-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T3VZFnpKob9YJtvSdvfiPWnHznHO+pHlbX5ZPRxiCVg+B2/i37cfGV8suVITZhT3 B0dz8dL3IqCOYC3pa+gldQ== 0000700565-00-000006.txt : 20000323 0000700565-00-000006.hdr.sgml : 20000323 ACCESSION NUMBER: 0000700565-00-000006 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST MID ILLINOIS BANCSHARES INC CENTRAL INDEX KEY: 0000700565 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 371103704 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-13368 FILM NUMBER: 575688 BUSINESS ADDRESS: STREET 1: 1515 CHARLESTON AVE STREET 2: PO BOX 499 CITY: MATTOON STATE: IL ZIP: 61938 BUSINESS PHONE: 2172347454 MAIL ADDRESS: STREET 1: 1515 CHARLESTON AVENUE STREET 2: PO BOX 499 CITY: MATTOON STATE: IL ZIP: 61938 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER: 0-13368 FIRST MID-ILLINOIS BANCSHARES, INC. (Exact name of Company as specified in its charter) DELAWARE 37-1103704 (State of incorporation) (I.R.S. employer identification No.) 1515 CHARLESTON AVENUE, MATTOON, ILLINOIS 61938 (Address and Zip Code of Principal Executive Offices) (217) 234-7454 (Company's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $4.00 PER SHARE, AND RELATED COMMON STOCK PURCHASE RIGHTS (Title of class) Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Company's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 21, 2000, 2,272,643 common shares, $4.00 par value, were outstanding, and the aggregate market value of common shares (based on the last sale price of the Company's common shares on March 21, 2000) held by non- affiliates was approximately $74,997,000. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENT INTO FORM 10-K PART: Portions of the Proxy Statement for 2000 Annual Meeting of Shareholders to be held on May 17, 2000 III FIRST MID-ILLINOIS BANCSHARES, INC. FORM 10-K TABLE OF CONTENTS PAGE PART I Item 1 Business 3 Item 2 Properties 11 Item 3 Legal Proceedings 14 Item 4 Submission of Matters to a Vote of Security Holders 14 PART II Item 5 Market for Company's Common Shares and Related Shareholder Matters 15 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 36 Item 8 Financial Statements and Supplementary Data 38 Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosures 63 PART III Item 10 Directors and Executive Officers of the Company 63 Item 11 Executive Compensation 63 Item 12 Security Ownership of Certain Beneficial Owners and Management 63 Item 13 Certain Relationships and Related Transactions 63 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 64 SIGNATURES 65 Exhibit Index 66 PART I ITEM 1. BUSINESS COMPANY AND SUBSIDIARIES First Mid-Illinois Bancshares, Inc. (the "Company") is a bank holding company engaged in the business of banking through its wholly-owned subsidiary, First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank"). The Company provides data processing services to affiliates through another wholly-owned subsidiary, Mid-Illinois Data Services, Inc. ("MIDS"). First Mid Bank provides insurance services to customers through its wholly-owned subsidiary First Mid-Illinois Insurance Services, Inc. ("First Mid Insurance"). The Company, a Delaware corporation, was incorporated on September 8, 1981, pursuant to the approval of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and became the holding company owning all of the outstanding stock of First National Bank, Mattoon ("First National") on June 1, 1982. The Company acquired all of the outstanding stock of a number of community banks on the following dates: * 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 100%-owned subsidiary of the Company. In connection with the Heartland acquisition, $3.1 million of Series A perpetual, cumulative, non-voting, convertible, preferred stock was issued to directors and certain senior officers of the Company in a private placement. Refer to note #1 of Notes to the Consolidated Financial Statements. On October 4, 1994, First Mid Bank acquired all of the outstanding stock of Downstate Bancshares, Inc. ("DBI") which owned 100% of the stock of Downstate National Bank ("DNB"). DNB operated branch locations in Altamont and Effingham, Illinois. Immediately following the acquisition, DBI was dissolved and DNB was merged with and into First Mid Bank with First Mid Bank being the surviving entity. In December 1994, Heartland (formerly known as Heartland Federal Savings and Loan Association) converted from a federally-chartered stock savings association to a state-chartered savings bank and changed its name to Heartland Savings Bank. 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. DESCRIPTION OF BUSINESS First Mid Bank conducts a general banking business embracing most of the services, both consumer and commercial, which banks may lawfully provide, including the following principal services: the acceptance of deposits to demand, savings and time accounts and the servicing of such accounts; commercial, industrial, agricultural, consumer and real estate lending, including installment, credit card, personal lines of credit and overdraft protection; safe deposit box operations; and an extensive variety of additional services tailored to the needs of customers, such as traveler's checks and cashiers' checks, foreign currency, and other special services. First Mid Bank also provides services to its customers through its trust department and investment center. Loans, both commercial and consumer, are provided on either a secured or unsecured basis to corporations, partnerships and individuals. Commercial lending covers such categories as business, industry, capital, construction, agriculture, inventory and real estate, with the latter including residential properties. First Mid Bank's installment loan department makes direct loans to consumers and some commercial customers, and purchases retail obligations from retailers, primarily without recourse. First Mid Bank conducts its business in the middle of some of the richest farmland in the world. Accordingly, First Mid Bank provides a wide range of financial services to farmers and agribusiness within their respective markets. The farm management department, headquartered in Mattoon, Illinois, has approximately 33,000 acres under management and is the