UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
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 if the Company is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ] Yes [X ] No
Indicate by check mark if the Company is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act. [ ] Yes [X] No
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X ]
Indicate by check mark whether the Company is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer[ ] Accelerated filer[X] Non-accelerated filer[ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). [ ] Yes [X] No
The aggregate market value of the outstanding common stock, other than shares
held by persons who may be deemed affiliates of the Company, as of the last
business day of the Company's most recently completed second fiscal quarter was
approximately $106,508,000. Determination of stock ownership by non-affiliates
was made solely for the purpose of responding to this requirement and the
Company is not bound by this determination for any other purpose.
As of March 8, 2006, 4,367,941 shares of the Company's common stock, $4.00 par
value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Into Form 10-K Part:
Portions of the Proxy Statement for 2006 Annual
Meeting of Shareholders to be held on May 24, 2006 III
First Mid-Illinois Bancshares, Inc.
Form 10-K Table of Contents
Page
Part I
Item 1 Business 3
Item 1A Risk Factors 10
Item 1B Unresolved Staff Comments 11
Item 2 Properties 11
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Part II
Item 5 Market for Company's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 14
Item 6 Selected Financial Data 16
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 7A Quantitative and Qualitative Disclosures About Market Risk 37
Item 8 Financial Statements and Supplementary Data 39
Item 9 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 64
Item 9A Controls and Procedures 64
Item 9B Other Information 66
Part III
Item 10 Directors and Executive Officers of the Company 66
Item 11 Executive Compensation 66
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 66
Item 13 Certain Relationships and Related Transactions 67
Item 14 Principal Accountant Fees and Services 67
Part IV
Item 15 Exhibit and Financial Statement Schedules 68
Signatures 69
Exhibit Index 70
PART I
ITEM 1. BUSINESS
Company and Subsidiaries
First Mid-Illinois Bancshares, Inc. (the "Company") is a financial holding
company. The Company is engaged in the business of banking through its wholly
owned subsidiary, First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank"). The
Company provides data processing services to affiliates through another wholly
owned subsidiary, Mid-Illinois Data Services, Inc. ("MIDS"). The Company offers
insurance products and services to customers through its wholly owned
subsidiary, The Checkley Agency, Inc. ("Checkley"). The Company also wholly owns
a statutory business trust, First Mid-Illinois Statutory Trust I (the "Trust"),
an unconsolidated subsidiary of the Company.
The Company, a Delaware corporation, was incorporated on September 8, 1981, and
pursuant to the approval of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") became the holding company owning all of the
outstanding stock of First National Bank, Mattoon ("First National") on June 1,
1982. The Company acquired all of the outstanding stock of a number of community
banks on the following dates:
* Mattoon Bank, Mattoon ("Mattoon Bank") on April 2, 1984
* State Bank of Sullivan ("Sullivan Bank") on April 1, 1985
* Cumberland County National Bank in Neoga ("Cumberland County") on
December 31, 1985
* First National Bank and Trust Company of Douglas County ("Douglas
County") on December 31, 1986
* Charleston Community Bank ("Charleston Bank")on December 30, 1987.
In April 1989, a purchase and assumption agreement was executed between First
National and Mattoon Bank whereby First National purchased substantially all of
the assets and assumed all of the liabilities of Mattoon Bank. On May 31, 1992,
the Company merged Sullivan Bank, Cumberland County, Douglas County and
Charleston Bank into First National. First National changed its name at that
time to First Mid-Illinois Bank & Trust, N.A.
On July 1, 1992, the Company acquired and re-capitalized Heartland Federal
Savings and Loan Association ("Heartland"), a $125 million thrift headquartered
in Mattoon with offices in Charleston, Sullivan and Urbana, Illinois. Under the
terms of the acquisition, Heartland converted from the mutual form of
organization into a federally chartered, stock savings association and became a
wholly owned subsidiary of the Company. In connection with the Heartland
acquisition, $3.1 million of Series A perpetual, cumulative, non-voting,
convertible, preferred stock was issued to directors and certain senior officers
of the Company in a private placement.
On October 4, 1994, First Mid Bank acquired all of the outstanding stock of
Downstate Bancshares, Inc. ("DBI"), which owned all of the stock of Downstate
National Bank ("DNB"). DNB operated branch locations in Altamont and Effingham,
Illinois. Immediately following the acquisition, DBI was dissolved and DNB was
merged with and into First Mid Bank with First Mid Bank being the surviving
entity.
In December 1994, Heartland (formerly known as Heartland Federal Savings and
Loan Association) converted from a federally chartered stock savings association
to a state-chartered savings bank and changed its name to Heartland Savings
Bank.
On March 7, 1997, First Mid Bank acquired the Charleston, Illinois branch
location and the customer base of First of America Bank. This cash acquisition
added approximately $28 million to total deposits, $.5 million to loans, $1.3
million to premises and equipment and $3.8 million to intangible assets.
In November 1997, Heartland merged with and into First Mid Bank with First Mid
Bank being the surviving entity.
On May 7, 1999, the Company acquired the Monticello, Taylorville and DeLand
branch offices and deposit base of Bank One Illinois, N.A. This cash acquisition
added approximately $64 million to total deposits, $10 million to loans, $1.7
million to premises and equipment and $6.5 million to intangible assets. This
acquisition was accounted for using the purchase method of accounting whereby
the acquired assets and deposits of the branches were recorded at their fair
values as of the acquisition date.
On April 17, 2000, the Company opened a de novo branch in Decatur, Illinois.
On September 5, 2000, the Company opened a banking center in the Student Union
of Eastern Illinois University in Charleston, Illinois.
On April 20, 2001, First Mid Bank acquired all of the outstanding stock of
American Bank of Illinois in Highland ("American Bank") and merged American Bank
with and into First Mid Bank with First Mid Bank being the surviving entity.
On January 29, 2002, the Company acquired all of the outstanding stock of
Checkley, an insurance agency located in Mattoon.
On November 13, 2002, the Company opened a de novo branch in Champaign,
Illinois.
On November 15, 2002, the Company opened a de novo branch in Maryville,
Illinois.
On April 1, 2005, the Company opened a de novo branch in Highland, Illinois.
Employees
The Company, MIDS, Checkley and First Mid Bank, collectively, employed 318
people on a full-time equivalent basis as of December 31, 2005. 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.
Description of Business
The Company has chosen to operate in three primary lines of business--community
banking and wealth management through First Mid Bank and insurance brokerage
through Checkley. Of these, the community banking line contributes in excess of
90% of the Company's total revenues and profits. Within the community banking
line, the Company serves commercial, retail and agricultural customers with a
broad array of deposit and loan related products. The wealth management line
provides estate planning, investment and farm management services for
individuals and employee benefit services for business enterprises. The
insurance brokerage line provides a full range of commercial lines insurance to
businesses as well as homeowner, automobile and other types of personal lines
insurance to individuals.
All three lines emphasize a "hands on" approach to service so that products and
services can be tailored to fit the specific needs of existing and potential
customers. Management believes that by emphasizing this personalized approach,
the Company can, to a degree, diminish the trend towards homogeneous financial
services, thereby differentiating the Company from competitors and allowing for
slightly higher operating margins in each of the three lines.
Business Strategies
Strategy for Growth
The Company believes that growth of its revenue stream and of its customer base
is vital to the goal of increasing the value of its shareholder's investment.
Management attempts to grow in three primary ways:
o by organic growth through adding new customers and selling more products and
services to existing customers; o by acquisitions; and o by entering new markets
with de novo branches.
Virtually all of the Company's customer-contact personnel, in each of its
business lines, are engaged in organic growth efforts to one degree or another.
These personnel are trained to engage in needs-based selling whereby they make
an attempt to match its products and services with the particular financial
needs of individual customers and prospective customers. All senior officers of
the organization are required to attend monthly sales meetings where they report
on their business development efforts and results. Executive management uses
these meetings as educational and risk management opportunity as well.
Cross-selling opportunities are encouraged between the business lines.
Within the community banking line, the Company has focused on growing business
operating and real estate loans. Total commercial real estate loans have
increased from $125 million at December 31, 2000 to $283 million at December 31,
2005. Approximately 68% of the Company's total revenues are derived from lending
activities. The Company has also focused on growing the commercial and retail
deposit base through growth in checking, money markets and customer repurchase
agreement balances. The wealth management line has focused its growth efforts on
estate planning, investment and farm management services for individuals and
employee benefit services for businesses. The insurance brokerage line has
focused on increasing property and casualty insurance for businesses and
personal lines insurance to individuals.
Growth through a series of small acquisitions has been an integral part of the
Company's strategy for an extended period of time. When reviewing acquisition
possibilities, the Company focuses on those organizations where there is a
cultural fit with its existing operations and where there is a strong likelihood
of adding to shareholder value. As the stock of the Company has not had
widespread marketability to outside investors, most past acquisitions have been
cash-based transactions. While the Company expects to continue this trend in the
future, it would certainly consider a stock-based acquisition if the strategic
and financial metrics were compelling. The emphasis on smaller acquisitions is
due to the inherent risks accompanying acquisitions and the previously mentioned
preference for cash financing rather than use of the Company's common stock.
The Company supplements its organic growth and growth through acquisitions with
de novo branches in new market areas where there is a potential for economic
progress or there is a distinct competitive advantage. The Company expects to
continue this approach in the future.
This overall growth strategy is designed to grow the customer base without
significantly increasing the shareholder base. This requires a certain amount of
financial leverage and the Company monitors its capital base carefully to
satisfy all regulatory requirements while maintaining flexibility. The Company
has maintained a Dividend Reinvestment Plan as well as various forms of equity
compensation for directors and key managers. It has also maintained an ongoing
share buy back program both as a service to shareholders and a means of
maintaining optimal levels of capital. The Company uses various forms of
long-term debt to augment its capital when appropriate.
Strategy for Operations and Risk Management
Operationally, the Company centralizes as many administrative and clerical tasks
as possible within its home office location in Mattoon, Illinois. This allows
branches to maintain customer focus, ensures compliance with banking
regulations, keeps fixed administrative costs at as low a level as is
practicable and better manages the various forms of risk inherent in this
business. This approach also allows for the best possible use of technology in
day-to-day banking activities thereby reducing the potential for human error.
While the Company does not employ every new technology that is introduced, it
does attempt to be near the leading edge with respect to operational technology.
The Company has a comprehensive set of operational policies and procedures that
have been developed over time to address risk. These policies are intended to be
as close as possible to "best practices" of the financial services industry and
are subjected to continual review by management and the Board of Directors. The
Company's internal audit function incorporates procedures to determine
compliance with these policies.
In the business of banking, credit risk is the single most important risk as
losses from uncollectible loans can significantly diminish capital, earnings and
shareholder value. In order to address this risk, the lending function of First
Mid Bank receives significant attention from executive management and the Board
of Directors. An important element of credit risk management is the quality,
experience and training of the loan officers of First Mid Bank. The Company has
invested, and will continue to invest, significant resources to ensure the
quality, experience and training of First Mid Bank's loan officers in order to
keep credit losses at a minimum. In addition to the human element of credit risk
management, the Company's loan policies address the additional aspects of credit
risk. All lending personnel have signature authority that allows them to lend up
to a certain amount based on their own judgment as to the creditworthiness of a
borrower. The amount of the signature authority is based on the lending
officers' experience and training. The Senior Loan Committee, consisting of the
most experienced lenders within the organization, must approve all underwriting
decisions in excess of $1.5 million. The Board of Directors must approve all
underwriting decisions in excess of $2 million.
While the underlying nature of lending will result in some amount of loan
losses, First Mid Bank's loan loss experience has been good with average net
charge offs amounting to $649,000 (.11% of average loans) over the past five
years. Nonperforming loans were $3,458,000 (.54% of total loans) at December 31,
2005. Both of these percentages compare well with peer financial institutions.
Interest rate and liquidity risk are two other forms of risk embedded in the
business of financial intermediation. The Company's Asset Liability Management
Committee, consisting of experienced individuals who monitor all aspects of
interest rates and maturities of interest earning assets and interest paying
liabilities, manages these risks. The underlying objectives of interest rate and
liquidity risk management are to shelter the Company's net interest margin from
changes in interest rates while maintaining adequate liquidity reserves to meet
unanticipated funding demands. The Company uses financial modeling technology as
a tool, employing a variety of "what if" scenarios to properly plan its
activities. Despite the tools and methods used to monitor this risk, a sustained
unfavorable interest rate environment will lead to some amount of compression in
the net interest margin. During 2005, the Company's net interest margin declined
to 3.70% from 3.75% in 2004. This was the result of intense competition for
loans and deposits as well as a flat yield curve. A flat yield curve generally
compresses a bank's margin as short term rates typically have the most impact on
funding costs whereas longer-term rates have the greatest impact on loan
pricing. As this interest rate environment is expected to continue into 2006, it
is likely that our net interest margin will continue to experience some
compression.
Markets and Competition
The Company actively competes in all areas in which First Mid Bank presently
does business. First Mid Bank competes for commercial and individual deposits,
loans, and trust business with many east central Illinois banks, savings and
loan associations, and credit unions. The principal methods of competition in
the banking and financial services industry are quality of services to
customers, ease of access to facilities, and pricing of services, including
interest rates paid on deposits, interest rates charged on loans, and fees
charged for fiduciary and other banking services.
First Mid Bank operates facilities in the Illinois counties of Bond, Champaign,
Christian, Coles, Cumberland, Douglas, Effingham, Macon, Madison, Moultrie, and
Piatt. Each facility primarily serves the community in which it is located.
First Mid Bank serves seventeen different communities with twenty-four separate
locations in the towns of Altamont, Arcola, Champaign, Charleston, Decatur,
DeLand, Effingham, Highland, Maryville, Mattoon, Monticello, Neoga, Pocahontas,
Sullivan, Taylorville, Tuscola, and Urbana, Illinois. Within the areas of
service, there are numerous competing financial institutions and financial
services companies.
Website
The Company maintains a website at www.firstmid.com. All periodic and current
reports of the Company and amendments to these reports filed with the Securities
and Exchange Commission ("SEC") can be accessed, free of charge, through this
website as soon as reasonably practicable after these materials are filed with
the SEC.
SUPERVISION AND REGULATION
General
Financial institutions, financial services companies, and their holding
companies are extensively regulated under federal and state law. As a result,
the growth and earnings performance of the Company can be affected not only by
management decisions and general economic conditions, but also by the
requirements of applicable state and federal statutes and regulations and the
policies of various governmental regulatory authorities including, but not
limited to, the Office of the Comptroller of the Currency (the "OCC"), the
Federal Reserve Board, the Federal Deposit Insurance Corporation (the "FDIC"),
the Internal Revenue Service and state taxing authorities. Any change in
applicable laws, regulations or regulatory policies may have material effect on
the business, operations and prospects of the Company and First Mid Bank. The
Company is unable to predict the nature or extent of the effects that fiscal or
monetary policies, economic controls or new federal or state legislation may
have on its business and earnings in the future.
Federal and state laws and regulations generally applicable to financial
institutions and financial services companies, such as the Company and its
subsidiaries, regulate, among other things, the scope of business, investments,
reserves against deposits, capital levels relative to operations, the nature and
amount of collateral for loans, the establishment of branches, mergers,
consolidations and dividends. The system of supervision and regulation
applicable to the Company and its subsidiaries establishes a comprehensive
framework for their respective operations and is intended primarily for the
protection of the FDIC's deposit insurance funds and the depositors, rather than
the stockholders, of financial institutions.
The following references to material statutes and regulations affecting the
Company and its subsidiaries are brief summaries thereof and do not purport to
be complete, and are qualified in their entirety by reference to such statutes
and regulations. Any change in applicable law or regulations may have a material
effect on the business of the Company and its subsidiaries.
Financial Modernization Legislation
On November 12, 1999, the President signed into law the Gramm-Leach-Bliley Act
(the "GLB Act"). The GLB Act significantly changes financial services regulation
by expanding permissible non-banking activities of bank holding companies and
removing certain barriers to affiliations among banks, insurance companies,
securities firms and other financial services entities. These activities and
affiliations can be structured through a holding company structure or, in the
case of many of the activities, through a financial subsidiary of a bank. The
GLB Act also establishes a system of federal and state regulation based on
functional regulation, meaning that primary regulatory oversight for a
particular activity generally resides with the federal or state regulator having
the greatest expertise in the area. Banking is supervised by banking regulators,
insurance by state insurance regulators and securities activities by the SEC and
state securities regulators. In addition, the GLB Act establishes a minimum
federal standard of financial privacy by, among other provisions, requiring
banks to adopt and disclose privacy policies with respect to consumer
information and setting forth certain rules with respect to consumer information
and setting forth certain rules with respect to the disclosure to third parties
of consumer information. The GLB Act also requires the disclosure of agreements
reached with community groups that relate to the Community Reinvestment Act, and
contains various other provisions designed to improve the delivery of financial
services to consumers while maintaining an appropriate level of safety in the
financial services industry.
The GLB Act repeals the anti-affiliation provisions of the Glass-Steagall Act
and revises the Bank Holding Company Act of 1956 (the "BHCA") to permit
qualifying holding companies, called "financial holding companies," to engage
in, or to affiliate with companies engaged in, a full range of financial
activities, including banking, insurance activities (including insurance
portfolio investing), securities activities, merchant banking and additional
activities that are "financial in nature," incidental to financial activities
or, in certain circumstances, complementary to financial activities. A bank
holding company's subsidiary banks must be "well-capitalized" and "well-managed"
and have at least a "satisfactory" Community Reinvestment Act rating for the
bank holding company to elect status as a financial holding company.
A significant component of the GLB Act's focus on functional regulation relates
to the application of federal securities laws and SEC oversight of some bank
securities activities previously exempt from broker-dealer registration. Among
other things, the GLB Act amends the definitions of "broker" and "dealer" under
the Securities Exchange Act of 1934 to remove the blanket exemption for banks.
Banks now may conduct securities activities without broker-dealer registration
only if the activities fall within a set of activity-based exemptions designed
to allow banks to conduct only those activities traditionally considered to be
primarily banking or trust activities. Securities activities outside these
exemptions, as a practical matter, need to be conducted by registered
broker-dealer affiliate. The SEC issued interim final rules to define certain
terms in, and grant additional exemptions from, the provisions of the GLB Act in
May 2001. By several orders, the SEC extended the blanket exemption for banks
from the definition of "broker" and "dealer" while it has considered amendments
to the interim final rules. On February 13, 2003, the SEC adopted amendments to
its rules relating to the "dealer" exemption for banks, and banks have been
required to comply with those rules since September 30, 2003. On June 17, 2004,
the SEC proposed new rules and exemptions relating to bank brokerage activities
as Regulation B, which would replace the interim final rules. Regulation B has
not yet been adopted, and the SEC has extended the blanket exemption for banks
from the definition of "broker" until September 30, 2006. The SEC also indicated
that it may extend this exemption after the adoption of final rules to give
banks additional time to comply with the rules. 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 that has elected to
become a financial holding company under the 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 or 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.
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, 2005, the Company had regulatory capital, calculated on a
consolidated basis, in excess of the Federal Reserve Board's minimum
requirements, and its capital ratios exceeded those required for categorization
as well-capitalized under the capital adequacy guidelines established by bank
regulatory agencies with a total risk-based capital ratio of 11.87%, a Tier 1
risk-based ratio of 11.14% and a leverage ratio of 8.55%.
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, 2005, FDIC assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 2006, 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 2006,
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 2006 debt service assessment was .0132%.
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, 2005, First Mid Bank
paid supervisory fees to the OCC totaling $185,000.
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, 2005, First Mid Bank was not required by the
OCC to increase its capital to an amount in excess of the minimum regulatory
requirements, and its capital ratios exceeded those required for categorization
as well-capitalized under the capital adequacy guidelines established by bank
regulatory agencies with a total risk-based capital ratio of 11.66%, a Tier 1
risk-based ratio of 10.92% and a leverage ratio of 8.36%.
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, 2005. As of December 31, 2005, approximately $11.9 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 OCC determines
that such payment would constitute an unsafe or unsound practice.
Affiliate and Insider Transactions. First Mid Bank is subject to certain
restrictions under federal law, including Regulation W, on extensions of credit
to the Company and its subsidiaries, on investments in the stock or other
securities of the Company and its subsidiaries and the acceptance of the stock
or other securities of the Company or its subsidiaries as collateral for loans.
Certain limitations and reporting requirements are also placed on extensions of
credit by First Mid Bank to its directors and officers, to directors and
officers of the Company and its subsidiaries, to principal stockholders of the
Company, and to "related interests" of such directors, officers and principal
stockholders.
First Mid Bank is subject to restrictions under federal law that limits certain
transactions with the Company, including loans, other extensions of credit,
investments or asset purchases. Such transactions by a banking subsidiary with
any one affiliate are limited in amount to 10 percent of the bank's capital and
surplus and, with all affiliates together, to an aggregate of 20 percent of the
bank's capital and surplus. Furthermore, such loans and extensions of credit, as
well as certain other transactions, are required to be secured in specified
amounts. These and certain other transactions, including any payment of money to
the Company, must be on terms and conditions that are or in good faith would be
offered to nonaffiliated companies.
In addition, federal law and regulations may affect the terms upon which any
person becoming a director or officer of the Company or one of its subsidiaries
or a principal stockholder of the Company may obtain credit from banks with
which First Mid Bank maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines that establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings. In general, the guidelines prescribe the goals to be achieved in each
area, and each institution is responsible for establishing its own procedures to
achieve those goals. If an institution fails to comply with any of the standards
set forth in the guidelines, the institution's primary federal regulator may
require the institution to submit a plan for achieving and maintaining
compliance. The preamble to the guidelines states that the agencies expect to
require a compliance plan from an institution whose failure to meet one or more
of the guidelines are of such severity that it could threaten the safety and
soundness of the institution. Failure to submit an acceptable plan, or failure
to comply with a plan that has been accepted by the appropriate federal
regulator, would constitute grounds for further enforcement action.
Supplemental Item - Executive Officers of the Company
The executive officers of the Company are elected annually by the Company's
board of directors and are identified below.
Name (Age) Position With Company
- ------------------------------------------------------------------------------
William S. Rowland (59) Chairman of the Board of Directors, President and
Chief Executive Officer
Michael L. Taylor (37) Vice President and Chief Financial Officer
John W. Hedges (58) President, First Mid Bank
Laurel G. Allenbaugh (46) Vice President
Christie L. Wright (49) Vice President, Secretary/Treasurer
Stanley E. Gilliland (61) Vice President
Robert J. Swift, Jr. (54) Vice President
Kelly A. Downs (38) Vice President
William S. Rowland, age 59, 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 37, 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 58, 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 46, has been Vice President of Operations since
February 2000. She served as Controller of the Company and First Mid Bank from
1990 to February 2000 and has been President of MIDS since 1998.
Christie L. Wright, age 49, has been Vice President of Investments since 1995
and Secretary and Treasurer since 1998.
Stanley E. Gilliland, age 61, 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 54, has been Vice President of the Trust and Financial
Services Department of the Company since August 2000. He was with Central Trust
Bank in Jefferson City, Missouri from 1989 to 2000.
Kelly A. Downs, age 38, has been Vice President of Human Resources since 2001,
and has been with the Company since 1991.
ITEM 1A. RISK FACTORS
Various risks and uncertainties, some of which are difficult to predict and
beyond the Company's control, could negatively impact the Company. As a
financial institution, the Company is exposed to interest rate risk, liquidity
risk, credit risk, operational risk, risks from economic or market conditions,
and general business risks among others. Adverse experience with these or other
risks could have a material impact on the Company's financial condition and
results of operations, as well as the value of its common stock.
Interest rate risk. Interest rate risk is the risk that changes in market rates
and prices will adversely affect the Company's financial condition or results of
operations. The Company's net interest income, its largest source of revenue, is
highly dependent on achieving a positive spread between the interest earned on
loans and investments and the interest paid on deposits and borrowings. Changes
in interest rates could negatively impact the Company's ability to attract
deposits, make loans, and achieve a positive spread resulting in compression of
the net interest margin. The Company's management and its Board of Directors
have adopted policies that are designed to limit exposure to changing interest
rates. In addition, the Company's Asset Liability Management Committee monitors
compliance with these policies and monitors the sensitivity of net interest
income to changes in interest rates through measures such as financial modeling.
Liquidity risk. Liquidity risk is the risk that the Company will have
insufficient cash or access to cash to satisfy current and future financial
obligations, including demands for loans and deposit withdrawals, funding
operating costs, and for other corporate purposes. Liquidity risk arises
whenever the maturities of financial instruments included in assets and
liabilities differ. The Company's management and its Board of Directors have
adopted policies that are designed to measure and manage liquidity risk. In
addition, the Company's Asset Liability Management Committee monitors compliance
with these policies and manages liquidity risk through review of balance sheet
activity and projection of liquidity needs. The Company has various liquidity
sources as described under "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity" herein.
Credit risk. Credit risk is the risk that loan customers or other
counter-parties will be unable to perform their contractual obligations
resulting in a negative impact on the Company's earnings. Overall economic
conditions affecting businesses and consumers could impact the Company's credit
losses. In addition, real estate valuations could also impact the Company's
credit losses as the Company maintains $450 million in loans secured by
commercial, agricultural, and residential real estate. A significant decline in
real estate values could have a negative effect on the Company's financial
condition and results of operations. In addition, the Company's total loan
balances by industry exceeded 25% of total risk-based capital for each of five
industries as of December 31, 2005. A listing of these industries is contained
in under "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Loans" herein. A significant change in one of these
industries such as a significant decline in agricultural crop prices could
impact the Company's credit losses. The Company devotes significant resources
and attention to managing credit risk starting with the experience and training
of loan officers. The Company has adopted underwriting policies and procedures
through its loan policy that specify lending authority. The Company's Senior
Loan Committee, made up of the most experienced lenders within the organization,
approve all underwriting decisions in excess of $1.5 million and the Board of
Directors approves all underwriting decisions in excess of $2 million. The
Company's loan review area evaluates and monitors loans on a periodic basis.
Operational risk. Operational risk is the risk of loss resulting from human
error, inadequate or failed internal processes and systems, and external events.
Operational risk includes compliance or legal risk, which is the risk of loss
from violations of, or noncompliance with, laws, rules, regulations, prescribed
practices, or ethical standards. Operational risk also encompasses transaction
risk, which includes losses from fraud, error, the inability to deliver products
or services, and loss or theft of information. Losses resulting from operational
risk could take the form of explicit charges, increased operational costs, harm
to our reputation or forgone opportunities. Any of these could potentially have
a material adverse effect on our financial condition and results of operations.
The Company has designed a comprehensive set of internal controls that it
believes are responsive to these risks. The Company's internal audit department
periodically assesses the adequacy and effectiveness of these controls. This
includes determining whether internal controls and information systems are
properly designed and adequately tested and reviewed. Significant issues related
to adequacy of controls are reported to management and the Audit Committee of
the Board of Directors.
Risk of changes in economic or market conditions. The Company's financial
condition and results of operations are sensitive to the general business and
economic conditions in the United States and in its area of operations in
central Illinois. These conditions include short-term and long-term interest
rates, inflation, fluctuations in debt and equity capital markets, agricultural
prices for land and crops, commercial and residential real estate values, and
the strength of the U.S. economy, as well as the local economies in which it
conducts business. An economic downturn within the Company's footprint could
negatively impact household and corporate incomes. This impact may lead to
decreased demand for loan and deposit products and increase the number of
customers who fail to pay interest or principal on their loans. This could have
a negative effect on the Company's financial condition and results of
operations. Changes in economic conditions are generally beyond the Company's
control and difficult to predict.
General business risks. The Company is also exposed to various business risks
that could have a negative effect on the financial performance of the Company.
These risks include: changes in customer behavior, changes in competition, new
litigation or changes to existing litigation, claims and assessments,
environmental liabilities, real or threatened acts of war or terrorist activity,
adverse weather, changes in accounting standards, legislative or regulatory
changes, taxing authority interpretations, and an inability on the Company's
part to retain and attract skilled employees.
In addition to these risks identified by the Company, investments in the
Company's common stock involve risk. The market price of the Company's common
stock may fluctuate significantly in response to a number of factors including:
volatility of stock market prices and volumes, rumors or erroneous information,
changes in market valuations of similar companies, changes in securities
analysts' estimates of financial performance, and variations in quarterly or
annual operating results.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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-up teller stations, and four sit-down teller stations.
Adjacent to this building is a parking lot with parking for approximately
seventy cars. A drive-up facility with nine drive-up lanes and a drive-up
automated teller machine ("ATM") is located across the street from First Mid
Bank's main office.
First Mid Bank has a facility at 333 Broadway Avenue East, Mattoon, Illinois.
The one-story office building contains approximately 7,600 square feet of office
space. The main floor provides space for five teller windows, two private
offices, a safe deposit vault and four drive-up lanes. There is adequate parking
located adjacent to the building. A drive-up ATM is located adjacent to the
building.
First Mid Bank leases a facility at 1504-A Lakeland Boulevard, Mattoon, Illinois
that provides space for three tellers, two drive-up lanes and a drive-up ATM.
First Mid Bank owns a facility located at 1520 Charleston Avenue, Mattoon,
Illinois, which is used as the corporate headquarters of the Company and is used
by MIDS for its data processing and back room operations for the Company and
First Mid Bank. The office building consists of a two-story structure with an
occupied basement that has approximately 20,000 square feet of office space.
The Company owns a facility at 1500 Wabash Avenue, Mattoon, Illinois, which is
used by the loan and deposit services departments of First Mid Bank. The office
building consists of a two-story structure with a basement that has
approximately 11,200 square feet of office space.
There are four additional ATMs located in Mattoon. They are located in the
Administration building of Lake Land College, in the main lobby of Sarah Bush
Lincoln Health Center, at R.R. Donnelley & Sons Co. on North Route 45 and County
Market at 2000 Western Avenue.
Sullivan
First Mid Bank operates two locations in Sullivan, Illinois. The main office is
located at 200 South Hamilton Street, Sullivan, Illinois. Its office building is
a one-story structure containing approximately 11,400 square feet of office
space with five teller windows, six private offices and four drive-up lanes.
Adequate customer parking is available on two sides of the main office building.
The second office is a leased facility at 435 South Hamilton, Sullivan, Illinois
in the IGA. The facility has two teller stations, a vault, an ATM and a night
depository. There is also a walk-up ATM located in the Sullivan Citgo Station at
105 West Jackson.
Neoga
First Mid Bank's office in Neoga, Illinois, is located at 102 East Sixth Street,
Neoga, Illinois. The building consists of a one-story structure containing
approximately 4,000 square feet of office space. The main office building
provides space for four tellers in the lobby of the building, two drive-up
tellers, four private offices, two night depositories, and an ATM. Adequate
customer parking is available on three sides of the main office building. During
1996, an adjacent building with approximately 400 square feet was purchased and
was subsequently donated to the Neoga Food Pantry in 2004.
