensitive, on a cumulative basis, through the twelve-month time
horizon. This indicates that future increases in interest rates, if any, could
have a positive effect on net interest income. Conversely, future decreases in
interest rates could have an adverse effect on net interest income.
There are several ways the Company measures and manages the exposure to
interest rate sensitivity, static GAP analysis being one. The Company's asset
liability management committee (ALCO) also uses other financial models to
project interest income under various rate scenarios and prepayment/extension
assumptions consistent with the bank's historical experience and with known
industry trends. ALCO meets at least monthly to review the Company's exposure to
interest rate changes as indicated by the various techniques and to make
necessary changes in the composition terms and/or rates of the assets and
liabilities. Based on all information available, management does not believe
that changes in interest rates which might reasonably be expected to occur in
the next twelve months will have a material, adverse effect on the Company's net
interest income.
Capital Resources
At December 31, 2002, stockholders' equity increased $2,882,000 or 4.5%
to $66,807,000 from $63,925,000 as of December 31, 2001. During 2002, net income
contributed $8,034,000 to equity before the payment of dividends to common
stockholders of $1,638,000. The change in the market value of available-for-sale
investment securities increased stockholders' equity by $1,633,000, net of tax.
Additional purchases of treasury stock decreased stockholders' equity by
$6,540,000.
Stock Plans
On November 16, 2001, the Company effected a three-for-two stock split
in the form of a 50 percent stock dividend. All share and per share information
has been restated to reflect the split.
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"). At December 31, 2002, the Company classified
the cost basis of its common stock issued and held in trust in connection with
the DCP of approximately $1,589,000 as treasury stock. The Company also
classified the cost basis of its related deferred compensation obligation of
approximately $1,589,000 as 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, pursuant to DCP:
>> 5,785 common shares during 2002
>> 8,108 common shares during 2001
>> 1,605 common shares during 2000.
First Retirement and Savings Plan
The First Retirement and Savings Plan ("401k plan") was effective
beginning in 1985. Employees are eligible to participate in the 401k plan after
six months of service to the Company. During 1996, the Company began issuing
common stock as an investment option for participants of the 401k plan. The
Company issued, pursuant to the 401k plan:
>> 6,770 common shares during 2002
>> 9,983 common shares during 2001
>> 645 common shares during 2000.
Dividend Reinvestment Plan
The Dividend Reinvestment Plan ("DRIP") was effective as of October
1994. The purpose of the DRIP is to provide participating stockholders with a
simple and convenient method of investing cash dividends paid by the Company on
its common and preferred shares into newly issued common shares of the Company.
All holders of record of the Company's common or preferred stock are eligible to
voluntarily participate in the DRIP. The DRIP is administered by Computershare
Investor Services LLC and offers a way to increase one's investment in the
Company. Of the $1,638,000 in common stock dividends paid during 2002, $912,000
or 55.7%, was reinvested into shares of common stock of the Company through the
DRIP. Events that resulted in common shares being reinvested in the DRIP:
>> During 2002, 37,309 common shares were issued from common stock dividends
>> During 2001, 39,791 common shares were issued from common stock dividends
>> During 2000, 32,143 common shares were issued from common stock dividends.
Stock Incentive Plan
In December 1997, the Company established a Stock Incentive Plan ("SI
Plan") intended to provide a means whereby directors and certain officers can
acquire shares of the Company's common stock, and a maximum of 150,000 shares
were originally authorized under the SI Plan. In September 2001, the board
authorized an additional 150,000 shares to be issued and sold under the SI Plan.
Options to acquire shares will be awarded at an exercise price equal to the fair
market value of the shares on the date of grant. Options to acquire shares have
a 10-year term. Options granted to employees vest over a four-year period and
those options granted to directors vest at the time they are issued. The Company
has awarded the following stock options:
>> In December 2002, the Company granted 43,500 options at an option price of
$27.25
>> In December 2001, the Company granted 39,500 options at an option price of
$24.00
>> In December 2000, the Company granted 29,250 options at an option price of
$18.83
>> In January 2000, the Company granted 4,500 options at an option price of
$23.00.
The Company applied APB Opinion No. 25 in accounting for the SI Plan
and, accordingly, compensation cost based on fair value at grant date has not
been recognized for its stock options in the consolidated financial statements
for the years ended December 31, 2002, 2001, and 2000.
Stock Repurchase Program
On August 5, 1998, the Company announced a stock repurchase program of
up to 3% of its common stock. In March 2000, the board approved the repurchase
of an additional 5% of the Company's common stock. In September 2001, the board
authorized the repurchase of $3 million additional shares of the authorized
common stock and in August 2002, the board authorized the repurchase of $5
million additional shares, bringing the aggregate total to 8% of the Company's
common stock plus $8 million additional shares.
During 2002, the Company repurchased 239,618 shares (7.5%) at a total
price of $6,540,000. On November 1, 2002, the Company acquired, as treasury
stock, a total of 200,000 shares of outstanding common stock from two
shareholders who are the sisters of a Director of the Company pursuant to
privately negotiated transactions. Total consideration for these share
repurchases amounted to $5,500,000. In 2001, 46,111 shares (1.4%) at a total
price of $1,038,000 were repurchased and 90,254 shares (2.7%) at a total price
of $1,881,000 were repurchased in 2000. As of December 31, 2002, the Company was
authorized pursuant to all repurchase programs to purchase an additional 134,150
shares. Treasury stock is further affected by activity in the DCP.
Capital Ratios
Minimum regulatory requirements for highly-rated banks that do not
expect significant growth is 8% for the Total Capital to Risk-Weighted Assets
ratio and 3% for the Tier 1 Capital to Average Assets ratio. Other institutions,
not considered highly-rated, are required to maintain a ratio of Tier 1 Capital
to Risk-Weighted Assets of 4% to 5% depending on their particular circumstances
and risk profiles. The Company and First Mid Bank have capital ratios above the
regulatory capital requirements.
A tabulation of the Company and First Mid Bank's capital ratios as of
December 31, 2002 follows:
Tier One Capital Total Capital Tier One Capital
to Risk-Weighted to Risk-Weighted to Average
Assets Assets Assets
------------------ ------------------ ------------------
First Mid-Illinois Bancshares, Inc.
(Consolidated) 9.64% 10.35% 6.62%
First Mid-Illinois Bank & Trust,N.A. 10.71% 11.42% 7.39%
Banks and bank holding companies are generally expected to operate at
or above the minimum capital requirements. These ratios are in excess of
regulatory minimums and will allow the Company to operate without capital
adequacy concerns.
Liquidity
Liquidity represents the ability of the Company and its subsidiaries to
meet all present and future financial obligations arising in the daily
operations of the business. Financial obligations consist of the need for funds
to meet extensions of credit, deposit withdrawals and debt servicing. The
Company's liquidity management focuses on the ability to obtain funds
economically through assets that may be converted into cash at minimal costs or
through other sources. The Company's other sources for cash include overnight
Federal fund lines, Federal Home Loan Bank advances, deposits of the State of
Illinois, the ability to borrow at the Federal Reserve Bank, and the Company's
operating line of credit with The Northern Trust Company. Details for the
sources include:
>> First Mid Bank has $17 million available in overnight Federal fund
lines, including $10 million from Harris Trust and Savings Bank of
Chicago and $7 million from The Northern Trust Company. Availability
of the funds is subject to the First Mid Bank's meeting minimum
regulatory capital requirements for Total Capital to Risk-Weighted
Assets and Tier 1 Capital to Total Assets. As of December 31, 2002,
the First Mid Bank's ratios of Total Capital to Risk-Weighted Assets
of 11.42% and Tier 1 Capital to Total Assets of 7.39% met regulatory
requirements.
>> First Mid Bank can also borrow from the Federal Home Loan Bank as a
source of liquidity. Availability of the funds is subject to the
pledging of collateral to the Federal Home Loan Bank. Collateral that
can be pledged includes one-to-four family residential real estate
loans and securities. At December 31, 2002, the excess collateral at
the Federal Home Loan Bank will support approximately $26 million of
additional advances.
>> First Mid Bank also receives deposits from the State of Illinois. The
receipt of these funds is subject to competitive bid and requires
collateral to be pledged at the time of placement.
>> First Mid Bank is also a member of the Federal Reserve System and can
borrow funds provided that sufficient collateral is pledged.
>> In addition, the Company has a revolving credit agreement in the
amount of $15 million with The Northern Trust Company. The Company has
an outstanding balance of $8,325,000 as of December 31, 2002 and
$6,675,000 in available funds. The credit agreement matures on October
24, 2003. The agreement contains requirements for the Company and
First Mid Bank to maintain various operating and capital ratios and
also contains requirements for prior lender approval for certain sales
of assets, merger activity, the acquisition or issuance of debt, and
the acquisition of treasury stock. The Company and First Mid Bank were
in compliance with the existing covenants at December 31, 2002.
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 scheduled debt repayments and
dividends to stockholders.
The following table summarizes significant contractual obligations and
other commitments at December 31, 2002 (in thousands):
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
----------- ------------ ------------ ----------- ------------
Time deposits $264,863 $160,591 $71,482 $32,495 $295
Debt 9,325 8,525 400 400 -
Other borrowings 79,484 66,484 5,000 5,000 300
Operating leases 2,546 237 557 354 1,398
----------- ------------ ------------ ----------- ------------
$356,218 $235,837 $77,439 $38,249 $4,693
=========== ============ ============ =========== ============
For the year ended December 31, 2002, net cash was provided from both
financing activities and operating activities ($58.8 million and $9.8 million,
respectively), while investing activities used net cash of $32.0 million. Thus,
cash and cash equivalents increased by $36.6 million since year-end 2001.
Generally, during 2002, increases in deposits and customer repurchase agreements
increased cash balances. This was offset by declines in residential real estate
loan balances, which were greater than the growth in commercial loans and
securities in since year-end 2001.
For the year ended December 31, 2001, net cash was provided from
both financing activities and operating activities ($24.4 million and $4.5
million, respectively), while investing activities used net cash of $20.6
million. Thus, cash and cash equivalents increased by $8.3 million since
year-end 2000. Generally, during 2001, the increases in deposits, customer
repurchase agreements, and declines in residential real estate loan balances due
to the low rate environment were greater than the growth in commercial loans and
securities since year-end 2000. Also included was the addition of American Bank
of Illinois in Highland that provided $30.8 million in deposits, $24.9 million
in loans, and $2 million in securities. Thus, other financing sources, including
short-term FHLB advances, were reduced.
Effects of Inflation
Unlike industrial companies, virtually all of the assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or experience the same magnitude of changes as goods and services,
since such prices are effected by inflation. In the current economic
environment, liquidity and interest rate adjustments are features of the
Company's assets and liabilities that are important to the maintenance of
acceptable performance levels. The Company attempts to maintain a balance
between monetary assets and monetary liabilities, over time, to offset these
potential effects.
Accounting Pronouncements
The Company adopted the provisions of SFAS 141 as of July 1, 2001, and
SFAS 142 as of January 1, 2002. Goodwill and intangible assets, acquired in
business combinations completed before July 1, 2001, continued to be amortized
and tested for impairment prior to the full adoption of SFAS 142.
Since its adoption of SFAS 142 as of January 1, 2002, the Company was
required to evaluate its existing intangible assets and goodwill that were
acquired in purchase business combinations, and to make any necessary
reclassifications in order to conform with the new classification criteria in
SFAS 141 for recognition separate from goodwill. The Company was also required
to reassess the useful lives and residual values of all intangible assets
acquired, and make any necessary amortization period adjustments by the end of
the first interim period after adoption. If an intangible asset was identified
as having an indefinite useful life, the Company was required to test the
intangible asset for impairment in accordance with the provisions of SFAS 142
within the first interim period. Impairment is measured as the excess of the
carrying value over the fair value of an intangible asset with an indefinite
life. Any impairment loss is measured as of the date of adoption and recognized
as the cumulative effect of a change in accounting principle in the first
interim period.
In connection with the SFAS 142 transitional goodwill impairment
evaluation, SFAS 142 required the Company to perform an assessment of whether
there is an indication that goodwill was impaired as of the date of adoption. To
accomplish this, the Company identified its reporting units and determined the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of January 1, 2002. To the extent the carrying amount of a reporting unit
exceeded the fair value of the reporting unit, an indication would exist that
the reporting unit goodwill might be impaired and the Company would perform the
second step of the transitional impairment test to determine whether a
transitional impairment loss existed. In addition, the Company has chosen
September 30 as the date of its annual testing of goodwill for impairment. The
Company performed the testing of goodwill for impairment as of June 30, 2002 and
September 30, 2002 and determined as of each of the above dates that goodwill
was not impaired. The second step was not required to be completed as the
Company determined that its goodwill was not impaired.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," ("SFAS 144") which supersedes both
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of a Disposal of a Segment and Extraordinary,
Unusual, and Infrequently Occurring Events and Transactions," ("Opinion 30") for
the disposal of a segment of a business. SFAS 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicates that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows the asset
is expected to generate. If the carrying amount of an asset exceeds it estimated
future cash flows, an impairment charge is recognized for the amount by which
the carrying amount of the assets exceeds the fair value of the asset. SFAS 144
requires companies to separately report discontinued operations and extends that
reporting to a component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held for sale.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value, less any cost to sell. The Company adopted SFAS 144 on January 1,
2002, as required. The adoption did not have a material effect on the Company's
financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). The standard requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. The Company is required to adopt the provisions of SFAS 146 for exit or
disposal activities initiated after December 31, 2002. The adoption is not
expected to be material to the Company's financial position or results of
operations.
On October 1, 2002, the FASB issued SFAS No. 147, "Acquisitions of
Certain Financial Institutions." This Statement brings all business combinations
involving financial institutions, except mutual enterprises, into the scope of
SFAS 141. SFAS 147, which was effective as of October 1, 2002, required that all
acquisitions of financial institutions that meet the definition of a business,
including acquisitions of a part of a financial institution that meet the
definition of a business, be accounted for in accordance with SFAS 141 and the
related intangibles accounted for in accordance with SFAS 142. Accordingly, the
specialized accounting guidance of SFAS 72, "Accounting for Certain Acquisitions
of Banking or Thrift Institutions," no longer applied after September 30, 2002.
Upon adoption of SFAS 147, if certain criteria were met, unidentifiable
intangible assets were reclassified to goodwill and ceased being amortized
effective as of the date of adoption of SFAS 142, and previously issued
financial statements were required to be restated. SFAS 147 also amends the
scope of FASB Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," to include long-term customer-relationship intangible assets
such as depositor-and borrower-relationship intangible assets and credit
cardholder intangible assets.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS 123"
(SFAS 148). SFAS 148 permits two additional transition methods for entities that
adopt the fair value based method of accounting for stock-based employee
compensation. The Statement also requires new disclosures about the ramp-up
effect of stock-based employee compensation on reported results, and requires
that those effects be disclosed more prominently by specifying the form, content
and location of those disclosures. The transition guidance and annual disclosure
provisions of SFAS 148 are effective for fiscal years ending after December 15,
2002, with earlier application permitted in certain circumstances. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. 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. 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 Note 15 in the Company's
consolidated financial statements. The Company has not decided yet if it will
adopt a change to the fair value based method of accounting.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). This Interpretation provides
guidance on disclosures to be made by a guarantor about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The disclosure
requirements are effective for financial statement periods after December 15,
2002. The initial measurement and recognition provisions are applicable to
guarantees issued or modified after December 31, 2002. The adoption of FIN 45's
measurement and recognition provisions will not have a material impact on the
Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidated Variable Interest Entities." The objective of this interpretation
is to provide guidance on how to identify a variable interest entity and
determine when the assets, liabilities, non-controlling interests, and results
of operations of a variable interest in an entity will need to consolidate the
entity if the company's interest in the variable interest entity's losses and/or
receive a majority of the entity's expected residual returns, if they occur. FIN
46 also requires additional disclosures by primary beneficiaries and other
significant variable interest holders. The provisions of this interpretation are
effective upon issuance. The Company does not expect the provisions of FIN 46 to
have a material impact on its financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk arises primarily from interest rate risk
inherent in its lending, investing and deposit taking activities, which are
restricted to First Mid Bank. The Company does not currently use derivatives to
manage market or interest rate risks. For a discussion of how management of the
Company addresses and evaluates interest rate risk see also "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Interest Rate Sensitivity."
Based on the financial analysis performed as of December 31, 2002,
which takes into account how the specific interest rate scenario would be
expected to impact each interest-earning asset and each interest-bearing
liability, the Company estimates that changes in the prime interest rate would
impact First Mid Bank's performance as follows:
Increase (Decrease) In
------------------------------------------------
Net Interest Net Interest Return On
December 31, 2002 Income Income Average Equity
Prime rate is 4.25% (000) (%) 2002=12.87%
------------------------------------------------
Prime rate increase of:
200 basis points to 6.25% $ 1,445 5.3 % 1.24 %
100 basis points to 5.25% 1,177 4.3 % 1.01 %
Prime rate decrease of:
200 basis points to 2.25% (3,677) (13.6)% (3.33)%
100 basis points to 3.25% (1,904) (7.0)% (1.69)%
The following table shows the same analysis performed as of December
31, 2001.
Increase (Decrease) In
------------------------------------------------
Net Interest Net Interest Return On
December 31, 2001 Income Income Average Equity
Prime rate is 4.75% (000) (%) 2001=11.52%
------------------------------------------------
Prime rate increase of:
200 basis points to 6.75% $(1,624) (5.8)% (1.59)%
100 basis points to 5.75% (314) (1.1)% (.30)%
Prime rate decrease of:
200 basis points to 2.75% (1,960) (7.0)% (1.93)%
100 basis points to 3.75% (725) (2.6)% (.71)%
First Mid Bank's board of directors has adopted an interest rate risk
policy that establishes maximum decreases in the percentage change in net
interest margin of 5% in a 100 basis point rate shift and 10% in a 200 basis
point rate shift.
No assurance can be given that the actual net interest income would
increase or decrease by such amounts in response to a 100 or 200 basis point
increase or decrease in the prime rate.