largest management operation in the area, ranking in the top 100 firms nationwide. First Mid Bank is the largest supplier of farm credit in the Company's market area with $59.5 million in agriculture-related loans at December 31, 1999. The farm credit products offered by First Mid Bank include not only real estate loans, but machinery and equipment loans, production loans, inventory financing and lines of credit. Before intercompany eliminations, First Mid Bank had total assets of $597,819,000 and stockholder's equity of $52,546,000 at December 31, 1999. EMPLOYEES The Company, MIDS and First Mid Bank, collectively, employed 276 people on a full-time equivalent basis as of December 31, 1999. The Company places a high priority on staff development which involves extensive training, including customer service training. New employees are selected on the basis of both technical skills and customer service capabilities. None of the employees are covered by a collective bargaining agreement with the Company. The Company offers a variety of employee benefits and management considers its employee relations to be excellent. COMPETITION The Company actively competes in all areas in which First Mid Bank presently does business. First Mid Bank competes for commercial and individual deposits, loans, and trust business with many east central Illinois banks, savings and loan associations, and credit unions. The principal methods of competition in the banking and financial services industry are quality of services to customers, ease of access to facilities, and pricing of services, including interest rates paid on deposits, interest rates charged on loans, and fees charged for fiduciary and other banking services. First Mid Bank operates facilities in the Illinois counties of Champaign, Christian, Coles, Cumberland, Douglas, Effingham, Moultrie, and Piatt. Each facility primarily serves the community in which it is located. First Mid Bank serves twelve different communities with 18 separate locations in the towns of Mattoon, Charleston, Effingham, Altamont, Neoga, Sullivan, Arcola, Taylorville, Tuscola, Monticello, DeLand, and Urbana, Illinois. Within the area of service there are numerous competing financial institutions and financial services companies. SUPERVISION AND REGULATION GENERAL Financial institutions and their holding companies are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities including, but not limited to, the OCC, the Board of Governors of the Federal Reserve System, the FDIC, the Internal Revenue Service and state taxing authorities. Any change in applicable laws, regulations or regulatory policies may have material effect on the business, operations and prospects of the Company and First Mid Bank. The Company is unable to predict the nature or extent of the effects that fiscal or monetary policies, economic controls or new federal or state legislation may have on its business and earnings in the future. Federal and state laws and regulations generally applicable to financial institutions, such as the Company and its subsidiaries, regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and its subsidiaries establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC's deposit insurance funds and the depositors, rather than the shareholders, of financial institutions. The following references to material statutes and regulations affecting the Company and its subsidiaries are brief summaries thereof and do not purport to be complete, and are qualified in their entirety by reference to such statutes and regulations. Any change in applicable law or regulations may have a material effect on the business of the Company and its subsidiaries. FINANCIAL MODERNIZATION LEGISLATION On November 12, 1999, President Clinton 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 barriers to affiliations among banks, insurance companies, securities firms and other financial services entities. These new activities and affiliations can be structured through a holding company structure or, subject to certain limitations, through a financial subsidiary of a bank. The GLB Act establishes a system of federal and state regulation based on functional regulation, meaning that primary regulatory oversight for a particular activity will generally reside with the federal or state regulator having the greatest expertise in the area. Banking is to be supervised by banking regulators, insurance by state insurance regulators and securities activities by the SEC and state securities regulators. The GLB Act also establishes a minimum federal standard of financial privacy and adopts 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 ("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 to bank securities activities previously subject to blanket exemptions. 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. Following effectiveness of these amendments, which are not effective until May 12, 2001, banks will no longer be able to rely solely on their status as banks to avoid registration as broker-dealers. Instead, banks will need to carefully consider their securities activities in light of a new set of limited exemptions designed to allow banks to continue, without broker-dealer registration, only those activities traditionally considered to be primarily banking or trust activities. The GLB Act also amends, effective May 12, 2001, the Investment Advisers Act of 1940 to require the registration of banks that act as investment advisers for mutual funds. The Company is currently evaluating the effects of the GLB Act on its activities and the activities of its banking subsidiaries, including reviewing its prospects for expanded financial services through internal growth or affiliations with third parties and considering the likelihood of increased competition in the financial services industry as a result of the GLB Act and how it will meet this increased competition. The Company, at present, has not elected status as a "financial holding company." THE COMPANY GENERAL. The Company is registered as a bank holding company under BHCA and 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. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve Board and is required to file with the Federal Reserve Board periodic reports of its operations and such additional information as the Federal Reserve Board may require. INVESTMENTS AND ACTIVITIES. Under the BHCA, a bank holding company must obtain Federal Reserve Board approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank; or (iii) merging or consolidating with another bank holding company. Subject to certain conditions (including certain deposit concentration limits established by the BHCA), the Federal Reserve Board may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the Federal Reserve Board is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) or which require that the target bank has been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. The BHCA also prohibits, with certain exceptions, the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. The principal exception to this prohibition allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve Board to be "so closely related to banking ... as to be a proper incident thereto." Under current regulations of the Federal Reserve Board, applicable to bank holding companies, the Company and its non-bank subsidiaries are permitted to engage in, among other activities, such banking-related businesses as the operation of a thrift, sales and consumer finance, equipment leasing, the operation of a computer service bureau, including software development, and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies. Federal law also prohibits acquisition of "control" of a bank, such as First Mid Bank, or bank holding company, such as the Company, without prior notice to certain federal bank regulators. "Control" is defined in certain cases as acquisition of 10% of the outstanding shares of a bank or bank holding company. CAPITAL REQUIREMENTS. Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve Board capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses. The Federal Reserve Board's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: a risk- based requirement expressed as a percentage of total risk-weighted assets, and a leverage requirement expressed as a percentage of total assets. The risk- based requirement consists of a minimum ratio of total capital to total risk- weighted assets of 8%, at least one-half of which must be Tier 1 capital. The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated companies, with minimum requirements of 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, 1999, the Company had regulatory capital, calculated on a consolidated basis, in excess of the Federal Reserve Board's minimum requirements, with a risk-based capital ratio of 11.98% and a leverage ratio of 6.96%. FIRST MID BANK GENERAL. First Mid Bank is a national bank, chartered under the National Bank Act. The deposit accounts of First Mid Bank are insured by the FDIC. 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. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period. During the year ended December 31, 1999, FDIC assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment period beginning January 1, 2000, 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 2000, 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 2000 debt service assessment was .0212%. 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, 1999, First Mid Bank paid supervisory fees to the OCC totaling $123,000. 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 consist of substantially the same components as Tier 1 capital and total capital under the Federal Reserve Board's capital guidelines for bank holding companies (SEE "--The Company--Capital Requirements"). The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, the regulations of the OCC provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. During the year ended December 31, 1999, First Mid Bank was not required by the OCC to increase its capital to an amount in excess of the minimum regulatory requirements. As of December 31, 1999, First Mid Bank exceeded its minimum regulatory capital requirements with a leverage ratio of 7.19% and a risk-based capital ratio of 12.40%. 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, 1999. As of December 31, 1999, approximately $7.8 million was available to be paid as dividends to the Company by First Mid Bank. Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment of any dividends by First Mid Bank if the Federal Reserve Board determines such payment would constitute an unsafe or unsound practice. AFFILIATE AND INSIDER TRANSACTIONS. First Mid Bank is subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to the Company and its subsidiaries, on investments in the stock or other securities of the Company and its subsidiaries and the acceptance of the stock or other securities of the Company or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by First Mid Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal stockholders of the Company, and to "related interests" of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its subsidiaries or a principal stockholder of the Company may obtain credit from banks with which First Mid Bank maintains a correspondent relationship. SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies have adopted guidelines which establish operational and managerial standards to promote the safety and soundness of federally-insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. In general, the guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution's primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. The preamble to the guidelines states that the agencies expect to require a compliance plan from an institution whose failure to meet one or more of the guidelines is of such severity that it could threaten the safety and soundness of the institution. Failure to submit an acceptable plan, or failure to comply with a plan that has been accepted by the appropriate federal regulator, would constitute grounds for further enforcement action. 