Tuscola
First Mid Bank operates an office in Tuscola, Illinois, which is located at 410
South Main Street. The all brick building consists of a one-story structure with
approximately 4,000 square feet of office space. This main office building
provides for four lobby tellers, two drive-up tellers, four private offices, a
conference room, four drive-through lanes, including one with a drive-up ATM and
one with a drive-up night depository. Adequate customer parking is available
outside the main entrance.
Charleston
First Mid Bank has three offices in Charleston, Illinois. The main office,
acquired in March 1997, is located at 500 West Lincoln Avenue, Charleston,
Illinois. This one-story facility contains approximately 8,400 square feet with
five teller stations, eight private offices and four drive-up lanes.
A second facility is located at 701 Sixth Street, Charleston, Illinois. It is a
one-story facility with an attached two-bay drive-up structure and consists of
approximately 5,500 square feet of office space. Adequate parking is available
to serve its customers. The office space is comprised of three teller stations,
three private offices, storage area, and a night depository. Approximately 2,200
square feet of this building is rented out to non-affiliated companies.
The third facility consists of approximately 400 square feet of leased space at
the Martin Luther King Student Union on the Eastern Illinois University campus.
The facility has two walk-up teller stations and two sit-down teller/CSR
stations.
Seven ATMs are located in Charleston. One drive-up ATM is located in the parking
lot of the facility at 500 West Lincoln Avenue, one in the parking lot of
Save-A-Lot at 1400 East Lincoln Avenue, and one drive-up ATM is located in the
parking lot of the Sixth Street facility. The fourth is an off-site walk-up ATM
located in the Student Union at Eastern Illinois University and the fifth is a
walk-up ATM located in Lantz Arena at Eastern Illinois University. The sixth ATM
is a drive-up unit located on the Eastern Illinois University campus in a
parking lot at the corner of Ninth Street and Roosevelt and the seventh is a
drive-up unit located on the Eastern Illinois University campus in a parking lot
at the corner of Fourth Street and Roosevelt.
Champaign
First Mid Bank leases a facility at 2229 South Neil Street, Champaign, Illinois.
The office space, comprised of approximately 3,496 square feet, contains six
lobby teller windows, two drive-up lanes, one drive-up ATM, a night depository,
four private offices, and a conference room. Adequate customer parking is
available to serve customers.
Urbana
First Mid Bank owns a facility located at 601 South Vine Street, Urbana,
Illinois. Its office building consists of a one-story structure and contains
approximately 3,600 square feet. The office building provides space for three
tellers, two private offices and two drive-up lanes. An ATM machine is located
in front of the building. An adequate customer parking lot is located on the
south side of the building.
Effingham
First Mid Bank operates a facility at 902 North Keller Drive, Effingham,
Illinois. The building is a two-story structure with approximately 4,000 square
feet of office space. This office space consists of four teller stations, three
drive-up teller lanes, five private offices and a night depository. Adequate
parking is available to customers in front of the facility.
First Mid Bank also owns property at 900 North Keller Drive, Effingham, Illinois
that provides additional customer parking along with a drive-up ATM.
Altamont
First Mid Bank has a banking facility located at 101 West Washington Street,
Altamont, Illinois. This building is a one-story structure that has
approximately 4,300 square feet of office space. The office space consists of
nine teller windows, three drive-up teller lanes (one of which facilitates an
ATM), seven private offices, one conference room and a night depository.
Adequate parking is available on three sides of the building.
Arcola
First Mid Bank leases a facility at 324 South Chestnut Street, Arcola, Illinois.
This building is a one-story structure with approximately 1,140 square feet of
office space. This office space consists of two lobby teller stations, one loan
station, two drive-up teller lanes, one private office and a night depository. A
drive-up ATM lane is available adjacent to the teller lanes. Adequate parking is
available to customers in front of the facility. There are also two additional
ATMs located at the Arcola Citgo Station on Route 133 at Interstate Five and the
Arthur Citgo Station at 209 North Vine.
Monticello
First Mid Bank has two offices in Monticello. The main facility is located on
the northeast corner of the historic town square at 100 West Washington Street.
This building is a two-story structure that has 8,000 square feet of office
space consisting of five teller stations, seven private offices, and a night
depository. The second floor is furnished and the basement is used for storage.
Adequate parking is available to customers in back of the facility.
A second facility is located at 219 West Center Street, Monticello, Illinois. It
is a one-story facility with two lobby teller stations and an attached two-bay
drive-up structure with a drive-up ATM and a night depository. Adequate parking
is available to serve its customers.
DeLand
First Mid Bank has an office at 220 North Highway Avenue, DeLand, Illinois. It
is a one-story structure with one private office, three teller stations and a
night depository. A portion of the space is leased to an outside insurance
agency. Adequate parking is available in front of the building.
Taylorville
First Mid Bank has a banking facility located at 200 North Main Street,
Taylorville, Illinois. This one-story building has approximately 3,700 square
feet with five teller stations, three private offices, one drive-up lane, and a
finished basement. A drive-up ATM is located in the parking lot and adequate
customer parking is available adjacent to the building.
Decatur
First Mid Bank leases a facility at 111 E. Main Street, Decatur, Illinois. The
office space comprised of 4,340 square feet contains three lobby teller windows,
two drive-up lanes, a night depository, three private offices, safe deposit and
loan vaults, and a conference room. Customer parking is available adjacent to
the building.
Highland
First Mid Bank owns a facility located at 12616 State Route 143, Highland,
Illinois. The building is a two-story structure with approximately 6,720 square
feet of office space, a portion of which is leased to an unaffiliated business.
This office space consists of a customer service area and teller windows, three
drive-up teller lanes, an ATM and four private offices. Adequate parking is
available to serve customers.
First Mid Bank leases a facility located at 1301 Broadway, Highland, Illinois.
The office space, comprised of 1300 square feet, contains three lobby teller
windows, two drive-up lanes and one drive-up ATM, a night depository, two
private offices, safe deposit and loan vaults and a conference room. Adequate
parking is available to serve customers.
Pocahontas
First Mid Bank owns a facility located at 103 Park Street, Pocahontas, Illinois.
The building is a one-story brick structure with approximately 3,360 square feet
of office space. This office space consists of a customer processing room, three
private offices and three bank vaults. Adequate parking is available to serve
customers.
Maryville
First Mid leases a facility at 2930 North Center Street, Maryville, Illinois.
The office space, comprised of approximately 6,684 square feet, contains four
lobby teller windows, including one sit-down teller, two drive-up lanes, one
drive-up ATM, a night depository, three private offices, a vault, and a
conference room. Adequate customer parking is available to serve customers.
Checkley
Mattoon
Checkley leases a facility located at 100 Lerna South, Mattoon, Illinois. The
office space, comprised of approximately 8,829 square feet, contains ten
offices, two conference rooms, a file room and an open work area that can
accommodate nine workstations. Adequate parking is available to serve customers.
ITEM 3. LEGAL PROCEEDINGS
Since First Mid Bank acts as a depository of funds, it is named from time to
time as a defendant in lawsuits (such as garnishment proceedings) involving
claims to the ownership of funds in particular accounts. Management believes
that all such litigation as well as other pending legal proceedings, in which
the Company is involved, constitute ordinary routine litigation incidental to
the business of the Company and that such litigation will not materially
adversely affect the Company's consolidated financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER OF PURCHASES OF EQUITY SECURITIES
The Company's common stock was held by approximately 661 shareholders of record
as of December 31, 2005 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
------------------- ------------- -------------
2005
4th 41 1/2 40 1/4
3rd 42 40 1/9
2nd 40 8/9 40
1st 41 37 3/4
2004
4th 41 36 3/4
3rd 37 32 5/6
2nd 33 2/3 32
1st 33 4/9 31
The following table sets forth the cash dividends per share on the Company's
common stock for the last two years.
Dividend
Date Declared Date Paid Per Share
--------------------------- ------------------- ------------------
12-13-2005 1-09-2006 $.26
4-26-2005 6-15-2005 $.24
12-14-2004 1-07-2005 $.24
4-27-2004 6-18-2004 $.21
On July 16, 2004, the Company effected a three-for-two stock split in the form
of a 50% stock dividend. Par value remained at $4 per share. All share and per
share amounts have been restated for years prior to 2004 to give retroactive
recognition to the stock split.
The Company's shareholders are entitled to receive such dividends as are
declared by the Board of Directors, which considers payment of dividends
semi-annually. The ability of the Company to pay dividends, as well as fund its
operations, is dependent upon receipt of dividends from First Mid Bank.
Regulatory authorities limit the amount of dividends that can be paid by First
Mid Bank without prior approval from such authorities. For further discussion of
First Mid Bank's dividend restrictions, see Note 17 - "Dividend Restrictions"
herein. The Board of Directors of the Company declared cash dividends
semi-annually during the two years ended December 31, 2005.
The following table summarizes share repurchase activity for the fourth quarter
of 2005:
ISSUER PURCHASES OF EQUITY SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------
Period (a) Total (b) Average (c) Total Number of (d) Approximate Dollar
Value of Shares that
Number of Shares Purchased as Part May Yet Be Purchased
Shares Price Paid of Publicly Announced Under the Plans or
Purchased per Share Plans or Programs Programs
- ----------------------------------------- --------------- ------------- -------------------------- ------------------------
October 1, 2005 - October 31, 2005 -- -- -- $5,003,000
November 1, 2005 - November 30, 2005 8,700 $40.37 8,700 $4,652,000
December 1, 2005 - December 31, 2005 4,753 $41.21 4,753 $4,456,000
--------------- ------------- -------------------------- ------------------------
Total 13,453 $40.67 13,453 $4,456,000
=============== ============= ========================== ========================
On August 5, 1998, the Company announced a stock repurchase program of up to 3%
of its common stock. In March 2000, the Board of Directors approved the
repurchase of an additional 5% of the Company's common stock. In September 2001,
the Board of Directors authorized the repurchase of $3 million additional shares
of the authorized common stock and in August 2002, the Board of Directors
authorized the repurchase of $5 million additional shares of the Company's
common stock. In September 2003, the Board of Directors approved the repurchase
of $10 million additional shares of the Company's stock and on April 27, 2004,
the Board approved the repurchase of $5 million additional shares of the
Company's common stock. On August 23, 2005, the Board approved the repurchase of
$5 million additional shares of the Company's common stock, bringing the
aggregate total of purchases authorized on December 31, 2005 to 8% of the
Company's common stock plus $28 million of additional shares.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth a five-year comparison of selected financial data.
(dollars in thousands, except per share data)
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
Summary of Operations
Interest income $44,580 $40,024 $38,938 $41,387 $45,506
Interest expense 15,687 11,644 11,896 14,661 21,590
------------ ------------ ------------ ------------ ------------
Net interest income 28,893 28,380 27,042 26,726 23,916
Provision for loan losses 1,091 588 1,000 1,075 600
Other income 12,518 11,639 12,255 10,394 8,279
Other expense 25,385 25,139 24,530 24,006 22,039
------------ ------------ ------------ ------------ ------------
Income before income taxes 14,935 14,292 13,767 12,039 9,556
Income tax expense 5,128 4,541 4,674 4,005 3,040
------------ ------------ ------------ ------------ ------------
Net income $ 9,807 $ 9,751 $ 9,093 $ 8,034 $ 6,516
============ ============ ============ ============ ============
Per Common Share Data (1)
Basic earnings per share $ 2.22 $ 2.17 $ 1.92 $ 1.60 $ 1.29
Diluted earnings per share 2.16 2.13 1.88 1.58 1.28
Dividends per common share .50 .45 .43 .33 .29
Book value per common share 16.47 15.53 15.02 13.97 12.64
Capital Ratios
Total capital to risk-weighted assets 11.87% 11.71% 10.61% 10.35% 11.23%
Tier 1 capital to risk-weighted assets 11.14% 10.94% 9.83% 9.64% 10.47%
Tier 1 capital to average assets 8.55% 7.99% 7.18% 6.62% 7.34%
Financial Ratios
Net interest margin 3.70% 3.75% 3.75% 3.99% 3.87%
Return on average assets 1.18% 1.20% 1.17% 1.11% .97%
Return on average common equity 13.64% 14.24% 13.11% 11.82% 10.56%
Dividend payout ratio 22.55% 20.92% 22.57% 20.92% 22.28%
Average equity to average assets 8.64% 8.44% 8.94% 9.36% 9.20%
Allowance for loan losses as a percent
of total loans 0.73% 0.77% 0.80% 0.74% 0.79%
Year End Balances
Total assets $850,573 $826,728 $793,981 $776,240 $705,979
Net loans 631,707 590,539 547,647 489,071 463,970
Total deposits 649,069 650,240 614,992 613,452 559,420
Total equity 72,326 69,154 70,595 66,807 63,925
Average Balances
Total assets $832,752 $811,061 $776,072 $727,986 $670,890
Net loans 606,064 568,271 520,962 479,957 450,466
Total deposits 650,116 638,445 611,982 573,670 540,209
Total equity 71,911 68,459 69,349 67,989 61,714
(1) All share and per share data have been restated to reflect the 3-for-2
stock splits effective July 16, 2004 and November 16, 2001.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis is intended to provide a better
understanding of the consolidated financial condition and results of operations
of the Company and its subsidiaries for the years ended December 31, 2005, 2004
and 2003. 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 Item 1A of this Annual Report on Form 10-K captioned "Risk Factors"
and elsewhere in the filing and the Company's other filings with the Securities
and Exchange Commission.
For the Years Ended December 31, 2005, 2004, and 2003
Overview
This overview of management's discussion and analysis highlights selected
information in this document and may not contain all of the information that is
important to you. For a more complete understanding of trends, events,
commitments, uncertainties, liquidity, capital resources, and critical
accounting estimates, you should carefully read this entire document. These have
an impact on the Company's financial condition and results of operations.
Net income was $9.81 million, $9.75 million, and $9.09 million and diluted
earnings per share was $2.16, $2.13, and $1.88 for the years ended December 31,
2005, 2004, and 2003, respectively. The increase in net income was primarily the
result of higher net interest income and greater non-interest income. The
increase in earnings per share was the result of improved net income and a
decrease in the number of shares outstanding due to share repurchases made
through the Company's stock buy-back program. During 2005, the Company acquired
119,813 shares for a total investment of $4,851,000. The following table shows
the Company's annualized performance ratios for the years ended December 31,
2005, 2004 and 2003:
2005 2004 2003
------------- ------------- -------------
Return on average assets 1.18% 1.20% 1.17%
Return on average equity 13.64% 14.24% 13.11%
Average equity to average 8.64% 8.44% 8.94%
assets
Total assets at December 31, 2005, 2004, and 2003 were $850.6 million, $826.7
million, and $794.0 million, respectively. The increase in net assets was
primarily the result of an increase in net loan balances offset by a decrease in
available for sale securities that matured during 2005 and were not replaced.
Net loan balances increased to $631.7 million at December 31, 2005, from $590.5
million and $547.6 million at December 31, 2004 and 2003, respectively. The
increase in 2005 of $41.2 million or 7% was primarily due to an increase in
commercial real estate loans. Total deposit balances decreased to $649.1 million
at December 31, 2005 from $650.2 million at December 31, 2004 and $615.0 million
at December 31, 2003.
Net interest margin, defined as net interest income divided by average
interest-earning assets, was 3.70% for 2005 and 3.75% for 2004 and 2003. The
decrease in net interest margin is attributable to a greater increase in
borrowing and deposit rates compared to the increase in interest-earning asset
rates. This is primarily due to a flattening of the interest rate yield curve
where rates on short-term financial instruments have increased faster than rates
on longer-term instruments.
While the net interest margin declined between 2004 and 2005 and remained flat
between 2003 and 2004, net interest income increased from $27.0 million in 2003
to $28.4 million in 2004 and to $28.9 million in 2005. This increase was the
result of management's business development efforts that led to higher levels of
average interest-earning assets of $721.7 million in 2003, $756.8 million in
2004 and $781.7 million in 2005. This growth offset the factors previously
mentioned which led to margin compression and led to higher levels of net
interest income. The ability of the Company to continue to grow net interest
income is largely dependent on management's ability to succeed in its overall
business development efforts. Management expects these efforts to continue but
will not compromise credit quality and prudent management of the maturities of
interest-earning assets and interest-paying liabilities in order to achieve
growth.
Non-interest income increased to $12.5 million in 2005 compared to $11.6 million
in 2004 and $12.3 million in 2003. The primary reasons for this increase of $.9
million or 7.8% were $373,000 in gains on the sale of securities during 2005 as
market conditions and investment portfolio liquidity were conducive to the sale
compared to $92,000 in gains during 2004 and an increase in income on mortgage
loans originated and sold due to lower long-term interest rates. In addition,
there were increases in trust revenues, insurance commissions and ATM and
bankcard service fees during 2005 compared to 2004.
Non-interest expenses increased 1.2% or $.3 million, to $25.4 million in 2005
compared to $25.1 million in 2004 and $24.5 million in 2003. The primary factor
in the expense increase was an increase in occupancy and equipment expenses due
to increased rent expense for Checkley offices offset by a decrease in
depreciation expense for computer equipment fully depreciated in 2004 and
increases in accounting and legal professional fees.
Following is a summary of the factors that contributed to the changes in net
income (in thousands):
2005 vs 2004 2004 vs 2003
--------------- --------------
Net interest income $ 513 $1,338
Provision for loan losses (503) 412
Other income, including securities 879 (616)
transactions
Other expenses (246) (609)
Income taxes (587) 133
--------------- --------------
Increase in net income $ 56 $ 658
=============== ==============
Credit quality is an area of importance to the Company and the level of
nonperforming loans and net charge-offs remained below peer banks in 2005.
Year-end total nonperforming loans did not change materially with $3.5 million
at December 31, 2005 compared to $3.1 million at December 31, 2004 and $3.3
million at December 31, 2003. The Company's provision for loan losses was
$1,091,000 for 2005 compared to $588,000 for 2004. During the year, a decline in
credit quality of two commercial loans secured by business assets and one
secured by commercial real estate resulted in charges to the provision for loan
losses of $408,000 and accounted for the majority of the provision increase. At
December 31, 2005, the composition of the loan portfolio remained similar to
2004. Loans secured by both commercial and residential real estate comprised 71%
of the loan portfolio as of December 31, 2005 and 2004.
The Company's capital position remains strong and the Company has consistently
maintained regulatory capital ratios above the "well-capitalized" standards. The
Company's Tier 1 capital ratio to risk weighted assets ratio at December 31,
2005, 2004, and 2003 was 11.14%, 10.94%, and 9.83%, respectively. The Company's
total capital to risk weighted assets ratio at December 31, 2005, 2004, and 2003
was 11.87%, 11.71%, and 10.61%, respectively. The increase in 2005 was primarily
the result of an increase in retained earnings due to the Company's increase in
net income. The increase in 2004 was primarily the result of the issuance of
trust preferred securities by First Mid-Illinois Statutory Trust I ("Trust"),
which qualify as Tier I capital for the Company under Federal Reserve Board
guidelines. The Trust invested the proceeds of the issuance in junior
subordinated debentures of the Company. This was partially offset by a decline
in equity as a result of the increase in the number of shares repurchased under
the Company's stock repurchase program.
The Company's liquidity position remains sufficient to fund operations and meet
the requirements of borrowers, depositors, and creditors. The Company maintains
various sources of liquidity to fund its cash needs. See "Liquidity" herein for
a full listing of its sources and anticipated significant contractual
obligations.
The Company enters into financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include lines of credit, letters of credit and other
commitments to extend credit. The total outstanding commitments at December 31,
2005, 2004 and 2003 were $117.8 million, $94.2 million and $87.8 million,
respectively. See Note 12 - "Disclosure of Fair Values of Financial Instruments"
and Note 18 - "Commitments and Contingent Liabilities" herein for further
information.
Critical Accounting Policies
The Company has established various accounting policies that govern the
application of accounting principles generally accepted in the United States in
the preparation of the Company's financial statements. The significant
accounting policies of the Company are described in the footnotes to the
consolidated financial statements. Certain accounting policies involve
significant judgments and assumptions by management that have a material impact
on the carrying value of certain assets and liabilities; management considers
such accounting policies to be critical accounting policies. The judgments and
assumptions used by management are based on historical experience and other
factors, which are believed to be reasonable under the circumstances. Because of
the nature of the judgments and assumptions made by management, actual results
could differ from these judgments and assumptions, which could have a material
impact on the carrying values of assets and liabilities and the results of
operations of the Company.
The Company believes the allowance for loan losses is the critical accounting
policy that requires the most significant judgments and assumptions used in the
preparation of its consolidated financial statements. In estimating the
allowance for loan losses, management utilizes historical experience, as well as
other factors, including the effect of changes in the local real estate market
on collateral values, the effect on the loan portfolio of current economic
indicators and their probable impact on borrowers, and increases or decreases in
nonperforming and impaired loans. Changes in these factors may cause
management's estimate of the allowance to increase or decrease and result in
adjustments to the Company's provision for loan losses. See "Loan Quality and
Allowance for Loan Losses" and Note 1 - "Summary of Significant Accounting
Policies" herein for a detailed description of the Company's estimation process
and methodology related to the allowance for loan losses.
Mergers and Acquisitions
On February 14, 2006, the Company announced it had entered into an agreement and
plan of merger to acquire Mansfield Bancorp, Inc. ("Mansfield"), and its wholly
owned subsidiary, Peoples State Bank of Mansfield ("Peoples") in Mansfield,
Mahomet and Weldon, Illinois for a total cost of approximately $24 million in
cash with no Company stock to be issued. The Company expects to finance the
purchase price through a dividend of $5 million from First Mid Bank and a loan
of the balance from The Northern Trust Company. As of December 31, 2005,
Mansfield had consolidated assets of $127 million, consolidated total deposits
of $111 million and consolidated stockholders' equity of $15 million. The
Company expects the acquisition to be accretive to earnings in 2006, and that it
will be able to reduce the annual expenses of the acquired operations by
approximately 20-25%. The acquisition is expected to close in the second quarter
of 2006, pending approval from Mansfield's shareholders, the Federal Reserve
Board and the Illinois Department of Financial and Professional Regulation.
Results of Operations
Net Interest Income
The largest source of operating revenue for the Company is net interest income.
Net interest income represents the difference between total interest income
earned on earning assets and total interest expense paid on interest-bearing
liabilities. The amount of interest income is dependent upon many factors,
including the volume and mix of earning assets, the general level of interest
rates and the dynamics of changes in interest rates. The cost of funds necessary
to support earning assets varies with the volume and mix of interest-bearing
liabilities and the rates paid to attract and retain such funds.
The Company's average balances, interest income and expense and rates earned or
paid for major balance sheet categories are set forth in the following table
(dollars in thousands):
Year Ended Year Ended Year Ended
December 31, 2005 December 31, 2004 December 31, 2003
------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------
ASSETS
Interest-bearing deposits $ 1,330 $ 40 3.01% $ 4,729 $ 75 1.59% $ 10,715 $ 112 1.05%
Federal funds sold 9,184 285 3.10% 8,813 103 1.17% 16,285 164 1.01%
Investment securities
Taxable 140,972 5,313 3.77% 143,568 4,860 3.39% 141,120 4,961 3.52%
Tax-exempt (1) 19,435 871 4.48% 26,814 1,193 4.45% 28,467 1,266 4.45%
Loans (2) (3) 610,781 38,071 6.23% 572,836 33,793 5.90% 525,095 32,435 6.18%
------------------------------------------------------------------------------------
Total earning assets 781,702 44,580 5.70% 756,760 40,024 5.29% 721,682 38,938 5.40%
------------------------------------------------------------------------------------
Cash and due from banks 17,828 18,870 18,464
Premises and equipment 15,115 15,692 16,578
Other assets 22,824 24,304 23,481
Allowance for loan losses (4,717) (4,565) (4,133)
---------- ----------- ----------
Total assets $832,752 $811,061 $776,072
========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
Demand deposits $229,532 2,975 1.30% $230,300 1,568 0.68% $219,809 1,778 0.81%
Savings deposits 59,830 248 0.41% 61,144 236 0.39% 56,402 302 0.54%
Time deposits 271,161 8,496 3.13% 261,564 7,318 2.80% 250,403 7,671 3.06%
Securities sold under
agreements to repurchase 57,799 1,496 2.59% 55,645 455 0.82% 47,795 272 0.57%
FHLB advances 31,545 1,536 4.87% 27,117 1,484 5.47% 31,094 1,632 5.25%
Federal funds purchased 874 33 3.78% 218 3 1.38% 14 - 0.00%
Subordinated debentures 10,310 643 6.24% 8,704 382 4.39% - - -
Other debt 5,711 260 4.55% 7,161 198 2.76% 9,411 241 2.56%
------------------------------------------------------------------------------------
Total interest-bearing
liabilities 666,762 15,687 2.35% 651,853 11,644 1.79% 614,928 11,896 1.93%
------------------------------------------------------------------------------------
Demand deposits 89,593 85,437 85,368
Other liabilities 4,486 5,312 6,427
Stockholders' equity 71,911 68,459 69,349
---------- ----------- ----------
Total liabilities & equity $832,752 $811,061 $776,072
========== =========== ==========
Net interest income $28,893 $28,380 $27,042
========== ========== ==========
Net interest spread 3.35% 3.50% 3.47%
Impact of non-interest bearing funds .35% .25% .28%
---------- ---------- ----------
Net yield on interest-earning assets 3.70% 3.75% 3.75%
========== ========== ==========
(1) The tax-exempt income is not recorded on a tax equivalent basis.
(2) Nonaccrual loans have been included in the average balances.
(3) Includes loans held for sale.
Changes in net interest income may also be analyzed by segregating the volume
and rate components of interest income and interest expense. The following table
summarizes the approximate relative contribution of changes in average volume
and interest rates to changes in net interest income for the past two years (in
thousands):
2005 Compared to 2004 2004 Compared to 2003
Increase - (Decrease) Increase - (Decrease)
-----------------------------------------------------------
Total Total
Change Volume (1) Rate (1) Change Volume (1) Rate (1)
-----------------------------------------------------------
Earning Assets:
Interest-bearing deposits $(35) $ 175 $ (210) $ (37) $(466) $ 429
Federal funds sold 182 4 178 (61) (93) 32
Investment securities:
Taxable 453 (87) 540 (101) 90 (191)
Tax-exempt (2) (322) (331) 9 (73) (74) 1
Loans (3) 4,278 2,320 1,958 1,358 2,707 (1,349)
-----------------------------------------------------------
Total interest income 4,556 2,081 2,475 1,086 2,164 (1,078)
-----------------------------------------------------------
Interest-Bearing Liabilities:
Interest-bearing deposits
Demand deposits 1,407 (5) 1,412 (210) 89 (299)
Savings deposits 12 (9) 21 (66) 29 (95)
Time deposits 1,178 280 898 (353) 391 (744)
Securities sold under
agreements to repurchase 1,041 19 1,022 183 50 133
FHLB advances 52 159 (107) (148) (219) 71
Federal funds purchased 30 19 11 3 1 2
Subordinated debentures 261 80 181 382 382 -
Other debt 62 (28) 90 (43) (64) 21
-----------------------------------------------------------
Total interest expense 4,043 515 3,528 (252) 659 (911)
-----------------------------------------------------------
Net interest income $513 $1,566 $(1,053) $1,338 $1,505 $ (167)
===========================================================
(1) Changes attributable to the combined impact of volume and rate have been
allocated proportionately to the change due to volume and the change due to
rate.
(2) The tax-exempt income is not recorded on a tax equivalent basis.
(3) Nonaccrual loans are not material and have been included in the average
balances.
Net interest income increased $513,000, or 1.8% in 2005, compared to an increase
of $1,338,000, or 4.9% in 2004. The increases in net interest income in 2005 and
2004 were primarily due to growth in interest-earning assets primarily composed
of loan growth that was offset by an increase in the cost of interest-bearing
liabilities.
In 2005, average earning assets increased by $24.9 million, or 3.3%, and average
interest-bearing liabilities increased $14.9 million or 2.3% compared with 2004.
In 2004, average earning assets increased by $35 million or 4.9%, and average
interest-bearing liabilities increased $36.9 million or 6.0% compared with 2003.
Changes in average balances are shown below:
* Average loans increased by $37.9 million or 6.6% in 2005 compared to
2004. In 2004, average loans increased by $47.7 million or 9.0%
compared to 2003.
* Average securities decreased by $10 million or 5.9% in 2005 compared
to 2004. In 2004, average securities increased by $.8 million or .5%
compared to 2003.
* Average interest-bearing deposits increased by $7.5 million or 1.4% in
2005 compared to 2004. In 2004, average interest-bearing deposits
increased by $26.4 million or 5.0% compared to 2003.
* Average securities sold under agreements to repurchase increased by
$2.2 million or 3.9% in 2005 compared to 2004. In 2004, average
securities sold under agreements to repurchase increased by $7.9
million or 16.5% compared to 2003.
* Average borrowings and other debt increased by $5.2 million or 12% in
2005 compared to 2004. In 2004, average borrowings and other debt
decreased by $2.7 million or 6.7% compared to 2003.
* The federal funds rate increased to 4.50% at December 31, 2005 from
2.25% at December 31, 2004 and from 1.00% at December 31, 2003.
* Net interest margin decreased to 3.70% compared to 3.75% in 2004 and
2003. Asset yields increased by 41 basis points in 2005, while
interest-bearing liabilities increased by 56 basis points.
To compare the tax-exempt yields on interest-earning assets to taxable yields,
the Company also computes non-GAAP net interest income on a tax equivalent basis
(TE) where the interest earned on tax-exempt securities is adjusted to an amount
comparable to interest subject to normal income taxes, assuming a federal tax
rate of 34% (referred to as the tax equivalent adjustment). The TE adjustments
to net interest income for 2005, 2004 and 2003 were $449,000, $615,000 and
$652,000, respectively. The net yield on interest-earning assets (TE) was 3.75%
in 2005, 3.83% in 2004 and 3.84% in 2003.
Provision for Loan Losses
The provision for loan losses in 2005 was $1,091,000 compared to $588,000 in
2004 and $1,000,000 in 2003. Nonperforming loans increased to $3,458,000 at
December 31, 2005 from $3,106,000 and $3,331,000 at December 31, 2004 and 2003,
respectively. Net charge-offs were $1,064,000 during 2005, $393,000 during 2004,
and $297,000 during 2003. For information on loan loss experience and
nonperforming loans, see "Nonperforming Loans" and "Loan Quality and Allowance
for Loan Losses" herein.