Interest rate sensitivity analysis is also used to measure the
Company's interest risk by computing estimated changes in the Economic Value of
Equity (EVE) of First Mid Bank under various interest rate shocks. EVE is
determined by calculating the net present value of each asset and liability
category by rate shock. The net differential between assets and liabilities is
the Economic Value of Equity. EVE is an expression of the long-term interest
rate risk in the balance sheet as a whole. The following tables present, in
thousands, First Mid Bank's projected change in EVE for the various rate shock
levels at December 31, 2002 and December 31, 2001. All market risk sensitive
instruments presented in the tables are held-to-maturity or available-for-sale.
First Mid Bank has no trading securities.
December 31, 2002
Change in
Changes In Economic Value of Equity
Interest Rates Amount Percent
(basis points) of Change of Change
----------------------------------------------------------
+200 bp $(1,833) (2.0)%
+100 bp 3,027 3.3 %
-200 bp 6,672 7.2 %
-100 bp 6,473 7.0 %
December 31, 2001
Change in
Changes In Economic Value of Equity
Interest Rates Amount Percent
(basis points) of Change of Change
----------------------------------------------------------
+200 bp $(15,315) (16.3)%
+100 bp (5,695) (6.1)%
-200 bp 12,651 13.5 %
-100 bp 9,423 10.0 %
As indicated above, at December 31, 2002, in the event of a sudden and
sustained increase in prevailing market interest rates, First Mid Bank's EVE
would be expected to decrease, and in the event of a sudden and sustained
decrease in prevailing market interest rates, First Mid Bank's EVE would be
expected to increase. At December 31, 2002, First Mid Bank's estimated changes
in EVE were within the industry guidelines that normally allow for a change in
capital of +/-10% from the base case scenario under a 100 basis point shock and
+/- 20% from the base case scenario under a 200 basis point shock.
Computation of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and declines in deposit balances, and should
not be relied upon as indicative of actual results. Further, the computations do
not contemplate any actions First Mid Bank may undertake in response to changes
in interest rates.
Certain shortcomings are inherent in the method of analysis presented
in the computation of EVE. Actual values may differ from those projections set
forth in the table, should market conditions vary from assumptions used in the
preparation of the table. Certain assets, such as adjustable-rate loans, have
features that restrict changes in interest rates on a short-term basis and over
the life of the asset. In addition, the proportion of adjustable-rate loans in
First Mid Bank's portfolio change in future periods as market rates change.
Further, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in the
table. Finally, the ability of many borrowers to repay their adjustable-rate
debt may decrease in the event of an interest rate increase.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
December 31, 2002 and 2001
(In thousands, except share data) 2002 2001
------------ ------------
Assets
Cash and due from banks (note 4):
Non-interest bearing $ 22,437 $ 23,471
Interest bearing 19,995 5,400
Federal funds sold 27,225 4,225
------------ ------------
Cash and cash equivalents 69,657 33,096
Investment securities (note 5):
Available-for-sale, at fair value 166,415 160,096
Held-to-maturity, at amortized cost
(estimated fair value of $1,927 and $2,136
at December 31, 2002 and 2001, respectively) 1,902 2,071
Loans (note 6) 499,864 473,243
Less allowance for loan losses (note 7) (3,723) (3,702)
------------ ------------
Net loans 496,141 469,541
Premises and equipment, net (note 8) 16,916 16,656
Accrued interest receivable 6,362 6,790
Goodwill, net (notes 3 and 9) 9,034 9,034
Intangible assets, net (notes 3 and 9) 4,743 3,575
Other assets (note 16) 5,070 5,120
------------ ------------
Total assets $776,240 $705,979
============ ============
Liabilities and Stockholders' Equity
Deposits (note 10):
Non-interest bearing $ 84,025 $ 80,265
Interest bearing 529,427 479,155
------------ ------------
Total deposits 613,452 559,420
Accrued interest payable 1,793 2,370
Securities sold under agreements to
repurchase (notes 11) 44,184 38,879
Other borrowings (note 11) 44,625 37,625
------------ ------------
Other liabilities (note 16) 5,379 3,760
------------ ------------
Total liabilities 709,433 642,054
------------ ------------
Stockholders' Equity (notes 12 and 15)
Common stock, $4 par value; authorized
6,000,000 shares; issued 3,603,737 shares
in 2002 and 3,546,060 shares in 2001 14,415 14,184
Additional paid-in capital 14,450 13,288
Retained earnings 45,896 39,500
Deferred compensation 1,589 1,392
Accumulated other comprehensive income 2,373 740
Less treasury stock at cost, 414,562 shares
in 2002 and 174,216 shares in 2001 (11,916) (5,179)
------------ ------------
Total stockholders' equity 66,807 63,925
------------ ------------
Total liabilities and stockholders' equity $776,240 $705,979
============ ============
See accompanying notes to consolidated financial statements.
Consolidated Statements of Income
For the years ended December 31, 2002, 2001 and 2000
(In thousands, except per share data)
2002 2001 2000
--------- --------- ---------
Interest income:
Interest and fees on loans $33,726 $36,877 $34,893
Interest on investment securities:
Taxable 6,014 6,820 7,722
Exempt from federal income tax 1,311 1,393 1,449
Interest on Federal funds sold 199 335 121
Interest on deposits with other financial institutions 137 81 6
--------- --------- ---------
Total interest income 41,387 45,506 44,191
Interest expense:
Interest on deposits (note 10) 12,253 18,773 18,412
Interest on securities sold under agreements
to repurchase 345 915 1,357
Interest on FHLB advances 1,863 1,664 2,409
Interest on Federal funds purchased 6 12 66
Interest on debt 194 226 329
--------- --------- ---------
Total interest expense 14,661 21,590 22,573
--------- --------- ---------
Net interest income 26,726 23,916 21,618
Provision for loan losses (note 7) 1,075 600 550
--------- --------- ---------
Net interest income after provision for loan losses 25,651 23,316 21,068
Other income:
Trust revenues 1,855 1,924 2,010
Brokerage commissions 265 234 347
Insurance commissions 1,182 122 90
Service charges 3,799 3,122 2,592
Gain (loss) on sale of securities, net (note 5) 223 208 (3)
Mortgage banking income 1,514 1,156 383
Other 2,060 1,992 1,349
--------- --------- ---------
Total other income 10,898 8,758 6,768
Other expense:
Salaries and employee benefits (note 14) 12,732 11,116 10,104
Net occupancy and equipment expense 4,055 3,909 3,563
Amortization of goodwill (note 9) - 704 639
Amortization of other intangible assets (note 9) 742 610 630
Stationery and supplies 679 671 534
Legal and professional 1,027 1,033 941
Marketing and promotion 738 789 769
Other 4,537 3,686 2,981
--------- --------- ---------
Total other expense 24,510 22,518 20,141
--------- --------- ---------
Income before income taxes 12,039 9,556 7,695
Income taxes (note 16) 4,005 3,040 2,035
--------- --------- ---------
Net income $ 8,034 $ 6,516 $5,660
========= ========= =========
Per common share data:
Basic earnings per share $2.39 $1.93 $1.67
Diluted earnings per share 2.38 1.92 1.67
========= ========= =========
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 2002, 2001 and 2000
(In thousands, except share and per share data)
Accumulated
Additional Other
Common Paid-In- Retained Deferred Comprehensive Treasury
Stock Capital Earnings Compensation Income(Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 $9,208 $11,608 $34,835 $1,123 $ (3,265) $(1,991) $51,518
Comprehensive income:
Net income - - 5,660 - - - 5,660
Net unrealized change in available-for-
sale investment securities - - - - 2,977 - 2,977
----------
Total Comprehensive Income 8,637
Cash dividends on common
stock ($.39 per share) - - (1,326) - - - (1,326)
Issuance of 32,173 common shares pursuant
to the Dividend Reinvestment Plan 86 639 - - - - 725
Issuance of 1,605 common shares pursuant
to the Deferred Compensation Plan 4 26 - - - - 30
Issuance of 645 common shares pursuant
to the First Retirement & Savings Plan 2 10 - - - - 12
Purchase of 90,254 treasury shares - - - - - (1,881) (1,881)
Deferred compensation - - - 95 - (95) -
Issuance of 750 common shares pursuant
to the exercise of stock options 2 10 - - - - 12
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 $9,302 $12,293 $39,169 $1,218 $ (288) $(3,967) $57,727
Comprehensive income:
Net income - - 6,516 - - - 6,516
Net unrealized change in available-for-
sale investment securities - - - - 1,028 - 1,028
----------
Total Comprehensive Income 7,544
Cash dividends on common stock ($.43 per share) - - (1,460) - - - (1,460)
Issuance of 39,791 common shares pursuant
to the Dividend Reinvestment Plan 85 690 - - - - 775
Issuance of 8,108 common shares pursuant
to the Deferred Compensation Plan 32 134 - - - - 166
Issuance of 9,983 common shares pursuant
to the First Retirement & Savings Plan 40 171 - - - - 211
Purchase of 46,111 treasury shares - - - - - (1,038) (1,038)
Deferred compensation - - - 174 - (174) -
3-for-2 stock split in the form of 50% stock
dividend (3for-2) 4,725 - (4,725) - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 $ 14,184 $13,288 $39,500 $1,392 $740 $(5,179) $63,925
====================================================================================
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 2002, 2001 and 2000
(In thousands, except share and per share data)
Accumulated
Additional Other
Common Paid-In- Retained Deferred Comprehensive Treasury
Stock Capital Earnings Compensation Income(Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 $ 14,184 $13,288 $39,500 $1,392 $740 $(5,179) $63,925
Comprehensive income:
Net income - - 8,034 - - - 8,034
Net unrealized change in available-for-
sale investment securities - - - - 1,633 - 1,633
----------
Total Comprehensive Income 9,667
Cash dividends on common stock ($.47 per share) - - (1,638) - - - (1,638)
Issuance of 37,309 common shares pursuant
to the Dividend Reinvestment Plan 150 762 - - - - 912
Issuance of 5,785 common shares pursuant
to the Deferred Compensation Plan 23 122 - - - - 145
Issuance of 6,770 common shares pursuant
to the First Retirement & Savings Plan 27 142 - - - - 169
Purchase of 239,618 treasury shares - - - - - (6,540) (6,540)
Deferred compensation - - - 197 - (197) -
Issuance of 7,813 common shares pursuant
to the exercise of stock options 31 136 - - - - 167
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2002 $ 14,415 $14,450 $45,896 $1,589 $2,373 $(11,916) $66,807
====================================================================================
Consolidated Statements of Cash Flows
For the years ended December 31, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
--------- --------- --------
Cash flows from operating activities:
Net income $ 8,034 $ 6,516 $ 5,660
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,075 600 550
Depreciation, amortization and accretion, net 3,169 3,204 2,887
(Gain) loss on sale of securities, net (223) (208) 3
Loss on sale of other real property owned, net 107 132 48
Gain on sale of mortgage loans held for sale, net (1,350) (998) (286)
Deferred income taxes (146) (313) (260)
Decrease (increase) in accrued interest receivable 428 605 (1,462)
Increase (decrease) in accrued interest payable (577) (258) 332
Origination of mortgage loans held for sale (106,461) (76,212) (14,220)
Proceeds from sale of mortgage loans held for sale 106,312 72,226 15,268
Impairment of other investment 250 - -
(Increase) decrease in other assets (2,057) (841) 1,828
Increase (decrease) in other liabilities 1,232 48 (1,688)
--------- --------- ---------
Net cash provided by operating activities 9,793 4,501 8,660
--------- --------- ---------
Cash flows from investing activities:
Capitalization of mortgage servicing rights (6) (47) (189)
Purchases of premises and equipment (2,130) (1,625) (1,106)
Net increase in loans (26,176) (14,512) (41,958)
Proceeds from sales of:
Securities available-for-sale 12,091 9,888 607
Proceeds from maturities of:
Securities available-for-sale 45,253 88,213 10,229
Securities held-to-maturity 20,331 456 375
Securities available-for-sale (81,250) (103,216) (4,817)
Securities held-to-maturity (164) (394) (1,794)
Purchase of financial organizations, net of cash received 15 606 -
--------- --------- ---------
Net cash used in investing activities (32,036) (20,631) (38,653)
--------- --------- ---------
Cash flows from financing activities:
Net increase in deposits 54,032 24,854 18,974
Decrease in federal funds purchased - - (1,175)
Increase (decrease) in repurchase agreements 5,305 7,783 (1,212)
Increase (decrease) in short-term FHLB advances (3,000) (15,000) 17,000
Increase in long-term FHLB advances 5,000 8,000 1,800
Repayment of short-term debt (1,000) - -
Repayment of long-term debt - (4,325) -
Proceeds from issuance of short-term debt 5,000 4,325 -
Increase in other borrowings 200 - -
Proceeds from issuance of common stock 481 377 54
Purchase of treasury stock (6,540) (1,038) (1,881)
Dividends paid on common stock (674) (590) (569)
--------- --------- ---------
Net cash provided by financing activities 58,804 24,386 32,991
--------- --------- ---------
Increase in cash and cash equivalents 36,561 8,256 2,998
Cash and cash equivalents at beginning of year 33,096 24,840 21,842
--------- --------- ---------
Cash and cash equivalents at end of year $69,657 $33,096 $24,840
========= ========= =========
Additional disclosures of cash flow information
Cash paid during the year for:
Interest $15,238 $21,848 $22,241
Income taxes 4,228 3,171 2,417
Loans transferred to real estate owned 841 617 102
Dividends reinvested in common shares 913 775 725
========= ========= =========
See accompanying notes to consolidated financial statements.
Notes To Consolidated Financial Statements
December 31, 2002, 2001 and 2000
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") and the Checkley
Agency, Inc. ("Checkley"). All significant inter-company balances and
transactions have been eliminated in consolidation. Certain amounts in the prior
years' consolidated financial statements have been reclassified to conform to
the 2002 presentation. The accounting and reporting policies of the Company
conform to accounting principles generally accepted in the United States of
America. The following is a description of the more significant of these
policies.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from these estimates.
Cash Equivalents
For purposes of reporting cash flows, cash equivalents include amounts
due from banks and Federal funds sold. Generally, Federal funds are sold for
one-day periods.
Investment Securities
The Company classifies its debt securities into one or more of three
categories: held-to-maturity, available-for-sale, or trading. Held-to-maturity
securities are those which management has the positive intent and ability to
hold to maturity. Available-for-sale securities are those securities which
management may sell prior to maturity as a result of changes in interest rates,
prepayment factors, or as part of the Company's overall asset and liability
strategy. Trading securities are those securities bought and held principally
for the purpose of selling them in the near term. The Company had no securities
designated as trading during 2002, 2001 or 2000.
Held-to-maturity securities are recorded at cost adjusted for
amortization of premiums and accretion of discounts to the earlier of the call
date or maturity date using the interest method.
Available-for-sale securities are recorded at fair value. Unrealized
holding gains and losses, net of the related income tax effect, are excluded
from income and reported as a separate component of stockholders' equity. If a
decrease in the fair value of a security is expected to be other than temporary,
then the security is written down to its fair value through a charge to income.
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 probable losses inherent in the loan
portfolio. The allowance is based on a continuing review of the loan portfolio,
the underlying value of the collateral securing the loans, current economic
conditions and past loan loss experience. Loans that are deemed to be
uncollectible are charged off to the allowance. The provision for loan losses
and recoveries are credited to the allowance.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a loan to be impaired
when it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the note agreement, including principal
and interest. The amount of the impairment is measured based on the fair value
of the collateral, if the loan is collateral dependent, or alternatively, at the
present value of expected future cash flows discounted at the loan's effective
interest rate. Certain homogeneous loans such as residential real estate
mortgage and installment loans are excluded from the impaired loan provisions.
Interest income on impaired loans is recorded when cash is received and only if
principal is considered to be fully collectible.
Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation and amortization is determined
principally by the straight-line method over the estimated useful lives of the
assets.
Goodwill and Intangible Assets
The Company has goodwill from business combinations, identifiable
intangible assets assigned to core deposit relationships and customer lists of
acquisitions, and intangible assets arising from the rights to service mortgage
loans for others.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 142 provides that intangible assets with finite useful lives be
amortized and that goodwill and intangible assets with indefinite lives will not
be amortized, but rather will be tested at least annually for impairment. If
goodwill is considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the goodwill exceeds the
implied fair value of the goodwill. Effective October 1, 2002, the Company
adopted Statement of Financial Accounting Standard No. 147, "Acquisitions of
Certain Financial Institutions" ("SFAS 147"). SFAS 147 requires that all
acquisitions of financial institutions that meet the definition of a business,
including acquisitions of a part of a financial institution that meet the
definition of a business, be accounted for in accordance with SFAS 142.
Accordingly, unidentifiable intangible assets were reclassified to goodwill and
were no longer amortized.
Identifiable intangible assets generally arise from branches acquired
that the Company accounted for as purchases. Such assets consist of the excess
of the purchase price over the fair value of net assets acquired, with specific
amounts assigned to core deposit relationships and customer lists primarily
related to insurance agencies. Intangible assets are amortized by the
straight-line method over various periods up to fifteen years. Management
reviews intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
The Company recognizes as a separate asset the rights to service
mortgage loans for others. Mortgage servicing rights are not subject to SFAS
142, but are amortized in proportion to and over the period of estimated net
servicing income and are subject to periodic impairment testing.
Income Taxes
The Company and its subsidiaries file consolidated Federal and state
income tax returns with each organization computing its taxes on a separate
company basis. Amounts provided for income tax expense are based on income
reported for financial statement purposes rather than amounts currently payable
under tax laws.
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to the temporary differences existing between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases, as well as operating loss and tax credit carry forwards.
To the extent that current available evidence about the future raises doubt
about the realization of a deferred tax asset, a valuation allowance is
established. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as an increase or
decrease in income tax expense in the period in which such change is enacted.
Trust Department Assets
Property held for customers in fiduciary or agency capacities is not
included in the accompanying consolidated balance sheets since such items are
not assets of the Company or its subsidiaries.