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 (53) Chairman of the Board of Directors, President and Chief Executive Officer John W. Hedges (53) President, First Mid Bank Laurel G. Allenbaugh (40) Vice President Christie L. Burich (43) Vice President, Secretary/Treasurer Stanley E. Gilliland (55) Vice President John R. Kuczynski (47) Vice President William S. Rowland, age 53, has been Chairman of the Board of Directors, President and Chief Executive Officer of the Company since mid-1999. He served as Executive Vice President of the Company from 1997 to mid-1999 and as Treasurer and Chief Financial Officer from 1989 to mid-1999. Mr. Rowland also serves as Chairman of the Board of First Mid Bank. John W. Hedges, age 53, has been the President of First Mid Bank since September, 1999. He was with National City Bank, Decatur from 1976 to 1999. Laurel G. Allenbaugh, age 40, has been Vice President and Controller of the Company and First Mid Bank since 1990 and President of MIDS since 1998. Christie L. Burich, age 43, has been Vice President of Investments since 1995 and Secretary since 1998. Stanley E. Gilliland, age 55, has been Vice President of Lending of the Company since 1985, and has been Executive Vice President of Lending for First Mid Bank since 1990. John R. Kuczynski, age 47, has been Vice President of the Trust and Farm Department of the Company since June, 1996. Mr. Kuczynski was a Senior Vice President and Trust Officer for the Amcore Trust Company in Sterling, Illinois, from 1980 to 996. ITEM 2. PROPERTIES All of the following properties are owned by the Company or First Mid Bank except those specifically identified as being leased. FIRST MID BANK MATTOON First Mid Bank's main office is located at 1515 Charleston Avenue, Mattoon, Illinois. The office building consists of a one-story structure which was opened in 1965 with approximately 36,000 square feet of office space and eight walk-in teller stations. Adjacent to this building is a parking lot with parking for approximately seventy cars. A drive-up facility with ten drive-up lanes, including a drive-up automated teller machine ("ATM"), is located across the street from First Mid Bank's main office. During 1997, First Mid Bank began a remodeling project of its main office which was completed in mid-1998. Costs associated with this project totaled approximately $1.6 million. First Mid Bank has a facility at 333 Broadway Avenue East, Mattoon, Illinois. The one-story office building contains approximately 7,600 square feet of office space. The main floor provides space for five teller windows, two private offices, a safe deposit vault and four drive-up lanes. There is adequate parking located adjacent to the building. A drive-up ATM is located adjacent to the building. First Mid Bank leases a facility at 1504-A Lakeland Boulevard, Mattoon, Illinois which provides space for three tellers, two drive-up lanes and a walk- up ATM. First Mid Bank owns an office building located at 1701 Charleston Avenue, Mattoon, Illinois and an adjacent parking lot. 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 which has approximately 20,000 square feet of office space. SULLIVAN First Mid Bank operates two locations in Sullivan, Illinois. The main office is located at 200 South Hamilton Street, Sullivan, Illinois. Its office building is a one-story structure containing approximately 11,400 square feet of office space with five tellers, six private offices and four drive-up lanes. Adjacent to its main office is a parking lot used primarily by the employees. Adequate customer parking is available on two sides of the main office building. The second office is a leased facility at 435 South Hamilton, Sullivan, Illinois in the IGA. The facility has two teller stations, a vault, an ATM and a night depository. NEOGA First Mid Bank's office in Neoga, Illinois, is located at 102 East 6th Street, Neoga, Illinois. The building consists of a one-story structure containing approximately 4,000 square feet of office space. The main office building provides space for four tellers in the lobby of the building, two drive-up tellers, four private offices, two night depositories, and an ATM. Adequate customer parking is available on three sides of the main office building. During 1996, an adjacent building with approximately 400 square feet was purchased and is being held for future expansion. TUSCOLA First Mid Bank operates an office in Tuscola, Illinois, which is located at 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-thru lanes, including one with a drive-up ATM and one with a drive-up night depository. Adequate customer parking is available just outside the main entrance. The building at 100 North Main Street was closed in 1998 and sold in 1999. CHARLESTON First Mid Bank has two offices in Charleston, Illinois. The main office, acquired in March, 1997, is located at 500 West Lincoln Avenue, Charleston, Illinois. This one-story facility contains approximately 8,400 square feet with five teller stations, eight private offices and four drive-up lanes. 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. Four ATMs are located in Charleston. One drive-up ATM is located in the parking lot of the facility at 500 West Lincoln Avenue, one in the parking lot of Save-A-Lot at 1400 East Lincoln Avenue, and one drive-up ATM is located in the parking lot of the 6th St. facility. The fourth is an off-site walk-up ATM located in the student union at Eastern Illinois University. In January, 1998, First Mid Bank sold a facility located at 580 West Lincoln Avenue, Charleston, Illinois. URBANA First Mid Bank owns a facility located at 601 South Vine Street, Urbana, Illinois. Its office building consists of a one-story structure and contains approximately 3,600 square feet. The office building provides space for three tellers, two private offices and two drive-up lanes. An adequate customer parking lot is located on the south side of the building. EFFINGHAM First Mid Bank operates a facility at 902 North Keller Drive, Effingham, Illinois. The building is a two-story structure with approximately 4,000 square feet of office space. This office space consists of four teller stations, three drive-up teller lanes, five private offices and a night depository. Adequate parking is available to customers in front of the facility. First Mid Bank also owns property at 900 North Keller Drive, Effingham, Illinois which provides additional customer parking along with a drive-up