Other Income
An important source of the Company's revenue is derived from other income. The
following table sets forth the major components of other income for the last
three years (in thousands):
$ Change
From Prior Year
-------------------
2005 2004 2003 2005 2004
------------ ------------ ------------ --------- ---------
Trust $ 2,356 $ 2,254 $ 1,992 $ 102 $ 262
Brokerage 383 428 283 (45) 145
Insurance commissions 1,567 1,447 1,476 120 (29)
Service charges 4,719 4,746 4,484 (27) 262
Securities gains 373 92 370 281 (278)
Mortgage banking 742 522 1,673 220 (1,151)
Other 2,378 2,150 1,977 228 173
------------ ------------ ------------ --------- ---------
Total other income $12,518 $11,639 $12,255 $ 879 $ (616)
============ ============ ============ ========= =========
Total non-interest income increased to $12,518,000 in 2005 compared to
$11,639,000 in 2004 and $12,255,000 in 2003. The primary reasons for the more
significant year-to-year changes in other income components are as follows:
* Trust revenues increased $102,000 or 4.5% to $2,356,000 in 2005 from
$2,254,000 in 2004 and $1,992,000 in 2003. Approximately 50 percent of
trust revenue is market value dependent. The increase in trust
revenues was the result of new business and an increase in equity
prices.
* Revenue from brokerage and annuity sales decreased $45,000 or 10.5% to
$383,000 in 2005 from $428,000 in 2004 and $283,000 in 2003 as a
result of a decrease in the number of stock transactions.
* Insurance commissions increased $120,000 or 8.3% to $1,567,000 in 2005
from $1,447,000 in 2004 and $1,476,000 in 2003 due to an increase in
commissions received on sales of business property and casualty
insurance.
* Fees from service charges decreased $27,000 or .6% to $4,719,000 in
2005 from $4,746,000 in 2004 and $4,484,000 in 2003. This decrease was
primarily the result of decreases in transaction account services
charges due to increased balances in free-checking products.
* Net securities gains in 2005 were $373,000 compared to net securities
gains of $92,000 in 2004, and $370,000 in 2003. Several securities in
the available-for-sale portfolio were sold to improve the overall
portfolio mix and the margin in 2005, 2004 and 2003.
* Mortgage banking income increased $220,000 or 42.1% to $742,000 in
2005 from $522,000 in 2004 and $1,673,000 in 2003. This increase was
due to the increased volume of fixed rate loans originated and sold by
First Mid Bank. Loans sold balances are as follows:
* $63 million (representing 605 loans) in 2005
* $42 million (representing 441 loans) in 2004
* $135 million (representing 1,451 loans) in 2003
* Other income increased $228,000 or 8.8% to $2,378,000 in 2005 from
$2,150,000 in 2004 and $1,977,000 in 2003. The increase was primarily
due to increased ATM and bankcard service fees and increased check
printing 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
-----------------
2005 2004 2003 2005 2004
--------- --------- --------- -------- --------
Salaries and benefits $13,310 $13,626 $13,232 $(316) $ 394
Occupancy and equipment 4,401 4,259 4,290 142 (31)
Amortization of other intangibles 568 623 774 (55) (151)
Stationery and supplies 522 518 566 4 (48)
Legal and professional fees 1,553 1,173 991 380 182
Marketing and promotion 728 771 662 (43) 109
Other 4,303 4,169 4,015 134 154
--------- --------- --------- -------- --------
Total other expense $25,385 $25,139 $24,530 $ 246 $ 609
======== ========= ========= ======== ========
Total non-interest expense increased to $25,385,000 in 2005 from $25,139,000 in
2004 and $24,530,000 in 2003. 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, decreased $316,000 or 2.3% to $13,310,000 in 2005 from
$13,626,000 in 2004 and $13,232,000 in 2003. This decrease is due to a
reduction in incentive compensation expense for bonuses paid based on
company performance offset by merit increases for continuing employees
and additional employees hired due to the addition of a branch in
Highland. There were 318 full-time equivalent employees at December
31, 2005 compared to 317 at December 31, 2004 and 314 at December 31,
2003.
* Occupancy and equipment expense increased $142,000 or 3.3% to
$4,401,000 in 2005 from $4,259,000 in 2004 and $4,290,000 in 2003.
This increase is due to an increase in rent expense for Checkley
offices offset by a decrease in depreciation expense for computer
equipment fully depreciated in 2004.
* There was no amortization of goodwill expense during 2005 and 2004 in
accordance with SFAS 142 and SFAS 147. Amortization of other
intangibles expense decreased $55,000. This was a result of a
reduction of core deposit intangible expense of $29,000 and a
reduction of mortgage servicing rights amortization of $26,000.
* Other operating expenses increased $134,000 or 3.2% to 4,303,000 in
2005 from $4,169,000 in 2004 and $4,015,000 in 2003. This increase
resulted from an increase in expenses related to other real estate
owned.
* On a net basis, all other categories of operating expenses increased
$341,000 or 13.9% to $2,803,000 in 2005 from $2,462,000 in 2004 and
$2,219,000 in 2003. The increase was primarily due to increases in
various professional fees.
Income Taxes
Income tax expense amounted to $5,128,000 in 2005 compared to $4,541,000 in 2004
and $4,674,000 in 2003. Effective tax rates were 34.3%, 31.8% and 33.9%,
respectively, for 2005, 2004 and 2003. The increase in the effective tax rate in
2005 compared to 2004 is due to a decrease in deductible interest income from
municipal securities and a non-recurring reduction to the tax accrual in 2004
that was made to accurately reflect the estimated tax liability position.
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):
2005 2004 2003 2002 2001
-----------------------------------------------------------------------
Real estate - mortgage $450,435 $427,154 $390,841 $340,033 $331,873
Commercial & agricultural 150,598 137,733 131,609 127,065 107,620
Installment 34,385 30,587 28,932 31,119 32,522
Other 2,715 2,375 1,442 1,647 1,228
-----------------------------------------------------------------------
Total loans $638,133 $597,849 $552,824 $499,864 $473,243
=======================================================================
Loan balances have increased over the past few years primarily as a result of
increased commercial real estate loans and commercial operating loans. The
increase in commercial real estate loans outstanding has been the result of
demand for credit for commercial real estate projects in central Illinois and
business development efforts. Also, corporate borrowers have required additional
capital for inventory and company expansion. The growth has been primarily in
the communities of Champaign, Decatur, Effingham, Highland, and Maryville.
Loan balances increased by $40 million or 6.7% from December 31, 2004 to
December 31, 2005 primarily as a result of an increase in commercial real estate
loan balances of $27.1 million. Loans secured by apartment buildings and hotels
comprised the largest percentage of the growth in commercial real estate loans.
Balances of loans sold into the secondary market were $63 million in 2005,
compared to $42 million in 2004. The balance of real estate loans held for sale,
included in the balances shown above, amounted to $1,778,000 and $2,689,000 as
of December 31, 2005 and 2004, respectively.
At December 31, 2005, the Company had loan concentrations in agricultural
industries of $92.3 million, or 14.5%, of outstanding loans and $91.5 million,
or 15.3%, at December 31, 2004. In addition, the Company had loan concentrations
in the following industries as of December 31, 2005 and 2004 (dollars in
thousands):
2005 2004
Principal % Outstanding Principal % Outstanding
balance loans balance loans
----------- ------------- ----------- -------------
Operators of non-residential
buildings $22,446 3.52% $18,864 3.16%
Apartment building owners 40,843 6.40% 23,111 3.87%
Motels, hotels & tourist courts 28,054 4.40% 25,756 4.31%
Subdividers & developers (1) 26,397 4.14% 14,302 2.39%
(1) At December 31, 2004, this industry was not a concentration for the
Company. The December 31, 2004 balance for this industry is included for
comparative purposes only.
The Company had no further industry loan concentrations in excess of 25% of
total risk-based capital.
The following table presents the balance of loans outstanding as of December 31,
2005, by maturities (in thousands):
Maturity (1)
-------------------------------------------------
Over 1
One year through Over
or less(2) 5 years 5 years Total
-------------------------------------------------
Real estate - mortgage $130,450 $278,583 $ 41,402 $450,435
Commercial & agricultural 101,098 44,509 4,991 150,598
Installment 17,310 16,451 291 34,385
Other 978 1,399 338 2,715
-------------------------------------------------
Total loans $249,836 $341,275 $47,022 $638,133
=================================================
(1) Based upon remaining maturity.
(2) Includes demand loans, past due loans and overdrafts.
As of December 31, 2005, loans with maturities over one year consisted of $304
million in fixed rate loans and $84 million in variable rate loans. The loan
maturities noted above are based on the contractual provisions of the individual
loans. The Company has no general policy regarding rollovers and borrower
requests, which are handled on a case-by-case basis.
Nonperforming Loans
Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b)
accruing loans contractually past due ninety days or more as to interest or
principal payments; and (c) loans not included in (a) and (b) above which are
defined as "renegotiated loans".
The following table presents information concerning the aggregate amount of
nonperforming loans (in thousands):
December 31,
-----------------------------------------------------------
2005 2004 2003 2002 2001
-----------------------------------------------------------
Nonaccrual loans $3,458 $3,106 $3,296 $2,961 $3,419
Renegotiated loans which are performing in
accordance with revised terms - - 35 188 188
-----------------------------------------------------------
Total nonperforming loans $3,458 $3,106 $3,331 $3,149 $3,607
===========================================================
At December 31, 2005, $1,966,000 of the nonperforming loans resulted from
collateral-dependent loans to three borrowers. The $352,000 increase in
nonaccrual loans during the year resulted from the net of $893,000 of loans put
on nonaccrual status, offset by $114,000 of loans transferred to other real
estate owned, $143,000 of loans charged off and $284,000 of loans becoming
current or paid-off.
Interest income that would have been reported if nonaccrual and renegotiated
loans had been performing totaled $99,000, $169,000 and $213,000 for the years
ended December 31, 2005, 2004 and 2003, respectively.
The Company's policy is to discontinue the accrual of interest income on any
loan for which principal or interest is ninety days past due or earlier when, in
the opinion of management, there is reasonable doubt as to the timely collection
of interest or principal. Nonaccrual loans are returned to accrual status when,
in the opinion of management, the financial position of the borrower indicates
there is no longer any reasonable doubt as to the timely collection of interest
or principal.
Loan Quality and Allowance for Loan Losses
The allowance for loan losses represents management's estimate of the reserve
necessary to adequately account for probable losses that could ultimately be
realized from current loan exposures. The provision for loan losses is the
charge against current earnings that is determined by management as the amount
needed to maintain an adequate allowance for loan losses. In determining the
adequacy of the allowance for loan losses, and therefore the provision to be
charged to current earnings, management relies predominantly on a disciplined
credit review and approval process that extends to the full range of the
Company's credit exposure. The review process is directed by overall lending
policy and is intended to identify, at the earliest possible stage, borrowers
who might be facing financial difficulty. Once identified, the magnitude of
exposure to individual borrowers is quantified in the form of specific
allocations of the allowance for loan losses. Management considers collateral
values and guarantees in the determination of such specific allocations.
Additional factors considered by management in evaluating the overall adequacy
of the allowance include historical net loan losses, the level and composition
of nonaccrual, past due and renegotiated loans, trends in volumes and terms of
loans, effects of changes in risk selection and underwriting standards or
lending practices, lending staff changes, concentrations of credit, industry
conditions and the current economic conditions in the region where the Company
operates. Management considers the allowance for loan losses a critical
accounting policy.
Management recognizes there are risk factors that are inherent in the Company's
loan portfolio. All financial institutions face risk factors in their loan
portfolios because risk exposure is a function of the business. The Company's
operations (and therefore its loans) are concentrated in east central Illinois,
an area where agriculture is the dominant industry. Accordingly, lending and
other business relationships with agriculture-based businesses are critical to
the Company's success. At December 31, 2005, the Company's loan portfolio
included $92.3 million of loans to borrowers whose businesses are directly
related to agriculture. The balance increased $.8 million from $91.5 million at
December 31, 2004. While the Company adheres to sound underwriting practices,
including collateralization of loans, any extended period of low commodity
prices, significantly reduced yields on crops and/or reduced levels of
government assistance to the agricultural industry could result in an increase
in the level of problem agriculture loans and potentially result in loan losses
within the agricultural portfolio.
In addition, the Company has $28.1 million of loans to motels, hotels and
tourist courts. The performance of these loans is dependent on borrower specific
issues as well as the general level of business and personal travel within the
region. While the Company adheres to sound underwriting standards, a prolonged
period of reduced business or personal travel could result in an increase in
non-performing loans to this business segment and potentially in loan losses.
The Company also has $22.4 million of loans to operators of non-residential
buildings, $40.8 million of loans to apartment building owners and $26.4 million
of loans to subdividers and developers. A significant widespread decline in real
estate values could result in an increase in non-performing loans to this
segment and potentially in loan losses.
Loan loss experience for the past five years are summarized as follows (dollars
in thousands):
-------------------------------------------------------------
2005 2004 2003 2002 2001
-------------------------------------------------------------
Average loans outstanding, net of
unearned income $610,781 $572,836 $525,095 $483,764 $454,108
Allowance-beginning of year $4,621 $4,426 $3,723 $3,702 $3,262
Balance added through acquisitions - - - - 275
Charge-offs:
Commercial, financial and agricultural 757 436 589 673 244
Real estate-mortgage 122 23 50 200 86
Installment 278 129 139 255 171
Other 130 - - - -
-------------------------------------------------------------
Total charge-offs 1,287 588 778 1,128 501
Recoveries:
Commercial, financial and agricultural 75 146 427 12 22
Real estate-mortgage 63 - 15 17 -
Installment 42 49 39 45 44
Other 43 - - - -
-------------------------------------------------------------
Total recoveries 223 195 481 74 66
-------------------------------------------------------------
Net charge-offs 1,064 393 297 1,054 435
Provision for loan losses 1,091 588 1,000 1,075 600
-------------------------------------------------------------
Allowance-end of year $ 4,648 $ 4,621 $ 4,426 $ 3,723 $ 3,702
=============================================================
Ratio of net charge-offs to average loans .17% .07% .06% .22% .10%
=============================================================
Ratio of allowance for loan losses to
loans outstanding (at end of year) .73% .77% .80% .74% .79%
=============================================================
Ratio of allowance for loan losses to
nonperforming loans 134.4% 148.8% 132.9% 118.2% 102.6%
=============================================================
The Company minimizes credit risk by adhering to sound underwriting and credit
review policies. These policies are reviewed at least annually, and the Board of
Directors approves all changes. Senior management is actively involved in
business development efforts and the maintenance and monitoring of credit
underwriting and approval. The loan review system and controls are designed to
identify, monitor and address asset quality problems in an accurate and timely
manner. On a monthly basis, the Board of Directors reviews the status of problem
loans. In addition to internal policies and controls, regulatory authorities
periodically review asset quality and the overall adequacy of the allowance for
loan losses.
During 2005, the Company had net charge-offs of $1,064,000 compared to $393,000
in 2004 and $297,000 in 2003. During 2005, the Company's significant charge-offs
included $408,000 on two commercial loans secured by business assets and one
secured by commercial real estate. The Company also recovered $56,000 on a
commercial real estate loan that had been charged-off in a prior period. During
2004, significant charge-offs included $118,000 on two commercial loans of a
single borrower and $124,000 on two commercial real estate loans of a single
borrower. The Company also recovered $85,000 in interest on an agricultural real
estate loan that had been charged-off in a prior period and $68,500 on two
commercial real estate loans that were previously charged-off. The Company's
significant charge-offs during 2003 included $170,000 on a commercial loan and
$80,000 on an agricultural loan secured by crops.
At December 31, 2005, the allowance for loan losses amounted to $4,648,000, or
..73% of total loans, and 134.4% of nonperforming loans. At December 31, 2004,
the allowance was $4,621,000, or .77% of total loans, and 148.8% of
nonperforming loans. The ratio of the allowance for loan losses to total loans
has been consistent over the past five years ranging from .73% to .80% and
represents management's estimates of the amounts necessary to provide an
adequate reserve against possible future charge-offs.
The allowance for loan losses, in management's judgment, is allocated as follows
to cover probable loan losses (dollars in thousands):
December 31, 2005 December 31, 2004 December 31, 2003
-------------------------- -------------------------- --------------------------
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 $ 134 70.6% $ 240 71.4% $ 219 70.7%
Commercial, financial
and agricultural 3,249 23.6% 3,124 23.1% 2,912 23.8%
Installment 319 5.4% 150 5.1% 154 5.2%
Other 18 .4% - .4% - .3%
-------------------------- -------------------------- --------------------------
Total allocated 3,720 3,514 3,285
Unallocated 928 N/A 1,107 N/A 1,141 N/A
-------------------------- -------------------------- --------------------------
Allowance at end of
Year $4,648 100.0% $4,621 100.0% $4,426 100.0%
========================== ========================== ==========================
December 31, 2002 December 31, 2001
-------------------------- --------------------------
Allowance % of Allowance % of
for loans for loans
loan to total loan to total
losses loans losses loans
-------------------------------------------------------
Real estate-mortgage $ 215 68.1% $ 282 70.1%
Commercial, financial
and agricultural 2,882 25.4% 2,524 22.7%
Installment 190 6.2% 207 6.9%
Other - .3% - .3%
-------------------------------------------------------
Total allocated 3,287 3,013
Unallocated 436 N/A 689 N/A
-------------------------------------------------------
Allowance at end of
year $3,723 100.0% $3,702 100.0%
========================== ==========================
The allowance is allocated to the individual loan categories by a specific
allocation for all classified loans plus a percentage of loans not classified
based on historical losses and other factors. The unallocated allowance
represents an estimate of the probable, inherent, but yet undetected, losses in
the loan portfolio. It is based on factors that cannot necessarily be associated
with a specific credit or loan category and represents management's attempt to
ensure that the overall allowance of loan losses appropriately reflects a margin
for the imprecision necessarily inherent in the estimates of expected credit
losses. A number of subjective factors are considered when determining the
unallocated portion, including local and general economic business factors and
trends, portfolio concentrations, and changes in size, mix and general terms of
the portfolio.
Securities
The Company's overall investment goal is to maximize earnings while maintaining
liquidity in securities having minimal credit risk. The types and maturities of
securities purchased are primarily based on the Company's current and projected
liquidity and interest rate sensitivity positions.
The following table sets forth the year-end amortized cost of the Company's
securities for the last three years (dollars in thousands):
December 31,
----------------------------------------------------------------------------------
2005 2004 2003
--------------------------- -------------------------- ---------------------------
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 $ 108,506 3.74% $92,369 2.81% $ 109,544 3.25%
Obligations of states and
political subdivisions 16,829 4.54% 25,133 4.54% 26,895 4.86%
Mortgage-backed securities 20,046 4.34% 34,032 3.82% 21,607 3.64%
Other securities 13,083 6.21% 17,817 6.02% 17,521 5.87%
------------- ------------- ------------- ------------ ------------- -------------
Total securities $158,464 4.10% $169,351 3.61% $175,567 3.81%
============= ============= ============= ============ ============= =============
At December 31, 2005, the Company's investment portfolio showed a decrease in
mortgage-backed securities and obligations of states and political subdivisions
securities and an increase in U.S. Treasury securities and obligations of U.S.
government corporations and agencies. There was also a decrease in other
securities. 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, 2005 (dollars in thousands) and the weighted average yield
for each range of maturities. Mortgage-backed securities are aged according to
their weighted average life. All other securities are shown at their contractual
maturity.
One After 1 After 5 After
year through through 10
or less 5 years 10 years years Total
------------------------------------------------------------------------
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 27,771 $62,257 $13,484 $4,994 $108,506
Obligations of state and
political subdivisions 1,958 4,806 6,646 2,007 15,417
Mortgage-backed securities 1,602 18,444 - - 20,046
Other securities - - 2,500 10,583 13,083
------------------------------------------------------------------------
Total investments $31,331 $85,507 $22,630 $17,584 $157,052
========================================================================
Weighted average yield 3.26% 3.99% 4.77% 5.20% 4.09%
Full tax-equivalent yield 3.40% 4.10% 5.40% 5.43% 4.30%
Held-to-maturity:
Obligations of state and
political subdivisions $140 $ 630 $ 140 $ 502 $ 1,412
========================================================================
Weighted average yield 5.28% 5.50% 5.75% 5.35% 5.45%
Full tax-equivalent yield 7.79% 8.12% 8.51% 7.91% 8.05%
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, 2005.
At December 31, 2005, there were three mortgage-backed securities with a fair
value of $8,146,000 and an unrealized loss of $178,000, and ten obligations of
U.S. government agencies with a fair value of $53,798,313 and an unrealized loss
of $1,109,665, in a continuous unrealized loss position for twelve months or
more. This position is due to short-term and intermediate rates increasing since
the purchase of these securities resulting in the market value of the security
being lower than book value. Management does not believe any individual
unrealized loss as of December 31, 2005 represents an other than temporary
impairment.
Investment securities carried at approximately $136,787,000 and $143,560,000 at
December 31, 2005 and 2004, 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, 2005, 2004 and 2003 (dollars
in thousands):
2005 2004 2003
--------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
--------------------------------------------------------------------------
Demand deposits:
Non-interest bearing $ 89,593 - $ 85,437 - $ 85,368 -
Interest bearing 229,532 1.30% 230,300 .68% 219,809 .81%
Savings 59,830 .41% 61,144 .39% 56,402 .54%
Time deposits 271,161 3.13% 261,564 2.80% 250,403 3.06%
--------------------------------------------------------------------------
Total average deposits $650,116 1.80% $638,445 1.43% $611,982 1.59%
==========================================================================
December 31,
(dollars in thousands) 2005 2004 2003
- ------------------------------------------------------------------------------
High month-end balances of total deposits $677,872 $668,540 $629,043
Low month-end balances of total deposits 627,107 620,200 601,223
In 2005, the average balance of deposits increased by $11.7 million from 2004.
The increase was primarily attributable to growth in interest-bearing deposits,
including money market accounts, Club 50 accounts, and time deposit balances
("CD"). Average money market account balances increased by $4.4 million, average
balances in the Club 50 accounts increased by $3.9 million, and consumer CD
balances increased by $13.2 million, partially offset by a decline in brokered
CD balances and public time deposits. In 2004, the average balance of deposits
increased by $26.5 million from 2003. The increase was primarily attributable to
growth in interest-bearing deposits including money market accounts, Club 50
accounts and brokered CD balances.
In 2005, the Company's significant deposits included brokered CDs, time deposits
with the State of Illinois, and deposit relationships with two public entities.
The Company had eleven brokered CDs at various maturities with a total balance
of $38.4 million as of December 31, 2005. State of Illinois time deposits
maintained with the Company totaled $3.4 million as of December 31, 2005. These
balances are subject to bid annually. In addition, the Company maintains account
relationships with various public entities throughout its market areas. Two
public entities had total balances of $16.2 million in various checking accounts
and time deposits as of December 31, 2005. These balances are subject to change
depending upon the cash flow needs of the public entity.
The following table sets forth the maturity of time deposits of $100,000 or more
(in thousands):
December 31,
----------------------------------------------
2005 2004 2003
----------------------------------------------
3 months or less $15,947 $26,916 $ 20,510
Over 3 through 6 months 23,593 17,560 10,906
Over 6 through 12 months 34,944 22,826 24,654
Over 12 months 28,950 48,031 28,446
----------------------------------------------
Total $103,434 $115,333 $ 84,516
==============================================
The balance of time deposits of $100,000 or more decreased by $11.9 million from
December 31, 2004 to December 31, 2005. The decrease in balances was primarily
attributable to maturing brokered CD and other time deposit balances that were
not replaced. The balance of time deposits of $100,000 or more increased by
$30.8 million from December 31, 2003 to December 31, 2004. The increase in
balances was primarily attributable to the movement of deposit balances into CDs
due to rising rates and to an increase in brokered deposits.
Balances of time deposits of $100,000 or more includes brokered CDs, time
deposits maintained for public entities, and consumer time deposits. The balance
of brokered CDs was $38.4 million, $42.1 million and $22.9 as of December 31,
2005, 2004 and 2003, respectively. The Company also maintains time deposits for
the State of Illinois with balances of $3.4 million, $4.4 million and $6.3
million as of December 31, 2005, 2004 and 2003, respectively. The State of
Illinois deposits are subject to bid annually and could increase or decrease in
any given year.
Repurchase Agreements and Other Borrowings
Securities sold under agreements to repurchase are short-term obligations of
First Mid Bank. First Mid Bank collateralizes these obligations with certain
government securities that are direct obligations of the United States or one of
its agencies. First Mid Bank offers these retail repurchase agreements as a cash
management service to its corporate customers. Other borrowings consist of
Federal Home Loan Bank ("FHLB") advances, federal funds purchased, junior
subordinated debentures and loans (short-term or long-term debt) that the
Company has outstanding.
Information relating to securities sold under agreements to repurchase and other
borrowings for the last three years is presented below (dollars in thousands):
2005 2004 2003
------------ ------------- -------------
At December 31:
Federal funds purchased $ 4,000 - -
Securities sold under agreements to repurchase 9,875 $ 59,835 $59,875
Federal Home Loan Bank advances:
Overnight 12,000
Fixed term - due in one year or less 3,000 17,300 5,000
Fixed term - due after one year 20,000 8,000 25,300
Junior subordinated debentures 10,310 10,310 -
Debt:
Loans due in one year or less 5,500 4,200 9,025
Loans due after one year - 400 600
------------ ------------- -------------
Total $122,190 $100,045 $99,800
============ ============= =============
Average interest rate at year end 4.27% 2.59% 2.13%
Maximum Outstanding at Any Month-end
Federal funds purchased $ 4,000 - -
Securities sold under agreements to repurchase 67,380 $63,517 $59,875
Federal Home Loan Bank advances:
Overnight 12,014 7,000 -
Fixed term - due in one year or less 20,000 17,300 5,000
Fixed term - due after one year 20,000 25,300 30,300
Junior subordinated debentures 10,310 10,310 -
Debt:
Loans due in one year or less 6,200 9,025 9,025
Loans due after one year 200 400 600
Averages for the Year
Federal funds purchased $ 874 $ 218 $ 14
Securities sold under agreements to repurchase 57,799 55,645 47,795
Federal Home Loan Bank advances:
Overnight 2,447 997 -
Fixed term - due in one year or less 13,575 8,200 5,000
Fixed term - due after one year 15,523 17,920 26,094
Junior subordinated debentures 10,310 8,704 -
Debt:
Loans due in one year or less 5,607 6,746 8,796
Loans due after one year 104 415 615
------------ ------------- -------------
Total $106,239 $98,845 $88,314
============ ============= =============
Average interest rate during the year 3.74% 2.63% 2.41%
FHLB advances represent borrowings by First Mid Bank to economically fund loan
demand. The fixed term advances consist of $23 million as follows:
* $3 million advance at 3.73% with a 1-year maturity, due March 21, 2006
* $7 million advance at 4.00% with a 2-year maturity, due April 15, 2007
* $5 million advance at 4.58% with a 5-year maturity, due March 22, 2010
* $3 million advance at 5.98% with a 10-year maturity, due March 1,
2011, callable quarterly
* $5 million advance at 4.33% with a 10-year maturity, due November 23,
2011, five year lockout, one-time call 11/23/06
At December 31, 2005, outstanding loan balances include $5,500,000 on a
revolving credit agreement with The Northern Trust Company with a floating
interest rate of 1.25% over the federal funds rate (5.44% as of December 31,
2005) that is set to mature October 21, 2006. This loan was renegotiated on
October 22, 2005 and has a maximum available balance of $15 million. The loan is
secured by all of the common stock of First Mid Bank. The borrowing agreement
contains requirements for the Company and First Mid Bank to maintain various
operating and capital ratios and also contains requirements for prior lender
approval for certain sales of assets, merger activity, the acquisition or
issuance of debt and the acquisition of treasury stock. The Company and First
Mid Bank were in compliance with the existing covenants at December 31, 2005 and
2004. Subsequently, the Company has obtained a commitment letter dated February
3, 2006 from The Northern Trust Company that would replace the existing
revolving credit agreement. The commitment letter was obtained in conjunction
with obtaining financing for the acquisition of Mansfield Bancorp, Inc. The new
revolving credit agreement has a maximum available balance of $27.5 million with
a term of 3 years from the date of closing. The credit agreement calls for
annual reductions in the maximum credit of $2 million per year. The interest
rate is floating at 1.25% over the Federal funds rate when the ratio of senior
debt to tier 1 capital is equal to or below 35% as of the end of the previous
quarter. The interest rate is floating at 1.50% over the Federal funds rate when
the ratio of senior debt to tier 1 capital is above 35%. The loan will be
secured by the common stock of First Mid Bank and subject to a borrowing
agreement containing requirements for the Company and First Mid Bank for
operating and capital ratios. The Company expects to close on the new credit
agreement during the second quarter of 2006.
On February 27, 2004, the Company completed the issuance and sale of $10 million
of floating rate trust preferred securities through First Mid-Illinois Statutory
Trust I (the "Trust"), a statutory business trust and wholly-owned
unconsolidated subsidiary of the Company, as part of a pooled offering. The
Company established the Trust for the purpose of issuing the trust preferred
securities. The $10 million in proceeds from the trust preferred issuance and an
additional $310,000 for the Company's investment in common equity of the Trust,
a total of $10,310 000, was invested in junior subordinated debentures of the
Company. The underlying junior subordinated debentures issued by the Company to
the Trust mature in 2034, bear interest at three-month London Interbank Offered
Rate ("LIBOR") plus 280 basis points, reset quarterly, and are callable, at the
option of the Company, at par on or after April 7, 2009. At December 31, 2005
and 2004 the rate was 6.95% and 4.87%, respectively. The Company used the
proceeds of the offering for general corporate purposes. The trust preferred
securities issued by the Trust are included as Tier 1 capital of the Company for
regulatory capital purposes.
Interest Rate Sensitivity
The Company seeks to maximize its net interest margin while maintaining an
acceptable level of interest rate risk. Interest rate risk can be defined as the
amount of forecasted net interest income that may be gained or lost due to
changes in the interest rate environment, a variable over which management has
no control. Interest rate risk, or sensitivity, arises when the maturity or
repricing characteristics of assets differ significantly from the maturity or
repricing characteristics of liabilities.