Stock Split
On November 16, 2001, the Company effected a three-for-two stock split
in the form of a 50 percent stock dividend. Par value remained at $4 per share.
The stock split increased the Company's outstanding common shares from 2,250,714
to 3,376,071 shares. All prior years' share and per share amounts have been
restated to give retroactive recognition to the stock split.
Recent Accounting Pronouncements
In September 2001, the FASB issued SFAS No. 141, "Business
Combinations," ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible
Assets," ("SFAS 142"). SFAS 141 requires that the purchase method of accounting
be used for all business combinations. SFAS 141 also specifies criteria that
intangible assets acquired in a business combination must meet to be recognized
and reported separately from goodwill. SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of SFAS 142. SFAS 142 also requires that intangible assets with
finite useful lives be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
The Company adopted the provisions of SFAS 141 as of July 1, 2001, and
SFAS 142 as of January 1, 2002. Goodwill and intangible assets acquired in
business combinations completed before July 1, 2001 continued to be amortized
and tested for impairment prior to the full adoption of SFAS 142.
Since its adoption of SFAS 142 as of January 1, 2002, the Company was
required to evaluate its existing intangible assets and goodwill that were
acquired in purchase business combinations, and to make any necessary
reclassifications in order to conform with the new classification criteria in
SFAS 141 for recognition separate from goodwill. The Company was also required
to reassess the useful lives and residual values of all intangible assets
acquired, and make any necessary amortization period adjustments by the end of
the first interim period after adoption. If an intangible asset was identified
as having an indefinite useful life, the Company was required to test the
intangible asset for impairment in accordance with the provisions of SFAS 142
within the first interim period. Impairment is measured as the excess of the
carrying value over the fair value of an intangible asset with an indefinite
life. Any impairment loss is measured as of the date of adoption and recognized
as the cumulative effect of a change in accounting principle in the first
interim period.
In connection with the SFAS 142 transitional goodwill impairment
evaluation, SFAS 142 required the Company to perform an assessment of whether
there is an indication that goodwill was impaired as of the date of adoption. To
accomplish this, the Company identified its reporting units and determined the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of January 1, 2002. To the extent the carrying amount of a reporting unit
exceeded the fair value of the reporting unit, an indication would exist that
the reporting unit goodwill might be impaired and the Company would perform the
second step of the transitional impairment test to determine whether a
transitional impairment loss existed. In addition, the Company has chosen
September 30 as the date of its annual testing of goodwill for impairment. The
Company performed the testing of goodwill for impairment as of June 30, 2002 and
September 30, 2002 and determined as of each of the above dates that goodwill
was not impaired. The second step was not required to be completed as the
Company determined that its goodwill was not impaired. Management also concluded
that the remaining amounts and amortization periods were appropriate for all
intangible assets.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," ("SFAS 144") which supersedes both
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of a Disposal of a Segment and Extraordinary,
Unusual, and Infrequently Occurring Events and Transactions," ("Opinion 30") for
the disposal of a segment of a business. SFAS 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicates that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows the asset
is expected to generate. If the carrying amount of an asset exceeds it estimated
future cash flows, an impairment charge is recognized for the amount by which
the carrying amount of the assets exceeds the fair value of the asset. SFAS 144
requires companies to separately report discontinued operations and extends that
reporting to a component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held for sale.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value, less any cost to sell. The Company adopted SFAS 144 on January 1,
2002, as required. The adoption did not have a material effect on the Company's
financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). The standard requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. The Company is required to adopt the provisions of SFAS 146 for exit or
disposal activities initiated after December 31, 2002. The adoption is not
expected to be material to the Company's financial position or results of
operations.
On October 1, 2002, the FASB issued SFAS No. 147, "Acquisitions of
Certain Financial Institutions." This Statement brings all business combinations
involving financial institutions, except mutual enterprises, into the scope of
SFAS 141. SFAS 147, which was effective as of October 1, 2002, required that all
acquisitions of financial institutions that meet the definition of a business,
including acquisitions of a part of a financial institution that meet the
definition of a business, be accounted for in accordance with SFAS 141 and the
related intangibles be accounted for in accordance with SFAS 142. Accordingly,
the specialized accounting guidance of SFAS 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions," no longer applied after
September 30, 2002. Upon adoption of SFAS 147, if certain criteria were met,
unidentifiable intangible assets were reclassified to goodwill and ceased being
amortized effective as of the date of adoption of SFAS 142, and previously
issued financial statements were required to be restated. SFAS 147 also amends
the scope of FASB Statement No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," to include long-term customer-relationship intangible
assets such as depositor- and borrower-relationship intangible assets and credit
cardholder intangible assets.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS 123"
(SFAS 148). SFAS 148 permits two additional transition methods for entities that
adopt the fair value based method of accounting for stock-based employee
compensation. The Statement also requires new disclosures about the ramp-up
effect of stock-based employee compensation on reported results, and requires
that those effects be disclosed more prominently by specifying the form, content
and location of those disclosures. The transition guidance and annual disclosure
provisions of SFAS 148 are effective for fiscal years ending after December 15,
2002, with earlier application permitted in certain circumstances. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. 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. 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 Note 15 in the Company's
consolidated financial statements. The Company has not decided yet if it will
adopt a change to the fair value based method of accounting.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). This Interpretation provides
guidance on disclosures to be made by a guarantor about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The disclosure
requirements are effective for financial statement periods after December 15,
2002. The initial measurement and recognition provisions are applicable to
guarantees issued or modified after December 31, 2002. The adoption of FIN 45's
measurement and recognition provisions will not have a material impact on the
Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidated Variable Interest Entities." The objective of this interpretation
is to provide guidance on how to identify a variable interest entity and
determine when the assets, liabilities, non-controlling interests, and results
of operations of a variable interest in an entity will need to consolidate the
entity if the company's interest in the variable interest entity's losses and/or
receive a majority of the entity's expected residual returns, if they occur. FIN
46 also requires additional disclosures by primary beneficiaries and other
significant variable interest holders. The provisions of this interpretation are
effective upon issuance. The Company does not expect the provisions of FIN 46 to
have a material impact on its financial position or results of operations.
Comprehensive Income
The Company's comprehensive income for the years ended December 31,
2002, 2001 and 2000 is as follows (in thousands):
2002 2001 2000
-------- -------- --------
Net income $8,034 $6,516 $5,660
Other comprehensive income:
Unrealized gains (losses) during the year 2,889 1,886 4,857
Reclassification adjustment for net
(gains) losses realized in net income (223) (208) 3
Tax effect (1,033) (650) (1,883)
-------- -------- --------
Comprehensive income $9,667 $7,544 $8,637
======== ======== ========
Note 2 - Earnings Per Share
The Company follows Financial Accounting Standards Board's Statement
No. 128, "Earnings Per Share" ("SFAS 128") in which income for Basic Earnings
per Share ("EPS") is 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 stock options, if not anti-dilutive.
The components of basic and diluted earnings per common share for the
years ended December 31, 2002, 2001, and 2000 are as follows:
2002 2001 2000
----------- ----------- -----------
Basic Earnings per Share:
Net income available to common stockholders $8,034,000 $6,516,000 $5,660,000
=========== =========== ===========
Weighted average common shares outstanding 3,357,571 3,378,019 3,386,111
=========== =========== ===========
Basic earnings per common share $2.39 $1.93 $1.67
=========== =========== ===========
Diluted Earnings per Share:
Net income available to common stockholders $8,034,000 $6,516,000 $5,660,000
=========== =========== ===========
Weighted average common shares outstanding 3,357,571 3,378,019 3,386,111
Assumed conversion of stock options 24,166 11,195 7,918
----------- ----------- -----------
Diluted weighted average common
shares outstanding 3,381,737 3,389,214 3,394,029
=========== =========== ===========
Diluted earnings per common share $2.38 $1.92 $1.67
=========== =========== ===========
Note 3 - Mergers and Acquisitions
On January 29, 2002, the Company acquired all of the issued and
outstanding stock of Checkley, an insurance agency headquartered in Mattoon,
Illinois. Checkley was purchased for cash with a portion ($750,000) paid at
closing and the remainder ($1,000,000) to be paid pursuant to a promissory note
over a five-year period ending January 2007. Checkley operates as a separate
subsidiary of the Company and provides customers with commercial property,
casualty, life, auto and home insurance. In order to facilitate this
acquisition, the Company became a financial holding company under the GLB Act on
December 14, 2001. The results of Check ley's operations are included in the
consolidated financial statements since the acquisition date.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition (in thousands):
At January 29, 2002:
----------------------------------------------
Current assets $643
Property and equipment 76
Intangible assets 1,904
--------------------
Total assets acquired 2,623
--------------------
Current liabilities (771)
Debt (20)
--------------------
Total liabilities (791)
--------------------
Net assets acquired $1,832
====================
The Company recorded $1,904,000 of intangible assets. The identified
intangible assets were allocated to customer lists and are amortized over a
period of ten years.
On April 20, 2001, First Mid Bank acquired all the outstanding stock of
American Bank of Illinois in Highland for $3.7 million in cash. This acquisition
added approximately $30.8 million in total deposits, $24.9 million in loans, $2
million in securities, $1.7 million in premises and equipment and $1.4 million
in intangible assets. The acquisition was accounted for using the purchase
method of accounting whereby the acquired assets and liabilities were recorded
at fair value as of the acquisition date and the excess cost over fair value of
net assets was recorded as goodwill. The consolidated financial statements
include the results of operations of American Bank of Illinois in Highland since
the acquisition date.
Note 4 - Cash and Due from Banks
Aggregate cash and due from bank balances of $270,000 and $214,000 at
December 31, 2002 and 2001, were maintained in satisfaction of statutory reserve
requirements of the Federal Reserve Bank.
Note 5 - Investment Securities
The amortized cost, gross unrealized gains and losses and estimated
fair values of available-for-sale and held-to-maturity securities by major
security type at December 31, 2002 and 2001 were as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ------------ -----------
2002
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $ 76,342 $1,665 $ (30) $ 77,977
Obligations of states and political
subdivisions 25,695 1,232 - 26,927
Mortgage-backed securities 44,697 749 (4) 45,442
Federal Home Loan Bank stock 3,266 - - 3,266
Other securities 12,541 293 (31) 12,803
----------- ----------- ------------ -----------
Total available-for-sale $162,541 $ 3,939 $ (65) $166,415
=========== =========== ============ ===========
Held-to-maturity:
Obligations of states and political
subdivisions $ 1,902 $ 27 $ (2) $ 1,927
=========== =========== ============ ===========
2001
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $ 60,852 $1,165 $ (181) $ 61,836
Obligations of states and political
subdivisions 27,140 247 (212) 27,175
Mortgage-backed securities 54,306 427 (242) 54,491
Federal Home Loan Bank stock 3,102 - - 3,102
Other securities 13,489 23 (20) 13,492
----------- ----------- ------------ -----------
Total available-for-sale $158,889 $ 1,862 $ (655) $160,096
=========== =========== ============ ===========
Held-to-maturity:
Obligations of states and political
subdivisions $ 2,071 $ 70 $ (5) $ 2,136
=========== =========== ============ ===========
Proceeds from sales of investment securities and realized gains and
losses were as follows during the years ended December 31, 2002, 2001 and 2000
(in thousands):
2002 2001 2000
------------ ------------ -----------
Proceeds from sales $12,091 $ 9,888 $ 607
Gross gains 223 208 1
Gross losses - - 4
Maturities of investment securities were as follows at December 31,
2002 (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 $32,867 $33,411
Due after one-five years 44,544 45,933
Due after five-ten years 12,763 13,400
Due after ten years 27,670 28,229
-------------- -------------
117,844 120,973
Mortgage-backed securities 44,697 45,442
-------------- -------------
Total available-for-sale $162,541 $166,415
-------------- -------------
Held-to-maturity:
Due in one year or less $ 225 $ 226
Due after one-five years 585 598
Due after five-ten years 535 545
Due after ten-years 557 558
-------------- -------------
Total held-to-maturity $ 1,902 $ 1,927
-------------- -------------
Total investment securities $164,443 $168,342
============== =============
Investment securities of approximately $141,462,000 and $133,208,000 at
December 31, 2002 and 2001, 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, 2002 and 2001 follows (in
thousands):
2002 2001
--------------- --------------
Commercial, financial and agricultural $127,077 $107,794
Real estate-mortgage 340,033 331,873
Installment 31,174 32,652
Other 1,647 1,228
--------------- --------------
Total gross loans 499,931 473,547
Less unearned discount 67 304
--------------- --------------
Net loans $499,864 $473,243
=============== ==============
The real estate mortgage loan balance in the above table includes loans
held for sale of $7,070,000 and $5,571,000 at December 31, 2002 and 2001,
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 $23,358,000 at December 31, 2002 and
$21,451,000 at December 31, 2001.
Activity during 2002 was as follows (in thousands):
Balance at December 31, 2001 $21,451
New loans 6,603
Loan repayments (4,696)
--------------
Balance at December 31, 2002 $23,358
==============
The aggregate principal balances of nonaccrual, past due and
renegotiated loans were as follows at December 31, 2002 and 2001 (in thousands):
2002 2001
----------- -----------
Nonaccrual loans $2,961 $3,419
Renegotiated loans which are performing
in accordance with revised terms 188 188
Interest income which would have been recorded under the original terms
of such nonaccrual or renegotiated loans totaled $164,000, $247,000 and $154,000
in 2002, 2001 and 2000, respectively. The amount of interest income that was
recorded amounted to $2,000 in 2002, $16,000 in 2001 and $20,000 in 2000.
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, 2002 2001
---------- -----------
Impaired loans for which an allowance has
been provided $1,429 $727
Impaired loans for which no allowance has
been provided 1,532 2,692
----------- -----------
Total loans determined to be impaired $2,961 $3,419
=========== ===========
Allowance on impaired loans $386 $218
=========== ===========
For the year ended December 31, 2002 2001 2000
--------- --------- ---------
Average recorded investment in impaired loans $3,053 $2,306 $2,037
Cash basis interest income recognized from
impaired loans 8 16 20
Most of the Company's business activities are with customers located
within east central Illinois. At December 31, 2002 and 2001, the Company's loan
portfolio included approximately $90,729,000 and $82,615,000, 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, 2002, 2001 and 2000 was approximately
$26,391,000, $38,960,000 and $55,729,000, 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, 2002 (in thousands):
2002 2001 2000
---------- ---------- ----------
Balance, beginning of year $3,702 $3,262 $2,939
Provision for loan losses 1,075 600 550
Added through acquisitions - 275 -
Recoveries 74 66 60
Charge-offs (1,128) (501) (287)
---------- ---------- ----------
Balance, end of year $3,723 $3,702 $3,262
========== ========== ==========
Note 8 - Premises and Equipment, Net
Premises and equipment at December 31, 2002 and 2001 consisted of (in
thousands):
2002 2001
---------- ----------
Land $ 3,364 $ 3,364
Buildings and improvements 14,219 14,166
Furniture and equipment 10,297 10,121
Leasehold improvements 1,049 382
Construction in progress 8 59
---------- ----------
Subtotal 28,937 28,092
Accumulated depreciation and amortization 12,021 11,436
---------- ----------
Total $16,916 $16,656
========== ==========
Depreciation and amortization expense was $1,946,000, $2,040,000 and
$1,884,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
Note 9 - Goodwill and Intangible Assets
The Company has goodwill from business combinations, intangible assets
from branch acquisitions, identifiable intangible assets assigned to core
deposit relationships and customer lists of insurance agencies acquired, and
intangible assets arising from the rights to service mortgage loans for others.
As of January 1, 2002, the date of adoption of SFAS 142 and the
effective date of SFAS 147, the Company had unamortized goodwill of $9 million,
which was subject to the transition provisions of SFAS 142 and SFAS 147, and is
no longer being amortized. The Company also had $2.1 million of intangible
assets for an acquisition of a branch whereby the liabilities assumed were
greater than the assets obtained and was not considered an acquisition of a
business, $1.3 million of core deposit intangibles, and $217,000 of intangible
assets arising from the rights to service mortgage loans for others, all which
continue to be amortized. In January 2002, the Company added an additional $1.9
million of amortizable intangibles as a result of the acquisition of Checkley.
The following table presents gross carrying amount and accumulated amortization
by major intangible asset class as of December 31, 2002 and 2001 (in thousands):
December 31, 2002 December 31, 2001
------------------------- -------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
---------- -------------- ---------- --------------
Goodwill not subject to amortization $12,794 $3,760 $12,794 $3,760
Intangibles from branch acquisition 3,015 1,157 3,015 955
Core deposit intangibles 2,805 1,807 2,805 1,507
Mortgage servicing rights 608 451 601 384
Customer list intangibles 1,904 174 - -
---------- -------------- ---------- --------------
$21,126 $7,349 $19,215 $6,606
========== ============== ========== ==============
Net income and earnings per share adjusted for the adoption of SFAS 142
and 147 is as follows (in thousands):
2002 2001 2000
-------- -------- --------
Net income, as reported $8,034 $6,516 $5,660
Add back: Goodwill amortization, net of tax benefit - 568 535
-------- -------- --------
Adjusted net income $8,034 $7,084 $6,195
======== ======== ========
BASIC EARNINGS PER SHARE:
Net income, as reported $2.39 $1.93 $1.67
Add back: Goodwill amortization, net of tax benefit - .17 .16
-------- -------- --------
Adjusted net income $2.39 $2.10 $1.83
======== ======== ========
DILUTED EARNINGS PER SHARE:
Net income, as reported $2.38 $1.92 $1.67
Add back: Goodwill amortization, net of tax benefit - .17 .16
-------- -------- --------
Adjusted net income $2.38 $2.09 $1.83
======== ======== ========
Total amortization expense for the years ended December 31, 2002, 2001
and 2000 was as follows (in thousands):
2002 2001 2000
-------- -------- --------
Goodwill not subject to amortization - $704 $639
Intangibles from branch acquisitions $201 201 201
Core deposit intangibles 300 323 350
Mortgage servicing rights 66 86 79
Customer list intangibles 175 - -
-------- -------- --------
$742 $1,314 $1,269
======== ======== ========
Aggregate amortization expense for the current year and estimated
amortization expense for each of the five succeeding years is shown in the table
below (in thousands):
Aggregate amortization expense:
For period ended 12/31/02 $742
Estimated amortization expense:
For period ended 12/31/03 $718
For period ended 12/31/04 $614
For period ended 12/31/05 $578
For period ended 12/31/06 $579
For period ended 12/31/07 $515
In accordance with the provisions of SFAS 142, the Company performed
testing of goodwill for impairment as of June 30, 2002 and September 30, 2002
and determined as of each of these dates that goodwill was not impaired.