ATM. ALTAMONT First Mid Bank has a banking facility located at 101 West Washington Street, Altamont, Illinois. This building is a one-story structure which has approximately 4,300 square feet of office space. The office space consists of nine teller windows, three drive-up teller lanes (one of which facilitates an ATM), seven private offices, one conference room and a night depository. Adequate parking is available on three sides of the building. ARCOLA First Mid Bank leases a facility at 324 South Chestnut Street, Arcola, Illinois. This building is a one-story structure with approximately 1,140 square feet of office space. This office space consists of two lobby teller stations, one loan station, two drive-up teller lanes, one private office and a night depository. A drive-up ATM lane is available adjacent to the teller lanes. Adequate parking is available to customers in front of the facility. MONTICELLO First Mid Bank has two offices in Monticello. The main facility is located on the north-east 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 but not currently being used and the basement is used for storage. Adequate parking is available to customers in back of the facility. A second facility is located at 219 West Center Street, Monticello, Illinois. It is a one-story facility with two lobby teller stations and an attached two-bay drive-up structure with a drive-up ATM and a night depository. Adequate parking is available to serve its customers. DELAND First Mid Bank has an office at 220 North Highway Ave, DeLand, Illinois. It is a one-story structure with one private office, three teller stations and a night depository. Adequate parking is available in front of the building. TAYLORVILLE First Mid Bank has a banking facility located at 200 N. Main St., 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 is available adjacent to the building. COMPANY During 1999, the Company sold a single family residence at 1515 Wabash Avenue, Mattoon, Illinois. 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 law suits (such as garnishment proceedings) involving claims to the ownership of funds in particular accounts. Management believes that all such litigation as well as other pending legal proceedings constitute ordinary routine litigation incidental to the business of First Mid Bank and that such litigation will not materially adversely affect the Company's consolidated financial condition. In addition to the normal proceedings referred to above, Heartland Savings Bank ("Heartland"), a subsidiary of the Company that merged with First Mid Bank during 1997, filed a complaint on December 5, 1995, against the U.S. Government which is now pending in the U.S. Court of Federal claims in Washington D.C. This complaint relates to Heartland's interest as successor to Mattoon Federal Savings and Loan Association which incurred a significant amount of supervisory goodwill when it acquired Urbana Federal Savings and Loan in 1982. The complaint alleges that the Government breached its contractual obligations when, in 1989, it issued new rules which eliminated supervisory goodwill from inclusion in regulatory capital. On August 6, 1998, First Mid Bank filed a motion with the U.S. Court of Federal claims to grant summary judgement on liability for breach of contract in this matter. On August 13, 1998, the U.S. Government filed a motion to stay such proceedings. At this time, it is too early to tell if First Mid Bank will prevail in its motion and, if so, what damages may be recovered. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR COMPANY'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS The Company's common stock was held by approximately 730 shareholders of record as of December 31, 1999, and is traded in the over-the-counter market. The following table shows, for the indicated periods, the range of reported prices per share of the Company's common stock in the over-the-counter market. These quotations represent inter-dealer prices without retail mark-ups, mark-downs or commissions and do not necessarily represent actual transactions. QUARTER HIGH LOW 1999 4th $ 36 1/4 $ 33 1/2 3rd 36 35 1/4 2nd 39 1/2 35 3/4 1st 37 33 1998 4th $ 36 1/2 $ 32 1/2 3rd 40 3/4 36 1/2 2nd 47 1/2 38 3/4 1st 42 3/4 33 The following table sets forth the cash dividends per share on the Company's common stock for the last two years. DIVIDEND DATE DECLARED DATE PAID PER SHARE 5-20-1998 6-19-1998 $.23 12-15-1998 1-05-1999 $.28 5-19-1999 6-18-1999 $.25 12-14-1999 1-05-2000 $.30 The Company's shareholders are entitled to receive such dividends as are declared by the board of directors, which considers payment of dividends semiannually. The ability of the Company to pay dividends, as well as fund its operations, is dependent upon receipt of dividends from First Mid Bank. Regulatory authorities limit the amount of dividends which can be paid by First Mid Bank without prior approval from such authorities. For further discussion of First Mid Bank's dividend restrictions and capital requirements, see "Note 18" of the Notes to the Consolidated Financial Statements included under Item 8 of this document. Cash dividends have been declared by the Board of Directors of the Company semi-annually during the two years ended December 31, 1999. On November 15, 1999, the Company issued 248,177 shares of its common stock to holders of its Series A Convertible preferred Stock upon the Company's election to convert all of such preferred stock to common stock. The transaction was exempt from registration pursuant to Section 3(a)(9) of the Securities Act of 1933. ITEM 6. SELECTED FINANCIAL DATA The following sets forth a five-year comparison of selected financial data. (Dollars in thousands)