The Company monitors its interest rate sensitivity position to maintain a
balance between rate-sensitive assets and rate-sensitive liabilities. This
balance serves to limit the adverse effects of changes in interest rates. The
Company's asset/liability management committee (ALCO) oversees the interest rate
sensitivity position and directs the overall allocation of funds.
In the banking industry, a traditional way to measure potential net interest
income exposure to changes in interest rates is through a technique known as
"static GAP" analysis which measures the cumulative differences between the
amounts of assets and liabilities maturing or repricing at various intervals. By
comparing the volumes of interest-bearing assets and liabilities that have
contractual maturities and repricing points at various times in the future,
management can gain insight into the amount of interest rate risk embedded in
the balance sheet.
The following table sets forth the Company's interest rate repricing gaps for
selected maturity periods at December 31, 2005 (dollars in thousands):
Rate Sensitive Within
---------------------------------------------------------------------------------
1 year 1-2 years 2-3 years 3-4 years 4-5 years Thereafter Total Fair Value
----------- ---------- ----------- ---------- ---------- ----------- ------------ ------------
Interest-earning assets:
Federal funds sold and other
interest-bearing deposits $ 426 $ - $ - $ - $ - $ - $ 426 $ 426
Taxable investment securities 83,014 15,386 12,457 - 1,617 27,761 140,235 140,235
Nontaxable investment securities 6,139 1,684 5,006 847 1,422 1,920 17,018 17,047
Loans 302,928 80,332 112,104 72,885 51,610 18,274 638,133 623,882
----------- ---------- ----------- ---------- ---------- ----------- ------------ ------------
Total $392,507 $ 97,402 $129,567 $73,732 $54,649 $47,955 $795,812 $781,590
=========== ========== =========== ========== ========== =========== ============ ============
Interest-bearing liabilities:
Savings and N.O.W. accounts $ 47,495 $ 10,397 $ 10,859 $ 15,940 $ 16,489 $ 98,962 $200,142 $207,592
Money market accounts 58,589 2,035 2,091 2,713 2,770 14,640 82,838 84.263
Other time deposits 175,095 75,094 6,989 4,878 8,587 141 270,784 267,849
Short-term borrowings/debt 91,880 - - - - - 91,880 91,889
Long-term borrowings/debt - 7,000 - - 15,310 8,000 30,310 30,500
----------- ---------- ----------- ---------- ---------- ----------- ------------ ------------
Total $373,059 $ 94,526 $ 19,939 $ 23,531 $ 43,156 $121,743 $675,954 $682,093
=========== ========== =========== ========== ========== =========== ============ ============
Rate sensitive assets -
rate sensitive liabilities $ 19,448 $ 2,876 $109,628 $50,201 $11,493 $(73,788) $119,858
Cumulative GAP $ 19,448 $ 22,324 $131,952 $182,153 $193,646 $119,858
Cumulative amounts as % of total
rate sensitive assets 2.4% 0.4% 13.8% 6.3% 1.4% -9.3%
Cumulative Ratio 2.4% 2.8% 16.6% 22.9% 24.3% 15.1%
The static GAP analysis shows that at December 31, 2005, the Company was asset
sensitive, on a cumulative basis, through the twelve-month time horizon. There
are several ways the Company measures and manages the exposure to interest rate
sensitivity, static GAP analysis being one. The Company's ALCO also uses other
financial models to project interest income under various rate scenarios and
prepayment/extension assumptions consistent with First Mid Bank's historical
experience and with known industry trends. ALCO meets at least monthly to review
the Company's exposure to interest rate changes as indicated by the various
techniques and to make necessary changes in the composition terms and/or rates
of the assets and liabilities. Based on all information available, management
does not believe that changes in interest rates which might reasonably be
expected to occur in the next twelve months will have a material, adverse effect
on the Company's net interest income.
Capital Resources
At December 31, 2005, stockholders' equity increased $3,172,000 or 4.6% to
$72,326,000 from $69,154,000 as of December 31, 2004. During 2005, net income
contributed $9,807,000 to equity before the payment of dividends to common
stockholders of $2,199,000. The change in the market value of available-for-sale
investment securities decreased stockholders' equity by $1,362,000, net of tax.
Additional purchases of treasury stock (119,813 shares at an average cost of
$40.49 per share) decreased stockholders' equity by $4,851,000.
Stock Plans
On July 16, 2004, the Company effected a three-for-two stock split in the form
of a 50% stock dividend. All share and per share information has been restated
to reflect the split.
Deferred Compensation Plan
The Company follows the provisions of the Emerging Issues Task Force Issue No.
97-14, "Accounting for Deferred Compensation Arrangements Where Amounts Earned
Are Held in a Rabbi Trust and Invested" ("EITF 97-14") for purposes of the First
Mid-Illinois Bancshares, Inc. Deferred Compensation Plan ("DCP"). At December
31, 2005, the Company classified the cost basis of its common stock issued and
held in trust in connection with the DCP of approximately $2,440,000 as treasury
stock. The Company also classified the cost basis of its related deferred
compensation obligation of approximately $2,440,000 as an equity instrument
(deferred compensation).
The DCP was effective as of June 1984. The purpose of the DCP 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:
* 3,622 common shares during 2005
* 6,421 common shares during 2004
* 10,866 common shares during 2003.
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 with the Company. During 1996, the Company began issuing common stock as
an investment option for participants of the 401k plan. The Company issued,
pursuant to the 401k plan:
* 8,002 common shares during 2005
* 8,225 common shares during 2004
* 20,790 common shares during 2003.
Dividend Reinvestment Plan
The Dividend Reinvestment Plan ("DRIP") was effective as of October 1994. The
purpose of the DRIP is to provide participating stockholders with a simple and
convenient method of investing cash dividends paid by the Company on its common
and preferred shares into newly issued common shares of the Company. All holders
of record of the Company's common or preferred stock are eligible to voluntarily
participate in the DRIP. The DRIP is administered by Computershare Investor
Services, LLC and offers a way to increase one's investment in the Company. Of
the $2,130,000 in common stock dividends paid during 2005, $699,000 or 32.8% 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 2005, 17,105 common shares were issued from common stock
dividends
* During 2004, 39,481 common shares were issued from common stock
dividends
* During 2003, 46,756 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. A maximum of 225,000 shares were
originally authorized under the SI Plan. In September 2001, the Board of
Directors authorized an additional 225,000 shares to be issued and sold under
the SI Plan. Options to acquire shares will be awarded at an exercise price
equal to the fair market value of the shares on the date of grant. Options to
acquire shares have a 10-year term. Options granted to employees vest over a
four-year period and those options granted to directors vest at the time they
are issued. The Company has awarded the following stock options:
* The Company awarded no options during the year ended December 31,
2005
* In December 2004, the Company granted 74,250 options at an option
price of $41.00
* In December 2003, the Company granted 72,000 options at an option
price of $31.00.
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, 2005, 2004, and 2003.
Stock Repurchase Program
On August 5, 1998, the Company announced a stock repurchase program of up to 3%
of its common stock. In March 2000, the Board of Directors approved the
repurchase of an additional 5% of the Company's common stock. In September 2001,
the Board of Directors authorized the repurchase of $3 million additional shares
of the authorized common stock and in August 2002, the Board of Directors
authorized the repurchase of $5 million additional shares of the Company's
common stock. In September 2003, the Board of Directors approved the repurchase
of $10 million additional shares of the Company's stock. On April 27, 2004, the
Board approved the repurchase of $5 million additional shares of the Company's
common stock and on August 23, 2005 the Board approved the repurchase of $5
million additional shares of the Company's common stock, bringing the aggregate
total of purchases authorized to 8% of the Company's common stock plus $28
million of additional shares.
During 2005, the Company repurchased 119,813 shares (2.7% of common shares) at a
total price of $4,851,000. During 2004, the Company repurchased 319,618 shares
(7.2% of common shares) at a total price of $10,365,000. On February 9, 2004,
the Company acquired, as treasury stock, a total of 100,000 shares of
outstanding common stock from three shareholders pursuant to privately
negotiated transactions. Total consideration for these share repurchases
amounted to $4,750,000. 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
minimum regulatory capital requirements and, as of December 31, 2005, the
Company and First Mid Bank had capital ratios above the levels required for
categorization as well-capitalized under the capital adequacy guidelines
established by the bank regulatory agencies.
A tabulation of the Company and First Mid Bank's capital ratios as of December
31, 2005 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) 11.14% 11.87% 8.55%
First Mid-Illinois Bank &
Trust, N.A. 10.92% 11.66% 8.36%
Liquidity
Liquidity represents the ability of the Company and its subsidiaries to meet all
present and future financial obligations arising in the daily operations of the
business. Financial obligations consist of the need for funds to meet extensions
of credit, deposit withdrawals and debt servicing. The Company's liquidity
management focuses on the ability to obtain funds economically through assets
that may be converted into cash at minimal costs or through other sources. The
Company's other sources for cash include overnight federal fund lines, FHLB
advances, deposits of the State of Illinois, the ability to borrow at the
Federal Reserve Bank, and the Company's operating line of credit with The
Northern Trust Company. Details for the sources include:
* First Mid Bank has $22.5 million available in overnight federal fund
lines, including $10 million from Harris Trust and Savings Bank of
Chicago and $12.5 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, 2005, the First Mid Bank's ratios of total capital to
risk-weighted assets of 11.66% and Tier 1 capital to total average
assets of 8.36% met regulatory requirements.
* First Mid Bank can also borrow from the FHLB as a source of liquidity.
Availability of the funds is subject to the pledging of collateral to
the FHLB. Collateral that can be pledged includes one-to-four family
residential real estate loans and securities. At December 31, 2005,
the excess collateral at the FHLB could support approximately $57
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 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 $5,500,000 as of December 31, 2005 and
$9,500,000 in available funds. The credit agreement matures on October
21, 2006. 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, 2005.
Subsequently, the Company has obtained a commitment letter dated
February 3, 2006 from The Northern Trust Company that would replace
the existing revolving credit agreement. The commitment letter was
obtained in conjunction with obtaining financing for the acquisition
of Mansfield Bancorp, Inc. The new revolving credit agreement has a
maximum available balance of $27.5 million with a term of 3 years from
the date of closing. The credit agreement calls for annual reductions
in the maximum credit of $2 million per year. The interest rate is
floating at 1.25% over the Federal funds rate when the ratio of senior
debt to tier 1 capital is equal to or below 35% as of the end of the
previous quarter. The interest rate is floating at 1.50% over the
Federal funds rate when the ratio of senior debt to tier 1 capital is
above 35%. The loan will be secured by the common stock of First Mid
Bank and subject to a borrowing agreement containing requirements for
the Company and First Mid Bank for operating and capital ratios. The
Company expects to close on the new credit agreement during the second
quarter of 2006.
Management monitors its expected liquidity requirements carefully, focusing
primarily on cash flows from:
* lending activities, including loan commitments, letters of credit and
mortgage prepayment assumptions;
* deposit activities, including seasonal demand of private and public
funds;
* investing activities, including prepayments of mortgage-backed
securities and call assumptions on U.S. Treasuries and agencies; and
* operating activities, including scheduled debt repayments and
dividends to stockholders.
The following table summarizes significant contractual obligations and other
commitments at December 31, 2005 (in thousands):
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
--------------- ---------------- ----------------- --------------- ---------------
Time deposits $270,784 $175,044 $82,135 $13,465 $ 140
Debt 15,810 5,500 - - 10,310
Other borrowings 102,380 82,380 7,000 5,000 8,000
Operating leases 4,161 431 912 863 1,955
Supplemental retirement
liability 768 50 100 100 518
--------------- ---------------- ----------------- --------------- ---------------
$393,903 $263,405 $90,147 $19,428 $20,923
=============== ================ ================= =============== ===============
For the year ended December 31, 2005, net cash was provided from both operating
activities and financing activities ($11.4 million and $15.6 million,
respectively), while investing activities used net cash of $31 million. Thus,
cash and cash equivalents decreased by $4 million since year-end 2004.
Generally, during 2005, cash balances were reduced by funds used to fund new
loans offset by an increase in borrowings, primarily Federal Home Loan Bank
advances.
For the year ended December 31, 2004, net cash was provided from both operating
activities and financing activities ($11.2 million and $24.7 million,
respectively), while investing activities used net cash of $37.3 million. Thus,
cash and cash equivalents decreased by $1.4 million since year-end 2003.
Generally, during 2004, cash balances were reduced by funds used to fund new
loans offset by an increase in deposit balances, primarily brokered deposits.
On February 27, 2004, the Company completed the issuance and sale of $10 million
of floating rate trust preferred securities through First Mid-Illinois Statutory
Trust I (the "Trust") as part of a pooled offering. The Company established the
Trust for the purpose of issuing the trust preferred securities. The underlying
junior subordinated debt securities issued by the Company to the Trust mature in
2034, bear interest at three-month London Interbank Offered Rate ("LIBOR") plus
280 basis points, reset quarterly, and are callable, at the option of the
Company, at par on or after April 7, 2009.
Effects of Inflation
Unlike industrial companies, virtually all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or experience the same magnitude of changes as goods and services,
since such prices are affected by inflation. In the current economic
environment, liquidity and interest rate adjustments are features of the
Company's assets and liabilities that are important to the maintenance of
acceptable performance levels. The Company attempts to maintain a balance
between monetary assets and monetary liabilities, over time, to offset these
potential effects.
Accounting Pronouncements
In March 2004, the Financial Accounting Standards Board ("FASB") reached a
consensus on Emerging Issues Task Force Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
("EITF 03-1"). EITF 03-1 provides guidance for determining when an investment is
impaired and whether the impairment is other than temporary. EITF 03-1 also
incorporates into its consensus the required disclosures about unrealized losses
on investments announced by the EITF in late 2003 and adds new disclosure
requirements relating to cost-method investments. The new disclosure
requirements were effective for annual reporting periods ending September 15,
2004 and the new impairment accounting guidance was to become effective for
reporting periods beginning after September 15, 2004. In September 2004, the
FASB delayed the effective date of EITF 03-1 for measurement and recognition of
impairment losses until implementation guidance is issued.
In June 2005, the FASB decided not to provide additional guidance on the meaning
of other-than-temporary impairment, but directed the FASB staff to issue a FASB
Staff Position ("FSP") which will be re-titled FSP FAS 115-1, "The Meaning of
Other-Than-Temporary Impairment and Its Applications to Certain Investments
("FSP FAS 115-1"). FSP FAS 115-1 will supercede EITF 03-1 and EITF Topic No.
D-44, "Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a
Security Whose Cost Exceeds Fair Value." FSP FAS 115-1 will replace guidance in
EITF 03-1 on loss recognition with references to existing other-than-temporary
impairment guidance, such as FASB Statement No. 115, Accounting For Certain
Investments in Debt and Equity Securities ("SFAS 115"). FSP FAS 115-1 will be
effective for other-than-temporary impairment analysis conducted in periods
beginning after September 15, 2005. The Company has consistently followed the
loss recognition guidance in SFAS 115, so the adoption of FSP FAS 115-1 is not
expected to have a significant impact on the Company's financial condition or
results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, "Accounting for Nonmonetary Assets"
("SFAS 153"). SFAS 153 amends the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged and more
broadly provides for exceptions regarding exchanges of nonmonetary assets that
do not have commercial substance. The provisions of SFAS 153 are effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after
September 15, 2005. The Company does not expect the requirements of SFAS 153 to
have a material impact on its financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised), "Accounting for
Stock-Based Compensation" ("SFAS 123R"). SFAS 123R establishes accounting
requirements for share-based compensation to employees and carries forward prior
guidance on accounting for awards to non-employees. The Statement requires an
entity to recognize compensation expense based on an estimate of the number of
awards expected to actually vest, exclusive of awards expected to be forfeited.
The provisions of this Statement will became effective July 1, 2005 for all
equity awards granted after the effective date. The Company is currently
evaluating the impact of SFAS 123R on its financial position and results of
operations.
In September 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3,"
("SFAS 154"). SFAS 154 changes the requirements for the accounting for and
reporting of a change in accounting principles and also applies to all voluntary
changes in accounting principles. SFAS 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005.
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, 2005, 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, 2005 Income Income Average Equity
Prime rate is 7.25% (000) (%) 2005=13.79%
----------------------------------------------
Prime rate increase of:
200 basis points to 9.25% $ 98 0.5 % .11 %
100 basis points to 8.25% 44 0.2 % .05%
Prime rate decrease of:
200 basis points to 5.25% (639) (3.1)% (.70)%
100 basis points to 6.25% (41) (0.2)% (.05)%
The following table shows the same analysis performed as of December 31, 2004.
Increase (Decrease) In
Net Interest Net Interest Return On
December 31, 2004 Income Income Average Equity
(000) (%) 2004=13.62%
------------ --------------- ----------------
Prime rate is 5.25%
Prime rate increase of:
200 basis points to 7.25% $ 1,279 4.1 % .94 %
100 basis points to 6.25% 642 2.1 % .47 %
Prime rate decrease of:
200 basis points to 3.25% (3,654) (11.8)% (2.79)%
100 basis points to 4.25% (1,778) (5.8)% (1.34)%
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 because it is also affected by many other factors.
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,
2005 and December 31, 2004. 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, 2005
Change in
Changes In Economic Value of Equity
Interest Rates Amount Percent
(basis points) of Change of Change
----------------------------------------------------------
+200 bp $(9,181) (8.6)%
+100 bp (3,785) (3.5)%
-200 bp (6,194) (5.8)%
-100 bp 1,439 1.3 %
December 31, 2004
Change in
Changes In Economic Value of Equity
Interest Rates Amount Percent
(basis points) of Change of Change
----------------------- ----------------- -----------------
+200 bp $(10,846) (10.5)%
+100 bp (2,273) (2.2)%
-200 bp 1,137 1.1 %
-100 bp 6,825 6.6 %
As indicated above, at December 31, 2005, 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, 2005, First Mid Bank's estimated changes in EVE were
within the First Mid Bank's policy 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, 2005 and 2004
(In thousands, except share data) 2005 2004
------------ ------------
Assets
Cash and due from banks:
Non-interest bearing $ 19,131 $ 19,119
Interest bearing 426 1,985
Federal funds sold - 2,450
------------ ------------
Cash and cash equivalents 19,557 23,554
Investment securities:
Available-for-sale, at fair value 155,841 168,821
Held-to-maturity, at amortized cost (estimated
fair value of $1,442 and $1,598 at December 31,
2005 and 2004, respectively) 1,412 1,552
Loans held for sale 1,778 2,689
Loans 636,355 595,160
Less allowance for loan losses (4,648) (4,621)
------------ ------------
Net loans 631,707 590,539
Interest receivable 6,410 5,405
Premises and equipment, net 15,168 15,227
Goodwill, net 9,034 9,034
Intangible assets, net 2,778 3,346
Other assets 6,888 6,561
------------ ------------
Total assets $850,573 $826,728
============ ============
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 95,305 $ 85,524
Interest bearing 553,764 564,716
------------ ------------
Total deposits 649,069 650,240
Securities sold under agreements to repurchase 67,380 59,835
Interest payable 1,717 1,506
------------ ------------
Other borrowings 44,500 29,900
Junior subordinated debentures 10,310 10,310
Other liabilities 5,271 5,783
------------ ------------
Total liabilities 778,247 757,574
------------ ------------
Stockholders' Equity
Common stock, $4 par value; authorized 18,000,000
shares; issued 5,633,621 shares in 2005 and
5,578,897 shares in 2004 22,534 22,316
Additional paid-in capital 19,439 17,845
Retained earnings 60,867 53,259
Deferred compensation 2,440 2,204
Accumulated other comprehensive income (loss) (739) 623
Less treasury stock at cost, 1,241,359 shares
in 2005 and 1,121,546 shares in 2004 (32,215) (27,093)
------------ ------------
Total stockholders' equity 72,326 69,154
------------ ------------
Total liabilities and stockholders' equity $850,573 $826,728
============ ============
See accompanying notes to consolidated financial statements.
Consolidated Statements of Income
For the years ended December 31, 2005, 2004 and 2003
(In thousands, except per share data) 2005 2004 2003
------------- ------------- --------------
Interest income:
Interest and fees on loans $38,071 $33,793 $32,435
Interest on investment securities:
Taxable 5,313 4,860 4,961
Exempt from federal income tax 871 1,193 1,266
Interest on federal funds sold 285 103 164
Interest on deposits with other financial institutions 40 75 112
------------- ------------- --------------
Total interest income 44,580 40,024 38,938
Interest expense:
Interest on deposits 11,719 9,122 9,751
Interest on securities sold under agreements
to repurchase 1,496 455 272
Interest on FHLB advances 1,536 1,484 1,632
Interest on federal funds purchased 33 3 -
Interest on subordinated debt 643 382 -
Interest on other debt 260 198 241
------------- ------------- --------------
Total interest expense 15,687 11,644 11,896
------------- ------------- --------------
Net interest income 28,893 28,380 27,042
Provision for loan losses 1,091 588 1,000
------------- ------------- --------------
Net interest income after provision for loan losses 27,802 27,792 26,042
Other income:
Trust revenues 2,356 2,254 1,992
Brokerage commissions 383 428 283
Insurance commissions 1,567 1,447 1,476
Service charges 4,719 4,746 4,484
Gains on sales of securities, net 373 92 370
Mortgage banking revenue, net 742 522 1,673
Other 2,378 2,150 1,977
------------- ------------- --------------
Total other income 12,518 11,639 12,255
Other expense:
Salaries and employee benefits 13,310 13,626 13,232
Net occupancy and equipment expense 4,401 4,259 4,290
Amortization of other intangible assets 568 623 774
Stationery and supplies 522 518 566
Legal and professional 1,553 1,173 991
Marketing and promotion 728 771 662
Other 4,303 4,169 4,015
------------- ------------- --------------
Total other expense 25,385 25,139 24,530
------------- ------------- --------------
Income before income taxes 14,935 14,292 13,767
Income taxes 5,128 4,541 4,674
------------- ------------- --------------
Net income
$ 9,807 $ 9,751 $ 9,093
============= ============= ==============
Per common share data:
Basic earnings per share $2.22 $2.17 $1.92
Diluted earnings per share 2.16 2.13 1.88
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 2005, 2004 and 2003
(In thousands, except share and per share data) Additional Accumulated Other
Common Paid-In- Retained Deferred Comprehensive Treasury
Stock Capital Earnings Compensation Income (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2002 $ 14,415 $14,450 $45,896 $1,589 $2,373 $(11,916) $66,807
Comprehensive income:
Net income - - 9,093 - - - 9,093
Net unrealized change in available-for-sale
investment securities - - - - (792) - (792)
--------------
Total Comprehensive Income 8,301
Cash dividends on common stock ($.43 per share) - - (2,047) - - - (2,047)
Issuance of 46,756 common shares pursuant to
the Dividend Reinvestment Plan 125 748 - - - - 873
Issuance of 10,866 common shares pursuant to
the Deferred Compensation Plan 29 194 - - - - 223
Issuance of 20,790 common shares pursuant to
the First Retirement & Savings Plan 55 382 - - - - 437
Purchase of 180,085 treasury shares - - - - - (4,233) (4,233)
Deferred compensation - - - 292 - (292) -
Issuance of 17,813 common shares pursuant to
the exercise of stock options 48 186 - - - - 234
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2003 $ 14,672 $15,960 $52,942 $1,881 $1,581 $(16,441) $70,595
Comprehensive income:
Net income - - 9,751 - - - 9,751
Net unrealized change in available-for-sale
investment securities - - - - (958) - (958)
--------------
Total Comprehensive Income 8,793
Cash dividends on common stock ($.45 per share) - - (2,023) - - - (2,023)
Issuance of 39,481 common shares pursuant to
the Dividend Reinvestment Plan 105 1,143 - - - - 1,248
Issuance of 6,421 common shares pursuant to
the Deferred Compensation Plan 20 188 - - - - 208
Issuance of 8,225 common shares pursuant to
the First Retirement & Savings Plan 29 240 - - - - 269
Purchase of 319,618 treasury shares - - - - - (10,365) (10,365)
Deferred compensation - - - 287 - (287) -
Tax benefit related to deferred
compensation distributions - - - 36 - - 36
Issuance of 22,937 common shares pursuant to
the exercise of stock options 79 246 - - - - 325
Tax benefit related to exercise of incentive
stock options - 58 - - - - 58
Tax benefit related to exercise of
non-qualified stock options - 10 - - - - 10
3-for-2 stock split in the form of 50%
stock dividend 7,411 - (7,411) - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2004 $ 22,316 $17,845 $53,259 $2,204 $623 $(27,093) $69,154
=====================================================================================
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 2005, 2004 and 2003
(In thousands, except share and per share data) Additional Accumulated Other
Common Paid-In- Retained Deferred Comprehensive Treasury
Stock Capital Earnings Compensation Income (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2004 $ 22,316 $17,845 $53,259 $2,204 $623 $(27,093) $69,154
Comprehensive income:
Net income - - 9,807 - - - 9,807
Net unrealized change in available-for-sale
investment securities - - - - (1,362) - (1,362)
--------------
Total Comprehensive Income 8,445
Cash dividends on common stock ($.50 per share) - - (2,199) - - - (2,199)
Issuance of 17,105 common shares pursuant to
the Dividend Reinvestment Plan 68 631 - - - - 699
Issuance of 3,622 common shares pursuant to
the Deferred Compensation Plan 14 133 - - - - 147
Issuance of 8,001 common shares pursuant to
the First Retirement & Savings Plan 32 292 - - - - 324
Purchase of 119,813 treasury shares - - - - - (4,851) (4,851)
Deferred compensation - - - 271 - (271) -
Tax benefit related to deferred
compensation distributions - 52 - (35) - - 17
Issuance of 25,996 common shares pursuant to
the exercise of stock options 104 363 - - - - 467
Tax benefit related to exercise of incentive
stock options - 115 - - - - 115
Tax benefit related to exercise of
non-qualified stock options - 8 - - - - 8
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2005 $ 22,534 $19,439 $60,867 $2,440 $(739) $(32,215) $72,326
=====================================================================================
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
For the years ended December 31, 2005, 2004 and 2003
(In thousands) 2005 2004 2003
------------- ------------- --------------
Cash flows from operating activities:
Net income $ 9,807 $ 9,751 $ 9,093
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,091 588 1,000
Depreciation, amortization and accretion, net 1,489 2,450 3,104
Gain on sales of securities, net (373) (92) (370)
Loss on sales of other real property owned, net 236 76 53
Gain on sales of loans held for sale, net (845) (595) (1,813)
Deferred income taxes 238 178 (226)
(Increase) decrease in accrued interest receivable (1,005) 165 792
Increase (decrease) in accrued interest payable 211 278 (565)
Origination of loans held for sale (62,278) (44,019) (128,708)
Proceeds from sales of loans held for sale 64,034 42,675 136,840
Decrease (increase) in other assets (612) 794 (2,698)
(Decrease) increase in other liabilities (582) (1,068) 1,257
------------- ------------- --------------
Net cash provided by operating activities 11,411 11,181 17,759
------------- ------------- --------------
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale 45,819 5,137 13,815
Proceeds from maturities of securities available-for-s 96,189 96,442 139,783
Proceeds from maturities of securities held-to-maturit 140 125 225
Purchases of securities available-for-sale (130,069) (95,502) (163,266)
Purchases of securities held-to-maturity (264) - (1,734)
Net increase in loans (42,259) (43,479) (59,576)
Purchases of premises and equipment (1,416) (889) (1,052)
Proceeds from sales of other real property owned 822 924 925
Capitalization of mortgage servicing rights - - (1)
------------- ------------- --------------
Net cash used in investing activities (31,038) (37,242) (70,881)
------------- ------------- --------------
Cash flows from financing activities:
Net increase (decrease) in deposits (1,171) 35,248 1,540
Increase in federal funds purchased 4,000 - -
(Decrease) increase in repurchase agreements 7,545 (40) 15,691
Decrease in short-term FHLB advances (2,300) (5,000) (5,000)
Increase in long-term FHLB advances 12,000 - -
Repayment of short-term debt (3,100) (11,700) (200)
Proceeds from short-term debt 4,000 6,675 500
Issuance of junior subordinated debentures - 10,000 -
Proceeds from issuance of common stock 938 802 894
Purchase of treasury stock (4,851) (10,365) (4,233)
Dividends paid on common stock (1,431) (954) (778)
------------- ------------- --------------
Net cash provided by financing activities 15,630 24,666 8,414
------------- ------------- --------------
Decrease in cash and cash equivalents (3,997) (1,395) (44,708)
Cash and cash equivalents at beginning of year 23,554 24,949 69,657
------------- ------------- --------------
Cash and cash equivalents at end of year $19,557 $23,554 $24,949
============= ============= ==============
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $15,476 $11,366 $12,461
Income taxes 5,115 4,658 4,632
Supplemental disclosure of noncash investing and
financing activities:
Loans transferred to real estate owned $454 $1,250 890
Dividends reinvested in common shares 699 1,248 873
Net tax benefit related to option and deferred
compensation plans 140 104 -
See accompanying notes to consolidated financial statements.
Notes To Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(Table dollar amounts in thousands, except share data)
Note 1 - Summary of Significant Accounting Policies
Basis of Accounting and Consolidation
The accompanying consolidated financial statements include the accounts of First
Mid-Illinois Bancshares, Inc. ("Company") and its wholly-owned subsidiaries:
Mid-Illinois Data Services, Inc. ("MIDS"), First Mid-Illinois Bank & Trust, N.A.
("First Mid Bank") and The Checkley Agency, Inc. ("Checkley"). All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain amounts in the prior years' consolidated financial statements have been
reclassified to conform to the 2005 presentation and there was no impact on net
income or stockholders' equity from these reclassifications. The Company
operates as a one-segment entity for financial reporting purposes. The
accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America. Following is a
description of the more significant of these policies.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
these estimates. Material estimates that are particularly susceptible to
significant change related to the determination of the allowance for loan
losses. In connection with the determination of the allowance for loan losses,
management obtains independent appraisals for significant properties.
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 2005, 2004 or 2003.
Held-to-maturity securities are recorded at cost adjusted for amortization of
premiums and accretion of discounts to the earlier of the call date or maturity
date using the interest method.
Available-for-sale securities are recorded at fair value. Unrealized holding
gains and losses, net of the related income tax effect, are excluded from income
and reported as a separate component of stockholders' equity. If a decrease in
the fair value of a security is expected to be other than temporary, then the
security is written down to its fair value through a charge to income and a new
cost basis is established for the security.
Realized gains and losses on the sale of investment securities are recorded
using the specific identification method.