Management also concluded that the remaining amounts and amortization periods
were appropriate for all intangible assets.
Note 10 - Deposits
As of December 31, 2002 and 2001, deposits consisted of the following
(in thousands):
2002 2001
-------------- --------------
Demand deposits:
Non-interest bearing $ 84,025 $ 80,264
Interest bearing 143,189 139,715
Savings 52,285 44,884
Money market 69,089 58,545
Time deposits 264,864 236,012
-------------- --------------
Total deposits $613,452 $559,420
============== ==============
Total interest expense on deposits for the years ended December 31,
2002, 2001 and 2000 was as follows (in thousands):
2002 2001 2000
---------- ---------- ----------
Interest-bearing demand $ 1,542 $ 2,603 $ 2,989
Savings 799 923 952
Money market 1,125 1,771 2,123
Time deposits 8,787 13,476 12,348
---------- ---------- ----------
Total $12,253 $18,773 $18,412
=========== ========== ==========
As of December 31, 2002, 2001 and 2000, 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):
2002 2001 2000
---------- ---------- ----------
Outstanding $93,951 $61,438 $62,922
Interest expense for the year 2,766 3,607 2,738
The following table shows the amount of maturities for all time
deposits as of December 31, 2002 (in thousands):
Less than 1 year $160,592
1 year to 2 years 54,653
2 years to 3 years 16,829
3 years to 4 years 3,028
Over 4 years 29,762
------------
Total $264,864
============
Note 11 - Other Borrowings
As of December 31, 2002 and 2001 other borrowings consisted of the
following (in thousands):
2002 2001
---------- ----------
Securities sold under agreements to repurchase $44,184 $38,879
Federal Home Loan Bank advances:
Fixed term-advances 35,300 33,300
Other debt:
Loans due in one year or less 8,525 4,325
Loans due after one year 800 -
---------- ----------
Total $88,809 $76,504
========== ==========
The Federal Home Loan Bank fixed-term advances at December 31, 2002
consisted of the following:
>> $5 million advance at 2.54%, due February 28, 2003
>> $5 million advance at 3.45%, due February 28, 2004
>> $5 million advance at 6.16%, due March 20, 2005, one year call option
beginning March 20, 2001
>> $2.3 million advance at 6.10%, due April 7, 2005, callable quarterly
after January 2001
>> $5 million advance at 6.12%, due September 6, 2005
>> $5 million advance at 5.34%, due December 14, 2005
>> $3 million advance at 5.98%, due March 1, 2011
>> $5 million advance at 4.33%, due November 23, 2011
2002 2001 2000
--------- --------- ---------
Securities sold under agreements to repurchase:
Maximum outstanding at any month-end $44,588 $40,646 $34,546
Average amount outstanding for the year 34,389 29,547 24,576
First Mid Bank has collateral pledge agreements whereby it has agreed
to keep on hand at all times, free of all other pledges, liens, and
encumbrances, whole first mortgages on improved residential property with unpaid
principal balances aggregating no less than 167% of the outstanding advances
from the Federal Home Loan Bank. The securities underlying the repurchase
agreements are under the Company's control.
The Company had an other debt balance of $9,325,000 as of December 31,
2002, consisting of a loan agreement with The Northern Trust Company with a
balance of $8,325,000 and a $1 million promissory note for the Checkley
acquisition of which $200,000 is due in one year or less and $800,000 is due
after one year. As of December 31, 2001, the Company had a debt balance of
$4,325,000 that consisted of a loan agreement with The Northern Trust Company.
Terms of the loan agreement are a floating interest rate of 1.25% over the
Federal funds rate with interest due quarterly. The interest rate as of December
31, 2002 was 2.53% (3.1% at December 31, 2001). The loan is a revolving credit
agreement with a maximum available balance of $15 million. The outstanding loan
balance matures October 24, 2003. Management of the Company expects this loan to
be renewed in the future. The loan is secured by all of the common stock of
First Mid Bank. The borrowing agreement contains requirements for the Company
and First Mid Bank to maintain various operating and capital ratios and also
contains requirements for prior lender approval for certain sales of assets,
merger activity, the acquisition or issuance of debt and the acquisition of
treasury stock. The Company and First Mid Bank were in compliance with the
existing covenants at December 31, 2002 and 2001.
The $1 million promissory note resulting from the acquisition of
Checkley has an annual interest rate equal to the prime rate listed in the money
rate section of the Wall Street Journal (4.25% as of December 31, 2002) and
principal payable in the amount of $200,000 annually over five years, with a
final maturity of January 2007.
Note 12 - Regulatory Capital
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Bank holding companies follow
minimum regulatory requirements established by the Federal Reserve Board. First
Mid Bank follows similar minimum regulatory requirements established for
national banks by the Office of the Comptroller of the Currency. Failure to meet
minimum capital requirements can result in the initiation of certain mandatory
and possibly additional discretionary action by regulators that, if undertaken,
could have a direct material effect on the Company's financial statements.
Quantitative measures established by each regulatory agency to ensure
capital adequacy require the reporting institutions to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier 1 capital to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 2002 and 2001, that all capital adequacy
requirements have been met.
As of December 31, 2002 and 2001, the most recent notification from
the primary regulators categorized First Mid Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, minimum total risk-based, Tier 1 risk-based and Tier 1 leverage
ratios must be maintained as set forth in the table. At December 31, 2002, there
are no conditions or events since the most recent notification that management
believes have changed this categorization.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ------------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
--------- ------ ----------- ------- --------- -------
December 31, 2002
Total Capital
(to risk-weighted assets)
Company $ 54,380 10.35% $ 42,051 > 8.00% N/A N/A
-
First Mid Bank 59,476 11.42 41,653 > 8.00 $52,067 >10.00%
- -
Tier 1 Capital
(to risk-weighted assets)
Company 50,657 9.64 21,026 > 4.00 N/A N/A
-
First Mid Bank 55,753 10.71 20,827 > 4.00 31,240 > 6.00
- -
Tier 1 Capital
(to average assets)
Company 50,657 6.62 30,630 > 4.00 N/A N/A
-
First Mid Bank 55,753 7.39 30,158 > 4.00 37,698 > 5.00
- -
December 31, 2001
Total Capital
(to risk-weighted assets)
Company $ 54,498 11.23 $ 38,810 > 8.00% N/A N/A
-
First Mid Bank 54,139 11.24 38,521 > 8.00 $48,152 >10.00%
- -
Tier 1 Capital
(to risk-weighted assets)
Company 50,796 10.47 19,405 > 4.00 N/A N/A
-
First Mid Bank 50,437 10.47 19,261 > 4.00 28,891 > 6.00
- -
Tier 1 Capital
(to average assets)
Company 50,796 7.34 27,669 > 4.00 N/A N/A
-
First Mid Bank 50,437 7.36 27,427 > 4.00 34,284 > 5.00
- -
Note 13 - Disclosure of Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107 "Disclosures about
Fair Value of Financial Instruments" ("SFAS 107") requires the disclosure of the
estimated fair value of financial instrument assets and liabilities. For the
Company, as for most financial institutions, most of the assets and liabilities
are considered financial instruments as defined in SFAS 107. However, many of
the Company's financial instruments lack an available trading market as
characterized by a willing buyer and seller engaging in an exchange transaction.
Additionally, the Company's general practice and intent is to hold its financial
instruments until maturity and not to engage in trading or sales activity.
Accordingly, the Company, for purposes of the SFAS 107 disclosure, used
significant assumptions and estimations as well as present value calculations.
Future changes in these assumptions or methodologies may have a material effect
on estimated fair values.
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, 2002 and 2001 were as
follows (in thousands):
Financial instruments for which an active secondary market exists have
been valued using quoted available market prices.
2002 2001
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ---------- ----------- ----------
Cash and cash equivalents $ 69,657 $ 69,657 $ 33,096 $ 33,096
Investments available-for-sale 166,415 166,415 160,096 160,096
Investments held-to-maturity 1,902 1,927 2,071 2,136
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.
2002 2001
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Deposits with stated maturities $264,864 $268,376 $236,012 $238,126
Securities sold under agreements
to repurchase 44,184 44,180 38,879 38,866
Federal Home Loan Bank advances 35,300 37,881 33,300 37,319
Financial instrument liabilities without stated maturities and floating
rate debt have estimated fair values equal to both the amount payable on demand
and the carrying amount.
2002 2001
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Deposits with no stated maturity $348,588 $348,588 $323,408 $323,408
Floating rate debt 9,325 9,325 4,325 4,325
For loans with floating interest rates, it is assumed that the
estimated fair values generally approximate the carrying amount balances. Fixed
rate loans have been valued using a discounted present value of projected cash
flow. The discount rate used in these calculations is the current rate at which
similar loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.
2002 2001
--------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ---------
Net loan portfolio $496,141 $505,990 $469,541 $480,522
Off-balance sheet items such as unfunded loan commitments and stand-by
letters of credit generally approximate their estimated fair values.
Note 14 - Retirement Plan
The 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 $547,000,
$450,000 and $413,000 in 2002, 2001 and 2000, respectively. The Company has two
agreements in place to pay $50,000 annually for 20 years from the retirement
date to one retired senior officer of the Company and one to a current senior
officer.
Note 15 - Stock Option Plan
The Company established a Stock Incentive Plan ("SI Plan") intended to
provide a means whereby directors and certain officers can acquire shares of the
Company's common stock. A maximum of 300,000 shares have been authorized under
the SI Plan. Options to acquire shares will be awarded at an exercise price
equal to the fair market value of the shares on the date of grant. Options to
acquire shares have a 10-year term. Options granted to employees vest over a
four-year period and those options granted to directors vest at the time they
are issued.
A summary of the status of stock options under the SI plan at December
31, 2002, 2001 and 2000 and changes during the years then ended are presented in
the following table:
For the year ended December 31,
2002 2001 2000
-------------------- -------------------- --------------------
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ---------- --------- ---------- --------- ----------
Beginning of year 131,750 $21.06 92,250 $19.81 70,500 $20.10
Granted 43,500 27.25 39,500 24.00 33,750 19.39
Exercised (7,813) 21.43 - - (750) 15.67
Cancelled - - - - (11,250) 20.96
--------- ---------- --------- ---------- --------- ----------
End of year 167,437 $22.65 131,750 $21.06 92,250 $19.81
========= ========== ========= ========== ========= ==========
Options exercisable 66,565 $19.96 58,250 $19.61 34,876 $19.12
========= ========== ========= ========== ========= ==========
Fair value of options
granted during year $ 6.80 $ 6.48 $ 5.22
========== ========== ==========
At December 31, 2002, options for 132,563 shares were available for
grant under the SI Plan.
The Company applies APB Opinion No. 25 in accounting for the SI Plan
and, accordingly, compensation cost based on fair value at grant date has not
been recognized for its stock options in the consolidated financial statements.
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 (in thousands, except per share date):
For the years ended December 31,
2002 2001 2000
---------- ---------- ----------
Net income:
As reported $8,034 $6,516 $5,660
Pro forma 7,819 6,317 5,516
Basic Earnings Per Share:
As reported $ 2.39 $ 1.93 $ 1.67
Pro forma 2.33 1.87 1.63
Diluted Earnings Per Share:
As reported $ 2.38 $ 1.92 $ 1.67
Pro forma 2.31 1.86 1.63
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 2002, 2001 and 2000.
2002 2001 2000
---------- ---------- ----------
Dividend yield 1.8% 2.0% 1.9%
Risk free interest rate 4.56% 5.16% 5.41%
Weighted average expected life 9.9 yrs 9.9 yrs 9.9 yrs
Expected volatility 15% 16% 13%
Note 16 - Income Taxes
The components of Federal and state income tax expense (benefit) for
the years ended December 31, 2002, 2001 and 2000 were as follows (in thousands):
2002 2001 2000
---------- ---------- -----------
Current
Federal $3,515 $2,977 $2,197
State 636 376 98
---------- ---------- -----------
Total Current 4,151 3,353 2,295
Deferred
Federal (119) (275) (227)
State (27) (38) (33)
---------- ---------- -----------
Total Deferred (146) (313) (260)
---------- ---------- -----------
Total $4,005 $3,040 $2,035
========== ========== ===========
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):
2002 2001 2000
---------- ---------- ----------
Expected income taxes $4,093 $3,249 $2,616
Effects of:
Tax-exempt income (577) (659) (595)
Nondeductible interest expense 46 82 87
Goodwill amortization - 120 120
State taxes, net of federal taxes 402 222 43
Donation of property - - (197)
Other items, net 41 26 (39)
---------- ---------- ----------
Total $4,005 $3,040 $2,035
========== ========== ==========
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, 2002 and 2001 are presented below (in thousands):
2002 2001
---------- ----------
Deferred tax assets:
Allowance for loan losses $ 1,442 $ 1,417
Deferred compensation 460 441
Supplemental retirement 59 -
Other, net 216 303
---------- ----------
Total gross deferred tax assets $ 2,177 $ 2,161
========== ==========
Deferred tax liabilities:
Depreciation $ 93 $ 232
Available-for-sale investment securities 1,501 468
Core deposit premium amortization 128 156
Other, net 282 245
---------- ----------
Total gross deferred tax liabilities $ 2,004 $ 1,101
---------- ----------
Net deferred tax assets $ 173 $ 1,060
========== ==========
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, 2002 and 2001 as management believes it is more likely than not
that the deferred tax assets will be fully realized.
Note 17 - Dividend Restrictions
Banking regulations impose restrictions on the ability of First Mid
Bank to pay dividends to the Company. At December 31, 2002, regulatory approval
would have been required for aggregate dividends from First Mid Bank to the
Company in excess of approximately $12.0 million. The amount of such dividends
that could be paid is further restricted by the limitations of sound and prudent
banking principles.
Note 18 - Commitments and Contingent Liabilities
First Mid enters into financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include lines of credit, letters of credit and other
commitments to extend credit. Each of these instruments involves, to varying
degrees, elements of credit, and interest rate and liquidity risk in excess of
the amounts recognized in the consolidated balance sheets. The Company uses the
same credit policies and requires similar collateral in approving lines of
credit and commitments and issuing letters of credit as it does in making loans.
The exposure to credit losses on financial instruments is represented by the
contractual amount of these instruments. However, the Company does not
anticipate any losses from these instruments.
The off-balance sheet financial instruments whose contract amounts
represent credit risk at December 31, 2002 and 2001 are as follows (in
thousands):
2002 2001
---------- ----------
Unused commitments including lines of credit:
Commercial real estate $31,506 $34,787
Commercial operating 31,160 29,746
Home Equity 9,509 7,831
Other 13,753 15,666
---------- ----------
Total $85,928 $88,030
========== ==========
Standby letters of credit $997 $642
========== ==========
Commitments to originate credit represent approved commercial,
residential real estate and home equity loans that generally are expected to be
funded within ninety days. Lines of credit are agreements by which the Company
agrees to provide a borrowing accommodation up to a stated amount as long as
there is no violation of any condition established in the loan agreement. Both
commitments to originate credit and lines of credit generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the liens and some commitments are expected to expire without
being drawn upon, the total amounts do not necessarily represent future cash
requirements.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the financial performance of customers to third parties.
Standby letters of credit are primarily issued to facilitate trade or support
borrowing arrangements and generally expire in one year or less. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending credit facilities to customers. The maximum amount of credit that
would be extended under letters of credit is equal to the total off-balance
sheet contact amount of such instrument.