1999 1998 1997 1996 1995 SUMMARY OF OPERATIONS Interest income $39,168 $37,451 $37,805 $35,559 $33,465 Interest expense 18,415 18,626 19,131 17,805 16,725 Net interest income 20,753 18,825 18,674 17,754 16,740 Provision for loan losses 600 550 700 147 280 Other income 6,703 6,340 5,421 4,799 4,009 Other expense 19,387 17,119 16,039 15,977 14,715 Income before income taxes 7,469 7,496 7,356 6,429 5,754 Income tax expense 2,237 2,434 2,630 2,263 1,830 Net income $ 5,232 $ 5,062 $ 4,726 $ 4,166 $ 3,924 PER COMMON SHARE DATA Basic earnings per share $ 2.40 $ 2.39 $ 2.30 $ 2.11 $ 2.05 Diluted earnings per share 2.29 2.24 2.17 1.99 1.94 Dividends per common share .55 .51 .46 .43 .41 Book value per common share 22.63 23.61 21.55 19.56 18.04 FINANCIAL RATIOS Net interest margin (TE) 4.09% 3.93% 3.96% 3.98% 3.98% Return on average assets .91% .95% .90% .85% .84% Return on average equity 10.14% 10.39% 11.08% 11.03% 11.76% Return on average common equity 10.08% 10.47% 11.23% 11.18% 12.02% Dividend payout ratio 22.95% 21.35% 19.99% 20.16% 19.76% Average equity to average assets 8.96% 9.16% 8.11% 7.69% 7.17% Capital to risk-weighted assets 11.98% 13.89% 12.20% 11.80% 11.51% YEAR END BALANCES Total assets $601,103 $554,663 $532,978 $515,397 $472,494 Net loans 385,380 346,350 355,587 345,533 304,190 Total deposits 485,011 449,636 457,598 413,676 396,879 Total equity 51,518 50,480 45,576 39,904 35,309 AVERAGE BALANCES Total assets $575,903 $531,809 $525,751 $491,058 $465,287 Net loans 356,031 345,254 352,495 323,540 294,220 Total deposits 474,636 445,048 443,399 405,223 395,580 Total equity 51,577 48,704 42,638 37,783 33,371
Effective May 22, 1997, the Company had a two-for-one stock split in the form of a 100% stock dividend. All share and per share information has been restated to reflect the split. 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, 1999, 1998 and 1997. This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes and selected financial data appearing elsewhere in this report. FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, such as, discussions of the Company's pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses and planned schedules. The Company intends such forward- looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many uncertainties including: changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. OVERVIEW In 1999, the Company had net income of $5,232,000, up 3.4% from $5,062,000 in 1998. In 1998, net income increased 7.1% from $4,726,000 in 1997. Diluted earnings per share was $2.29 in 1999 compared with $2.24 in 1998 and $2.17 in 1997. A summary of the factors which contributed to the changes in net income follows (in thousands): 1999 VS 1998 1998 VS 1997 Net interest income $1,928 $ 151 Provision for loan losses (50) 150 Other income, including securities transactions 363 919 Other expenses (2,268) (1,080) Income taxes 197 196 Increase in net income $ 170 $ 336 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. The operating results have been combined with those of the Company since May 7, 1999. On March 7, 1997, the Company acquired the Charleston, Illinois branch location and the deposit base of First of America Bank. This cash acquisition added approximately $28 million to total deposits, $500,000 to loans, $1.3 million to premises and equipment and $3.8 million to intangible assets. The acquisition of the branch was accounted for using the purchase method of accounting whereby the acquired assets and deposits of the branch were recorded at their fair values as of the acquisition date. The operating results have been combined with those of the Company since March 7, 1997. RESULTS OF OPERATIONS NET INTEREST INCOME The largest source of operating revenue for the Company is net interest income. Net interest income represents the difference between total interest income earned on earning assets and total interest expense paid on interest-bearing liabilities. The amount of interest income is dependent upon many factors including the volume and mix of earning assets, the general level of interest rates and the dynamics of changes in interest rates. The cost of funds necessary to support earning assets varies with the volume and mix of interest-bearing liabilities and the rates paid to attract and retain such funds. For purposes of the following discussion and analysis, the interest earned on tax-exempt securities is adjusted to an amount comparable to interest subject to normal income taxes. The adjustment is referred to as the tax-equivalent ("TE") adjustment. The Company's average balances, interest income and expense and rates earned or paid for major balance sheet categories are set forth in the following table (dollars in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ASSETS Interest-bearing $ 1,407 $ 70 4.99% $ 644 $ 33 5.12% $ 1,497 $ 75 5.01% deposits Federal funds sold 9,799 485 4.95% 8,754 451 5.15% 4,254 230 5.41% Investment securities Taxable 125,311 7,425 5.93% 114,831 7,052 6.14% 107,124 6,759 6.31% Tax-exempt 29,762 2,125 7.14% 17,501 1,278 7.30% 13,046 1,062 8.14% Loans 358,948 29,785 8.30% 348,055 29,072 8.35% 355,167 30,040 8.46% Total earning assets 525,227 39,890 7.59% 489,785 37,886 7.73% 481,088 38,166 7.93% Cash and due from banks 17,438 15,944 18,363 Premises and equipment 14,873 12,745 11,916 Other assets 21,282 16,136 17,056 Allowance for loan (2,917) (2,801) (2,672) losses Total assets $575,903 $531,809 $525,751 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-Bearing Deposits Demand deposits $147,753 3,809 2.58% $125,586 3,675 2.93% $125,666 3,684 2.93% Savings deposits 40,875 944 2.31% 37,831 856 2.26% 38,642 999 2.59% Time deposits 225,451 11,476 5.09% 222,562 12,255 5.51% 226,431 12,464 5.50% Securities sold under agreements to 22,063 948 4.29% 9,717 435 4.47% 10,806 488 4.52% repurchase FHLB advances 18,602 942 5.07% 18,740 1,008 5.38% 17,221 1,018 5.91% Federal funds purchased 345 18 5.28% 364 19 5.19% 502 26 5.18% Long-term debt 4,416 278 6.29% 5,629 378 6.72% 6,584 452 6.87% Total interest-bearing liabilities 459,505 18,415 4.01% 420,429 18,626 4.43% 425,852 19,131 4.49% Demand deposits 60,557 59,069 52,660 Other liabilities 4,264 3,607 4,601 Stockholders' equity 51,577 48,704 42,638 Total liabilities & $575,903 $531,809 $525,751 equity Net interest income (TE) $ 21,475 $ 19,260 $ 19,035 Net interest spread 3.58% 3.30% 3.44% Impact of non-interest bearing funds .51% .63% .52% Net yield on interest- earning assets (TE) 4.09% 3.93% 3.96% Interest income and rates are presented on a tax-equivalent basis ("TE") assuming a federal income tax rate of 34%. Loan fees are included in interest income and are not material. Nonaccrual loans have been included in the average balances.
Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income (TE) for the past two years (in thousands):
1999 COMPARED TO 1998 1998 COMPARED TO 1997 INCREASE - (DECREASE) INCREASE - (DECREASE) TOTAL RATE/ TOTAL RATE/ CHANGE VOLUME RATE VOLUME CHANGE VOLUME RATE VOLUME EARNING ASSETS: Interest-bearing deposits $ 37 $ 39 $ (1) $ (1) $ (42) $ (42) $ 3 $ (3) Federal funds sold 34 53 (17) (2) 221 243 (11) (11) Investment securities: Taxable 373 644 (248) (23) 292 486 (181) (13) Tax-exempt 847 895 (28) (20) 216 363 (109) (38) Loans 713 911 (192) (6) (968) (602) (374) 8 Total interest income 2,004 2,542 (486) (52) (281) 448 (672) (57) Interest-Bearing Liabilities Interest-bearing deposits Demand deposits 134 648 (437) (77) (8) (2) (6) - Savings deposits 88 69 18 1 (143) (21) (125) 3 Time deposits (779) 159 (926) (12) (209) (213) 4 - Securities sold under agreements to repurchase 513 552 (17) (22) (54) (49) (5) - FHLB advances (66) (7) (59) - (10) 90 (92) (8) Federal funds purchased (1) (1) - - (7) (7) - - Long-term debt (100) (82) (24) 5 (74) (66) (9) 1 Total interest expense (211) 1,338 (1,445) (104) (505) (268) (233) (4) Net interest income $2,215 $1,204 $ 959 $ 52 $ 224 $ 716 $(439) $ (53) Interest income and rates are presented on a tax-equivalent basis, assuming a federal income tax rate of 34%. Loan fees are included in interest income and are not material. Nonaccrual loans are not material and have been included in the average balances. The changes in rate/volume are computed on a consistent basis by multiplying the change in rates with the change in volume.
On a tax equivalent basis, net interest income increased $1,928,000, or 10.2% in 1999, compared to an increase of $151,000, or .8% in 1998. The increase in net interest income in 1999 was due primarily to the decrease in the deposit rates combined with a higher deposit base as well as the increase in interest income due from an increase in the volume of earning assets. In 1998, the increase in net interest income was due to the increases in the volume of earning assets mixed with the lowering of interest rates. In 1999, average earning assets increased by $35,442,000, or 7.2%, and average interest-bearing liabilities increased $39,076,000, or 9.3%, compared with 1998. Change in volume is partially attributed to the assets purchased and liabilities assumed in the 1999 acquisition of several Bank One branches. Loans purchased and deposits assumed were approximately $10 million and $64 million, respectively. Changes in average balances, as a percent of average earnings assets, are shown below: * average loans (as a percent of average earnings assets) decreased 2.9% to 68.3% in 1999 from 71.2% in 1998 * average securities (as a percent of average earnings assets) increased 2.5% to 29.5% in 1999 from 27.0% in 1998 * net interest margin has increased to 4.09% in 1999 from 3.93% in 1998 and 3.96% in 1997. PROVISION FOR LOAN LOSSES The provision for loan losses in 1999 was $600,000 compared to $550,000 in 1998 and $700,000 in 1997. For information on loan loss experience and nonperforming loans, see the "Nonperforming Loans" and "Loan Quality and Allowance for Loan Losses" sections later in this document. OTHER INCOME An important source of the Company's revenue is derived from other income. The following table sets forth the major components of other income for the last three years (in thousands):
$ CHANGE FROM PRIOR YEAR 1999 1998 1997 1999 1998 Trust $ 1,912 $ 1,746 $ 1,663 $ 166 $ 83 Brokerage 456 304 464 152 (160) Securities gains(losses) 8 154 (6) (146) 160 Service charges 2,317 1,919 1,804 398 115 Mortgage banking 624 1,121 491 (497) 630 Other 1,386 1,096 1,005 290 91 Total other income $ 6,703 $ 6,340 $ 5,421 $ 363 $ 919
* Total non-interest income increased to $6,703,000 in 1999 as compared to $6,340,000 in 1998 and $5,421,000 in 1997. * Trust revenues increased $166,000 or 9.5% to $1,912,000 in 1999 from $1,746,000 in 1998 and $1,663,000 in 1997 mostly due to the net effect of the following: * increase in the fee structure for trust accounts * growth in employee benefit accounts managed by the Trust Department * increase in the farm management fees Trust assets, reported at market value, were $324 million, $338 million, and $327 million at December 31, 1999, 1998, and 1997, respectively. * Revenues from brokerage and annuity sales increased $152,000 or 50.0% in 1999 as compared to 1998 as a result of increased sales in annuities. * Net securities gains in 1999 were $8,000 compared to net securities gains of $154,000 in 1998 and net securities losses of $6,000 in 1997. * Fees from service charges increased $398,000 or 20.7% to $2,317,000 in 1999 from $1,919,000 in 1998 and $1,804,000 in 1997. This increase was primarily due to an increase in the number of savings and transaction accounts and an increase in the fees charges on deposit accounts. * Mortgage banking income decreased $497,000 or 44.3% to $624,000 in 1999 from $1,121,000 in 1998. This decrease was in the volume of fixed rate loans originated and sold by First Mid Bank. This decrease in volume of is largely attributed to less re- financings by customers as a result of rising interest rates. Loan sold balances are as follows: * $36 million (representing 480 loans) in 1999 * $69 million (representing 825 loans) in 1998 * $29 million (representing 476 loans) in 1997 * Other income increased $290,000 or 26.5% to $1,386,000 in 1999 from $1,096,000 in 1998 and $1,005,000 in 1997. This increase was primarily due to a $93,000 gain on the sale of property (net book value of $230,000) in Mattoon, Tuscola and Charleston, Illinois, and due to increases in the ATM/Debit card transactions. 