Loans
Loans are stated at the principal amount outstanding net of unearned discounts,
unearned income and the allowance for loan losses. Unearned income includes
deferred loan origination fees reduced by loan origination costs and is
amortized to interest income over the life of the related loan using methods
that approximate the effective interest rate method. Interest on substantially
all loans is credited to income based on the principal amount outstanding.
The Company's policy is to discontinue the accrual of interest income on any
loan that becomes ninety days past due as to principal or interest or earlier
when, in the opinion of management there is reasonable doubt as to the timely
collection of principal or interest. Nonaccrual loans are returned to accrual
status when, in the opinion of management, the financial position of the
borrower indicates there is no longer any reasonable doubt as to the timely
collectibility of interest or principal.
Loans expected to be sold are classified as held for sale in the consolidated
financial statements and are recorded at the lower of aggregate cost or market
value, taking into consideration future commitments to sell the loans.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level deemed appropriate by
management to provide for probable losses inherent in the loan portfolio. The
allowance is based on a continuing review of the loan portfolio, the underlying
value of the collateral securing the loans, current economic conditions and past
loan loss experience. Loans that are deemed to be uncollectible are charged off
to the allowance. The provision for loan losses and recoveries are credited to
the allowance.
Management, considering current information and events regarding the borrowers'
ability to repay their obligations, considers a loan to be impaired when it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the note agreement, including principal and interest.
The amount of the impairment is measured based on the fair value of the
collateral, if the loan is collateral dependent, or alternatively, at the
present value of expected future cash flows discounted at the loan's effective
interest rate. Certain homogeneous loans such as residential real estate
mortgage and installment loans are excluded from the impaired loan provisions.
Interest income on impaired loans is recorded when cash is received and only if
principal is considered to be fully collectible.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization is determined principally by the
straight-line method over the estimated useful lives of the assets.
Goodwill and Intangible Assets
The Company has goodwill from business combinations, identifiable intangible
assets assigned to core deposit relationships and customer lists acquired, and
intangible assets arising from the rights to service mortgage loans for others.
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 agency. 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
basis, 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
Assets held in fiduciary or agency capacities are not included in the
consolidated balance sheets since such items are not assets of the Company or
its subsidiaries. Fees from trust activities are recorded on an cash basis over
the period in which the service is provided. Fees are a function of the market
value of assets managed and administered, the volume of transactions, and fees
for other services rendered, as set forth in the underlying client agreement
with the Wealth Management department of First Mid Bank. This revenue
recognition involves the use of estimates and assumptions, including components
that are calculated based on asset valuations and transaction volumes. Any out
of pocket expenses or services not typically covered by the fee schedule for
trust activities are charged directly to the trust account on a gross basis as
trust revenue is incurred. The Company manages or administers 1,159 accounts
with assets totaling approximately $401,841,000.
Stock Split
On July 16, 2004, the Company effected a three-for-two stock split in the form
of a 50% stock dividend. Par value remained at $4 per share. The stock split
increased the Company's outstanding common shares from 2,981,539 to 4,472,309
shares. All share and per share amounts have been restated for years prior to
2004 to give retroactive recognition to the stock split.
Treasury Stock
Treasury stock is stated at cost. Cost is determined by the first-in, first-out
method.
Stock Options
The Company applies APB Opinion No. 25 in accounting for the Stock Incentive
Plan and, accordingly, compensation cost based on fair value at grant date has
not been recognized for its stock options in the consolidated financial
statements. As required by SFAS 123(R), "Share Based Payment," which is a
revision to SFAS 123, "Accounting for Stock-Based Compensation" as amended by
SFAS 148, "Accounting for Stock-Based Compensation--Transition and Disclosure,"
the Company provides pro forma net income and pro forma earnings per share
disclosures for employee stock option grants.
The following table illustrates the effect on net income if the fair-value-based
method had been applied.
For the years ended December 31,
2005 2004 2003
------------ ----------- ----------
Net income, as reported $ 9,807 $ 9,751 $ 9,093
Stock-based compensation expense
determined under fair-value-based
method, net of related tax effect (333) (347) (206)
------------ ----------- ----------
Pro forma net income $ 9,474 $ 9,404 $ 8,887
============ =========== ==========
Basic Earnings Per Share:
As reported $ 2.22 $ 2.17 $ 1.92
Pro forma 2.14 2.09 1.87
Diluted Earnings Per Share:
As reported $ 2.16 $ 2.13 $ 1.88
Pro forma 2.08 2.05 1.84
Comprehensive Income
The Company's comprehensive income for the years ended December 31, 2005, 2004
and 2003 is as follows:
2005 2004 2003
----------- ----------- -----------
Net income $9,807 $9,751 $9,093
Other comprehensive loss:
Unrealized losses during the year (1,859) (1,478) (929)
Reclassification adjustment for net
gains realized in net income (373) (92) (370)
Tax effect 870 612 507
----------- ----------- -----------
Total other comprehensive loss (1,362) (958) (793)
----------- ----------- -----------
Comprehensive income $8,445 $8,793 $8,301
=========== =========== ===========
Note 2 - Earnings Per Share
Basic Earnings per Share ("EPS") is based on the weighted average number of
common shares outstanding. Diluted EPS is computed by using the weighted average
number of common shares outstanding, increased by the assumed conversion of
stock options, if not anti-dilutive. The components of basic and diluted
earnings per common share for the years ended December 31, 2005, 2004, and 2003
are as follows:
2005 2004 2003
---------------- --------------- ----------------
Basic Earnings per Share:
Net income available to common stockholders $9,807,000 $9,751,000 $9,093,000
================ =============== ================
Weighted average common shares outstanding 4,423,186 4,499,092 4,743,210
================ =============== ================
Basic earnings per common share $2.22 $2.17 $1.92
================ =============== ================
Diluted Earnings per Share:
Net income available to common stockholders $9,807,000 $9,751,000 $9,093,000
================ =============== ================
Weighted average common shares outstanging 4,423,186 4,499,092 4,743,210
Assumed conversion of stock options 124,481 88,967 85,935
---------------- --------------- ----------------
Diluted weighted average common shares outstanding 4,547,667 4,588,059 4,829,145
================ =============== ================
Diluted earnings per common share $2.16 $2.13 $1.88
================ =============== ================
Note 3 - Cash and Due from Banks
Aggregate cash and due from bank balances of $802,000 and $722,000 at December
31, 2005 and 2004, were maintained in satisfaction of statutory reserve
requirements of the Federal Reserve Bank.
Note 4 - Investment Securities
The amortized cost, gross unrealized gains and losses and estimated fair values
of available-for-sale and held-to-maturity securities by major security type at
December 31, 2005 and 2004 were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------- -------------- -------------- --------------- ---------------
2005
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
government corporations and Agencies $108,506 $ 31 $(1,500) $107,037
Obligations of states and political subdivisions 15,417 239 (50) 15,606
Mortgage-backed securities 20,046 25 (442) 19,629
Federal Home Loan Bank stock 5,557 - - 5,557
Other securities 7,526 486 - 8,012
-------------- -------------- --------------- ---------------
Total available-for-sale $157,052 $ 781 $(1,992) $155,841
============== ============== =============== ===============
Held-to-maturity:
Obligations of states and political subdivisions $ 1,412 $ 30 $ - $ 1,442
============== ============== =============== ===============
2004
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
government corporations and Agencies $ 92,369 $ 35 $ (507) $91,897
Obligations of states and political subdivisions 23,581 755 (2) 24,334
Mortgage-backed securities 34,032 220 (54) 34,198
Federal Home Loan Bank stock 5,293 - - 5,293
Other securities 12,524 575 - 13,099
-------------- -------------- --------------- ---------------
Total available-for-sale $167,799 $ 1,585 $ (563) $168,821
============== ============== =============== ===============
Held-to-maturity:
Obligations of states and political subdivisions $ 1,552 $ 48 $ (2) $ 1,598
============== ============== =============== ===============
Proceeds from sales of investment securities, realized gains and losses and
income tax expense and benefit were as follows during the years ended December
31, 2005, 2004 and 2003:
2005 2004 2003
------------ ------------ ------------
Proceeds from sales $45,819 $5,137 $13,815
Gross gains 402 92 370
Gross losses 29 - -
Income tax expense 132 32 130
With the exception of U.S. governmental agencies and corporations, the Company
did not hold any securities of a single issuer, payable from and secured by the
same source of revenue or taxing authority, the book value of which exceeded 10%
of stockholders' equity at December 31, 2005 or 2004.
The following table presents the aging of gross unrealized losses and fair value
by investment category as of December 31, 2005 and 2004:
Less than 12 months 12 months or more Total
-------------------- -------------------- ---------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
--------- ---------- --------- ---------- ---------- ----------
December 31, 2005:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $42,377 $(390) $53,798 $(1,110) $ 96,175 $(1,500)
Obligations of states and political
subdivisions 2,998 (50) - - 2,998 (50)
Mortgage-backed securities 10,268 (264) 8,146 (178) 18,414 (442)
--------- ---------- --------- ---------- ---------- ----------
Total $55,643 $ (704) $61,944 $(1,288) $117,587 $(1,992)
========= ========== ========= ========== ========== ==========
December 31, 2004:
U.S. Treasury securities and obligations of
U.S.government corporations and agencies $76,886 $(507) $ - $ - $ 76,886 $ (507)
Obligations of states and political
subdivisions 2,659 (4) - - 2,659 (4)
Mortgage-backed securities 11,505 (54) - - 11,505 (54)
--------- ---------- --------- ---------- ---------- ----------
Total $91,050 $ (565) $ - $ - $ 91,050 $ (565)
========= ========== ========= ========== ========== ==========
Management does not believe any individual unrealized loss as of December 31,
2005 or 2004 represents an other than temporary impairment. At December 31,
2005, the unrealized losses reported for U.S. agency securities relate to ten
securities issued by Federal Home Loan Bank. These unrealized losses are
primarily attributable to changes in interest rates and individually were 3.5%
or less of their respective amortized cost basis. The unrealized losses reported
for mortgage-backed securities relate primarily to three securities issued by
FHLMC and FNMA. These unrealized losses are also primarily attributable to
changes in interest rates and individually were 2.5% or less of their respective
amortized cost basis.
At December 31, 2004, the unrealized losses reported for U.S. agency securities
relate primarily to eleven securities issued by Federal Home Loan Bank and five
U.S. Treasury securities. These unrealized losses are primarily attributable to
changes in interest rates and individually were 2% or less of their respective
amortized cost basis. The unrealized losses reported for mortgage-backed
securities relate primarily to three securities issued by FHLMC. These
unrealized losses are also primarily attributable to changes in interest rates
and individually were 2% or less of their respective amortized cost basis.
The Company has both the intent and ability to hold the securities included in
the above table for a time necessary to recover the amortized cost.
Maturities of investment securities were as follows at December 31, 2005.
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 $29,729 $29,598
Due after one-five years 67,063 65,986
Due after five-ten years 22,630 22,637
Due after ten years 17,584 17,991
--------------- --------------
137,006 136,212
Mortgage-backed securities 20,046 19,629
--------------- --------------
Total available-for-sale $157,052 $155,841
--------------- --------------
Held-to-maturity:
Due in one year or less $ 140 $ 141
Due after one-five years 630 652
Due after five-ten years 140 141
Due after ten-years 502 508
--------------- --------------
Total held-to-maturity $ 1,412 $ 1,442
--------------- --------------
Total investment securities $158,464 $157,282
=============== ==============
Investment securities of approximately $136,787,000 and $143,560,000 at December
31, 2005 and 2004, respectively, were pledged to secure public deposits and
repurchase agreements and for other purposes as permitted or required by law.
Note 5 - Loans
A summary of loans at December 31, 2005 and 2004 follows:
2005 2004
--------------- ----------------
Commercial, financial and agricultural $150,596 $137,738
Real estate mortgage 450,435 427,154
Installment 34,384 30,592
Other 2,715 2,375
--------------- ----------------
Total gross loans 638,130 597,859
Less unearned discount 3 10
--------------- ----------------
Net loans $638,133 $597,849
=============== ================
The real estate mortgage loan balance in the above table includes loans held for
sale of $1,778,000 and $2,689,000 at December 31, 2005 and 2004, respectively.
The aggregate principal balances of nonaccrual, past due ninety days or more and
renegotiated loans were $3,458,000 and $3,106,000 at December 31, 2005 and 2004,
respectively. Interest income which would have been recorded under the original
terms of such nonaccrual or renegotiated loans totaled $99,000, $169,000 and
$213,000 in 2005, 2004 and 2003, respectively.
Impaired loans are defined as those loans where it is probable that amounts due
according to contractual terms, including principal and interest, will not be
collected. Both nonaccrual and renegotiated loans meet this definition. The
Company evaluates all individual loans on nonaccrual or renegotiated with a
balance over $100,000 for impairment. Impaired loans are measured by the Company
at the present value of expected future cash flows or, alternatively, if the
loan is collateral dependant, at the fair value of the collateral. Known losses
of principal on these loans have been charged off. Interest income on nonaccrual
loans is recognized only at the time cash is received. Interest income on
renegotiated loans is recorded according to the most recently agreed upon
contractual terms.
The following table presents information on impaired loans at December 31, 2005
and 2004:
2005 2004
-------------- --------------
Impaired loans for which a specific
allowance has been provided $ 500 $ 790
Impaired loans for which no specific
allowance has been provided 2,958 2,316
-------------- --------------
Total loans determined to be impaired $3,458 $3,106
============== ==============
Allowance on impaired loans $ 110 $ 39
============== ==============
For the year ended December 31, 2005 2004
- -------------------------------------------------------------------------
Average recorded investment in impaired loans $3,577 $3,324
Cash basis interest income recognized from
impaired loans 212 97
Most of the Company's business activities are with customers located within east
central Illinois. At December 31, 2005 and 2004, the Company's loan portfolio
included approximately $92,381,000 and $91,477,000, 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, 2005 and 2004 were approximately $7,605,000 and
$10,830,000, respectively.
Note 6 - Allowance for Loan Losses
Changes in the allowance for loan losses were as follows during the three years
ended December 31, 2005, 2004 and 2003:
2005 2004 2003
---------------- ----------------- ----------------
Balance, beginning of year $4,621 $4,426 $3,723
Provision for loan losses 1,091 588 1,000
Recoveries 223 195 481
Charge-offs (1,287) (588) (778)
---------------- ----------------- ----------------
Balance, end of year $4,648 $4,621 $4,426
================ ================= ================
Note 7 - Premises and Equipment, Net
Premises and equipment at December 31, 2005 and 2004 consisted of:
2005 2004
----------------- -----------------
Land $ 3,364 $ 3,364
Buildings and improvements 15,037 14,806
Furniture and equipment 10,782 10,262
Leasehold improvements 1,293 1,049
Construction in progress 84 29
----------------- -----------------
Subtotal 30,559 29,510
Accumulated depreciation and amortization 15,392 14,283
----------------- -----------------
Total $15,168 $15,227
================= =================
Depreciation and amortization expense was $1,475,000, $1,721,000 and $1,909,000
for the years ended December 31, 2005, 2004 and 2003, respectively.
Note 8 - Goodwill and Intangible Assets
The Company has goodwill from business combinations, intangible assets from
branch acquisitions, identifiable intangible assets assigned to core deposit
relationships and customer lists of insurance agencies acquired, and intangible
assets arising from the rights to service mortgage loans for others.
The following table presents gross carrying amount and accumulated amortization
by major intangible asset class as of December 31, 2005 and 2004:
2005 2004
---------------------------------- ---------------------------------
Gross Accumulated Gross Accumulated
Carrying Carrying
Value Amortization Value Amortization
--------------- ------------------ -------------- ------------------
Goodwill not subject to amortization $12,794 $3,760 $12,794 $3,760
Intangibles from branch acquisition 3,015 1,760 3,015 1,559
Core deposit intangibles 2,805 2,440 2,805 2,279
Customer list intangibles 1,904 746 1,904 555
Mortgage servicing rights 608 608 608 593
--------------- ------------------ -------------- ------------------
$21,126 $9,314 $21,126 $8,746
=============== ================== ============== ==================
Total amortization expense for the years ended December 31, 2005, 2004 and 2003
was as follows:
2005 2004 2003
------------ ------------ ------------
Intangibles from branch acquisitions $201 $201 $201
Core deposit intangibles 161 190 282
Mortgage servicing rights 15 41 100
Customer list intangibles 191 191 191
------------ ------------ ------------
$568 $623 $774
============ ============ ============
Estimated amortization expense for each of the five succeeding years is shown in
the table below:
Estimated amortization expense:
For period ended 12/31/06 $553
For period ended 12/31/07 $499
For period ended 12/31/08 $452
For period ended 12/31/09 $417
For period ended 12/31/10 $391
In accordance with the provisions of SFAS 142, the Company performed testing of
goodwill for impairment as of September 30, 2005 and 2004, and determined, as of
each of these dates, that goodwill was not impaired. Management also concluded
that the remaining amounts and amortization periods were appropriate for all
intangible assets.
Note 9 - Deposits
As of December 31, 2005 and 2004, deposits consisted of the following:
2005 2004
------------------- ------------------
Demand deposits:
Non-interest bearing $ 95,305 $ 85,524
Interest-bearing 144,597 146,668
Savings 55,545 57,897
Money market 82,838 83,793
Time deposits 270,784 276,358
------------------- ------------------
Total deposits $649,069 $650,240
=================== ==================
Total interest expense on deposits for the years ended December 31, 2005, 2004
and 2003 was as follows:
2005 2004 2003
--------------- ---------------- ----------------
Interest-bearing demand $1,314 $ 759 $ 907
Savings 212 203 263
Money market 1,660 809 872
Time deposits 8,533 7,351 7,709
--------------- ---------------- ----------------
Total $11,719 $9,122 $9,751
=============== ================ ================
As of December 31, 2005, 2004 and 2003, the aggregate amount of time deposits in
denominations of more than $100,000 and the total interest expense on such
deposits was as follows:
2005 2004 2003
------------- -------------- -------------
Outstanding $103,434 $115,333 $84,516
Interest expense for the year 3,579 2,956 2,462
The following table shows the amount of maturities for all time deposits as of
December 31, 2005:
Less than 1 year $175,044
1 year to 2 years 75,146
2 years to 3 years 6,989
3 years to 4 years 4,878
4 years to 5 years 8,587
Over 5 years 140
------------------
Total $270,784
==================
In 2005, the Company's significant deposits included brokered CDs, time deposits
with the State of Illinois, and a deposit relationship with a public entity. The
Company had eleven brokered CDs at various maturities with a total balance of
$38.4 million as of December 31, 2005. State of Illinois time deposits
maintained with the Company totaled $3.4 million as of December 31, 2005. These
balances are subject to bid annually. In addition, the Company maintains account
relationships with various public entities throughout its market areas. Two
public entities had total balances of $16.2 million in various checking accounts
and time deposits as of December 31, 2005. These balances are subject to change
depending upon the cash flow needs of the public entity.
Note 10 - Borrowings
As of December 31, 2005 and 2004 borrowings consisted of the following:
2005 2004
------------- --------------
Federal funds purchawsed $4,000 $ -
Securities sold under agreements to repurchase 67,380 59,835
Federal Home Loan Bank advances:
Overnight advances 12,000 -
Fixed-term advances 23,000 25,300
Subordinated debentures 10,310 10,310
Federal funds purchased 4,000 -
Other debt:
Loans due in one year or less 5,500 4,200
Loans due after one year - 400
------------- --------------
Total $122,190 $100,045
============= ==============
FHLB advances represent borrowings by First Mid Bank to economically fund loan
demand. The fixed term advances consist of $23 million as follows:
* $3 million advance at 3.73% with a 1-year maturity, due March 21, 2006
* $7 million advance at 4.00% with a 2-year maturity, due April 15, 2007
* $5 million advance at 4.58% with a 5-year maturity, due March 22, 2010
* $3 million advance at 5.98% with a 10-year maturity, due March 1,
2011, callable quarterly
* $5 million advance at 4.33% with a 10-year maturity, due November 23,
2011, five year lockout, one-time call 11/23/06
2005 2004 2003
--------- -------- ---------
Securities sold under agreements to repurchase:
Maximum outstanding at any month-end $67,380 $63,517 $59,875
Average amount outstanding for the year 57,799 55,645 47,795
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 133% of the outstanding advances and letters of credit
($4 million on December 31, 2005) from the FHLB. The securities underlying the
repurchase agreements are under the Company's control.
The Company had debt outstanding of $5.5 million as of December 31, 2005, on a
revolving credit agreement with The Northern Trust Company. Terms of the
Northern Trust loan agreement are a floating interest rate of 1.25% over the
federal funds rate with interest due quarterly. The interest rate as of December
31, 2005 was 5.44% (3.48% at December 31, 2004). The loan is a revolving credit
agreement with a maximum available balance of $15 million. The outstanding loan
balance matures October 21, 2006. 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, 2005 and 2004.
On February 27, 2004, the Company completed the issuance and sale of $10 million
of floating rate trust preferred securities through First Mid-Illinois Statutory
Trust I (the "Trust"), a statutory business trust and wholly-owned
unconsolidated subsidiary of the Company, as part of a pooled offering. The
Company established the Trust for the purpose of issuing the trust preferred
securities. The $10 million in proceeds from the trust preferred issuance and an
additional $310,000 for the Company's investment in common equity of the Trust,
a total of $10,310 000, was invested in junior subordinated debentures of the
Company. The underlying junior subordinated debentures issued by the Company to
the Trust mature in 2034, bear interest at three-month London Interbank Offered
Rate ("LIBOR") plus 280 basis points, reset quarterly, and are callable, at the
option of the Company, at par on or after April 7, 2009. At December 31, 2005
and 2004 the rate was 6.95% and 4.87%, respectively. The Company used the
proceeds of the offering for general corporate purposes. The trust preferred
securities issued by the Trust are included as Tier 1 capital of the Company for
regulatory capital purposes.
Note 11 - Regulatory Capital
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Bank holding companies follow minimum
regulatory requirements established by the Federal Reserve Board. First Mid Bank
follows similar minimum regulatory requirements established for national banks
by the OCC. Failure to meet minimum capital requirements can result in the
initiation of certain mandatory and possibly additional discretionary action by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements.
Quantitative measures established by each regulatory agency to ensure capital
adequacy require the reporting institutions to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 2005 and 2004, that all capital adequacy
requirements have been met.
As of December 31, 2005 and 2004, 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, 2005, 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, 2005
Total Capital
(to risk-weighted assets)
Company $ 75,901 11.87% $ 51,163 > 8.00% N/A N/A
-
First Mid Bank 73,913 11.66 50,726 > 8.00 $63,407 > 10.00%
- -
Tier 1 Capital
(to risk-weighted assets)
Company 71,253 11.14 25,581 > 4.00 N/A N/A
-
First Mid Bank 69,265 10.92 25,363 > 4.00 38,044 > 6.00
- -
Tier 1 Capital
(to average assets)
Company 71,253 8.55 33,330 > 4.00 N/A N/A
-
First Mid Bank 69,265 8.36 33,152 > 4.00 41,440 > 5.00
- -
December 31, 2004
Total Capital
(to risk-weighted assets)
Company $ 70,787 11.71% $ 48,371 > 8.00% N/A N/A
-
First Mid Bank 71,233 11.88 47,988 > 8.00 $59,986 > 10.00%
- -
Tier 1 Capital
(to risk-weighted assets)
Company 66,166 10.94 24,185 > 4.00 N/A N/A
-
First Mid Bank 66,612 11.10 23,994 > 4.00 35,991 > 6.00
- -
Tier 1 Capital
(to average assets)
Company 66,166 7.99 33,132 > 4.00 N/A N/A
-
First Mid Bank 66,612 8.08 32,961 > 4.00 41,201 > 5.00
- -
Note 12 - Disclosure of Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" ("SFAS 107") requires the disclosure of the
estimated fair value of financial instrument assets and liabilities. For the
Company, as for most financial institutions, most of the assets and liabilities
are considered financial instruments as defined in SFAS 107. However, many of
the Company's financial instruments lack an available trading market as
characterized by a willing buyer and seller engaging in an exchange transaction.
Additionally, the Company's general practice and intent is to hold its financial
instruments until maturity and not to engage in trading or sales activity.
Accordingly, the Company, for purposes of the SFAS 107 disclosure, used
significant assumptions and estimations as well as present value calculations.
Future changes in these assumptions or methodologies may have a material effect
on estimated fair values.
The Company has determined estimated fair values using the best available
information and an estimation methodology suitable for each category of
financial instrument. The estimation methodology used, the estimated fair values
and the carrying amount at December 31, 2005 and 2004 were as follows:
Financial instruments for which an active secondary market exists have been
valued using quoted available market prices.
2005 2004
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- -------------- -------------- --------------
Cash and cash equivalents $ 19,557 $19,557 $ 23,554 $ 23,554
Investments available-for-sale 155,841 155,841 168,821 168,821
Investments held-to-maturity 1,412 1,442 1,552 1,598
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.
2005 2004
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- -------------- -------------- --------------
Deposits with stated maturities $268,251 $267,849 $273,947 $275,578
Federal funds purchased 4,000 4,000 - -
Securities sold under agreements
to repurchase 67,380 67,393 59,835 59,847
Federal Home Loan Bank advances 35,000 35,186 25,300 26,178
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.
2005 2004
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- -------------- -------------- --------------
Deposits with no stated maturity $380,818 $380,818 $376,293 $376,293
Floating rate debt 5,500 5,500 4,600 4,600
Junior subordinated debentures 10,310 10,310 10,310 10,310
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.
2005 2004
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- -------------- -------------- --------------
Net loan portfolio (including
loans held for sale) $633,485 $623,882 $593,228 $596,175
Off-balance sheet items such as loan commitments and stand-by letters of credit
generally approximate their estimated fair values.
Note 13--Deferred Compensation Plan
The Company follows the provisions of the Emerging Issues Task Force Issue No.
97-14, "Accounting for Deferred Compensation Arrangements Where Amounts Earned
Are Held in a Rabbi Trust and Invested" ("EITF 97-14") for purposes of the First
Mid-Illinois Bancshares, Inc. Deferred Compensation Plan ("DCP"). At December
31, 2005, the Company classified the cost basis of its common stock issued and
held in trust in connection with the DCP of approximately $2,440,000 as treasury
stock. The Company also classified the cost basis of its related deferred
compensation obligation of approximately $2,440,000 as an equity instrument
(deferred compensation).
The DCP was effective as of June 1984. The purpose of the DCP 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.
During 2005 and 2004 the Company issued 3,622 common shares and 6,421 common
shares, respectively, pursuant to the DCP.
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 the 402(g) limit of compensation. The total expense for the plan amounted to
$591,000, $570,000 and $544,000 in 2005, 2004 and 2003, respectively. The
Company also has two agreements in place to pay $50,000 annually for 20 years
from the retirement date to one retired senior officer of the Company and to one
current senior officer. Total expense under these two agreements amounted to
$75,000 in 2005 and $610,000 and $81,000 per year in 2004 and 2003,
respectively. During the fourth quarter of 2004, the Company revised its
estimate for supplemental retirement benefits and made a non-recurring entry of
$528,000 to reflect the change in the estimate.
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 450,000 shares have been authorized under the SI
Plan. Options to acquire shares will be awarded at an exercise price equal to
the fair market value of the shares on the date of grant. Options to acquire
shares have a 10-year term. Options granted to employees vest over a four-year
period and those options granted to directors vest at the time they are issued.
A summary of the status of stock options under the SI Plan at December 31, 2005,
2004 and 2003 and changes during the years then ended are presented in the
following table:
2005 2004 2003
-------------------------- ---------------------------- ---------------------------
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------- ------------ --------------- ------------- -------------
Beginning of year 356,656 $23.86 305,343 $18.97 251,156 $15.10
Granted - - 74,250 41.00 72,000 31.00
Exercised (25,996) 17.97 (22,937) 14.15 (17,813) 12.85
Cancelled (5,625) 30.93 - - - -
------------ ------------- ------------ --------------- ------------- -------------
End of year 325,035 $24.21 356,656 $23.86 305,343 $18.97
============ ============= ============ =============== ============= =============
Options exercisable 197,724 $19.73 176,380 $19.33 140,441 $16.31
============ ============= ============ =============== ============= =============
Fair value of options
granted during year $ 7.81 $ 5.79
============ =============
The fair value of options granted is estimated on the grant date using the
Black-Scholes option-pricing model. There were no options granted during 2005.
The following assumptions were used in estimating the fair value for options
granted in 2004 and 2003:
2004 2003
------------ ----------
Dividend yield 1.3% 1.8%
Average risk free interest rate 3.51% 2.49%
Weighted average expected life 5.2 yrs 9.9 yrs
Average expected volatility 17.2% 15.5%
The following table summarizes information about stock options under the SI plan
outstanding at December 31, 2005:
Options Outstanding Options Exercisable
Weighted-Average
Range of Exercise Number Remaining Weighted-Average Number Weighted-Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------------- ------------- ------------------ ------------------ --------------- ------------------
Below $16.00 92,532 3.53 $13.85 92,532 $13.85
$16.00 to $30.00 97,220 6.53 $17.22 60,470 $17.05
Above $30.00 135,283 8.49 $36.32 44,722 $35.53
------------- ------------------ ------------------ --------------- ------------------
325,035 6.49 $24.21 197,724 $19.73
============= ================== ================== =============== ==================
Note 16 - Income Taxes
The components of federal and state income tax expense (benefit) for the years
ended December 31, 2005, 2004 and 2003 were as follows:
2005 2004 2003
------------ ----------- -----------
Current
Federal $4,337 $3,644 $4,183
State 553 719 717
------------ ----------- -----------
Total Current 4,890 4,363 4,900
Deferred
Federal 198 156 (186)
State 40 22 (40)
------------ ----------- -----------
Total Deferred 238 178 (226)
------------ ----------- -----------
Total $5,128 $4,541 $4,674
============ =========== ===========
Recorded income tax expense differs from the expected tax expense (computed by
applying the applicable statutory U.S. federal tax rate of 35% to income before
income taxes). During 2005, 2004 and 2003, the Company was in a graduated tax
rate position. The principal reasons for the difference are as follows:
2005 2004 2003
-------------- ------------- -------------
Expected income taxes $5,227 $5,002 $4,819
Effects of:
Tax-exempt income (433) (530) (550)
Nondeductible interest expense 34 32 35
State taxes, net of federal taxes 385 487 440
Other items 14 (350) 19
Effect of marginal tax rate (99) (100) (89)
-------------- ------------- -------------
Total $5,128 $4,541 $4,674
============== ============= =============
The Company reduced its accrual for taxes in 2004 by $355,000 based upon
management's best estimate of future tax liability. There was no such reduction
to the 2005 accrual. Tax returns filed with the Internal Revenue Service and
Illinois Department of Revenue are subject to review by law under a three-year
statute of limitations.