Note 19 - Parent Company Only Financial Statements
Presented below are condensed balance sheets, statements of income and
cash flows for the Company (in thousands):
First Mid-Illinois Bancshares, Inc. (Parent Company)
Balance Sheets
December 31, 2002 2001
---------- ----------
Assets
Cash $ 1,229 $ 1,690
Premises and equipment, net 1 2
Investment in subsidiaries 73,223 64,488
Other assets 2,635 2,985
---------- ----------
Total Assets $77,088 $69,165
========== ==========
Liabilities and Stockholders' equity
Liabilities
Dividends payable $ 861 $ 809
Debt 9,325 4,325
Other liabilities 95 106
---------- ----------
Total Liabilities 10,281 5,240
---------- ----------
Stockholders' equity 66,807 63,925
---------- ----------
Total Liabilities and Stockholders' equity $77,088 $69,165
========== ==========
First Mid-Illinois Bancshares, Inc. (Parent Company)
Statements of Income
Years ended December 31, 2002 2001 2000
--------- --------- ---------
Income:
Dividends from subsidiaries $3,515 $3,281 $2,813
Other income 42 93 96
--------- --------- ---------
3,557 3,374 2,909
Operating expenses 1,205 1,006 1,053
--------- --------- ---------
Income before income taxes and equity
in undistributed earnings of subsidiaries 2,352 2,368 1,856
Income tax benefit 425 319 371
--------- --------- ---------
Income before equity in undistributed
earnings of subsidiaries 2,777 2,687 2,227
Equity in undistributed earnings of subsidiaries 5,257 3,829 3,433
--------- --------- ---------
Net income $8,034 $6,516 $5,660
========= ========= =========
First Mid-Illinois Bancshares, Inc. (Parent Company)
Statements of Cash Flows
Years ended December 31, 2002 2001 2000
--------- --------- ---------
Cash flows from operating activities:
Net income $8,034 $6,516 $5,660
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization, accretion, net 2 2 4
Equity in undistributed earnings of
subsidiaries (5,257) (3,829) (3,433)
(Increase) decrease in other assets (1,495) (543) 121
Increase (decrease) in other liabilities (12) 50 (34)
--------- --------- ---------
Net cash provided by operating activities 1,272 2,196 2,318
--------- --------- ---------
Cash flows from financing activities:
Repayment of long-term debt (3,525) - -
Proceeds from short-term debt 8,525 - -
Proceeds from issuance of common stock 481 377 54
Purchase of treasury stock (6,540) (1,038) (1,881)
Dividends paid on common stock (674) (590) (569)
--------- --------- ---------
et cash used in financing activities (1,733) (1,251) (2,396)
--------- --------- ---------
Increase (decrease) in cash (461) 945 (78)
Cash at beginning of year 1,690 745 823
--------- --------- ---------
ash at end of year $ 1,229 $ 1,690 $ 745
========= ========= =========
Note 20 - Quarterly Financial Data - Unaudited
The following table presents summarized quarterly data for each of the
two years ended December 31:
Quarters ended in 2002
March 31(1) June 30(1) September 30(1) December 31(1)
------------ ----------- --------------- --------------
Selected operations data:
Interest income $10,365 $10,320 $10,384 $10,318
Interest expense 3,951 3,612 3,505 3,593
------------ ----------- --------------- --------------
Net interest income 6,414 6,708 6,879 6,725
Provision for loan losses 125 150 500 300
------------ ----------- --------------- --------------
Net interest income after 6,289 6,558 6,379 6,425
provision for loan losses
Other income 2,304 2,459 2,912 3,157
Other expense 5,612 5,997 6,245 6,590
------------ ----------- --------------- --------------
Income before income taxes 2,981 3,020 3,046 2,992
Income taxes 972 1,014 1,016 1,003
------------ ----------- --------------- --------------
Net income $ 2,009 $ 2,006 $ 2,030 $ 1,989
============ =========== =============== ==============
Basic earnings per share $0.59 $0.60 $0.59 $0.61
Diluted earnings per share $0.59 $0.59 $0.59 $0.61
(1) Restated for adoption of SFAS No. 147
Quarters ended in 2001
March 31 June 30 September 30 December 31
------------ ----------- --------------- --------------
Selected operations data:
Interest income $11,271 $11,563 $11,525 $11,147
Interest expense 5,828 5,710 5,388 4,664
------------ ----------- --------------- --------------
Net interest income 5,443 5,853 6,137 6,483
Provision for loan losses 150 150 150 150
------------ ----------- --------------- --------------
Net interest income after 5,293 5,703 5,987 6,333
provision for loan losses
Other income 1,996 2,220 2,076 2,380
Other expense 5,165 5,612 5,554 6,101
------------ ----------- --------------- --------------
Income before income taxes 2,124 2,311 2,509 2,612
Income taxes 659 696 817 868
------------ ----------- --------------- --------------
Net income $ 1,465 $ 1,615 $ 1,692 $ 1,744
============ =========== =============== ==============
Basic earnings per share $0.43 $0.48 $0.50 $0.52
Diluted earnings per share $0.43 $0.48 $0.50 $0.51
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, 2002 and 2001,
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, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Mid-Illinois Bancshares, Inc. and subsidiaries as of December 31, 2002 and 2001,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in notes 1 and 9 to the consolidated financial statements,
the Company changed its method of accounting for goodwill in 2002.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Chicago, Illinois
January 28, 2003
Statement of Responsibility for Financial Data
Management is responsible for the integrity of all the financial data
included in this Annual Report. The financial statements and related notes are
prepared in accordance with accounting principles generally accepted in the
United States of America. Financial information elsewhere in this Report is
consistent with that in the financial statements.
Management maintains a system of internal accounting control, including
an internal audit program, which provides reasonable assurance that assets are
safeguarded against loss from unauthorized use or disposition, transactions are
properly authorized and accounting records are reliable for the preparation of
financial statements. The foundation of the system of internal accounting
control rests upon careful selection and training of personnel, segregation of
responsibilities and application of formal policies and procedures that are
consistent with the highest standards of business conduct. The system of
internal accounting control is being continuously modified and improved in
response to changes in business conditions and operations.
The board of directors has an audit committee comprised of 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.
KPMG LLP, independent certified public accountants, as identified in
the accompanying Independent Auditors' Report, has audited the consolidated
financial statements. The audits were conducted in accordance with auditing
standards generally accepted in the United States of America, which included
tests of the accounting records and other auditing procedures considered
necessary to formulate an opinion as to the fairness, in all material respects,
of the consolidated financial statements.
William S. Rowland
Chairman & Chief Executive Officer
Michael L. Taylor
Chief Financial Officer
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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 2003 Proxy
Statement under the captions "Proposal 1 - Election of Directors" and "Section
16 - Beneficial Ownership Reporting Compliance."
The information called for by Item 10 with respect to executive
officers is incorporated by reference to Part I hereof under the caption
"Supplemental Item - Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference to
the Company's 2003 Proxy Statement under the caption "Executive Compensation,"
"Common Stock Price Performance Graph" and "Directors' Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information called for by Item 12 with respect to equity compensation
plans is provided in the table below.
Equity Compensation Plan Information
--------------------------------------------------------------------------------------
Number of securities to Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance
of outstanding options outstanding options under equity compensation plans
Plan category (a) (b) (c)
- ---------------------------------------- ------------------------- ------------------------- ----------------------------------
Equity compensation plans
approved by security holders:
(1) Deferred Compensation Plan 94,018 $16.80 205,982
(2) Stock Incentive Plan 167,437 22.65 132,563
Equity compensation plans not
approved by security holders - - -
------------------------- ------------------------- ----------------------------------
Total 261,455 $20.55 338,545
========================= ========================= ==================================
The Company's equity compensation plans approved by security holders
consist of the Deferred Compensation Plan and the Stock Incentive Plan.
Additional information regarding each plan is available in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations - Stock
Plans" and Note 15 of the Company's financial statements.
The information called for by Item 12 with respect to security
ownership is incorporated by reference to the Company's 2003 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 2003 Proxy Statement under the caption "Certain Relationships and
Related Transactions."
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Company's disclosure controls and procedures (as such term
is defined in Rules 13a-14(c) and 15d-14(c) under the Securities and Exchange
Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior
to filing date of this annual report (the "Evaluation Date"). Based on such
evaluation, such officers have concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures are effective in bringing to their
attention on a timely basis material information relating to the Company
(including its consolidated subsidiaries) required to be included in the
Company's periodic filings under the Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have
not been any significant changes in the Company's internal controls or in other
factors that could significantly affect such controls.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) -- Financial Statements and Financial Statement Schedules
The following consolidated financial statements and financial statement
schedules of the Company are filed as part of this document under Item 8.
Financial Statements and Supplementary Data:
>> Consolidated Balance Sheets -- December 31, 2002 and 2001
>> Consolidated Statements of Income -- For the Years Ended December
31, 2002, 2001 and 2000
>> Consolidated Statements of Changes in Stockholders' Equity -- For
the Years Ended December 31, 2002, 2001 and 2000
>> Consolidated Statements of Cash Flows -- For the Years Ended
December 31, 2002, 2001 and 2000.
(a)(3) -- Exhibits
The exhibits required by Item 601 of Regulation S-K and filed herewith
are listed in the Exhibit Index that follows the Signature Page and the
Certifications and immediately precedes the exhibits filed.
(b) Reports on Form 8-K
The Company filed Form 8-Ks on January 10, 2002 and February 4, 2002
regarding the acquisition of Checkley.
The Company filed Form 8-K on May 13, 2002 and Form 8-K/A on May 17,
2002 regarding the change in auditor of the Company's 401(k) Profit Sharing
Plan.
The Company filed Form 8-K on July 24, 2002 regarding plans of First
Mid Bank to open new banking centers in Champaign and Maryville, Illinois, which
were subject to regulatory approval.
The Company filed Form 8-K on November 1, 2002 regarding the Company's
acquisition, as treasury stock, of 200,000 shares of outstanding common stock.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST MID-ILLINOIS BANCSHARES, INC.
(Company)
Dated: March 25, 2003 By: /s/ William S. Rowland
William S. Rowland
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on the 26th day of March, 2003, by the following persons
on behalf of the Company and in the capacities listed.
Signature and Title
/s/ William S. Rowland
William S. Rowland, Chairman of the
Board, President and Chief Executive
Officer and Director
/s/ Michael L. Taylor
Michael L. Taylor, Vice President and
Chief Financial Officer
/s/ Charles A. Adams
Charles A. Adams, Director
/s/ Kenneth R. Diepholz
Kenneth R. Diepholz, Director
/s/ Steven L. Grissom
Steven L. Grissom, Director
/s/ Richard A. Lumpkin
Richard A. Lumpkin, Director
/s/ Daniel E. Marvin, Jr.
Daniel E. Marvin, Jr., Director
/s/ Gary W. Melvin
Gary W. Melvin, Director
/s/ Sara Jane Preston
Sara Jane Preston, Director
/s/ Ray A. Sparks
Ray A. Sparks, Director
CERTIFICATION
I, William S. Rowland, certify that:
1. I have reviewed this annual report on Form 10-K of First Mid-Illinois
Bancshares, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operation and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions:
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date March 25, 2003
By /s/ William S. Rowland
William S. Rowland
President and Chief Executive Officer
CERTIFICATION
I, Michael L. Taylor, certify that:
1. I have reviewed this annual report on Form 10-K of First Mid-Illinois
Bancshares, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operation and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions:
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date March 25, 2003
By /s/ Michael L. Taylor
Michael L. Taylor
Chief Financial Officer
Exhibit Index to Annual Report on Form 10-K
Exhibit
Number Description and Filing or Incorporation Reference
- --------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation and Amendment to Restated
Certificate of Incorporation of First Mid-Illinois Bancshares, Inc.
Incorporated by reference to Exhibit 3(a) to First Mid-Illinois
Bancshares, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1987 (File No. 0-13368)
3.2 Restated Bylaws of First Mid-Illinois Bancshares, Inc. and
Amendment thereto
(Filed herewith)
4.1 Rights Agreement, dated as of September 21, 1999, between First
Mid-Illinois Bancshares, Inc. and Harris Trust and Savings Bank,
as Rights Agent Incorporated by reference to Exhibit 4.1 to First
Mid-Illinois Bancshares, Inc.'s Registration Statement on Form 8-A
filed with the SEC on September 22, 1999
10.1 Employment Agreement between the Company and William S. Rowland
(Filed herewith)
10.2 Employment Agreement between the Company and John W. Hedges
(Filed herewith)
10.3 Deferred Compensation Plan
Incorporated by reference to Exhibit 10.4 to First Mid-Illinois
Bancshares, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1998 (File No 0-13368)
10.4 1997 Stock Incentive Plan
Incorporated by reference to Exhibit 10.5 to First Mid-Illinois
Bancshares, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1998 (File No 0-13368)
10.5 Schedule of Parties to Employment Agreements and Form of Employment
Agreement
The following Company officers have entered into Employment
Agreements with the Company: William J. Wagner,Michael Krueger,
and Patricia A. Wilson. The contracts are substantially identical
in all material respects except as to the parties, the execution
dates and the monthly base payout. A sample form of the agreement
is filed herewith.
11.1 Statement re: Computation of Earnings Per Share
(Filed herewith)
21.1 Subsidiaries of the Company
(Filed herewith)
23.1 Consent of KPMG LLP
(Filed herewith)
99.1 President and Chief Executive Officer Certification pursuant to 18
U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer Certification pursuant to 18 U.S.C. section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
Exhibit 3.2
As of
January 28, 2003
FIRST MID-ILLINOIS BANCSHARES, INC.
RESTATED
BY-LAWS, AS AMENDED
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Dover, County
of Kent, State of Delaware.
Section 2. The Corporation may also have offices at such other places
both within and without the State of Delaware as the board of directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
directors shall be held at such place either within or without the State of
Delaware as shall be designated from time to time by the board of directors and
stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual meetings of stockholders, commencing with the year
1986, shall be held on the third Wednesday of May, if not a legal holiday, and
if a legal holiday, then on the next secular day following, at 11:00 a.m., or at
such other date and time as shall be designated from time to time by the board
of directors and stated in the notice of the meeting, at which they shall elect
by a plurality vote a board of directors, and transact such other business as
may properly be brought before the meeting.
Section 3. Written notice of the annual meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote at
such meeting not less than ten nor more than fifty days before the date of the
meeting.
Section 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the president and shall be called by the
president or secretary at the request in writing of a majority of the board of
directors, or at the request in writing of stockholders owning a majority in an
amount of the entire capital stock of the corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
Section 6. Written notice of a special meeting stating the place, date
and hour of the meeting and the purpose or purposes for which the meeting is
called, shall be given not less than ten nor more than fifty days before the
date of the meeting, to each stockholder entitled to vote at such meeting.
Section 7. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
Section 8. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required in which case
such express provision shall govern and control the decision or such question.
Section 10. Each holder of common stock of the corporation shall at
every meeting of the stockholders be entitled to one vote in person or by proxy
for each share of capital stock having voting power held by such stockholder.
Each stockholder entitled to vote at a meeting of stockholders may authorize
another person or persons to act for such stockholder by proxy, but no proxy
shall be valid after three years from the date of its execution, unless a longer
time is expressly provided therein. Without limiting the manner in which a
stockholder may authorize another person or persons to act for such stockholder
as proxy pursuant to the immediately preceding sentence, a stockholder may
validly grant such authority (a) by executing a writing authorizing another
person or persons to act for such stockholder as proxy or (b) by authorizing
another person or persons to act for such stockholder as proxy by transmitting
or authorizing the transmission of a telegram, cablegram, or other means of
electronic submission to the person who will be the holder of the proxy or to a
proxy solicitation firm, proxy support service organization or like agent duly
authorized by the person who will be the holder of the proxy to receive the
submission, provided that any such telegram, cablegram or other means of
electronic submission must either contain or be accompanied by information from
which it can be determined that the telegram, cablegram or other electronic
submission was transmitted by or authorized by the stockholder, or by any other
method allowed under the Delaware General Corporation Law.
Section 11. Any action required to be taken at any annual or special
meeting of stockholders of the corporation, or any action which may be taken at
any annual or special meeting of such stockholders, may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Prompt notice of the taking of the
corporate action without a meeting by less than unanimous written consent shall
be given to those stockholders who have not consented in writing.
ARTICLE III
MEETINGS OF THE BOARD OF DIRECTORS
Section 1. The board of directors of the corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 2. The first meeting of each newly elected board of directors
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
board of directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the board of directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 3. Regular meetings of the board of directors may be held
without notice at such time and at such place as shall from time to time be
determined by the board and in any manner, including by means of conference
telephone or similar communications, permitted under the Delaware Corporation
Law, as the same may be from time to time amended.
Section 4. Special meetings of the board may be called by the president
on two days' notice to each director, either personally or by mail or by
telegram; special meetings shall be called by the president or secretary in like
manner and on like notice on the written request of two directors.
Section 5. At all meetings of the board, a majority of directors shall
constitute a quorum for the transaction of business and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the board of directors, except as may be otherwise specifically provided by
statute or by the certificate of incorporation. If a quorum shall not be present
at any meeting of the board of directors the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
Section 6. Unless otherwise restricted by the certificate of
incorporation or these by-laws, any action required or permitted to be taken at
any meeting of the board of directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
COMMITTEE OF DIRECTORS
Section 7. The board of directors may, by resolution passed by a
majority of the whole board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the board of directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the board of directors, shall have and may exercise all the powers
and authority of the board of directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to amending the certificate of incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
by-laws of the corporation; and, unless the resolution so provides, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the board of directors.
Section 8. Each committee shall keep regular minutes of its meetings
and report the same to the board of directors when required.
COMPENSATION OF DIRECTORS
Section 9. The board of directors shall have the authority to fix the
compensation of directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the board of directors and may be paid a fixed sum
for attendance at each meeting of the board of directors of a stated salary as
director. No such payments shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these by-laws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram, telex, or similar device.
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
by-laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the board
of directors and shall be a chairman of the board of directors, a president, a
secretary and a treasurer. The board of directors may also choose one or more
vice-presidents, and one or more assistant secretaries and assistant treasurers.
Any number of offices may be held by the same person, unless the certificate of
incorporation or these by-laws otherwise provide.
Section 2. The board of directors at its first meeting after each
annual meeting of stockholders shall choose a chairman of the board, a
president, one or more vice-presidents, a secretary and a treasurer.
Section 3. The board of directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 4. The salaries of all officers and agents of the corporation
shall be fixed by the board of directors.
Section 5. The officers of the corporation shall hold office until
their successors are chosen and qualify. Any officer elected or appointed by the
board of directors may be removed at any time by the affirmative vote of a
majority of the board of directors. Any vacancy occurring in any office of the
corporation shall be filled by the board of directors.
THE PRESIDENT
Section 6. The president shall be the chief executive officer of the
corporation, shall preside at all meetings of the stockholders and the board of
directors, shall have general and active management of the business of the
corporation and shall see that all orders and resolutions of the board of
directors are carried into effect.
Section 7. He shall execute bonds, mortgages and other contracts
requiring a seal, under the seal of the corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the board of
directors to some other officer or agent of the corporation.
THE VICE-PRESIDENTS
Section 8. In the absence of the president or in the event of his
inability or refusal to act, the vice-president (or in the event there be more
than one vice-president, the vice-presidents in the order designated, or in the
absence of any designation, then in the order of their election) shall perform
the duties of the president, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the president. The vice-presidents
shall perform such other duties and have such other powers as the board of
directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 9. The secretary shall attend all meetings of the board of
directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the board of directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the board of directors, and shall
perform such other duties as may be prescribed by the board of directors or
president, under whose supervision he shall be. He shall have custody of the
corporate seal of the corporation and he, or an assistant secretary, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by his signature or by the signature of such assistant
secretary. The board of directors may give general authority to any officer to
affix the seal of the corporation and to attest the affixing by his signature.
Section 10. The assistant secretary, or if there be more than one, the
assistant secretaries in the order determined by the board of directors (or if
there be no such determination, then in the order of their election), shall, in
the absence of the secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the board of directors may from
time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 11. The treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the board of directors.
Section 12. He shall disburse the funds of the corporation as may be
ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the president and the board of directors, at
its regular meetings, or when the board of directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
corporation.
Section 13. If required by the board of directors, he shall give the
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the board of directors for
the faithful performance of the duties of his office and for the restoration to
the corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
Section 14. The assistant treasurer, or if there shall be more than
one, the assistant treasurers in the order determined by the board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the treasurer or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the treasurer and
shall perform such other duties and have such other powers as the board of
directors may from time to time prescribe.
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Every holder of stock in the corporation shall be entitled
to have a certificate, signed by, or in the name of the corporation by, the
chairman or vice-chairman of the board of directors, or the president or a
vice-president and the treasurer or an assistant treasurer, or the secretary or
an assistant secretary of the corporation, certifying the number of shares owned
by him in the corporation. If the corporation shall be authorized to issue more
than one class of stock or more than one series of any class, the powers,
designations, preferences and relative, participating optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
corporation shall issue to represent such class or series of stock, provided
that, except as otherwise provided in section 202 of the General Corporation Law
of Delaware, in lieu of the foregoing requirements, there may be set forth in
the face or back of the certificate which the corporation shall issue to
represent such class or series of stock, a statement that the corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
Section 2. Where a certificate is countersigned (1) by a transfer agent
other than the corporation or its employee, or (2) by a registrar other than the
corporation or its employee, any other signature on the certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 3. The board of directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the board of directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 4. Upon surrender to the corporation or the transfer agent of
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the board of directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 6. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, a person registered on its books as the
owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share of shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation, subject
to the provisions of the certificate of incorporation, if any, may be declared
by the board of directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out
of any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the board of directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by
resolution of the board of directors.
SEAL
Section 5. The corporate seal shall have inscribed thereon the name of
the corporation, the year of its organization and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE VIII
AMENDMENTS
Section 1. These by-laws may be altered, amended or repealed or new
by-laws may be adopted by the stockholders or by the board of directors at any
regular meeting of the board of directors or of the stockholders or at any
special meeting of the board of directors or of the stockholders, if notice of
such alteration, amendment, repeal or adoption of new by-laws be contained in
the notice of such special meeting of the stockholders.
Exhibit 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
this 25th day of January, 2002, by and between First Mid-Illinois Bancshares,
Inc. ("the Company"), a corporation with its principal place of business located
in Mattoon, Illinois, and William S. Rowland ("Executive").
In consideration of the promises and mutual covenants and agreements
contained herein, the parties hereto acknowledge and agree as follows:
ARTICLE ONE
TERM AND NATURE OF AGREEMENT
1.01 Term of Agreement. The term of this Agreement shall commence as of
February 1, 2002 and shall continue until December 31, 2004. Thereafter, unless
Executive's employment with the Company has been previously terminated,
Executive shall continue his employment with the Company on an at will basis
and, except as provided in Articles Five, Six and Seven, this Agreement shall
terminate unless extended by mutual written agreement.
1.02 Employment as President and CEO. The Company agrees to employ
Executive as its President and Chief Executive Officer commencing February 1,
2002 and Executive accepts such employment by the Company on the terms and
conditions herein set forth. The duties of Executive shall be determined by the
Company's Board of Directors and Executive shall adhere to the policies and
procedures of the Company and shall follow the supervision and direction of the
Board in the performance of such duties. During the term of his employment,
Executive agrees to devote his full working time, attention and energies to the
diligent and satisfactory performance of his duties hereunder. Executive shall
not, while he is employed by the Company, engage in any activity which would (a)
interfere with, or have an adverse effect on, the reputation, goodwill or any
business relationship of the Company or any of its subsidiaries; (b) result in
economic harm to the Company or any of its subsidiaries; or (c) result in a
breach of Section Six of the Agreement.
1.03 Service as Chairman. The Company shall use its best efforts to
continue Executive's position as Chairman of the Board of Directors of the
Company during the term of his employment, to which position he was elected
effective as of June 1, 1999.
ARTICLE TWO
COMPENSATION AND BENEFITS
While Executive is employed with the Company during the term of this
Agreement, the Company shall provide Executive with the following compensation
and benefits:
2.01 Base Salary. The Company shall pay Executive an annual base salary
of $187,000.00 per fiscal year, payable in accordance with the Company's
customary payroll practices for executive employees. The Board may review and
adjust Executive's base salary from year to year; provided, however, that during
the term of Executive's employment, the Company shall not decrease Executive's
base salary.
2.02 Incentive Compensation Plan. Executive shall continue to
participate in the First Mid-Illinois Bancshares, Inc. Incentive Compensation
Plan in accordance with the terms and conditions of such Plan. Pursuant to the
Plan, Executive shall have an opportunity to receive incentive compensation of
up to a maximum of 40% of Executive's annual base salary. The incentive
compensation payable for a particular fiscal year will be based upon the
attainment of the performance goals in effect under the Plan for such year and
will be paid in accordance with the terms of the Plan and at the sole discretion
of the Board.
2.03 Deferred Compensation Plan. Executive may continue to participate
in the First Mid-Illinois Bancshares, Inc. Deferred Compensation Plan in
accordance with the terms and conditions of such Plan.
2.04 Supplemental Executive Retirement Plan. Executive shall continue
to participate in the First Mid-Illinois Bancshares, Inc. Supplemental Executive
Retirement Plan with retirement benefit payable under the Plan upon Executive's
retirement at age 63 of $50,000 per year and unreduced benefits commencing at
age 63. All other provisions of the Plan shall remain unchanged.
2.05 Stock Option Plan. Executive may continue to participate in the
First Mid-Illinois Bancshares, Inc. 1997 Stock Incentive Plan.
2.06 Vacation. Executive shall be entitled to four (4) weeks of paid
vacation each year during the term of this Agreement.
2.07 Fringe Benefits. The Company shall provide the following
additional fringe benefits to Executive:
(a) Use of a Company-owned or leased vehicle for professional and
personal use.
(b) An amount equal to the annual dues for a Class "H" membership
at the Mattoon Golf and Country Club.
(c) Use of a cellular phone for work-related calls and calls
associated with Internet connection for Executive's home.
2.08 Other Benefits. Executive shall be eligible (to the extent he
qualifies) to participate in any other retirement, health, accident and
disability insurance, or similar employee benefit plans as may be maintained
from time to time by the Company for its other executives or employees subject
to and on a consistent basis with the terms, conditions and overall
administration of such plans.
2.09 Business Expenses. Executive shall be entitled to reimbursement by
the Company for all reasonable expenses actually and necessarily incurred by him
on its behalf in the course of his employment hereunder and in accordance with
expense reimbursement plans and policies of the Company from time to time in
effect for executive employees.
2.10. Withholding. All salary, incentive compensation and other
benefits provided to Executive pursuant to this Agreement shall be subject to
withholding for federal, state or local taxes, amounts withheld under applicable
employee benefit plans, policies or programs, and any other amounts that may be
required to be withheld by law, judicial order or otherwise or by agreement
with, or consent of, Executive.
ARTICLE THREE
DEATH OF EXECUTIVE
This Agreement shall terminate prior to the end of the term described
in Section 1.01 upon Executive's termination of employment with the Company due
to his death. Upon Executive's termination due to death, the Company shall pay
Executive's estate the amount of Executive's base salary and his accrued but
unused vacation time earned through the date of such death and any incentive
compensation earned for the preceding fiscal year that is not yet paid as of the
date of such death.
ARTICLE FOUR
TERMINATION OF EMPLOYMENT
Executive's employment with the Company may be terminated by Executive
or by the Company at any time for any reason. Upon Executive's termination of
employment prior to the end of the term of the Agreement, the Company shall pay
Executive as follows:
4.01 Termination by the Company for Other Than Cause. If the Company
terminates Executive's employment for any reason other than Cause, the Company
shall pay Executive the following:
(a) An amount equal to Executive's monthly base salary in effect at
the time of such termination of employment for a period of twelve
(12) months thereafter. Such amount shall be paid to Executive
periodically in accordance with the Company's customary payroll
practices for executive employees.
(b) The base salary and accrued but unused paid vacation time earned
through the date of termination and any incentive compensation
earned for the preceding fiscal year that is not yet paid.
(c) Continued coverage for Executive and/or Executive's family under
the Company's health plan pursuant to Title I, Part 6 of the
Employee Retirement Income Security Act of 1974 ("COBRA") and for
such purpose the date of Executive's termination of employment
shall be considered the date of the "qualifying event" as such
term is defined by COBRA. During the twelve month period
beginning on the date of such termination, the Executive shall be
charged for such coverage in the amount that he would have paid
for such coverage had he remained employed by the Company, and
for the duration of the COBRA period, the Executive shall be
charged for such coverage in accordance with the provisions of
COBRA.
For purposes of this Agreement, "Cause" shall mean Executive's (i)
conviction in a court of law of (or entering a plea of guilty or no contest to)
any crime or offense involving fraud, dishonesty or breach of trust or involving
a felony; (ii) performance of any act which, if known to the customers, clients,
stockholders or regulators of the Company, would materially and adversely impact
the business of the Company; (iii) act or omission that causes a regulatory body
with jurisdiction over the Company to demand, request, or recommend that
Executive be suspended or removed from any position in which Executive serves
with the Company; (iv) substantial nonperformance of any of his obligations
under this Agreement; (v) misappropriation of or intentional material damage to
the property or business of the Company or any affiliate; or (vi) breach of
Article Five or Six of this Agreement.
4.02 Termination Following a Change in Control. Notwithstanding Section
4.01, if, following a Change in Control, Executive's employment is terminated by
the Company (or any successor thereto) for any reason other than Cause, or if
Executive terminates his employment because of a decrease in his then current
base salary or a substantial diminution in his position and responsibilities,
the Company (or any successor thereto) shall pay Executive the following:
(a) Two times Executive's annual base salary in effect at the time of
such termination. Such amount shall be paid, at Executive's
election, in either a lump sum payment as soon as practicable
following the date of such termination or periodically in
accordance with the Company's or successor's customary payroll
practices for executive employees.
(b) An amount equal to the incentive compensation earned by or paid
to Executive for the fiscal year immediately preceding the year
in which Executive's termination of employment occurs. Such
amount shall be paid to Executive in a lump sum as soon as
practicable after the date of his termination.
(c) The base salary and accrued but unused paid vacation time earned
through the date of termination and any incentive compensation
earned for the preceding fiscal year that is not yet paid.
(d) Continued coverage for Executive and/or Executive's family under
the Company's health plan pursuant to Title I, Part 6 of the
Employee Retirement Income Security Act of 1974 ("COBRA") and for
such purpose the date of Executive's termination of employment
shall be considered the date of the "qualifying event" as such
term is defined by COBRA. During the twelve month period
beginning on the date of such termination, the Executive shall be
charged for such coverage in the amount that he would have paid
for such coverage had he remained employed by the Company, and
for the duration of the COBRA period, the Executive shall be
charged for such coverage in accordance with the provisions of
COBRA.
For purposes of this Agreement, "Change in Control" shall have the
meaning as set forth in the First Mid-Illinois Bancshares, Inc. 1997 Stock
Incentive Plan.
4.03 Other Termination of Employment. If the Company terminates
Executive's employment for Cause, or if Executive terminates his employment for
any reason other than as described in Section 4.02 above, the Company shall pay
Executive the base salary and accrued but unused paid vacation time earned
through the date of such termination and any incentive compensation earned for
the preceding fiscal year that is not yet paid.
ARTICLE FIVE
CONFIDENTIAL INFORMATION
5.01 Non-Disclosure of Confidential Information. During his employment
with the Company, and after his termination of such employment with the Company,
Executive shall not, in any form or manner, directly or indirectly, use,
divulge, disclose or communicate to any person, entity, firm, corporation or any
other third party, any Confidential Information, except as required in the
performance of Executive's duties hereunder, as required by law or as necessary
in conjunction with legal proceedings.
5.02 Definition of Confidential Information. For the purposes of this
Agreement, the term "Confidential Information" shall mean any and all
information either developed by Executive during his employment with the Company
and used by the Company or its affiliates or developed by or for the Company or
its affiliates of which Executive gained knowledge by reason of his employment
with the Company that is not readily available in or known to the general public
or the industry in which the Company or any affiliate is or becomes engaged.
Such Confidential Information shall include, but shall not be limited to, any
technical or non-technical data, formulae, compilations, programs, devices,
methods, techniques, procedures, manuals, financial data, business plans, lists
of actual or potential customers, lists of employees and any information
regarding the Company's or any affiliate's products, marketing or database. The
Company and Executive acknowledge and agree that such Confidential Information
is extremely valuable to the Company and may constitute trade secret information
under applicable law. In the event that any part of the Confidential Information
becomes generally known to the public through legitimate origins (other than by
the breach of this Agreement by Executive or by other misappropriation of the
Confidential Information), that part of the Confidential Information shall no
longer be deemed Confidential Information for the purposes of this Agreement,
but Executive shall continue to be bound by the terms of this Agreement as to
all other Confidential Information.
5.03 Delivery Upon Termination. Upon termination of Executive's
employment with the Company for any reason, Executive shall promptly deliver to
the Company all correspondence, files, manuals, letters, notes, notebooks,
reports, programs, plans, proposals, financial documents, and any other
documents or data concerning the Company's or any affiliate's customers,
database, business plan, marketing strategies, processes or other materials
which contain Confidential Information, together with all other property of the
Company or any affiliate in Executive's possession, custody or control.
ARTICLE SIX
NON-COMPETE AND NON-SOLICITATION COVENANTS
6.01 Covenant Not to Compete. During the term of this Agreement and for
a period of two years following the later of (i) the termination of Executive's
employment for any reason or (ii) the last day of the term of the Agreement,
Executive shall not, on behalf of himself or on behalf of another person,
corporation, partnership, trust or other entity, within the counties of Coles,
Moultrie, Douglas, Cumberland, Effingham, Champaign, Christian, Madison, Macon,
Bond or Piatt, Illinois, or any other county in which the Company or any
affiliate conducts business:
(a) Directly or indirectly own, manage, operate, control, participate
in the ownership, management, operation or control of, be
connected with or have any financial interest in, or serve as an
officer, employee, advisor, consultant, agent or otherwise to any
person, firm, partnership, corporation, trust or other entity
which owns or operates a business similar to that of the Company
or its affiliates.
(b) Solicit for sale, represent, and/or sell Competing Products to
any person or entity who or which was the Company's customer or
client during the last two years of Executive's employment.
"Competing Products," for purposes of this Agreement, means
products or services which are similar to, compete with, or can
be used for the same purposes as products or services sold or
offered for sale by the Company or any affiliate or which were in
development by the Company or any affiliate within the last two
years of Executive's employment.
6.02 Covenant Not to Solicit. For a period of two years following the
later of (i) the termination of Executive's employment for any reason or (ii)
the last day of the term of this Agreement, Executive shall not:
(a) Attempt in any manner to solicit from any client or customer
business of the type performed by the Company or any affiliate or
persuade any client or customer of the Company or any affiliate
to cease to do such business or to reduce the amount of such
business which any such client or customer has customarily done
or contemplates doing with the Company or any affiliate, whether
or not the relationship between the Company or affiliate and such
client or customer was originally established in whole or in part
through Executive's efforts.
(b) Render any services of the type rendered by the Company or any
affiliate for any client or customer of the Company.
(c) Solicit or encourage, or assist any other person to solicit or
encourage, any employees, agents or representatives of the
Company or an affiliate to terminate or alter their relationship
with the Company or any affiliate.
(d) Do or cause to be done, directly or indirectly, any acts which
may impair the relationship between the Company or any affiliate
with their respective clients, customers or employees.
ARTICLE SEVEN
REMEDIES
Executive acknowledges that compliance with the provisions of Articles
Five and Six herein is necessary to protect the business, goodwill and
proprietary information of the Company and that a breach of these covenants will
irreparably and continually damage the Company for which money damages may not
be inadequate. Consequently, Executive agrees that, in the event that he
breaches or threatens to breach any of these provisions, the Company shall be
entitled to both (a) a temporary, preliminary or permanent injunction in order
to prevent the continuation of such harm; and (b) money damages insofar as they
can be determined. In addition, the Company will cease payment of all
compensation and benefits under Articles Three and Four hereof. In the event
that any of the provisions, covenants, warranties or agreements in this
Agreement are held to be in any respect an unreasonable restriction upon the
Executive or are otherwise invalid, for whatsoever cause, then the court so
holding shall reduce, and is so authorized to reduce, the territory to which it
pertains and/or the period of time in which it operates, or the scope of
activity to which it pertains or effect any other change to the extent necessary
to render any of the restrictions of this Agreement enforceable.
ARTICLE EIGHT
MISCELLANEOUS
8.01 Successors and Assignability.
(a) No rights or obligations of the Company under this Agreement may
be assigned or transferred except that the Company will require
any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to expressly assume and
agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if
no such succession had taken place.
(b) No rights or obligations of Executive under this Agreement may be
assigned or transferred by Executive other than his rights to
payments or benefits hereunder which may be transferred only by
will or the laws of descent and distribution.
8.02 Entire Agreement. This Agreement contains the entire agreement
between the parties with respect to the subject matter hereof and may not be
modified except in writing by the parties hereto. Furthermore, the parties
hereto specifically agree that all prior agreements, whether written or oral,
relating to Executive's employment by the Company shall be of no further force
or effect from and after the date hereof.
8.03 Severability. If any phrase, clause or provision of this Agreement
is deemed invalid or unenforceable, such phrase, clause or provision shall be
deemed severed from this Agreement, but will not affect any other provisions of
this Agreement, which shall otherwise remain in full force and effect. If any
restriction or limitation in this Agreement is deemed to be unreasonable,
onerous or unduly restrictive, it shall not be stricken in its entirety and held
totally void and unenforceable, but shall be deemed rewritten and shall remain
effective to the maximum extent permissible within reasonable bounds.