The tax effects of the temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2005 and 2004 are presented below:
2005 2004
--------------- ----------------
Deferred tax assets:
Allowance for loan losses $ 1,808 $ 1,801
Available-for-sale investment securities 472 -
Deferred compensation 759 696
Supplemental retirement 299 289
Depreciation 103 -
Other 79 68
--------------- ----------------
Total gross deferred tax assets $ 3,520 $ 2,854
--------------- ----------------
Deferred tax liabilities:
Deferred loan costs $ 140 $ 133
Goodwill 503 378
Prepaid expenses 115 -
FHLB stock dividend 510 407
Core deposit premium amortization 115 57
Depreciation - 41
Purchase accounting 44 63
Other 126 42
Available-for-sale investment securities - 398
--------------- ----------------
Total gross deferred tax liabilities $1,553 $1,519
--------------- ----------------
Net deferred tax assets $1,967 $1,335
=============== ================
Net deferred tax assets are recorded in other assets on the consolidated balance
sheets. No valuation allowance related to deferred tax assets has been recorded
at December 31, 2005 and 2004 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, 2005, regulatory approval would have
been required for aggregate dividends from First Mid Bank to the Company in
excess of approximately $11.9 million. The amount of such dividends that could
be paid is further restricted by the limitations of sound and prudent banking
principles.
Note 18 - Commitments and Contingent Liabilities
First Mid Bank enters into financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include lines of credit, letters of credit and other
commitments to extend credit. Each of these instruments involves, to varying
degrees, elements of credit, and interest rate and liquidity risk in excess of
the amounts recognized in the consolidated balance sheets. The Company uses the
same credit policies and requires similar collateral in approving lines of
credit and commitments and issuing letters of credit as it does in making loans.
The exposure to credit losses on financial instruments is represented by the
contractual amount of these instruments. However, the Company does not
anticipate any losses from these instruments.
The off-balance sheet financial instruments whose contract amounts represent
credit risk at December 31, 2005 and 2004 are as follows:
2005 2004
------------ ------------
Unused commitments including lines of credit:
Commercial real estate $28,745 $25,837
Commercial operating 46,012 35,986
Home Equity 16,160 16,002
Other 23,178 13,577
------------ ------------
Total $114,095 $91,402
============ ============
Standby letters of credit $3,694 $2,840
============ ============
Commitments to originate credit represent approved commercial, residential real
estate and home equity loans that generally are expected to be funded within
ninety days. Lines of credit are agreements by which the Company agrees to
provide a borrowing accommodation up to a stated amount as long as there is no
violation of any condition established in the loan agreement. Both commitments
to originate credit and lines of credit generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the
liens and some commitments are expected to expire without being drawn upon, the
total amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the financial performance of customers to third parties. Standby
letters of credit are primarily issued to facilitate trade or support borrowing
arrangements and generally expire in one year or less. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending credit facilities to customers. The maximum amount of credit that
would be extended under letters of credit is equal to the total off-balance
sheet contract amount of such instrument at December 31, 2005 and 2004. The
Company's deferred revenue under standby letters of credit agreements was
nominal.
Note 19--Related Party Transactions
Certain officers, directors and principal stockholders of the Company and its
subsidiaries, their immediate families or their affiliated companies ("related
parties") 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 $17,352,000 and $25,079,000 at December
31, 2005 and 2004, respectively.
Activity during 2005 was as follows:
Balance at December 31, 2004 $25,079
New loans 1,896
Loan repayments (9,623)
-----------------
Balance at December 31, 2005 $17,352
=================
Deposits from related parties held by First Mid Bank at December 31, 2005 and
2004 totaled $11,687,000 and $8,416,000, respectively.
Note 20--Acquisitions
On February 14, 2006, the Company announced it had entered into an agreement and
plan of merger to acquire Mansfield Bancorp, Inc. ("Mansfield"), parent company
of Peoples State Bank of Mansfield, in Mansfield, Illinois for a total cost of
approximately $24 million. As of December 31, 2005, Mansfield had consolidated
assets of $127 million, consolidated total deposits of $111 million and
consolidated stockholders' equity of $15 million. The acquisition is expected to
close in the second quarter of 2006, pending approval from Mansfield's
shareholders, the Federal Reserve Board and the Illinois Department of Financial
and Professional Regulation.
Note 21 - Future Change in Accounting Principle
In December 2004, the Financial Accounting Standards Board issued Statement of
Accounting Standard ("SFAS") No. 123R, "Share-Based Payment," which is a
revision of SFAS No. 123, "Accounting for Stock-Based Compensation," that sets
accounting requirements for "share-based" compensation to employees. This
statement will require the Company to recognize in the income statement the
grant-date fair value of the stock options and other equity-based compensation
issued to employees, but expresses no preference for the type of valuation
model. For the Company, this Statement is effective for years beginning after
June 15, 2005. The effect of the adoption of this statement on the Company is
currently being determined.
Note 22 - Parent Company Only Financial Statements
Presented below are condensed balance sheets, statements of income and cash
flows for the Company:
First Mid-Illinois Bancshares, Inc. (Parent Company)
Balance Sheets
December 31, 2005 2004
------------- -------------
Assets
Cash $2,772 $ 36
Premises and equipment, net 677 268
Investment in subsidiaries 83,330 82,179
Other assets 3,331 3,115
------------- -------------
Total Assets $90,110 $85,598
============= =============
Liabilities and Stockholders' equity
Liabilities
Dividends payable $ 1,143 $ 1,073
Debt 15,810 14,910
Other liabilities 831 461
------------- -------------
Total Liabilities 17,784 16,444
Stockholders' equity 72,326 69,154
------------- -------------
Total Liabilities and Stockholders' equity $90,110 $85,598
============= =============
First Mid-Illinois Bancshares, Inc. (Parent Company)
Statements of Income
Years ended December 31, 2005 2004 2003
--------- --------- ---------
Income:
Dividends from subsidiaries $8,906 $5,156 $4,922
Other income 38 104 80
--------- --------- ---------
8,944 5,260 5,002
Operating expenses 2,383 2,212 1,068
--------- --------- ---------
Income before income taxes and equity
in undistributed earnings of subsidiaries 6,561 3,048 3,934
Income tax benefit 930 1,202 381
--------- --------- ---------
Income before equity in undistributed
earnings of subsidiaries 7,491 4,250 4,315
Equity in undistributed earnings of subsidiaries 2,316 5,501 4,778
--------- --------- ---------
Net income $9,807 $9,751 $9,093
========= ========= =========
First Mid-Illinois Bancshares, Inc. (Parent Company)
Statements of Cash Flows
Years ended December 31, 2005 2004 2003
--------- ---------- ----------
Cash flows from operating activities:
Net income $9,807 $9,751 $9,093
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization, accretion, net 10 7 6
Equity in undistributed earnings of
subsidiaries (2,316) (5,501) (4,778)
(Increase) decrease in other assets (690) 209 (1,292)
(Decrease) increase in other liabilities 370 (631) 1,301
--------- ---------- ----------
Net cash provided by operating activities 7,181 3,835 4,330
--------- ---------- ----------
Cash flows from financing activities:
Repayment of debt (3,100) (11,700) (200)
Proceeds from debt 4,000 6,675 500
Issuance of subordinated debt - 10,000 -
Proceeds from issuance of common stock 937 802 895
Purchase of treasury stock (4,851) (10,365) (4,233)
Dividends paid on common stock (1,431) (954) (778)
--------- ---------- ----------
Net cash used in financing activities (4,445) (5,542) (3,816)
--------- ---------- ----------
(Decrease) increase in cash 2,736 (1,707) 514
Cash at beginning of year 36 1,743 1,229
--------- ---------- ----------
Cash at end of year $2,772 $ 36 $ 1,743
========= ========== ==========
Note 23 - Quarterly Financial Data - Unaudited
The following table presents summarized quarterly data for each of the two years
ended December 31:
Quarters ended in 2005
March 31 June 30 September 30 December 31
-------------- ------------- -------------- ----------------
Selected operations data:
Interest income $10,424 $10,873 $11,433 $11,850
Interest expense 3,349 3,651 4,184 4,503
-------------- ------------- -------------- ----------------
Net interest income 7,075 7,222 7,249 7,347
Provision for loan losses 187 150 213 541
-------------- ------------- -------------- ----------------
Net interest income after 6,888 7,072 7,036 6,806
provision for loan losses
Other income 3,176 3,068 3,137 3,137
Other expense 6,306 6,494 6,393 6,192
-------------- ------------- -------------- ----------------
Income before income taxes 3,758 3,646 3,780 3,751
Income taxes 1,323 1,284 1,335 1,186
-------------- ------------- -------------- ----------------
Net income $ 2,435 $ 2,362 $ 2,445 $ 2,565
============== ============= ============== ================
Basic earnings per share $0.55 $0.53 $0.55 $0.59
Diluted earnings per share $0.54 $0.52 $0.54 $0.56
Quarters ended in 2004
March 31 June 30 September 30 December 31 (1)
-------------- ------------- -------------- ----------------
Selected operations data:
Interest income $9,727 $9,761 $10,099 $10,437
Interest expense 2,687 2,727 2,986 3,244
-------------- ------------- -------------- ----------------
Net interest income 7,040 7,034 7,113 7,193
Provision for loan losses 187 188 62 151
-------------- ------------- -------------- ----------------
Net interest income after 6,853 6,846 7,051 7,042
provision for loan losses
Other income 2,898 2,943 2,876 2,922
Other expense 6,168 6,236 6,252 6,483
-------------- ------------- -------------- ----------------
Income before income taxes 3,583 3,553 3,675 3,481
Income taxes 1,194 1,190 1,246 911
-------------- ------------- -------------- ----------------
Net income $ 2,389 $ 2,363 $ 2,429 $ 2,570
============== ============= ============== ================
Basic earnings per share $0.52 $0.53 $0.54 $0.58
Diluted earnings per share $0.51 $0.52 $0.53 $0.57
(1) During the fourth quarter of 2004, the Company revised its estimates for
deferred loan fees and costs, deferred compensation liabilities and accrued
income taxes and adjusted its 2004 earnings accordingly. The net effect of
these adjustments increased 2004 reported earnings by $147,000 and $.04 per
diluted share.
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
First Mid-Illinois Bancshares, Inc.
Mattoon, Illinois
We have audited the accompanying consolidated balance sheet of First
Mid-Illinois Bancshares, Inc. as of December 31, 2005, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether 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 audit provides 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. as of December 31, 2005, and the results of its operations and
its cash flows for the year then ended, in conformity with accounting principals
generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of First
Mid-Illinois Bancshares, Inc.'s internal control over financial reporting as of
December 31, 2005 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated January 24, 2006 expressed unqualified
opinions on management's assessment and on the effectiveness of the Company's
internal control over financial reporting.
/s/ BKD, LLP
Decatur, Illinois
January 24, 2006
Report of Independent Registered Public Accounting Firm
The Board of Directors
First Mid-Illinois Bancshares, Inc.:
We have audited the accompanying consolidated balance sheet of First
Mid-Illinois Bancshares, Inc. and subsidiaries (the Company) as of December 31,
2004, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the two-year period
ended December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of First Mid-Illinois
Bancshares, Inc. and subsidiaries as of December 31, 2004 and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Chicago, Illinois
March 9, 2005
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information called for by Item 9 with respect to changes in accountants is
incorporated by reference to the Company's 2006 Proxy Statement under the
caption "Independent Public Accountants."
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company's management carried out an evaluation, under the supervision and
with the participation of the chief executive officer and the chief financial
officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31,
2005. Based upon that evaluation, the chief executive officer along with the
chief financial officer concluded that the Company's disclosure controls and
procedures as of December 31, 2005, are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic filings under
the Exchange Act.
Management's Annual Report on Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. The
Company's internal control over financial reporting is a process designed under
the supervision of the Company's chief executive officer and chief financial
officer to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of the Company's financial statements for external
reporting purposes in accordance with U.S. generally accepted accounting
principles.
Management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2005 based on the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in
"Internal Control--Integrated Framework." Based on the assessment, management
determined that, as of December 31, 2005, the Company's internal control over
financial reporting is effective, based on those criteria. Management's
assessment of the effectiveness of the Company's internal control over financial
reporting as of December 31, 2005 has been audited by BKD, LLP, an independent
registered public accounting firm, as stated in their report following.
March 8, 2006
/s/ William S. Rowland
William S. Rowland
President and Chief Executive Officer
/s/ Michael L. Taylor
Michael L. Taylor
Chief Financial Officer
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
First Mid-Illinois Bancshares, Inc.
Mattoon, Illinois
We have audited management's assessment, included in the accompanying
Management's Report, that First Mid-Illinois Bancshares, Inc. maintained
effective internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit includes obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that First Mid-Illinois Bancshares, Inc.
maintained effective internal control over financial reporting as of December
31, 2005, is fairly stated, in all material respects, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, First Mid-Illinois Bancshares, Inc. maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
First Mid-Illinois Bancshares, Inc. and subsidiaries as of December 31, 2005 and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for the year then ended, and our report dated January 24, 2006
expressed an unqualified opinion thereon.
/s/ BKD, LLP
Decatur, Illinois
January 24, 2006
Changes in Internal Control Over Financial Reporting
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's fourth fiscal quarter of 2005 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information called for by Item 10 with respect to directors and director
nominees is incorporated by reference to the Company's 2006 Proxy Statement
under the captions "Proposal 1 - Election of Directors" and "Section 16 -
Beneficial Ownership Reporting Compliance."
The information called for by Item 10 with respect to executive officers is
incorporated by reference to Part I hereof under the caption "Supplemental Item
- - Executive Officers of the Company."
The information called for by Item 10 with respect to audit committee financial
expert is incorporated by reference to the Company's 2006 Proxy Statement under
the caption "Report of the Audit Committee to the Board of Directors."
The Company has adopted a code of ethics for senior financial management
applicable to the Chief Executive Officer and Chief Financial Officer of the
Company. A copy of this code of ethics is filed herewith as Exhibit 14.1. This
code of ethics is also available on the Company's website. In the event that the
Company amends or waives any provisions of this code of ethics, the Company
intends to disclose the same on its website at www.firstmid.com.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference to the
Company's 2006 Proxy Statement under the captions "Meetings and Committees of
the Board of Directors," "Executive Compensation," "Common Stock Price
Performance Graph" and "Directors' Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information called for by Item 12 with respect to equity compensation plans
is provided in the table below.
Equity Compensation Plan Information
-------------------------------------------------------------------------------------
Plan category Number of securities
to be issued upon Weighted-average Number of securities remaining
exercise of exercise price of available for future issuance
outstanding options outstanding options under equity compensation plans
(a) (b) (c)
- ---------------------------------------- ------------------------ ------------------------ -----------------------------------
Equity compensation plans approved
by security holders:
(1) Deferred Compensation Plan 165,214 $14.69 284,786
(2) Stock Incentive Plan 325,035 24.21 42,000
Equity compensation plans not approved
by security holders - - -
------------------------ ------------------------ -----------------------------------
Total 490,249 $21.00 326,786
======================== ======================== ===================================
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 - "Stock Option Plan" herein.
The information called for by Item 12 with respect to security ownership is
incorporated by reference to the Company's 2006 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 2006 Proxy Statement under the caption "Certain Relationships and
Related Transactions."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for by Item 14 is incorporated by reference to the
Company's 2006 Proxy Statement under the caption "Fees of Independent Auditors."
PART IV
ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2) -- Financial Statements and Financial Statement Schedules
The following consolidated financial statements and financial statement
schedules of the Company are filed as part of this document under Item 8.
Financial Statements and Supplementary Data:
* Consolidated Balance Sheets -- December 31, 2005 and 2004
* Consolidated Statements of Income -- For the Years Ended December 31,
2005, 2004 and 2003
* Consolidated Statements of Changes in Stockholders' Equity -- For the
Years Ended December 31, 2005, 2004 and 2003
* Consolidated Statements of Cash Flows -- For the Years Ended December
31, 2005, 2004 and 2003.
(a)(3) -- Exhibits
The exhibits required by Item 601 of Regulation S-K and filed herewith are
listed in the Exhibit Index that follows the Signature Page and immediately
precedes the exhibits filed.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST MID-ILLINOIS BANCSHARES, INC.
(Company)
Dated: March 8, 2006
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 8th day of March 2006, by the following persons on
behalf of the Company and in the capacities listed.
Signature and Title
/s/ William S. Rowland
William S. Rowland, Chairman of the Board,
President and Chief Executive Officer and Director
/s/ Michael L. Taylor
Michael L. Taylor, Vice President and Chief Financial Officer
/s/ Charles A. Adams
Charles A. Adams, Director
/s/ Kenneth R. Diepholz
Kenneth R. Diepholz, Director
/s/ Joseph R. Dively
Joseph R. Dively, Director
/s/ S. L. Grissom
Steven L. Grissom, Director
/s/ Daniel E. Marvin, Jr.
Daniel E. Marvin, Jr., Director
/s/ Gary W. Melvin
Gary W. Melvin, Director
/s/ Sara Jane Preston
Sara Jane Preston, Director
/s/ Ray A. Sparks
Ray A. Sparks, Director
Exhibit Exhibit Index to Annual Report on Form 10-K
Number Description and Filing or Incorporation Reference
- --------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger By and Among First Mid-Illinois Bancshares,
Inc., First Mid Merger Company and Mansfield Bancorp, Inc. Incorporated by
reference to Exhibit 2 to First Mid-Illinois Bancshares, Inc.'s Report on
Form 8-K filed with the SEC on February 15, 2006.
3.1 Restated Certificate of Incorporation and Amendment to Restated Certificate
of Incorporation of First Mid-Illinois Bancshares, Inc. Incorporated by
reference to Exhibit 3(a) to First Mid-Illinois Bancshares, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1987 (File No. 0-13368)
3.2 Restated Bylaws of First Mid-Illinois Bancshares, Inc. and Amendment
thereto Incorporated by reference to Exhibit 3.2 to First Mid-Illinois
Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December
31, 2002 (File No. 0-13368)
4.1 Rights Agreement, dated as of September 21, 1999, between First
Mid-Illinois Bancshares, Inc. and Harris Trust and Savings Bank, as Rights
Agent Incorporated by reference to Exhibit 4.1 to First Mid-Illinois
Bancshares, Inc.'s Registration Statement on Form 8-A filed with the SEC on
September 22, 1999
10.1 Employment Agreement between the Company and William S. Rowland
Incorporated by reference to Exhibit 10.1 to First Mid-Illinois Bancshares,
Inc.'s Report on Form 8-K filed with the SEC on December 16, 2004. 10.2
Employment Agreement between the Company and John W. Hedges Incorporated by
reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.'s Report
on Form 8-K filed with the SEC on November 3, 2005.
10.3 First Amendment to Employment Agreement between the Company and John W.
Hedges (Filed herewith)
10.4 Amended and Restated Deferred Compensation Plan (Filed herewith)
10.5 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
for the year ended December 31, 1998 (File No 0-13368)
10.6 First Amendment to 1997 Stock Incentive Plan (Filed herewith) 10.7 Second
Amendment to 1997 Stock Incentive Plan (Filed herewith)
10.8 Supplemental Executive Retirement Plan (Filed herewith)
10.9 First Amendment to Supplemental Executive Retirement Plan (Filed herewith)
10.10 Participation Agreement (as Amended and Restated) to Supplemental
Executive Retirement Plan between the Company and William S. Rowland (Filed
herewith)
10.11 Form of Employment Agreement between the Company and certain officers of
the Company, including Michael L. Taylor, Robert J. Swift, Jr., Stanley E.
Gilliland and Laurel Allenbaugh The agreements are substantially identical
in all material respects except as to the parties, the execution dates and
the monthly base payout. A sample form of the agreement is filed herewith.
11.1 Statement re: Computation of Earnings Per Share (Filed herewith)
14.1 Code of Ethics for Senior Financial Management (Filed herewith)
21.1 Subsidiaries of the Company (Filed herewith)
23.1 Consent of BKD LLP (Filed herewith)
23.2 Consent of KPMG LLP (prior years) (Filed herewith)
31.1 Certification of Chief Executive Officer pursuant to section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 10.3
FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT OF
JOHN W. HEDGES
This First Amendment to the Employment Agreement is made and entered
into on March 6, 2006, 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 (the "Executive").
WHEREAS, the Company and the Executive are parties to an Employment
Agreement dated as of October 1, 2005 (the "Employment Agreement") and now
desire to amend the Employment Agreement to comply with Internal Revenue Code
Section 409A and the guidance and regulations thereunder, to the extent
applicable.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree to amend the
Employment Agreement as follows, effective as of January 1, 2005:
1. By amending the second sentence of Section 4.02(a) to read as follows:
"(a) Such amount shall be paid in a lump sum payment as soon as
practicable following the date of such termination."
2. By adding a final sentence to Section 4.02 to read as follows:
"If at the time of such termination of employment Executive is a "Key
Employee" as defined in Section 416(i) of the Internal Revenue Code
(without reference to paragraph 5 thereof), and the amounts payable to
Executive pursuant to Section 4.02(a) and (b) are subject to Section
409A of the Internal Revenue Code, payment of such amounts shall not
commence until six months following Executive's termination of
employment, with the first payment to include the payments that
otherwise would have been made during such six-month period."
IN WITNESS WHEREOF, the parties have executed this First Amendment to
the Employment Agreement on the 6th day of March, 2006.
FIRST MID-ILLINOIS BANCSHARES, INC.
By: /s/ William S. Rowland
Its: Chairman and Chief Executive Officer
JOHN W. HEDGES
/s/ John W. Hedges
Exhibit 10.4
FIRST MID-ILLINOIS BANCSHARES, INC.
AMENDED AND RESTATED
DEFERRED COMPENSATION PLAN
1. PURPOSE
The purpose of the First Mid-Illinois Bancshares, Inc. Deferred
Compensation Plan (the "Plan") is to enable First Mid-Illinois Bancshares, Inc.
(the "Company") directors, advisory directors and key officers to elect to defer
a portion of the fees and cash compensation payable by the Company and any
affiliates on account of service as a director or employee. The Plan is intended
as a means of maximizing the effectiveness and flexibility of the compensation
arrangements to directors and a select group of management or highly compensated
employees of the Company and affiliates, and as an aid in attracting and
retaining individuals of outstanding abilities and specialized skills for
service.
2. EFFECTIVE DATE
The Plan was effective as of June 14, 1984 and was amended and restated
effective as of September 15, 1998. The Plan is hereby further amended and
restated effective as of January 1, 2005 to comply with Internal Revenue Code
(the "Code") Section 409A and the guidance and regulations thereunder. Benefits
that are "Pre-2005 Benefits" (as herein defined) shall be administered without
giving effect to Code Section 409A and the guidance and regulations thereunder.
3. PLAN ADMINISTRATION
The Plan shall be administered by a committee which shall be comprised
solely of two or more directors which are "outside directors" (within the
meaning of Code Section 162(m) and the regulations thereunder) and "non-employee
directors" (within the meaning of Rule 16b-3 under the Securities Exchange Act
of 1934) appointed by the Board (the "Committee"). The Committee shall have sole
authority to select the employees from among those eligible who may participate
under the Plan. The Committee is authorized, subject to Board approval, to
interpret the Plan and may from time to time adopt such rules, regulations,
forms and agreements, not inconsistent with the provisions of the Plan, as it
may deem advisable to carry out the Plan. All decisions made by the Committee in
administering the Plan shall be subject to Board review.
4. ELIGIBILITY
Any director, advisory director or key officer of the Company or any
affiliate designated by the Board is eligible to participate in the Plan;
provided, however, that officers or employees so designated shall be limited to
a select group of management or highly compensated employees within the meaning
of Section 201(2) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). Any such director, advisory director or key officer shall be
a "Participant" as of the date designated by the Board, and his or her status as
a Participant shall continue until the date of the first payment pursuant to
Section 8 hereof.
5. SHARES SUBJECT TO THE PLAN
The aggregate number of shares of common stock of the Company ("Shares")
initially authorized for distribution to directors and employees under the Plan
was 100,000 Shares. After taking into account a 2-for-1 stock split in 1997, a
3-for-2 stock split in 2001 and a 3-for-2 stock split in 2004, the aggregate
number of Shares which may be distributed to directors and employees under the
Plan is 450,000. Any Shares that remain unissued upon termination of the Plan
shall cease to be subject to the Plan, but until termination of the Plan, the
Company shall at all times make available sufficient Shares to meet the
requirements of the Plan. The aggregate number of Shares which may be sold under
the Plan shall be adjusted to reflect a change in capitalization of the Company,
such as a stock dividend or stock split.
6. ELECTION TO DEFER PAY
(a) IN GENERAL. Each Participant shall be entitled to make an annual
irrevocable election to defer receipt of all or a part of the fees or
compensation payable to him or her in cash ("Pay"). Such election shall
continue in effect until the beginning of the subsequent calendar year.
Pay with respect to which a deferral election has been made shall be
referred to hereinafter as "Deferred Pay."
(b) MANNER OF ELECTION. Elections to defer receipt of Pay shall be made in
writing in accordance with such rules and procedures as the Board may
prescribe, provided that: (i) each such election to defer cash
compensation shall include the percentage to be deferred, either 5%,
10% or 15% of base salary or 25% increments of incentive compensation,
of Pay from the Company or affiliate which becomes payable; and (ii)
each such election to defer fees shall include all fees receivable.
Elections to defer receipt of base salary or fees must be made prior to
the beginning of the calendar year for which such amounts will be paid.
Elections to defer receipt of incentive compensation must be made prior
to the calendar year during which the services related to the incentive
compensation are performed; provided, that an election to defer
performance-based incentive compensation, as defined in Code Section
409A and guidance and regulations thereunder, must be made no later
than six months before the end of the performance period during which
the services related to the incentive compensation are performed
(provided that such performance period is at least 12 months in
duration).
7. RECORD AND CREDITING OF DEFERRED AMOUNTS
(a) DEFERRED PAY. The Company shall deposit the amount of any Deferred Pay
to an account for the benefit of the Participant (the "Deferred Pay
Account") as of the date the Pay would otherwise have been paid to the
Participant, or as soon thereafter as administratively feasible. Such
amount shall be invested in a money market or similar type of
investment vehicle as selected by the Committee. As soon as
administratively feasible after the end of the calendar quarter in
which such Pay has been credited to the Deferred Pay Account, the
Deferred Pay Account balance shall be applied to purchase whole and
fractional Shares. The price at which any Shares are purchased with
Deferred Pay shall be the actual purchase price (if purchased on the
open market) or the price as determined by the Board in accordance with
the other equity based stock purchase programs of the Company.
(b) EARNINGS CREDIT.
(i) While held in the money market or similar account, the Participant's
Deferred Pay Account shall be credited with earnings on the first
business day following the end of each month or as soon thereafter as
administratively feasible.
(ii) The Participant's Deferred Pay Account shall be credited, as of the
applicable dividend payment date or as soon thereafter as
administratively feasible, with the stock dividends that are paid with
respect to the Shares credited to the Deferred Pay Account as of the
related record date.
(iii) Until complete distribution of the balance of the Deferred Pay Account
has been made, the unpaid balance shall continue to be credited with
earnings in accordance with this Section 7(b).
(c) VALUE AND STATEMENT OF ACCOUNT. The Company shall provide each
Participant with a statement of the value of his or her Deferred Pay
Account, including the amount of Deferred Pay and income thereon, at
least annually.
8. PAYMENT OF DEFERRED ACCOUNT
(a) IN GENERAL. No withdrawals or payments shall be made from a
Participant's Deferred Pay Account except as provided in this Section
8. All withdrawals and payments hereunder, and under any trust
established pursuant to the last sentence of Section 10, shall be made
solely in Shares except for cash payments with respect to fractional
Shares, if any.
(b) INSTALLMENTS. The value of a Participant's Deferred Pay Account shall
be payable in five annual installments commencing on the March 15
following the date he or she separates from service with the Company.
Notwithstanding the foregoing, if at the time of such separation from
service the Participant is a Key Employee as defined in Code Section
416(i) (without reference to paragraph 5 thereof), and the first
installment is scheduled to be paid within six months of the date of
the Participant's separation from service, the first installment shall
be paid first from the portion of the Participant's Deferred Pay
Account that is considered a Pre-2005 Benefit. If any portion of the
first annual installment cannot be made from such Pre-2005 Benefit,
then the amount of the first installment payment shall be restricted to
the amount of the Pre-2005 Benefit and the remaining amount of the
first installment that cannot be paid due to this restriction shall be
paid from the portion of the Participant's Deferred Pay Account that is
considered a Post-2004 Benefit, but not until six months have elapsed
from the date of the Participant's separation from service. The four
remaining annual installments shall be paid on each anniversary of the
March 15 following the Participant's separation from service.
(c) SINGLE SUM PAYMENT. Notwithstanding Section 8(b) above, the Board in
its sole discretion may elect at any time to pay the value of a
Participant's Deferred Pay Account that is considered a Pre-2005
Benefit in a single payment. The portion of a Participant's Deferred
Pay Account that is considered a Post-2004 Benefit shall not be payable
in a single payment.
(d) ACCELERATION FOR UNFORESEEABLE EMERGENCY. The Board, in its sole
discretion, may accelerate payment of amounts credited to a
Participant's Deferred Pay Account if requested by the Participant to
do so and if the requirements of this Section 8(d) are met. Such
acceleration may occur only in the event of a severe financial hardship
to the Participant resulting from an illness or accident of the
Participant, the Participant's spouse, or a dependent (as defined in
Code Section 152(a)) of the Participant, loss of the Participant's
property due to casualty, or other similar extraordinary and
unforeseeable circumstances arising as a result of events beyond the
control of the Participant and is limited to the amount deemed
reasonably necessary to satisfy the emergency need.
(e) DEATH OF PARTICIPANT. In the event that a Participant dies at any time
prior to complete distribution of all amounts payable to him or her
under the provisions of the Plan, the unpaid balance of the
Participant's Deferred Pay Account shall be determined as of the
valuation date immediately following his or her death, and such amount
shall be paid in a single payment on the March 15 following such
valuation date, or as soon as reasonably possible thereafter, to the
Participant's beneficiary or beneficiaries.
(f) DEFINITIONS.
(i) Pre-2005 Benefit. "Pre-2005 Benefit" means the portion of a
Participant's Deferred Pay Account earned and vested as of December 31,
2004.
(ii) Post-2004 Benefit. "Post-2004 Benefit" means the portion of a
Participant's Deferred Pay Account in excess of his or her Pre-2005
Benefit, if any.