8.04 Controlling Law and Jurisdiction. This Agreement shall be governed
by and interpreted and construed according to the laws of the State of Illinois.
The parties hereby consent to the jurisdiction of the state and federal courts
in the State of Illinois in the event that any disputes arise under this
Agreement.
8.05 Notices. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed to have been duly
given (a) on the date of service if served personally on the party to whom
notice is to be given; (b) on the day after delivery to an overnight courier
service; (c) on the day of transmission if sent via facsimile to the facsimile
number given below; or (d) on the third day after mailing, if mailed to the
party to whom notice is to be given, by first class mail, registered or
certified, postage prepaid and properly addressed, to the party as follows:
If to Executive: William S. Rowland
1 Prairie Sun Lane
Mattoon, IL 61938
If to the Company: First Mid-Illinois Bancshares, Inc.
1515 Charleston Avenue
Mattoon, Illinois 61938
Facsimile: 217-234-0485
Attention: Chairman of Compensation Committee
Any party may change its address for the purpose of this Section by
giving the other party written notice of its new address in the manner set forth
above.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
FIRST MID-ILLINOIS BANCSHARES, INC.
By: /s/ Kenneth R. Diepholz
Kenneth R. Diepholz
Title: Chairman, Compensation Committee
EXECUTIVE: /s/ William S. Rowland
William S. Rowland
Exhibit 10.2
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
this 1st day of October, 2002, by and between First Mid-Illinois Bancshares,
Inc. ("the Company"), a corporation with its principal place of business located
in Mattoon, Illinois, and John W. Hedges ("Executive").
In consideration of the promises and mutual covenants and agreements
contained herein, the parties hereto acknowledge and agree as follows:
ARTICLE ONE
TERM AND NATURE OF AGREEMENT
1.01 Term of Agreement. The term of this Agreement shall commence as of
October 1, 2002 and shall continue for three years, until September 30, 2005.
Thereafter, unless Executive's employment with the Company has been previously
terminated, Executive shall continue his employment with the Company on an at
will basis and, except as provided in Articles Five, Six and Seven, this
Agreement shall terminate unless extended by mutual written agreement.
1.02 Employment. The Company agrees to employ Executive as President of
First Mid-Illinois Bank & Trust, N.A. commencing October 1, 1999 and Executive
accepts such employment by the Company on the terms and conditions herein set
forth. The duties of Executive shall be determined by the Company's Board of
Directors and Executive shall adhere to the policies and procedures of the
Company and shall follow the supervision and direction of the Board in the
performance of such duties. During the term of his employment, Executive agrees
to devote his full working time, attention and energies to the diligent and
satisfactory performance of his duties hereunder. Executive shall not, while he
is employed by the Company, engage in any activity which would (a) interfere
with, or have an adverse effect on, the reputation, goodwill or any business
relationship of the Company or any of its subsidiaries; (b) result in economic
harm to the Company or any of its subsidiaries; or (c) result in a breach of
Section Six of the Agreement.
ARTICLE TWO
COMPENSATION AND BENEFITS
While Executive is employed with the Company during the term of this
Agreement, the Company shall provide Executive with the following compensation
and benefits:
2.01 Base Salary. The Company shall pay Executive an annual base salary
of $110,000 per fiscal year, payable in accordance with the Company's customary
payroll practices for executive employees. The Board may review and adjust
Executive's base salary from year to year; provided, however, that during the
term of Executive's employment, the Company shall not decrease Executive's base
salary.
2.02 Incentive Compensation Plan. Executive shall continue to
participate in the First Mid-Illinois Bancshares, Inc. Incentive Compensation
Plan in accordance with the terms and conditions of such Plan. Pursuant to the
Plan, Executive shall have an opportunity to receive incentive compensation of
up to a maximum of 25% of Executive's annual base salary. The incentive
compensation payable for a particular fiscal year will be based upon the
attainment of the performance goals in effect under the Plan for such year and
will be paid in accordance with the terms of the Plan and at the sole discretion
of the Board.
2.03 Deferred Compensation Plan. Executive shall be eligible to
participate in the First Mid-Illinois Bancshares, Inc. Deferred Compensation
Plan in accordance with the terms and conditions of such Plan.
2.04 Vacation. Executive shall be entitled to three (3) weeks of paid
vacation each year during the term of this Agreement.
2.05 Fringe Benefits. The Company shall provide the following
additional fringe benefits to Executive:
(a) Use of a Company-owned or leased vehicle for professional and
personal use.
(b) An amount equal to the annual dues for a Class "H" membership at
the Mattoon Golf and Country Club.
(c) Use of a cellular phone for work-related calls and calls
associated with Internet connection for Executive's home.
2.06 Other Benefits. Executive shall be eligible (to the extent he
qualifies) to participate in any other retirement, health, accident and
disability insurance, or similar employee benefit plans as may be maintained
from time to time by the Company for its other executives or employees subject
to and on a consistent basis with the terms, conditions and overall
administration of such plans.
2.07 Business Expenses. Executive shall be entitled to reimbursement by
the Company for all reasonable expenses actually and necessarily incurred by him
on its behalf in the course of his employment hereunder and in accordance with
expense reimbursement plans and policies of the Company from time to time in
effect for executive employees.
2.08 Withholding. All salary, incentive compensation and other benefits
provided to Executive pursuant to this Agreement shall be subject to withholding
for federal, state or local taxes, amounts withheld under applicable employee
benefit plans, policies or programs, and any other amounts that may be required
to be withheld by law, judicial order or otherwise or by agreement with, or
consent of, Executive.
ARTICLE THREE
DEATH OF EXECUTIVE
This Agreement shall terminate prior to the end of the term described
in Section 1.01 upon Executive's termination of employment with the Company due
to his death. Upon Executive's termination due to death, the Company shall pay
Executive's estate the amount of Executive's base salary and his accrued but
unused vacation time earned through the date of such death and any incentive
compensation earned for the preceding fiscal year that is not yet paid as of the
date of such death.
ARTICLE FOUR
TERMINATION OF EMPLOYMENT
Executive's employment with the Company may be terminated by Executive
or by the Company at any time for any reason. Upon Executive's termination of
employment prior to the end of the term of the Agreement, the Company shall pay
Executive as follows:
4.01 Termination by the Company for Other Than Cause. If the Company
terminates Executive's employment for any reason other than Cause, the
Company shall pay Executive the following:
(a) An amount equal to Executive's monthly base salary in effect at
the time of such termination of employment for a period of twelve
(12) months thereafter. Such amount shall be paid to Executive
periodically in accordance with the Company's customary payroll
practices for executive employees.
(b) The base salary and accrued but unused paid vacation time earned
through the date of termination and any incentive compensation
earned for the preceding fiscal year that is not yet paid.
(c) Continued coverage for Executive and/or Executive's family under
the Company's health plan pursuant to Title I, Part 6 of the
Employee Retirement Income Security Act of 1974 ("COBRA") and for
such purpose the date of Executive's termination of employment
shall be considered the date of the "qualifying event" as such
term is defined by COBRA. During the twelve month period
beginning on the date of such termination, the Executive shall be
charged for such coverage in the amount that he would have paid
for such coverage had he remained employed by the Company, and
for the duration of the COBRA period, the Executive shall be
charged for such coverage in accordance with the provisions of
COBRA.
(d) For purposes of this Agreement, "Cause" shall mean Executive's
(i) conviction in a court of law of (or entering a plea of guilty
or no contest to) any crime or offense involving fraud,
dishonesty or breach of trust or involving a felony; (ii)
performance of any act which, if known to the customers, clients,
stockholders or regulators of the Company, would materially and
adversely impact the business of the Company; (iii) act or
omission that causes a regulatory body with jurisdiction over the
Company to demand, request, or recommend that Executive be
suspended or removed from any position in which Executive serves
with the Company; (iv) substantial nonperformance of any of his
obligations under this Agreement; (v) misappropriation of or
intentional material damage to the property or business of the
Company or any affiliate; or (vi) breach of Article Five or Six
of this Agreement.
4.02 Termination Following a Change in Control. Notwithstanding Section
4.01, if, following a Change in Control, Executive's employment is terminated by
the Company (or any successor thereto) for any reason other than Cause, or if
Executive terminates his employment because of a decrease in his then current
base salary or a substantial diminution in his position and responsibilities,
the Company (or any successor thereto) shall pay Executive the following:
(a) Two times Executive's annual base salary in effect at the time of
such termination. Such amount shall be paid, at Executive's
election, in either a lump sum payment as soon as practicable
following the date of such termination or periodically in
accordance with the Company's or successor's customary payroll
practices for executive employees.
(b) An amount equal to the incentive compensation earned by or paid
to Executive for the fiscal year immediately preceding the year
in which Executive's termination of employment occurs. Such
amount shall be paid to Executive in a lump sum as soon as
practicable after the date of his termination.
(c) The base salary and accrued but unused paid vacation time earned
through the date of termination and any incentive compensation
earned for the preceding fiscal year that is not yet paid.
(d) Continued coverage for Executive and/or Executive's family under
the Company's health plan pursuant to Title I, Part 6 of the
Employee Retirement Income Security Act of 1974 ("COBRA") and for
such purpose the date of Executive's termination of employment
shall be considered the date of the "qualifying event" as such
term is defined by COBRA. During the twelve month period
beginning on the date of such termination, the Executive shall be
charged for such coverage in the amount that he would have paid
for such coverage had he remained employed by the Company, and
for the duration of the COBRA period, the Executive shall be
charged for such coverage in accordance with the provisions of
COBRA.
For purposes of this Agreement, "Change in Control" shall have the
meaning as set forth in the First Mid-Illinois Bancshares, Inc. 1997 Stock
Incentive Plan.
4.03 Other Termination of Employment. If the Company terminates
Executive's employment for Cause, or if Executive terminates his employment for
any reason other than as described in Section 4.02 above, the Company shall pay
Executive the base salary and accrued but unused paid vacation time earned
through the date of such termination and any incentive compensation earned for
the preceding fiscal year that is not yet paid.
ARTICLE FIVE
CONFIDENTIAL INFORMATION
5.01 Non-Disclosure of Confidential Information. During his employment
with Company, and after his termination of such employment with the Company,
Executive shall not, in any form or manner, directly or indirectly, use,
divulge, disclose or communicate to any person, entity, firm, corporation or any
other third party, any Confidential Information, except as required in the
performance of Executive's duties hereunder, as required by law or as necessary
in conjunction with legal proceedings.
5.02 Definition of Confidential Information. For the purposes of this
Agreement, the term "Confidential Information" shall mean any and all
information either developed by Executive during his employment with the Company
and used by the Company or its affiliates or developed by or for the Company or
its affiliates of which Executive gained knowledge by reason of his employment
with the Company that is not readily available in or known to the general public
or the industry in which the Company or any affiliate is or becomes engaged.
Such Confidential Information shall include, but shall not be limited to, any
technical or non-technical data, formulae, compilations, programs, devices,
methods, techniques, procedures, manuals, financial data, business plans, lists
of actual or potential customers. Lists of employees and any information
regarding the Company's or any affiliate's products, marketing or database. The
Company and Executive acknowledge and agree that such Confidential Information
is extremely valuable to the Company and may constitute trade secret information
under applicable law. In the event that any part of the Confidential Information
becomes generally known to the public through legitimate origins (other than by
the breach of this Agreement by Executive or by other misappropriation of the
Confidential Information), that part of the Confidential Information shall no
longer be deemed Confidential Information for the purposes of this Agreement,
but Executive shall continue to be bound by the terms of this Agreement as to
all other Confidential Information.
5.03 Delivery Upon Termination. Upon termination of Executive's
employment with the Company for any reason, Executive shall promptly deliver to
the Company all correspondence, files, manuals, letters, notes, notebooks,
reports, programs, plans, proposals, financial documents, and any other
documents or data concerning the Company's or any affiliate's customers,
database, business plan, marketing strategies, processes or other materials
which contain Confidential Information, together with all other property of the
Company or any affiliate in Executive's possession, custody or control.
ARTICLE SIX
NON-COMPETE AND NON-SOLICITATION COVENANTS
6.01 Covenant Not to Compete. During the term of this Agreement and for
a period of two years following the later of (i) the termination of Executive's
employment for any reason or (ii) the last day of the term of the Agreement,
Executive shall not, on behalf of himself or on behalf of another person,
corporation, partnership, trust or other entity, within the counties of Coles,
Moultrie, Douglas, Cumberland, Effingham, Champaign, Christian or Piatt,
Illinois:
(a) Directly or indirectly own, manage, operate, control, participate
in the ownership, management, operation or control of, be
connected with or have any financial interest in, or serve as an
officer, employee, advisor, consultant, agent or otherwise to any
person, firm, partnership, corporation, trust or other entity
which owns or operates a business similar to that of the Company
or its affiliates.
(b) Solicit for sale, represent, and/or sell Competing Products to
any person or entity who or which was the Company's customer or
client during the last two years of Executive's employment.
"Competing Products," for purposes of this Agreement, means
products or services which are similar to, compete with, or can
be used for the same purposes as products or services sold or
offered for sale by the Company or any affiliate or which were in
development by the Company or any affiliate within the last two
years of Executive's employment.
6.02 Covenant Not to Solicit. For a period of two years following the
later of (i) the termination of Executive's employment for any reason or (ii)
the last day of the term of this Agreement, Executive shall not:
(a) Attempt in any manner to solicit from any client or customer
business of the type performed by the Company or any affiliate or
persuade any client or customer of the Company or any affiliate
to cease to do such business or to reduce the amount of such
business which any such client or customer has customarily done
or contemplates doing with the Company or any affiliate, whether
or not the relationship between the Company or affiliate and such
client or customer was originally established in whole or in part
through Executive's efforts.
(b) Render any services of the type rendered by the Company or any
affiliate for any client or customer of the Company.
(c) Solicit or encourage, or assist any other person to solicit or
encourage, any employees, agents or representatives of the
Company or an affiliate to terminate or alter their relationship
with the Company or any affiliate.
(d) Do not cause to be done, directly or indirectly, any acts which
may impair the relationship between the Company or any affiliate
with their respective clients, customers or employees.
ARTICLE SEVEN
REMEDIES
Executive acknowledges that compliance with the provisions of Articles
Five and Six herein is necessary to protect the business, goodwill and
proprietary information of the Company and that a breach of these covenants will
irreparably and continually damage the Company for which money damages may not
be inadequate. Consequently, Executive agrees that, in the event that he
breaches or threatens to breach any of these provisions, the Company shall be
entitled to both (a) a temporary, preliminary or permanent injunction in order
to prevent the continuation of such harm; and (b) money damages insofar as they
can be determined. In addition, the Company will cease payment of all
compensation and benefits under Articles Three and Four hereof. In the event
that any of the provisions, covenants, warranties or agreements in this
Agreement are held to be in any respect an unreasonable restriction upon the
Executive or are otherwise invalid, for whatsoever cause, then the court so
holding shall reduce, and is so authorized to reduce, the territory to which it
pertains and/or the period of time in which it operates, or the scope of
activity to which it pertains or effect any other change to the extent necessary
to render any of the restrictions of this Agreement enforceable.
ARTICLE EIGHT
MISCELLANEOUS
8.01 Successors and Assignability.
(a) No rights or obligations of the Company under this Agreement may
be assigned or transferred except that the Company will require
any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to expressly assume and
agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if
no such succession had taken place.
(b) No rights or obligations of Executive under this Agreement may be
assigned or transferred by Executive other than his rights to
payments or benefits hereunder which may be transferred only by
will or the laws of descent and distribution.
8.02 Entire Agreement. This Agreement contains the entire agreement
between the parties with respect to the subject matter hereof and may not be
modified except in writing by the parties hereto. Furthermore, the parties
hereto specifically agree that all prior agreements, whether written or oral,
relating to Executive's employment by the Company shall be of no further force
or effect from and after the date hereof.
8.03 Severability. If any phrase, clause or provision of this Agreement
is deemed invalid or unenforceable, such phrase, clause or provision shall be
deemed severed from this Agreement, but will not affect any other provisions of
this Agreement, which shall otherwise remain in full force and effect. If any
restriction or limitation in this Agreement is deemed to be unreasonable,
onerous or unduly restrictive, it shall not be stricken in its entirety and held
totally void and unenforceable, but shall be deemed rewritten and shall remain
effective to the maximum extent permissible within reasonable bounds.
8.04 Controlling Law and Jurisdiction. This Agreement shall be governed
by and interpreted and construed according to the laws of the State of Illinois.
The parties hereby consent to the jurisdiction of the state and federal courts
in the State of Illinois in the event that any disputes arise under this
Agreement.
8.05 Notices. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed to have been duly
given (a) on the date of service if served personally on the party to whom
notice is to be given; (b) on the day after delivery to an overnight courier
service; (c) on the day of transmission if sent via facsimile to the facsimile
number given below; or (d) on the third day after mailing, if mailed to the
party to whom notice is to be given, by first class mail, registered or
certified, postage prepaid and properly addressed, to the party as follows:
If to Executive: __________________________
Facsimile: __________________
If to the Company: First Mid-Illinois Bancshares, Inc.
1515 Charleston Avenue
Mattoon IL 61938
Facsimile: 217-258-0485
Attention: Chairman
Any party may change its address for the purpose of this Section by
giving the other party written notice of its new address in the manner set forth
above.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
FIRST MID-ILLINOIS BANCSHARES, INC.
By: /s/ William S. Rowland
William S. Rowland
Title: Chairman of the Board
EXECUTIVE: /s/ John W. Hedges
John W. Hedges
Exhibit 10.5
EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is
made and entered into this 1st day of ____________, 2002, by and between
First Mid-Illinois Bancshares, Inc. ("the Company"), a corporation with its
principal place of business located in Mattoon, Illinois, and _____________
("Manager").
In consideration of the promises and mutual covenants and agreements
contained herein, the parties hereto acknowledge and agree as follows:
ARTICLE ONE
TERM AND NATURE OF AGREEMENT
1.01 Term of Agreement. The term of this Agreement shall commence as of
_________, 2002 and shall continue until ___________, 2005. Thereafter, unless
Manager's employment with the Company has been previously terminated, Manager
shall continue his employment with the Company on an at will basis and, except
as provided in Articles Five, Six and Seven, this Agreement shall terminate
unless extended by mutual written agreement.
1.02 Employment. The Company agrees to employ Manager and Manager
accepts such employment by the Company on the terms and conditions herein set
forth. The duties of Manager shall be determined by the Company's Chief
Executive Officer and shall adhere to the policies and procedures of the Company
and shall follow the supervision and direction of the Chief Executive Officer or
his designee in the performance of such duties. During the term of his
employment, Manager agrees to devote his full working time, attention and
energies to the diligent and satisfactory performance of his duties hereunder.
Manager shall not, while he is employed by the Company, engage in any activity
which would (a) interfere with, or have an adverse effect on, the reputation,
goodwill or any business relationship of the Company or any of its subsidiaries;
(b) result in economic harm to the Company or any of its subsidiaries; or (c)
result in a breach of Section Six of the Agreement.
ARTICLE TWO
COMPENSATION AND BENEFITS
While Manager is employed with the Company during the term of this
Agreement, the Company shall provide Manager with the following compensation and
benefits:
2.01 Base Salary. The Company shall pay Manager an annual base salary
of $________ per fiscal year, payable in accordance with the Company's customary
payroll practices for management employees. The Chief Executive Officer or his
designee may review and adjust Manager's base salary from year to year;
provided, however, that during the term of Manager's employment, the Company
shall not decrease Manager's base salary.
2.02 Incentive Compensation Plan. Manager shall continue to participate
in the First Mid-Illinois Bancshares, Inc. Incentive Compensation Plan in
accordance with the terms and conditions of such Plan. Pursuant to the Plan,
Manager shall have an opportunity to receive incentive compensation of up to a
maximum of ____% of Manager's annual base salary. The incentive compensation
payable for a particular fiscal year will be based upon the attainment of the
performance goals in effect under the Plan for such year and will be paid in
accordance with the terms of the Plan and at the sole discretion of the Board.
2.03 Vacation. Manager shall be entitled to _ weeks of paid
vacation each year during the term of this Agreement.
2.04 Other Benefits. Manager shall be eligible (to the extent he
qualifies) to participate in any other retirement, health, accident and
disability insurance, or similar employee benefit plans as may be maintained
from time to time by the Company for its other management employees subject to
and on a consistent basis with the terms, conditions and overall administration
of such plans.
2.05 Business Expenses. Manager shall be entitled to reimbursement by
the Company for all reasonable expenses actually and necessarily incurred by him
on its behalf in the course of his employment hereunder and in accordance with
expense reimbursement plans and policies of the Company from time to time in
effect for management employees.
2.6. Withholding. All salary, incentive compensation and other benefits
provided to Manager pursuant to this Agreement shall be subject to withholding
for federal, state or local taxes, amounts withheld under applicable employee
benefit plans, policies or programs, and any other amounts that may be required
to be withheld by law, judicial order or otherwise or by agreement with, or
consent of, Manager.
ARTICLE THREE
DEATH OF MANAGER
This Agreement shall terminate prior to the end of the term described
in Section 1.01 upon Manager's termination of employment with the Company due to
his death. Upon Manager's termination due to death, the Company shall pay
Manager's estate the amount of Manager's base salary and his accrued but unused
vacation time earned through the date of such death and any incentive
compensation earned for the preceding fiscal year that is not yet paid as of the
date of such death.
ARTICLE FOUR
TERMINATION OF EMPLOYMENT
Manager's employment with the Company may be terminated by Manager or
by the Company at any time for any reason. Upon Manager's termination of
employment prior to the end of the term of the Agreement, the Company shall pay
Manager as follows:
4.01 Termination by the Company for Other Than Cause. If the Company
terminates Manager's employment for any reason other than Cause, the Company
shall pay Manager the following:
(a) An amount equal to Manager's monthly base salary in effect at the
time of such termination of employment for a period of _____
months thereafter. Such amount shall be paid to Manager
periodically in accordance with the Company's customary payroll
practices for management employees.
(b) The base salary and accrued but unused paid vacation time earned
through the date of termination and any incentive compensation
earned for the preceding fiscal year that is not yet paid.
(c) Continued coverage for Manager and/or Manager's family under the
Company's health plan pursuant to Title I, Part 6 of the Employee
Retirement Income Security Act of 1974 ("COBRA") and for such
purpose the date of Manager's termination of employment shall be
considered the date of the "qualifying event" as such term is
defined by COBRA. During the period beginning on the date of such
termination and ending at the end of the period described in
Section 4.01(a), Manager shall be charged for such coverage in
the amount that he would have paid for such coverage had he
remained employed by the Company, and for the duration of the
COBRA period, Manager shall be charged for such coverage in
accordance with the provisions of COBRA. For purposes of this
Agreement, "Cause" shall mean Manager's (i) conviction in a court
of law of (or entering a plea of guilty or no contest to) any
crime or offense involving fraud, dishonesty or breach of trust
or involving a felony; (ii) performance of any act which, if
known to the customers, clients, stockholders or regulators of
the Company, would materially and adversely impact the business
of the Company; (iii) act or omission that causes a regulatory
body with jurisdiction over the Company to demand, request, or
recommend that Manager be suspended or removed from any position
in which Manager serves with the Company; (iv) substantial
nonperformance of any of his obligations under this Agreement;
(v) misappropriation of or intentional material damage to the
property or business of the Company or any affiliate; or (vi)
breach of Article Five or Six of this Agreement.
4.02 Termination Following a Change in Control. Notwithstanding Section
4.01, if, following a Change in Control, and prior to the end of the term of
this Agreement, Manager's employment is terminated by the Company (or any
successor thereto) for any reason other than Cause, or if Manager terminates his
employment because of a decrease in his then current base salary or a
substantial diminution in his position and responsibilities, the Company (or any
successor thereto) shall pay Manager the following:
(a) An amount equal to Manager's monthly base salary in effect at the
time of such termination for a period of twelve (12) months
thereafter. Such amount shall be paid in accordance with the
Company's or successor's customary payroll practices for Manager
employees.
(b) The base salary and accrued but unused paid vacation time earned
through the date of termination and any incentive compensation
earned for the preceding fiscal year that is not yet paid.
(c) Continued coverage for Manager and/or Manager's family under the
Company's health plan pursuant to Title I, Part 6 of the Employee
Retirement Income Security Act of 1974 ("COBRA") and for such
purpose the date of Manager's termination of employment shall be
considered the date of the "qualifying event" as such term is
defined by COBRA. During the period beginning on the date of such
termination and ending at the end of the period described in
Section 4.02(a), Manager shall be charged for such coverage in
the amount that he would have paid for such coverage had he
remained employed by the Company, and for the duration of the
COBRA period, Manager shall be charged for such coverage in
accordance with the provisions of COBRA.
For purposes of this Agreement, "Change in Control" shall have the
meaning as set forth in the First Mid-Illinois Bancshares, Inc. 1997 Stock
Incentive Plan.
4.03 Other Termination of Employment. If, prior to the end of the term
of this Agreement, the Company terminates Manager's employment for Cause, or if
Manager terminates his employment for any reason other than as described in
Section 4.02 above, the Company shall pay Manager the base salary and accrued
but unused paid vacation time earned through the date of such termination and
any incentive compensation earned for the preceding fiscal year that is not yet
paid.
ARTICLE FIVE
CONFIDENTIAL INFORMATION
5.01 Non-Disclosure of Confidential Information. During his employment
with the Company, and after his termination of such employment with the Company,
Manager shall not, in any form or manner, directly or indirectly, use, divulge,
disclose or communicate to any person, entity, firm, corporation or any other
third party, any Confidential Information, except as required in the performance
of Manager's duties hereunder, as required by law or as necessary in conjunction
with legal proceedings.
5.02 Definition of Confidential Information. For the purposes of this
Agreement, the term "Confidential Information" shall mean any and all
information either developed by Manager during his employment with the Company
and used by the Company or its affiliates or developed by or for the Company or
its affiliates of which Manager gained knowledge by reason of his employment
with the Company that is not readily available in or known to the general public
or the industry in which the Company or any affiliate is or becomes engaged.
Such Confidential Information shall include, but shall not be limited to, any
technical or non-technical data, formulae, compilations, programs, devices,
methods, techniques, procedures, manuals, financial data, business plans, lists
of actual or potential customers, lists of employees and any information
regarding the Company's or any affiliate's products, marketing or database. The
Company and Manager acknowledge and agree that such Confidential Information is
extremely valuable to the Company and may constitute trade secret information
under applicable law. In the event that any part of the Confidential Information
becomes generally known to the public through legitimate origins (other than by
the breach of this Agreement by Manager or by other misappropriation of the
Confidential Information), that part of the Confidential Information shall no
longer be deemed Confidential Information for the purposes of this Agreement,
but Manager shall continue to be bound by the terms of this Agreement as to all
other Confidential Information.
5.03 Delivery Upon Termination. Upon termination of Manager's
employment with the Company for any reason, Manager shall promptly deliver to
the Company all correspondence, files, manuals, letters, notes, notebooks,
reports, programs, plans, proposals, financial documents, and any other
documents or data concerning the Company's or any affiliate's customers,
database, business plan, marketing strategies, processes or other materials
which contain Confidential Information, together with all other property of the
Company or any affiliate in Manager's possession, custody or control.
ARTICLE SIX
NON-COMPETE AND NON-SOLICITATION COVENANTS
6.01 Covenant Not to Compete. During the term of this Agreement and for
a period of one year following the later of (i) the termination of Manager's
employment for any reason or (ii) the last day of the term of the Agreement,
Manager shall not, on behalf of himself or on behalf of another person,
corporation, partnership, trust or other entity, within the counties of Coles,
Moultrie, Douglas, Cumberland, Effingham, Champaign, Christian, Madison, Macon,
Bond or Piatt, Illinois, or any other county in which the Company or any
affiliate conducts business:
(a) Directly or indirectly own, manage, operate, control, participate
in the ownership, management, operation or control of, be
connected with or have any financial interest in, or serve as an
officer, employee, advisor, consultant, agent or otherwise to any
person, firm, partnership, corporation, trust or other entity
which owns or operates a business similar to that of the Company
or its affiliates.
(b) Solicit for sale, represent, and/or sell Competing Products to
any person or entity who or which was the Company's customer or
client during the last year of Manager's employment. "Competing
Products," for purposes of this Agreement, means products or
services which are similar to, compete with, or can be used for
the same purposes as products or services sold or offered for
sale by the Company or any affiliate or which were in development
by the Company or any affiliate within the last year of Manager's
employment.
6.02 Covenant Not to Solicit. For a period of one year following the
later of (i) the termination of Manager's employment for any reason or (ii)
the last day of the term of this Agreement, Manager shall not:
(a) Attempt in any manner to solicit from any client or customer
business of the type performed by the Company or any affiliate or
persuade any client or customer of the Company or any affiliate
to cease to do such business or to reduce the amount of such
business which any such client or customer has customarily done
or contemplates doing with the Company or any affiliate, whether
or not the relationship between the Company or affiliate and such
client or customer was originally established in whole or in part
through Manager's efforts.
(b) Render any services of the type rendered by the Company or any
affiliate for any client or customer of the Company.
(c) Solicit or encourage, or assist any other person to solicit or
encourage, any employees, agents or representatives of the
Company or an affiliate to terminate or alter their relationship
with the Company or any affiliate.
(d) Do or cause to be done, directly or indirectly, any acts which
may impair the relationship between the Company or any affiliate
with their respective clients, customers or employees.
ARTICLE SEVEN
REMEDIES
Manager acknowledges that compliance with the provisions of Articles
Five and Six herein is necessary to protect the business, goodwill and
proprietary information of the Company and that a breach of these covenants will
irreparably and continually damage the Company for which money damages may be
inadequate. Consequently, Manager agrees that, in the event that he breaches or
threatens to breach any of these provisions, the Company shall be entitled to
both (a) a temporary, preliminary or permanent injunction in order to prevent
the continuation of such harm; and (b) money damages insofar as they can be
determined. In addition, the Company will cease payment of all compensation and
benefits under Articles Three and Four hereof. In the event that any of the
provisions, covenants, warranties or agreements in this Agreement are held to be
in any respect an unreasonable restriction upon Manager or are otherwise
invalid, for whatsoever cause, then the court so holding shall reduce, and is so
authorized to reduce, the territory to which it pertains and/or the period of
time in which it operates, or the scope of activity to which it pertains or
effect any other change to the extent necessary to render any of the
restrictions of this Agreement enforceable.
ARTICLE EIGHT
MISCELLANEOUS
8.01 Successors and Assignability.
(a) No rights or obligations of the Company under this Agreement may
be assigned or transferred except that the Company will require
any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to expressly assume and
agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if
no such succession had taken place.
(b) No rights or obligations of Manager under this Agreement may be
assigned or transferred by Manager other than his rights to
payments or benefits hereunder which may be transferred only by
will or the laws of descent and distribution.
8.02 Entire Agreement. This Agreement contains the entire agreement
between the parties with respect to the subject matter hereof and may not be
modified except in writing by the parties hereto. Furthermore, the parties
hereto specifically agree that all prior agreements, whether written or oral,
relating to Manager's employment by the Company shall be of no further force or
effect from and after the date hereof.
8.03 Severability. If any phrase, clause or provision of this Agreement
is deemed invalid or unenforceable, such phrase, clause or provision shall be
deemed severed from this Agreement, but will not affect any other provisions of
this Agreement, which shall otherwise remain in full force and effect. If any
restriction or limitation in this Agreement is deemed to be unreasonable,
onerous or unduly restrictive, it shall not be stricken in its entirety and held
totally void and unenforceable, but shall be deemed rewritten and shall remain
effective to the maximum extent permissible within reasonable bounds.
8.04 Controlling Law and Jurisdiction. This Agreement shall be governed
by and interpreted and construed according to the laws of the State of Illinois.
The parties hereby consent to the jurisdiction of the state and federal courts
in the State of Illinois in the event that any disputes arise under this
Agreement.
8.05 Notices. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed to have been duly
given (a) on the date of service if served personally on the party to whom
notice is to be given; (b) on the day after delivery to an overnight courier
service; (c) on the day of transmission if sent via facsimile to the facsimile
number given below; or (d) on the third day after mailing, if mailed to the
party to whom notice is to be given, by first class mail, registered or
certified, postage prepaid and properly addressed, to the party as follows:
If to Manager: ________________
________________
If to the Company: First Mid-Illinois Bancshares, Inc.
1515 Charleston Avenue
Mattoon, Illinois 61938
Facsimile: 217-234-0485
Attention: Chairman and Chief Executive Officer
Any party may change its address for the purpose of this Section by
giving the other party written notice of its new address in the manner set forth
above.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
FIRST MID-ILLINOIS BANCSHARES, INC.
By: /s/ William S. Rowland
William S. Rowland
Title: Chairman of the Board
MANAGER: /s/
Exhibit 11.1
Computation of Earnings Per Share
The Company follows Financial Accounting Standards Board's Statement
No. 128, "Earnings Per Share" ("SFAS 128") in which income for Basic Earnings
per Share ("EPS") is adjusted for dividends attributable to preferred stock and
is based on the weighted average number of common shares outstanding. Diluted
EPS is computed by using the weighted average number of common shares
outstanding, increased by the assumed conversion of the convertible preferred
stock and the assumed conversion of the stock options.
The components of basic and diluted earnings per common share for the
years ended December 31, 2002, 2001, and 2000 are as follows:
2002 2001 2000
----------- ----------- -----------
Basic Earnings per Share:
Net income available to common stockholders $8,034,000 $6,516,000 $5,660,000
=========== =========== ===========
Weighted average common shares outstanding 3,357,571 3,378,019 3,386,111
=========== =========== ===========
Basic earnings per common share $2.39 $1.93 $1.67
=========== =========== ===========
Diluted Earnings per Share:
Net income available to common stockholders $8,034,000 $6,516,000 $5,660,000
=========== =========== ===========
Weighted average common shares outstanding 3,357,571 3,378,019 3,386,111
Assumed conversion of stock options 24,166 11,195 7,918
Diluted weighted average common
shares outstanding 3,381,737 3,389,214 3,394,029
=========== =========== ===========
Diluted earnings per common share $2.38 $1.92 $1.67
=========== =========== ===========
Exhibit 21.1
Subsidiaries of the Company
First Mid-Illinois Bank & Trust, N.A. (a national banking association)
Mid-Illinois Data Services, Inc. (a Delaware corporation)
First Mid-Illinois Insurance Services, Inc. (an Illinois corporation; 100% owned
by First Mid Bank)
The Checkley Agency, Inc. (an Illinois corporation)
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 28, 2003, relating to the consolidated balance sheets of First
Mid-Illinois Bancshares, Inc. and subsidiaries as of December 31, 2002 and 2001,
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, 2002, which report appears in the December 31, 2002 annual report
on Form 10-K of First Mid-Illinois Bancshares, Inc.
Our report refers to a change in the method of accounting for goodwill
in 2002.
Chicago, Illinois
March 25, 2003
Exhibit 99.1
Certification pursuant to
18 U.S.C. section 1350,
as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of First Mid-Illinois Bancshares, Inc. (the
"Company") on Form 10-K for the period ending December 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
William S. Rowland, President and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
Date: March 25, 2003 /s/ William S. Rowland
William S. Rowland
President and Chief Executive Officer
Exhibit 99.2
Certification pursuant to
18 U.S.C. section 1350,
as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of First Mid-Illinois Bancshares, Inc. (the
"Company") on Form 10-K for the period ending December 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Michael L. Taylor, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
Date: March 25, 2003 /s/ Michael L. Taylor
Michael L. Taylor
Chief Financial Officer