9. DESIGNATION OF BENEFICIARY
Participants shall designate in writing, in accordance with such rules and
procedures as the Committee may prescribe, the beneficiary or beneficiaries who
are to receive the Participant's Deferred Pay Account in the event of the
Participant's death.
10. UNSECURED OBLIGATIONS
The obligation of the Company to make payments under the Plan shall be a
general obligation of the Company, and such payments shall be made in Shares
(other than cash payments with respect to fractional Shares), and such Shares
(and cash) shall at all times constitute a part of the general assets and
property of the Company. The Participant's relationship to the Company under the
Plan shall be only that of a general unsecured creditor and neither the Plan nor
any agreement entered into hereunder or action taken pursuant hereto shall
create or be construed to create a trust or fiduciary relationship of any kind.
The Company may establish an irrevocable grantor trust for purposes of holding
and investing the Deferred Pay Account balances but such establishment shall not
create any rights in or against any amount so held, except that the trustee of
such trust may vote any Shares thereunder in accordance with the direction of
the Participants.
11. AMENDMENT AND TERMINATION
The Board may amend, suspend or terminate the Plan or any portion thereof
at any time, but (except as provided in Section 5) no amendment shall be made
without approval of the stockholders of the Company which shall: (a) materially
increase the aggregate number of Shares with respect to which distributions may
be made under the Plan; (b) materially increase the benefits which may be
provided to individuals under the Plan; or (c) change the class of persons
eligible to participate in the Plan; provided, however, that no such amendment,
suspension or termination shall impair the rights of any individual, without his
or her consent, in any award theretofore made pursuant to the Plan.
Upon suspension or termination of the Plan, a Participant's Deferred Pay
Account shall continue to be paid to the Participant in the manner and at the
time described in Section 8.
12. EFFECT OF TRANSFER
(a) IN GENERAL. Upon a Change in Control, the entire unpaid balance of each
Deferred Pay Account shall be paid in a lump sum to the Participant as
of the effective date thereof.
(b) DEFINITION. "Change in Control" means the occurrence of one of the
following events:
(i) Any one person, or more than one Person Acting as a Group (as defined
below), acquires ownership of stock of the Company that, together with
stock held by such person or group, constitutes more than 50% of the
total fair market value or total voting power of the stock of the
Company. However, if any one person or more than one Person Acting as
a Group is considered to own more than 50% of the total fair market
value or total voting power of the stock of the Company, the
acquisition of additional stock by the same person or persons is not
considered to cause a Change in Control (or to cause a Change in
Control) of the Company. An increase in the percentage of stock owned
by any one person, or Persons Acting as a Group, as a result of a
transaction in which the Company acquires its stock in exchange for
property will be treated as an acquisition of stock. This paragraph
(i) applies only when there is a transfer of stock of the Company (or
issuance of stock of the Company) and stock in the Company remains
outstanding after the transaction.
(ii) Any one person, or more than one Person Acting as a Group, acquires (or
has acquired during the 12-month period ending on the date of the most
recent acquisition by such person or persons) ownership of stock of the
Company possessing 35% or more of the total voting power of the stock
of the Company. If any one person, or more than one Person Acting as a
Group, is considered to effectively control the Company, the
acquisition of additional control of the Company by the same person or
persons is not considered to cause a Change in Control (or to cause a
Change in Control) of the Company.
(iii) Any one person, or more than one Person Acting as a Group, acquires (or
has acquired during the 12-month period ending on the date of the most
recent acquisition by such person or persons) assets from the Company
that have a total gross fair market value equal to or more than 40% of
the total gross fair market value of all of the assets of the Company
immediately prior to such acquisition or acquisitions. For this
purpose, gross fair market value means the value of the assets of the
Company, or the value of the assets being disposed of, determined
without regard to any liabilities associated with such assets.
There is no Change in Control when there is a transfer to an
entity that is controlled by the stockholders of the Company
immediately after the transfer. A transfer of assets by the Company is
not treated as a Change of Control if the assets are transferred to -
(A) a stockholder of the Company (immediately before
the asset transfer) in exchange for or with respect to its
stock;
(B) an entity, 50% or more of the total value or
voting power of which is owned, directly or indirectly, by
the Company;
(C) a person, or more than one Person Acting as a
Group, that owns, directly or indirectly, 50% or more of the
total value or voting power of all the outstanding stock of
the Company; or
(D) an entity, at least 50% of the total value or
voting power of which is owned, directly or indirectly, by a
person described in clause (C) next above.
A person's status is determined immediately after the transfer of assets. For
example, a transfer to a corporation in which the Company has no ownership
interest before the transaction, but which is a majority-owned subsidiary of the
Company after the transaction is not treated as a Change of Control.
Persons Acting as a Group. Persons shall not be considered to be acting
as a group solely because they purchase or own stock of the same corporation at
the same time or as a result of the same public offering. However, persons will
be considered to be acting as a group if they are owners of a corporation that
enters into a merger, consolidation, purchase or acquisition of stock, or
similar business transaction with the Company. If a person, including an entity,
owns stock in both corporations that enter into a merger, consolidation,
purchase or acquisition of stock, or similar transaction, such stockholder is
considered to be acting as a group with other stockholders in a corporation
prior to the transaction giving rise to the change and not with respect to the
ownership interest in the other corporation.
13. NON-ASSIGNABILITY
No right to receive payments under the provisions of the Plan shall be
transferable or assignable by a Participant, except by will or by the laws of
descent and distribution, and during his or her lifetime payment may only be
received by the Participant or his or her legal representative or guardian.
14. DELIVERY AND REGISTRATION OF STOCK
The Company shall not be required to deliver any Shares under the Plan
prior to the completion of registration or other qualification of such Shares
under any state or federal law, rule or regulation, as the Committee shall
determine to be necessary or advisable.
IN WITNESS WHEREOF, the Company has caused this Amendment and Restatement
of the Plan to be executed in its name by its duly authorized officer this 28th
day of February, 2006, effective as of the 1st day of January, 2005.
FIRST MID-ILLINOIS BANCSHARES, INC.
By: /s/ William S. Rowland
Its: Chairman and Chief Executive Officer
Exhibit 10.6
AMENDMENT I TO FIRST MID-ILLINOIS BANCSHARES, INC.
1997 STOCK INCENTIVE PLAN
WHEREAS, the First Mid-Illinois Bancshares, Inc. 1997 Stock Incentive
Plan (the "Plan") was adopted by the Board of Directors of First Mid-Illinois
Bancshares, Inc. (the "Corporation") on October 21, 1997 and by the Stockholders
of the Corporation on May 20, 1998;
WHEREAS, the Corporation reserved the right to amend the Plan; and
WHEREAS, the Corporation deems it to be in its best interest to amend
the Plan as described below.
1. The Plan hereby is amended to (1) reflect the 3-for-2 stock split of
shares of the Corporation's common stock on November 16, 2001 and (2) increase
from 150,000 to 300,000 the number of shares of common stock of the Corporation
available for issuance under the Plan;
2. The first sentence of Section 4 of the Plan hereby is amended and
restated in its entirety to read as follows: "The aggregate number of Shares
that may be obtained by directors, employees, consultants and advisors under the
Plan shall be 300,000 Shares.";
3. The third sentence of Section 4 of the Plan hereby is amended and
restated in its entirety to read as follows: "The maximum number of Shares that
may be granted to an employee pursuant to an award for any calendar year may not
exceed 75,000 Shares."; and
4. The fourth sentence of Section 8 of the Plan hereby is amended and
restated in its entirety as follows: "Payment may be in a lump sum, or if the
lump sum exceeds $150,000, in substantially equal annual or more frequent
installments over a period not exceeding five (5) years in the discretion of the
Committee."
This Amendment I has been executed on March 28, 2002.
FIRST MID-ILLINOIS BANCSHARES, INC.
By: /s/ William S. Rowland
Its: Chairman and Chief Executive Officer
Exhibit 10.7
SECOND AMENDMENT TO
FIRST MID-ILLINOIS BANCSHARES, INC. 1997 STOCK INCENTIVE PLAN
WHEREAS, First Mid-Illinois Bancshares, Inc. (the "Company") maintains the First
Mid-Illinois Bancshares, Inc. 1997 Stock Incentive Plan, as amended from time to
time (the "Plan"); and
WHEREAS, pursuant to the authority set forth in Section 9 of the Plan, the
Company deems it desirable to amend the Plan to clarify that all options and
stock appreciation rights granted under the Plan will be granted at not less
than fair market value at the time of grant.
NOW, THEREFORE, the Plan is amended in the following respects, effective as of
January 1, 2005:
1. By revising Section 4 to read as follows:
"The aggregate number of Shares initially authorized for
issuance under the Plan was 100,000 Shares. After taking into
account a 3-for-2 stock split in 2001, a subsequent increase
in the number of Shares authorized for issuance under the Plan
from 150,000 to 300,000 Shares, and a 3-for-2 stock split in
2004, the aggregate number of Shares authorized for issuance
under the Plan is 450,000 Shares. Any Shares that remain
unissued at the termination of the Plan shall cease to be
subject to the Plan, but until termination of the Plan, the
Company shall at all times make available sufficient Shares to
meet the requirements of the Plan. The maximum number of
Shares that may be granted to an employee pursuant to an award
for any calendar year may not exceed 112,500 Shares."
2. By adding the following clause (vi) to Section 5(c):
"vi. Option Price. The option price per Share shall be not
less than 100% of the fair market value of a Share on
the date the option is granted."
3. By adding the following sentence to the beginning of Section 7(b):
"SARs shall be granted at not less than 100% of the fair
market value of a Share on the date the SAR is granted."
4. By amending the fourth sentence of Section 8 of the Plan to read as follows:
"Payment may be in a lump sum, or if the lump sum exceeds
$225,000, in substantially equal annual or more frequent
installments over a period not exceeding five (5) years in the
discretion of the Committee."
IN WITNESS WHEREOF, the Company has caused this Second Amendment to the Plan to
be executed on its behalf, by its officer, duly authorized, on this 28th day of
February, 2006.
FIRST MID-ILLINOIS BANCSHARES, INC.
By: /s/ William S. Rowland
Its: Chairman and Chief Executive Officer
Exhibit 10.8
FIRST MID-ILLINOIS BANCSHARES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
PREAMBLE
First Mid-Illinois Bancshares, Inc. has adopted the Supplemental Executive
Retirement Plan, effective as of May 21, 1986, for a select group of executive
personnel to ensure that the overall effectiveness of the Company's executive
compensation program will attract, retain and motivate qualified senior
management personnel.
SECTION I
DEFINITIONS
When used herein, the following words shall have the meanings below unless the
context clearly indicates otherwise:
1.1 "Affiliated Company" means any trade or business entity (whether or not
incorporated), or a predecessor company of such entity, if any, which is a
member of a controlled group of corporations of which the Company is also a
member or which is under common control with the Company.
1.2 "Committee" means the Compensation Committee of the Board of Directors of
the Company.
1.3 "Company" means First Mid-Illinois Bancshares, Inc. and any successor
thereto.
1.4 "Designated Beneficiary" means any person or persons designated by a
Participant to receive any Supplemental Plan Benefit by reason of his death.
Such designation shall be made by written notice delivered to the Committee
prior to the date of the Participant's death.
1.5 "Participant" means any employee of the Company or an Affiliated Company who
is recommended and designated with respect to participation in the Plan as set
forth in Section II.
1.6 "Participation Agreement" means an agreement entered into between the
Company and a Participant that sets forth the amount, terms and conditions of a
Supplemental Plan Benefit payable to or with respect to a Participant.
1.7 "Plan" means the First Mid-Illinois Bancshares, Inc. Supplemental Executive
Retirement Plan.
1.8 "President" means the President of the Company.
1.9 "Supplemental Plan Benefit" means the annual benefit payable to or with
respect to a Participant in accordance with the Plan.
SECTION II
ELIGIBILITY TO PARTICIPATE
A senior management employee of the Company or an affiliated Company will become
a Participant in the Plan when such employee is recommended to the Committee as
a Participant in writing by the President and is designated as a Participant by
the Committee in writing. Once an employee becomes a Participant he shall remain
a Participant until his termination of employment with the Company and all
Affiliated Companies and thereafter until the Supplemental Plan Benefit to which
he or any Designated Beneficiary is entitled under the Plan has been paid in
full.
SECTION III
SUPPLEMENTAL PLAN BENEFIT
The amount, terms and conditions of a Supplemental Plan Benefit payable to or
with respect to a Participant shall be set forth in a separate Participation
Agreement entered into between the Company and the Participant within sixty (60)
days after the date on which the Participant is designated as such pursuant to
Section II.
SECTION IV
AMENDMENT AND TERMINATION
4.1 Amendment or Termination. The Company intends the Plan to be permanent but
reserves the right to amend or terminate the Plan or any Participation Agreement
when, in the sole opinion of the Company, such amendment or termination is
advisable. Any such amendment or termination shall be made pursuant to a
resolution of the Board of Directors of the Company and shall be effective as of
the date of such resolution. Notwithstanding the preceding sentence, no
amendment or termination of the Plan or any Participation Agreement shall
directly or indirectly deprive any Participant or Designated Beneficiary of all
or any portion of any Supplemental Plan Benefit the payment of which has
commenced prior to the effective date of the resolution amending or terminating
the Plan or Participation Agreement.
4.2 Termination Benefit. In the case of a Plan termination, each actively
employed Participant on the termination date shall become fully vested in his
Supplemental Plan benefit as of the termination date without regard to the
number of years of employment with the Company and all Affiliated Companies he
has then completed. Payment of a Participant's Supplemental Plan Benefit shall
not be dependent upon his continuation of employment with the Company or any
Affiliated Company following the Plan termination date, and such Benefit shall
be payable in the form and at the time set forth in his Participation Agreement.
4.3 Corporate Successors. The Plan shall not be automatically terminated by a
transfer or sale of assets of the Company, or by the merger or consolidation of
the Company into or with any other corporation or other entity, but the Plan
shall be continued after such sale, merger or consolidation only if and to the
extent that the transferee, purchaser or successor entity agrees to continue the
Plan. In the event the Plan is not continued by the transferee, purchaser or
successor entity, then the Plan shall terminate subject to the provisions of
Paragraph 4.2.
SECTION V
MISCELLANEOUS
5.1 Forfeiture of Benefits. Notwithstanding any other provision of the Plan or
any Participation Agreement, future payment of a Supplemental Plan Benefit
hereunder to a Participant or Designated Beneficiary will, at the discretion of
the Committee, be discontinued and forfeited, and the Company will have no
further obligation hereunder to such Participant or Designated Beneficiary, if
any of the following circumstances occur:
(a) the Participant is discharged from employment with the Company or
an Affiliated Company for cause. For purposes of this clause,
"cause" shall be deemed to exist if, and only if, (i) the
Participant willfully refuses to perform services for the Company
or an Affiliated Company; (ii) the Participant engages in acts of
dishonesty or fraud in connection with his employment by the
Company or an Affiliated Company; or (iii) the Participant engages
in other serious misconduct of such a nature that the continued
employment of the Participant may reasonably be expected to
adversely affect the business of the Company or an Affiliated
Company. The Company shall have the sole discretion, which shall
be exercised in a reasonable manner, to determine whether the
events referred to in (i), (ii) and (iii) above have occurred;
(b) the Participant engages in competition with the Company or any
Affiliated Company or interferes with the business relationships
of the Company or an Affiliated Company during his employment or
during the period commencing on the date of termination of his
employment with the Company and all Affiliated Companies and
ending on the second anniversary thereof;
(c) the Participant discloses any type of confidential information of
the Company or an Affiliated Company to any third party by any
means, other than as required in the performance of his duties for
the Company or an Affiliated Company, or refused to report to the
Company or an Affiliated Company any discoveries, inventions, or
improvements conceived by him during the course of his employment
and in any way applicable to the business of the Company or any
Affiliated Company.
The Committee's exercise of its discretion under this Paragraph shall be
conclusive and binding upon the Participant, his Designated Beneficiary and all
other persons.
5.2 No Effect on Employment Rights. Nothing contained herein will confer any
Participant the right to be retained in the service of the Company or an
Affiliated Company nor limit the right of the Company or an Affiliated Company
to discharge or otherwise deal with any Participant without regard to the
existence of the Plan.
5.3 Funding. The Plan and all Participation Agreements shall at all times be
entirely unfunded and no provision shall at any time be made with respect to
segregating assets of the Company or any Affiliated Company for payment of any
Supplemental Plan Benefit hereunder. No Participant, Designated Beneficiary or
other person shall have any interest in any particular assets of the Company or
any Affiliated Company by reason of the right to receive a Supplemental Plan
Benefit under the Plan or under any Participation Agreement, and any such
Participant, Designated Beneficiary, or other person shall have only the rights
of a general unsecured creditor of the Company with respect to any rights under
the Plan or any Participation Agreement.
5.4 No Guaranty of Benefits. Nothing contained in the Plan or any Participation
Agreement shall constitute a guaranty by the Company, any Affiliated Company, or
any other entity or person that the assets of the Company will be sufficient to
pay any Supplemental Plan Benefit hereunder.
5.5 Spendthrift Provision. No Supplemental Plan Benefit payable under the Plan
or any Participation Agreement shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, or charge prior to
actual receipt thereof by the payee; and any attempt so to anticipate, alienate,
sell, transfer, assign, pledge, encumber or charge prior to such receipt shall
be void; and the Company shall not be liable in any manner for, or subject to,
the debts, contracts, liabilities, engagements or torts of any person entitled
to any Supplemental Plan Benefit under the Plan or any Participation Agreement.
5.6 Administration. The Committee shall be responsible for the general operation
and administration of the Plan and for carrying out the provisions thereof. The
Committee shall have all powers necessary to interpret and carry out the
provisions of the Plan and all Participation Agreements and may, from time to
time, establish rules for the administration of the Plan and the transaction of
the Plan's business. In making any such rule, the Committee shall pursue uniform
policies and shall not discriminate in favor of or against any Participant or
group of Participants. The Committee shall be entitled to rely conclusively upon
all tables, valuations, certificates, opinions and reports furnished by any
actuary, accountant, controller, counsel or other person employed or engaged by
the Company or the Committee with respect to the Plan.
5.7 Disclosure. Each Participant shall receive a copy of the Plan and the
Committee will make available for inspection by any Participant or Designated
Beneficiary a copy of any rules and regulations used by the Committee in
administering the Plan.
5.8 State Law. The Plan and all Participation Agreements are established under
and will be construed according to the laws of the State of Illinois, to the
extent that such laws are not preempted by the Employee Retirement Income
Security Act and valid regulations published thereunder.
5.9 Small Benefits. If the actuarial value of any Supplemental Plan Benefit is
less than $3,500, the Committee, in its discretion, may pay the actuarial value
of such Benefit to the Participant or Designated Beneficiary entitled thereto in
a single lump sum or in quarterly, semi-annual or annual installments in lieu of
any further benefit payments hereunder.
5.10 Incapacity of Recipient. In the event a Participant or Designated
Beneficiary is declared incompetent and a conservator or other person legally
charged with the care of his person or of his estate is appointed, any
Supplemental Plan Benefit to which such Participant or Designated Beneficiary is
entitled shall be paid to such conservator or other person legally charged with
the care of his person or his estate. Except as provided above in this
paragraph, when the Committee, in its sole discretion, determines that a
Participant or Designated Beneficiary is unable to manage his financial affairs,
the Committee may provide for any Supplemental Plan Benefit Payment, or any part
thereof, to be made to any other person or institution then contributing toward
or providing for the care and maintenance of such Participant or Designated
Beneficiary. Any such payment shall be for the benefit of such Participant or
Designated Beneficiary and a complete discharge of any obligation of the Company
and the Plan with respect thereto.
5.11 Unclaimed Benefit. Each Participant shall keep the Committee informed of
his current address and the current address of his Designated Beneficiary. The
Committee shall not be obligated to search for the whereabouts of any person. If
the location of a Participant is not made known to the Committee within three
(3) years after the date on which any payment of the Participant's Supplemental
Plan Benefit may be made, payment may be made as though the Participant had died
at the end of the three-year period. If, within one additional year after such
three-year period has elapsed, or, within three years after the actual death of
a Participant, the Committee is unable to locate any Designated Beneficiary of
the Participant, then the Committee shall have no further obligation to pay any
Supplemental Plan Benefit hereunder to such Participant or Designated
Beneficiary or any other person and such Benefit shall be irrevocably forfeited.
5.12 Limitations on Liability. Notwithstanding any of the preceding provisions
of the Plan, no individual acting as an employee or agent of the Company or an
Affiliated Company or any member of the Committee, shall be liable to any
Participant, former Participant, Designated Beneficiary, or any other person for
any claim, loss, liability or expense incurred in connection with the Plan or
any Participation Agreement.
5.13 Gender and Number. In the Plan, where the context admits, words in the
masculine gender include the feminine and neuter genders, words in the singular
include the plural, and the plural includes the singular.
Exhibit 10.9
FIRST AMENDMENT TO
FIRST MID-ILLINOIS BANCSHARES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
WHEREAS, First Mid-Illinois Bancshares, Inc. (the "Company") maintains the
First Mid-Illinois Bancshares, Inc. Supplemental Executive Retirement Plan (the
"Plan");
WHEREAS, pursuant to the authority set forth in Section 4.1 of the Plan,
the Company deems it desirable to amend the Plan to reduce the period of time
during which a Participation Agreement must be entered into between the Company
and the Participant from 60 days to 30 days.
NOW, THEREFORE, the Plan is amended, effective as of January 1, 2005, by
replacing "sixty (60) days" with "thirty (30) days" where it appears in Section
III.
IN WITNESS WHEREOF, the Company has caused this First Amendment to the Plan
to be executed on its behalf, by its officer, duly authorized, on this 28th day
of February, 2006.
FIRST MID-ILLINOIS BANCSHARES, INC.
By: /s/ William S. Rowland
Its: Chairman and Chief Executive Officer
Exhibit 10.10
PARTICIPATION AGREEMENT
(AS AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 1, 2005)
This Agreement is made this 28th day of February, 2006, by and between
First Mid-Illinois Bancshares, Inc. (the "Company") and William S. Rowland (the
"Participant"), to be effective as of January 1, 2005.
W I T N E S S E T H :
WHEREAS, the Participant has been designated as a participant in the First
Mid-Illinois Bancshares, Inc. Supplemental Executive Retirement Plan (the
"Plan"), effective August 20, 1991, and
WHEREAS, the Company and the Participant wish to amend and restate the
terms and conditions of the Supplemental Plan Benefit payable to or with respect
to the Participant pursuant to the terms of the Plan, to comply with Internal
Revenue Code (the "Code") Section 409A and the guidance and regulations
thereunder. The portion of a Supplemental Plan Benefit that is a "Pre-2005
Benefit" (as herein defined) shall be administered without giving effect to Code
Section 409A and the guidance and regulations thereunder.
NOW, THEREFORE, in consideration of the promises and the mutual covenants
herein contained, it is agreed as follows:
1. Terms and Conditions of Plan. This Agreement is subject to the
provisions set forth herein and the terms and conditions of the Plan,
the terms of which are hereby incorporated by reference.
2. Definitions. All words and phrases defined in the Plan shall have the
same meaning in this Agreement, except as otherwise expressly provided
herein:
(a) Disability. "Disability" means a disability under the rules and
definitions contained in the long term disability plan maintained by
the Company at the date the Participant's employment terminates.
(b) Post-2004 Benefit. "Post-2004 Benefit" means the portion of the
Participant's Supplemental Plan Benefit in excess of the Participant's
Pre-2005 Benefit, if any.
(c) Pre-2005 Benefit. "Pre-2005 Benefit" means the portion of the
Participant's Supplemental Plan Benefit equal to the present value,
determined as of December 31, 2004, of the benefit to which the
Participant would be entitled under the Plan if he terminated
employment for reasons other than as described in Section 5.1 of the
Plan on December 31, 2004 and received the entire payment of his
benefit from the Plan on the earliest possible date allowed under the
Plan following termination of employment.
3. Amount and Normal Form of Benefit.
(a) Retirement at Age 65 or Thereafter. If the Participant retires from
employment with the Company and all Affiliated Companies at age 65 or
thereafter, the Company shall pay a Supplemental Plan Benefit of
$50,000 per year for a period of 20 years to the Participant. Such
Supplemental Plan Benefit shall be paid in monthly installments
commencing on the first day of the month coincident with or next
following the date of the Participant's termination of employment due
to retirement. If the Participant dies after retirement and before all
payments have been received for such 20-year period, any remaining
payments shall be made to a Designated Beneficiary.
(b) Death Prior to Retirement. If the Participant's employment with the
Company and all Affiliated Companies terminates by reason of his
death, the Company shall pay a Supplemental Plan Benefit of $50,000
per year for a period of 20 years to a Designated Beneficiary of the
Participant. Such Supplemental Plan Benefit shall be paid in monthly
installments commencing on the first day of the month next following
the date of death of the Participant. If the Designated Beneficiary
dies before all payments have been received for such 20-year period,
any remaining payments shall be made to a successor Designated
Beneficiary.
(c) Disability. If the Participant's employment with the Company and all
Affiliated Companies terminates prior to his attaining age 65 by
reason of his Disability, the Company shall pay a Supplemental Plan
Benefit of $50,000 per year for a period of 20 years to the
Participant. The Supplemental Plan Benefit shall be paid in monthly
installments commencing on the first day of the month coincident with
or next following the Participant's 65th birthday. If the Participant
dies after payment of the Supplemental Plan Benefit has commenced
pursuant to this Section 3(c) and before all payments have been
received for such 20-year period, any remaining payments shall be made
to a Designated Beneficiary.
(d) Other Termination of Employment. Except as otherwise provided in the
Plan, if the Participant's employment with the Company and all
Affiliated Companies terminates prior to death or age 65 and other
than by reason of his Disability, the Company shall pay a Supplemental
Plan Benefit in an amount equal to $50,000 per year for 20 years and
reduced pursuant to the following schedule based on the Participant's
age at termination of employment:
Age Date of Termination Percent Reduction
--- ------------------- -----------------
44 Prior to 12/31/91 95
45 1/1/92 - 12/31/92 90
46 1/1/93 - 12/31/93 85
47 1/1/94 - 12/31/94 80
48 1/1/95 - 12/31/95 75
49 1/1/96 - 12/31/96 70
50 1/1/97 - 12/31/97 65
51 1/1/98 - 12/31/98 60
52 1/1/99 - 12/31/99 55
53 1/1/2000 - 12/31/2000 50
54 1/1/2001 - 12/31/2001 45
55 1/1/2002 - 12/31/2002 40
56 1/1/2003 - 12/31/2003 35
57 1/1/2004 - 12/31/2004 30
58 1/1/2005 - 12/31/2005 25
59 1/1/2006 - 12/31/2006 20
60 1/1/2007 - 12/31/2007 15
61 1/1/2008 - 12/31/2008 10
62 1/1/2009 - 12/31/2009 5
63 On or after 1/1/2010 -0-
The Supplemental Plan Benefit shall be paid in monthly
installments over a 20-year period commencing on the first day of the
month coincident with or next following the Participant's 65th
birthday. If the Participant dies after payment of the Supplemental
Plan Benefit has commenced and before all payments have been received
for such 20-year period, any remaining payments shall be made to a
Designated Beneficiary.
(e) Death After Termination of Employment and Before Benefit Commencement.
If the Participant's employment with the Company and all Affiliated
Companies terminates for any reason other than death prior to
attaining age 65, and he dies before payment to him of the
Supplemental Plan Benefit referred to in Section 5(c) or (d) above has
commenced, then such Supplemental Plan Benefit otherwise payable to
the Participant will be payable to the Participant's Designated
Beneficiary for a period of 20 years without any reduction for early
commencement thereof. Payment will be made in monthly installments and
will commence on the first day of the month next following the date of
death of the Participant. If the Designated Beneficiary dies before
all payments have been received for such 20-year period, any remaining
payments shall be made to a successor Designated Beneficiary.
4. Changes to Form and Timing of Benefit.
(a) Timing.
(i) Acceleration of Pre-2005 Benefit. A Participant whose
employment terminates prior to age 65 for reasons other than
death may elect, in accordance with Section 4(c), to have
payment of his Pre-2005 Benefit commence on the first day of
any month after his termination of employment and prior to
age 65; provided, however, that if such an election is made,
the Supplemental Plan Benefit otherwise payable at age 65
will be reduced at the rate of 0.0083% for each month by
which the first day of the month coincident with or next
following the date upon which payment of such Supplemental
Plan Benefit commences precedes the first day of the month
coincident with or next following the Participant's 65th
birthday.
(ii) Deferral of Payment. A Participant may elect, in accordance
with Section 4(c), to defer payment, or commencement of
payment, of his Supplemental Plan Benefit.
(b) Lump Sum Payment. The Participant may elect, in accordance
with Section 4(c), to have his Supplemental Plan Benefit paid
in a lump sum, which shall be actuarially equivalent to the
value of his Supplemental Plan Benefit payable in
installments over a 20-year period. For purposes of
adjustments made pursuant to this Agreement to determine the
equivalent lump sum value of such payments, the actuarial
factors and assumptions to be used shall be those selected by
the Committee, in its sole discretion. A lump sum form of
payment may not be requested by the Participant after payment
of the Supplemental Plan Benefit has commenced.
(c) Elections Procedures. The Participant's elections pursuant to
this Section 4 shall be irrevocable and binding on the
Participant and his Designated Beneficiary.
(i) Pre-2005 Benefit. A Participant's election to defer or
accelerate commencement of his Pre-2005 Benefit or to have
such Pre-2005 Benefit paid in a lump sum must be delivered in
writing to the Committee at least six months before the date
of the Participant's termination of employment.
(ii) Post-2004 Benefit.
(A) A Participant's election to defer
commencement of his Post-2004 Benefit or to have such
Post-2004 Benefit paid in a lump sum must be made at
least 12 months prior to the date on which the lump
sum payment or first installment payment would
otherwise commence and such payment shall be deferred
for a period of not less than five years from the
date on which such payment would otherwise have been
made.
(B) Notwithstanding any other provisions of
this Section 4(c) to the contrary, the Participant
may make an election with respect to the time and
form of payment of his Post-2004 Supplemental Plan
Benefit without regard to the restrictions imposed
under paragraph (A) provided that the election is
made on or before December 31, 2006, it applies only
to amounts that would not otherwise be payable in
calendar year 2006, and it shall not cause any amount
to be paid in calendar year 2006 that would not
otherwise be payable in such year.
5. Key Employee. If at the time of the Participant's termination of employment
the Participant is a "Key Employee" as defined in Code Section 416(i) (without
reference to paragraph 5 thereof), and the Participant's Supplemental Plan
Benefit is scheduled to begin or be made within six months of the date of the
Participant's termination of employment, (a) installment payments shall be paid
first from the Participant's Pre-2005 Benefit and (b) any lump sum payment shall
be paid as soon as practicable after the end of such six-month period, as
applicable.
6. Termination of Benefit. A Designated Beneficiary or successor Designated
Beneficiary may be selected only by the Participant by written notice delivered
to the Committee prior to the date of the Participant's death. If no Designated
Beneficiary has been designated by the Participant prior to his death, or if
none is living at the date of death of the Participant or at any time during the
20-year period over which the Supplemental Plan Benefit is payable, then no
further Supplemental Plan Benefit payments shall be made by the Company
following the date of death of the survivor of the Participant and all his
Designated Beneficiaries.
7. Benefit. The provisions of this Agreement shall inure to the benefit of the
Company, its successors and assigns, and shall be binding upon the Participant,
his heirs, personal representatives and successors, including without
limitation, his Designated Beneficiaries, his estate and the executors,
administrators or trustees of his estate.
8. Notices. All notices, requests, demands and other communications in
connection with this Agreement shall be made in writing and shall be deemed to
have been given when delivered by hand, when sent by facsimile or similar means
of communication, or 48 hours after mailing at any general or branch United
States post office, by registered or certified mail, postage prepaid, addressed
as follows, or to such other address as shall have been designated in writing by
the addressee:
If to the Company:
First Mid-Illinois Bancshares, Inc.
1515 Charleston Avenue
Mattoon, Illinois 61938
Attention: Kenneth R. Diepholz
Facsimile: (217) 235-0706
If to the Participant:
1 Prairie Sun Lane
Mattoon, Illinois 61938
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first above written.
FIRST MID-ILLINOIS BANCSHARES, INC.
By: /s/ Kenneth R. Diepholz
Kenneth R. Diepholz
Chairman, Compensation Committee
/s/ William S. Rowland
William S. Rowland, Participant
Exhibit 10.11
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into this ____
day of _____________, _____, by and between First Mid-Illinois Bancshares, Inc.
("the Company"), a corporation with its principal place of business located in
Mattoon, Illinois, and _____________ ("Manager").
In consideration of the promises and mutual covenants and agreements contained
herein, the parties hereto acknowledge and agree as follows:
ARTICLE ONE
TERM AND NATURE OF AGREEMENT
1.01 Term of Agreement. The term of this Agreement shall commence as of
_________, ____ and shall continue until ___________, ____. Thereafter, unless
Manager's employment with the Company has been previously terminated, Manager
shall continue his employment with the Company on an at will basis and, except
as provided in Articles Five, Six and Seven, this Agreement shall terminate
unless extended by mutual written agreement.
1.02 Employment. The Company agrees to employ Manager and Manager accepts such
employment by the Company on the terms and conditions herein set forth. The
duties of Manager shall be determined by the Company's Chief Executive Officer
and shall adhere to the policies and procedures of the Company and shall follow
the supervision and direction of the Chief Executive Officer or his designee in
the performance of such duties. During the term of his employment, Manager
agrees to devote his full working time, attention and energies to the diligent
and satisfactory performance of his duties hereunder. Manager shall not, while
he is employed by the Company, engage in any activity which would (a) interfere
with, or have an adverse effect on, the reputation, goodwill or any business
relationship of the Company or any of its subsidiaries; (b) result in economic
harm to the Company or any of its subsidiaries; or (c) result in a breach of
Section Six of the Agreement.
ARTICLE TWO
COMPENSATION AND BENEFITS
While Manager is employed with the Company during the term of this Agreement,
the Company shall provide Manager with the following compensation and benefits:
2.01 Base Salary. The Company shall pay Manager an annual base salary of
$________ per fiscal year, payable in accordance with the Company's customary
payroll practices for management employees. The Chief Executive Officer or his
designee may review and adjust Manager's base salary from year to year;
provided, however, that during the term of Manager's employment, the Company
shall not decrease Manager's base salary.
2.02 Incentive Compensation Plan. Manager shall continue to participate in the
First Mid-Illinois Bancshares, Inc. Incentive Compensation Plan in accordance
with the terms and conditions of such Plan. Pursuant to the Plan, Manager shall
have an opportunity to receive incentive compensation of up to a maximum of
____% of Manager's annual base salary. The incentive compensation payable for a
particular fiscal year will be based upon the attainment of the performance
goals in effect under the Plan for such year and will be paid in accordance with
the terms of the Plan and at the sole discretion of the Board.
2.03 Vacation. Manager shall be entitled to _ weeks of paid vacation each year
during the term of this Agreement.
2.04 Other Benefits. Manager shall be eligible (to the extent he qualifies) to
participate in any other retirement, health, accident and disability insurance,
or similar employee benefit plans as may be maintained from time to time by the
Company for its other management employees subject to and on a consistent basis
with the terms, conditions and overall administration of such plans.
2.05 Business Expenses. Manager shall be entitled to reimbursement by the
Company for all reasonable expenses actually and necessarily incurred by him on
its behalf in the course of his employment hereunder and in accordance with
expense reimbursement plans and policies of the Company from time to time in
effect for management employees.
2.6. Withholding. All salary, incentive compensation and other benefits provided
to Manager pursuant to this Agreement shall be subject to withholding for
federal, state or local taxes, amounts withheld under applicable employee
benefit plans, policies or programs, and any other amounts that may be required
to be withheld by law, judicial order or otherwise or by agreement with, or
consent of, Manager.
ARTICLE THREE
DEATH OF MANAGER
This Agreement shall terminate prior to the end of the term described in Section
1.01 upon Manager's termination of employment with the Company due to his death.
Upon Manager's termination due to death, the Company shall pay Manager's estate
the amount of Manager's base salary and his accrued but unused vacation time
earned through the date of such death and any incentive compensation earned for
the preceding fiscal year that is not yet paid as of the date of such death.
ARTICLE FOUR
TERMINATION OF EMPLOYMENT
Manager's employment with the Company may be terminated by Manager or by the
Company at any time for any reason. Upon Manager's termination of employment
prior to the end of the term of the Agreement, the Company shall pay Manager as
follows:
4.01 Termination by the Company for Other Than Cause. If the Company terminates
Manager's employment for any reason other than Cause, the Company shall pay
Manager the following:
(a) An amount equal to Manager's monthly base salary in effect at
the time of such termination of employment for a period of
_____ months thereafter. Such amount shall be paid to Manager
periodically in accordance with the Company's customary
payroll practices for management employees.
(b) The base salary and accrued but unused paid vacation time
earned through the date of termination and any incentive
compensation earned for the preceding fiscal year that is not
yet paid.
(c) Continued coverage for Manager and/or Manager's family under
the Company's health plan pursuant to Title I, Part 6 of the
Employee Retirement Income Security Act of 1974 ("COBRA") and
for such purpose the date of Manager's termination of
employment shall be considered the date of the "qualifying
event" as such term is defined by COBRA. During the period
beginning on the date of such termination and ending at the
end of the period described in Section 4.01(a), Manager shall
be charged for such coverage in the amount that he would have
paid for such coverage had he remained employed by the
Company, and for the duration of the COBRA period, Manager
shall be charged for such coverage in accordance with the
provisions of COBRA.
For purposes of this Agreement, "Cause" shall mean Manager's (i) conviction in a
court of law of (or entering a plea of guilty or no contest to) any crime or
offense involving fraud, dishonesty or breach of trust or involving a felony;
(ii) performance of any act which, if known to the customers, clients,
stockholders or regulators of the Company, would materially and adversely impact
the business of the Company; (iii) act or omission that causes a regulatory body
with jurisdiction over the Company to demand, request, or recommend that Manager
be suspended or removed from any position in which Manager serves with the
Company; (iv) substantial nonperformance of any of his obligations under this
Agreement; (v) misappropriation of or intentional material damage to the
property or business of the Company or any affiliate; or (vi) breach of Article
Five or Six of this Agreement.
4.02 Termination Following a Change in Control. Notwithstanding Section 4.01,
if, following a Change in Control, and prior to the end of the term of this
Agreement, Manager's employment is terminated by the Company (or any successor
thereto) for any reason other than Cause, or if Manager terminates his
employment because of a decrease in his then current base salary or a
substantial diminution in his position and responsibilities, the Company (or any
successor thereto) shall pay Manager the following:
(a) An amount equal to Manager's monthly base salary in effect at
the time of such termination for a period of twelve (12)
months thereafter. Such amount shall be paid in accordance
with the Company's or successor's customary payroll practices
for Manager employees.
(b) The base salary and accrued but unused paid vacation time
earned through the date of termination and any incentive
compensation earned for the preceding fiscal year that is not
yet paid.
(c) Continued coverage for Manager and/or Manager's family under
the Company's health plan pursuant to Title I, Part 6 of the
Employee Retirement Income Security Act of 1974 ("COBRA") and
for such purpose the date of Manager's termination of
employment shall be considered the date of the "qualifying
event" as such term is defined by COBRA. During the period
beginning on the date of such termination and ending at the
end of the period described in Section 4.02(a), Manager shall
be charged for such coverage in the amount that he would have
paid for such coverage had he remained employed by the
Company, and for the duration of the COBRA period, Manager
shall be charged for such coverage in accordance with the
provisions of COBRA.
For purposes of this Agreement, "Change in Control" shall have the meaning as
set forth in the First Mid-Illinois Bancshares, Inc. 1997 Stock Incentive Plan.
4.03 Other Termination of Employment. If, prior to the end of the term of this
Agreement, the Company terminates Manager's employment for Cause, or if Manager
terminates his employment for any reason other than as described in Section 4.02
above, the Company shall pay Manager the base salary and accrued but unused paid
vacation time earned through the date of such termination and any incentive
compensation earned for the preceding fiscal year that is not yet paid.
ARTICLE FIVE
CONFIDENTIAL INFORMATION
5.01 Non-Disclosure of Confidential Information. During his employment with the
Company, and after his termination of such employment with the Company, Manager
shall not, in any form or manner, directly or indirectly, use, divulge, disclose
or communicate to any person, entity, firm, corporation or any other third
party, any Confidential Information, except as required in the performance of
Manager's duties hereunder, as required by law or as necessary in conjunction
with legal proceedings.
5.02 Definition of Confidential Information. For the purposes of this Agreement,
the term "Confidential Information" shall mean any and all information either
developed by Manager during his employment with the Company and used by the
Company or its affiliates or developed by or for the Company or its affiliates
of which Manager gained knowledge by reason of his employment with the Company
that is not readily available in or known to the general public or the industry
in which the Company or any affiliate is or becomes engaged. Such Confidential
Information shall include, but shall not be limited to, any technical or
non-technical data, formulae, compilations, programs, devices, methods,
techniques, procedures, manuals, financial data, business plans, lists of actual
or potential customers, lists of employees and any information regarding the
Company's or any affiliate's products, marketing or database. The Company and
Manager acknowledge and agree that such Confidential Information is extremely
valuable to the Company and may constitute trade secret information under
applicable law. In the event that any part of the Confidential Information
becomes generally known to the public through legitimate origins (other than by
the breach of this Agreement by Manager or by other misappropriation of the
Confidential Information), that part of the Confidential Information shall no
longer be deemed Confidential Information for the purposes of this Agreement,
but Manager shall continue to be bound by the terms of this Agreement as to all
other Confidential Information.
5.03 Delivery Upon Termination. Upon termination of Manager's employment with
the Company for any reason, Manager shall promptly deliver to the Company all
correspondence, files, manuals, letters, notes, notebooks, reports, programs,
plans, proposals, financial documents, and any other documents or data
concerning the Company's or any affiliate's customers, database, business plan,
marketing strategies, processes or other materials which contain Confidential
Information, together with all other property of the Company or any affiliate in
Manager's possession, custody or control.
ARTICLE SIX
NON-COMPETE AND NON-SOLICITATION COVENANTS
6.01 Covenant Not to Compete. During the term of this Agreement and for a period
of one year following the later of (i) the termination of Manager's employment
for any reason or (ii) the last day of the term of the Agreement, Manager shall
not, on behalf of himself or on behalf of another person, corporation,
partnership, trust or other entity, within the counties of Coles, Moultrie,
Douglas, Cumberland, Effingham, Champaign, Christian, Madison, Macon, Bond or
Piatt, Illinois, or any other county in which the Company or any affiliate
conducts business:
(a) Directly or indirectly own, manage, operate, control,
participate in the ownership, management, operation or control
of, be connected with or have any financial interest in, or
serve as an officer, employee, advisor, consultant, agent or
otherwise to any person, firm, partnership, corporation, trust
or other entity which owns or operates a business similar to
that of the Company or its affiliates.
(b)Solicit for sale, represent, and/or sell Competing Products to
any person or entity who or which was the Company's customer
or client during the last year of Manager's employment.
"Competing Products," for purposes of this Agreement, means
products or services which are similar to, compete with, or
can be used for the same purposes as products or services sold
or offered for sale by the Company or any affiliate or which
were in development by the Company or any affiliate within the
last year of Manager's employment.
6.02 Covenant Not to Solicit. For a period of one year following the later of
(i) the termination of Manager's employment for any reason or (ii) the last day
of the term of this Agreement, Manager shall not:
(a)Attempt in any manner to solicit from any client or customer
business of the type performed by the Company or any affiliate
or persuade any client or customer of the Company or any
affiliate to cease to do such business or to reduce the amount
of such business which any such client or customer has
customarily done or contemplates doing with the Company or any
affiliate, whether or not the relationship between the Company
or affiliate and such client or customer was originally
established in whole or in part through Manager's efforts.
(b)Render any services of the type rendered by the Company or
any affiliate for any client or customer of the Company.
(c)Solicit or encourage, or assist any other person to solicit or
encourage, any employees, agents or representatives of the
Company or an affiliate to terminate or alter their
relationship with the Company or any affiliate.
(d)Do or cause to be done, directly or indirectly, any acts which
may impair the relationship between the Company or any
affiliate with their respective clients, customers or
employees.
ARTICLE SEVEN
REMEDIES
Manager acknowledges that compliance with the provisions of Articles Five and
Six herein is necessary to protect the business, goodwill and proprietary
information of the Company and that a breach of these covenants will irreparably
and continually damage the Company for which money damages may be inadequate.
Consequently, Manager agrees that, in the event that he breaches or threatens to
breach any of these provisions, the Company shall be entitled to both (a) a
temporary, preliminary or permanent injunction in order to prevent the
continuation of such harm; and (b) money damages insofar as they can be
determined. In addition, the Company will cease payment of all compensation and
benefits under Articles Three and Four hereof. In the event that any of the
provisions, covenants, warranties or agreements in this Agreement are held to be
in any respect an unreasonable restriction upon Manager or are otherwise
invalid, for whatsoever cause, then the court so holding shall reduce, and is so
authorized to reduce, the territory to which it pertains and/or the period of
time in which it operates, or the scope of activity to which it pertains or
effect any other change to the extent necessary to render any of the
restrictions of this Agreement enforceable.
ARTICLE EIGHT
MISCELLANEOUS
8.01 Successors and Assignability.
(a) No rights or obligations of the Company under this Agreement
may be assigned or transferred except that the Company will
require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company
to expressly assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place.
(b) No rights or obligations of Manager under this Agreement may
be assigned or transferred by Manager other than his rights to
payments or benefits hereunder which may be transferred only
by will or the laws of descent and distribution.
8.02 Entire Agreement. This Agreement contains the entire agreement between the
parties with respect to the subject matter hereof and may not be modified except
in writing by the parties hereto. Furthermore, the parties hereto specifically
agree that all prior agreements, whether written or oral, relating to Manager's
employment by the Company shall be of no further force or effect from and after
the date hereof.
8.03 Severability. If any phrase, clause or provision of this Agreement is
deemed invalid or unenforceable, such phrase, clause or provision shall be
deemed severed from this Agreement, but will not affect any other provisions of
this Agreement, which shall otherwise remain in full force and effect. If any
restriction or limitation in this Agreement is deemed to be unreasonable,
onerous or unduly restrictive, it shall not be stricken in its entirety and held
totally void and unenforceable, but shall be deemed rewritten and shall remain
effective to the maximum extent permissible within reasonable bounds.
8.04 Controlling Law and Jurisdiction. This Agreement shall be governed by and
interpreted and construed according to the laws of the State of Illinois. The
parties hereby consent to the jurisdiction of the state and federal courts in
the State of Illinois in the event that any disputes arise under this Agreement.
8.05 Notices. All notices, requests, demands and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given (a) on
the date of service if served personally on the party to whom notice is to be
given; (b) on the day after delivery to an overnight courier service; (c) on the
day of transmission if sent via facsimile to the facsimile number given below;
or (d) on the third day after mailing, if mailed to the party to whom notice is
to be given, by first class mail, registered or certified, postage prepaid and
properly addressed, to the party as follows:
If to Manager:
If to the Company: First Mid-Illinois Bancshares, Inc.
1515 Charleston Avenue
Mattoon, Illinois 61938
Facsimile: 217-234-0485
Attention: Chairman and Chief Executive Officer
Any party may change its address for the purpose of this Section by
giving the other party written notice of its new address in the manner set forth
above.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
FIRST MID-ILLINOIS BANCSHARES, INC.
By: /s/ William S. Rowland
William S. Rowland
Title: Chairman of the Board
MANAGER: /s/
Exhibit 11.1
Computation of Earnings Per Share
The Company follows Financial Accounting Standards Board's Statement No. 128,
"Earnings Per Share" ("SFAS 128") in which income for Basic Earnings per Share
("EPS") is adjusted for dividends attributable to preferred stock and is based
on the weighted average number of common shares outstanding. Diluted EPS is
computed by using the weighted average number of common shares outstanding,
increased by the assumed conversion of the convertible preferred stock and the
assumed conversion of the stock options.
The components of basic and diluted earnings per common share for the years
ended December 31, 2005, 2004, and 2003 are as follows:
2005 2004 2003
---------------- --------------- ----------------
Basic Earnings per Share:
Net income available to common stockholders $9,807,000 $9,751,000 $9,093,000
================ =============== ================
Weighted average common shares outstanding
4,423,186 4,499,092 4,743,210
================ =============== ================
Basic earnings per common share
$2.22 $2.17 $1.92
================ =============== ================
Diluted Earnings per Share:
Net income available to common stockholders $9,807,000 $9,751,000 $9,093,000
================ =============== ================
Weighted average common shares outstanding
4,423,186 4,499,092 4,743,210
Assumed conversion of stock options 124,481 88,967 85,935
---------------- --------------- ----------------
Diluted weighted average common shares outstanding
4,547,667 4,588,059 4,829,145
================ =============== ================
Diluted earnings per common share $2.16 $2.13 $1.88
================ =============== ================
Exhibit 14.1
CODE OF ETHICS
FOR SENIOR FINANCIAL MANAGEMENT
FIRST MID-ILLINOIS BANCSHARES, INC.
DATED DECEMBER 16, 2003
I. OVERVIEW
The banking business is based on trust.
Our shareholders and customers entrust us with their money and confidential
information because of our reputation for honesty, integrity and high ethical
standards.
The Chief Executive Officer and the Chief Financial Officer (referred to in this
Code as the "Senior Financial Management" collectively or "you") of First
Mid-Illinois Bancshares, Inc. (referred to in this Code as "First Mid" or "we"
or "our" or "us") are required to maintain high ethical standards.
The Code of Ethics for Senior Financial Management of First Mid-Illinois
Bancshares, Inc. ("Code") sets forth the guiding principles by which we operate
our company and conduct our daily business with our shareholders and customers
as well as with our directors, advisory board members, officers and employees.
These principles apply to each member of the Senior Financial Management of
First Mid. Each member of the Senior Financial Management of First Mid has a
responsibility to read, understand and comply with this Code.
Any person who has information concerning any violation of this Code by any
member of the Senior Financial Management of First Mid must promptly bring such
information to the attention of the Audit Committee Chairperson or his or her
designee. If the Chairperson or his or her designee determines that there is a
conflict of interest that would make it inappropriate for him or her to resolve
the matter, he or she shall refer the matter to the Audit Committee of the Board
of Directors for resolution.
Violations of this Code may subject the member of Senior Financial Management to
appropriate actions, such as censure, suspension or termination. Such actions
shall be reasonably designed to deter wrongdoing and to promote accountability
for adherence to this Code.
II. PRINCIPLES
Ethical Behavior
Each member of the Senior Financial Management must (a) act honestly and
ethically, including the ethical handling of actual or apparent conflicts of
interest between personal and professional relationships; (b) act in good faith,
responsibly, and with due care, competence and diligence, without
misrepresenting material facts or allowing the member's independent judgment to
be subordinated; (c) share knowledge and maintain skills relevant to carry out
the member's duties within First Mid; and (d) proactively promote ethical
behavior as a responsible partner among peers and colleagues in the work
environment and community.
Complying with Laws, Regulations, Policies and Procedures
All members of the Senior Financial Management of First Mid must understand,
respect and comply with all of the laws, rules, regulations, policies and
procedures that apply to them in their position with First Mid as well as those
that affect the conduct of First Mid's business and financial reporting. All
members of the Senior Financial Management of First Mid are responsible for
determining which laws, rules, regulations and First Mid policies apply to their
position and affect the conduct of First Mid's business and financial reporting
and what training is necessary to understand and comply with them. All members
of the Senior Financial Management of First Mid are directed to specific
policies and procedures available from the Corporate Secretary.
Conflicts of Interest
All members of the Senior Financial Management of First Mid should be scrupulous
in avoiding any action or interest that conflicts or gives the appearance of a
conflict with First Mid's interests. A "conflict of interest" exists whenever an
individual's private interests interfere or conflict in any way (or even appear
to interfere or conflict) with the interests of First Mid. A conflict situation
can arise when a member of the Senior Financial Management of First Mid takes
action or has interests that may make it difficult to perform his or her work
for First Mid objectively and effectively. Conflicts of interest may also arise
when a member of the Senior Financial Management of First Mid or a member of his
or her family receives improper personal benefits as a result of his or her
position with First Mid, whether from a third party or from First Mid. All
members of the Senior Financial Management of First Mid should utilize First
Mid's products and services, when appropriate, but this must be done on an
arm's-length basis. Conflicts of interest are prohibited as a matter of First
Mid policy.
Conflicts of interest may not always be clear-cut, so if a question arises, you
should consult with higher levels of management or the Corporate Secretary. Any
member of the Senior Financial Management of First Mid who becomes aware of a
conflict or potential conflict should bring it to the attention of a supervisor,
manager or other appropriate personnel.
Corporate Opportunity
All members of the Senior Financial Management of First Mid are prohibited from
(a) taking for themselves personally opportunities that properly belong to First
Mid or are discovered through the use of corporate property, information or
position; (b) using corporate property, information and position for personal
gain; and (c) competing with First Mid. All members of the Senior Financial
Management of First Mid owe a duty to First Mid to advance First Mid's
legitimate interests when the opportunity to do so arises.
Confidentiality
All members of the Senior Financial Management of First Mid must respect the
confidentiality of all information acquired in the course of work, except when
disclosure is specifically authorized or required by laws, regulations or legal
proceedings. Such information includes (a) information entrusted to members of
the Senior Financial Management by First Mid or its customers and (b) all
non-public information that might be of use to competitors of First Mid or
harmful to First Mid or its customers or employees if disclosed.
Fair Dealing
We seek to outperform our competition fairly and honestly. We do not seek
competitive advantages through unethical or illegal business practices. Stealing
proprietary information, possessing or utilizing trade secret information that
was obtained without the owner's consent or inducing such disclosures by past or
present employees of other companies is prohibited.
Each member of the Senior Financial Management of First Mid is expected to deal
fairly with the customers, competitors, officers and employees of First Mid. No
one should take unfair advantage of anyone through manipulation, concealment,
abuse of privileged information, misrepresentation of material facts or any
other unfair dealing.
Bribery
No member of the Senior Financial Management of First Mid may solicit or accept
a bribe. Use good judgment in determining what constitutes a bribe. When a
customer buys you lunch, that is not a bribe. When a customer pays you a fee to
make a loan, you are being bribed. A discount from a local department store,
available to everyone, is not a bribe. A free car from a customer is a bribe.
No member of the Senior Financial Management of First Mid may pay a bribe. Use
good judgment in determining what constitutes a bribe. A political contribution
within the law is not a bribe. An under-the-table fee paid to a government
officer is a bribe. A loan made to a public official, under normal terms and
conditions and with proper approvals, is not a bribe. A no-interest loan to a
government official is a bribe.
Strict laws and regulations apply to favors granted to public officials and you
must consult with executive management about any questionable situation.
Protection and Proper Use of First Mid Assets
All members of the Senior Financial Management of First Mid should protect First
Mid's assets and ensure their efficient use. Each member of the Senior Financial
Management of First Mid must achieve responsible use of and control over all
assets and resources of First Mid entrusted to the member. Theft, carelessness
and waste have a direct impact on First Mid's ability to do business
effectively. All First Mid assets should be used for legitimate business
purposes. This includes such things as the internet, software, office supplies
and office equipment.
Public Company Reporting
As a public company, it is of critical importance that First Mid's filings with
the Securities and Exchange Commission (the "SEC") be accurate and timely. You
may be called upon to provide necessary information to assure that First Mid's
public reports are complete, fair and understandable. First Mid expects all
members of the Senior Financial Management to take this responsibility very
seriously and to provide prompt and accurate answers to inquiries related to
First Mid's public disclosure requirements. All members of the Senior Management
of First Mid must provide full, fair, accurate, timely and understandable
disclosures in reports and documents First Mid files with, or submits to, the
SEC and in other public communications by First Mid.
Financial Statements and Other Records
All of First Mid's books, records, accounts and financial statements must be
maintained in reasonable detail, must appropriately reflect First Mid's
transactions and must conform to applicable legal requirements and to First
Mid's system of internal controls. Unrecorded or "off the books" funds or assets
should not be maintained unless permitted by applicable law or regulation.
III. REPORTING ILLEGAL OR UNETHICAL BEHAVIOR
Reporting Illegal or Unethical Behavior
All members of the Senior Financial Management of First Mid who suspect or know
of violations of this Code or illegal or unethical business or workplace conduct
by employees, officers, advisory board members or directors have an obligation
to contact either the Corporate Secretary or the manager in First Mid's Audit
Department. Such communications will be kept confidential to the extent
feasible. If concerns or complaints require confidentiality, then this
confidentiality will be protected to the extent feasible, subject to applicable
law.
Accounting Complaints
First Mid's policy is to comply with all applicable financial reporting and
accounting regulations. If any member of the Senior Financial Management of
First Mid has unresolved concerns or complaints regarding questionable
accounting or auditing matters of First Mid, then he or she is encouraged to
submit those concerns or complaints (anonymously, confidentially or otherwise)
to the manager in First Mid's Audit Department. Subject to his or her legal
duties, the manager in First Mid's Audit Department will treat such submissions
confidentially.
All members of the Senior Financial Management of First Mid must promptly bring
to the attention of the Audit Committee Chairperson any information concerning
(a) significant deficiencies in the design or operation of internal controls
which could adversely affect First Mid's ability to record, process, summarize
and report financial data or (b) any fraud, whether or not material, that
involves management or other employees who have a significant role in First
Mid's financial reporting, disclosures or internal controls.
Non-Retaliation
First Mid prohibits retaliation of any kind against individuals who have made
good faith reports or complaints of violations of this Code or other known or
suspected illegal or unethical conduct.
IV. AMENDMENT, MODIFICATION AND WAIVER
The Audit Committee of the Board of Directors shall consider any request for a
waiver of this Code and any amendment to this Code and all such waivers or
amendments shall be disclosed promptly as required by law or SEC regulation.
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)
The Checkley Agency, Inc. (an Illinois corporation)
First Mid-Illinois Statutory Trust I (a business trust)
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
First Mid-Illinois Bancshares, Inc.:
RE: Registration Statements
Registration No. 033-84404 on Form S-3
Registration No. 033-64061 on Form S-8
Registration No. 033-64139 on Form S-8
Registration No. 033-69673 on Form S-8
We consent to incorporation by reference in the Registration Statements on Form
S-3 and S-8 of First Mid-Illinois Bancshares, Inc. of our reports dated January
24, 2006, relating to the consolidated balance sheet of First Mid-Illinois
Bancshares, Inc. and subsidiaries as of December 31, 2005 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the year ended December 31, 2005, and management's assessment of the
effectiveness of internal control over financial reporting as of December 31,
2005 and the effectiveness of internal control over financial reporting as of
December 31, 2005, which reports appear in the December 31, 2005 annual report
on Form 10-K of First Mid-Illinois Bancshares, Inc.
/s/ BKD, LLP
Decatur, Illinois
March 8, 2006
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
The Board of Directors
First Mid-Illinois Bancshares, Inc.:
We consent to the incorporation by reference in Registration Statement No.
033-84404 on Form S-3, and Registration Statements No. 033-64061, No. 033-64139,
and No. 033-69673 on Form S-8 of First Mid-Illinois Bancshares, Inc. and
subsidiaries of our report dated March 9, 2005, with respect to the consolidated
balance sheet of First Mid-Illinois Bancshares, Inc. and subsidiaries as of
December 31, 2004 and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the two-year period
ended December 31, 2004, which report appears in the December 31, 2005 annual
report on Form 10-K of First Mid-Illinois Bancshares, Inc.
/s/ KPMG LLP
Chicago, Illinois
March 8, 2006
Exhibit 31.1
CERTIFICATION
I, William S. Rowland, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of First Mid-Illinois
Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 8, 2006
/s/ William S. Rowland
William S. Rowland
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Michael L. Taylor, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of First Mid-Illinois
Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 8, 2006
/s/ Michael L. Taylor
Michael L. Taylor
Chief Financial Officer
Exhibit 32.1
Certification pursuant to
18 U.S.C. section 1350,
as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of First Mid-Illinois Bancshares, Inc. (the
"Company") on Form 10-K for the period ended December 31, 2005 (the "Report"),
I, William S. Rowland, as 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 8, 2006
/s/ William S. Rowland
William S. Rowland
President and Chief Executive Officer
Exhibit 32.2
Certification pursuant to
18 U.S.C. section 1350,
as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of First Mid-Illinois Bancshares, Inc. (the
"Company") on Form 10-K for the period ended December 31, 2005 (the "Report"), I
Michael L. Taylor, as Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: March 8, 2006
/s/s Michael L. Taylor
Michael L. Taylor
Chief Financial Officer