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 1999 1998 1997 1999 1998 Salaries and benefits $ 9,616 $ 8,645 $ 7,922 $ 971 $ 723 Occupancy and equipment 3,437 2,947 2,782 490 165 FDIC premiums 104 107 40 (3) 67 Amortization of intangibles 1,024 764 709 260 55 Stationery and supplies 642 657 692 (15) (35) Legal and professional fees 1,232 920 890 312 30 Marketing and promotion 643 500 529 143 (29) Other operating expenses 2,689 2,579 2,475 110 104 Total other expense $19,387 $17,119 $16,039 $2,268 $1,080
* Total non-interest expense increased to $19,387,000 in 1999 from $17,119,000 in 1998 and $16,039,000 in 1997. * Salaries and employee benefits, the largest component of other expense, increased $971,000 or 11.2% to $9,616,000 in 1999 from $8,645,000 in 1998 and $7,922,000 in 1997. This increase can be explained by: * merit and incentive increases for continuing employees * an increase in the number of employees, primarily as a result of the Monticello, Taylorville and DeLand branch acquisitions * Occupancy and equipment expense increased $490,000 or 16.6% to $3,437,000 in 1999 from $2,947,000 in 1998 and $2,782,000 in 1997. This increase included depreciation expense recorded on technology equipment placed in service as well as the depreciation expense on buildings in Monticello, Taylorville, DeLand, and Tuscola. * The net amount of insurance premiums assessed by the Federal Deposit Insurance Corporation ("FDIC") was $104,000 in 1999, remaining fairly constant with $107,000 in 1998 and $40,000 in 1997. * Amortization of intangible assets increased $260,000 or 34.0% to $1,024,000 in 1999 from $764,000 in 1998 and $709,000 in 1997. This increase is due to the goodwill and core deposit intangibles associated with the purchase of the Monticello, Taylorville and DeLand branch acquisition in May, 1999. * All other operating expenses increased $550,000 or 11.8% to $5,206,000 in 1999 from $4,656,000 in 1998 and $4,586,000 in 1997. This increase was primarily due to costs associated with the new branches in Monticello, Taylorville and DeLand. INCOME TAXES Total income tax expense amounted to $2,237,000 in 1999 as compared to $2,434,000 in 1998 and $2,630,000 in 1997. Effective tax rates were 30.0%, 32.5% and 35.8% respectively, for 1999, 1998 and 1997. The steady decrease in the effective tax rates resulted primarily from increased tax exempt income. ANALYSIS OF BALANCE SHEETS LOANS The loan portfolio (net of unearned discount) is the largest category of the Company's earning assets. The following table summarizes the composition of the loan portfolio for the last five years (in thousands):
1999 1998 1997 1996 1995 Real estate - mortgage $273,293 $244,501 $252,312 $241,240 $211,147 Commercial, financial and agricultural 89,176 78,579 73,854 75,028 65,916 Installment 24,501 25,194 29,266 30,423 27,996 Other 1,349 791 2,791 1,526 1,945 Total loans $388,319 $349,065 $358,223 $348,217 $307,004
At December 31, 1999, the Company had loan concentrations in agricultural industries of $59.5 million, or 15.3%, of outstanding loans and $50.9 million, or 14.6%, at December 31, 1998. The Company had no further industry loan concentrations in excess of 10% of outstanding loans. Real estate mortgage loans have averaged approximately 70% of the Company's total loan portfolio for the past several years. This is the result of a strong local housing market and the Company's long-term commitment to residential real estate lending. The 11.8% increase in the residential real estate loan category in 1999 was primarily due to the origination and subsequent sale of certain fixed rate mortgage loans. First Mid Bank originates residential real estate loans for its own portfolio and for sale to others. In 1999, $36 million fixed rate mortgage loans, as compared to $69 million in 1998, were sold by First Mid Bank in the secondary market. This decrease in the volume of fixed rate loan originations is attributed to an increase in rates. The following table presents the balance of loans outstanding as of December 31, 1999, by maturities (dollars in thousands):
MATURITY OVER 1 ONE YEAR THROUGH OVER OR LESS(2) 5 YEARS 5 YEARS TOTAL Real estate - mortgage $ 54,537 $176,335 $ 42,421 $273,293 Commercial, financial and agricultural 56,036 29,047 4,093 89,176 Installment 6,183 17,807 511 24,501 Other 461 393 495 1,349 Total loans $117,217 $223,582 $47,520 $388,319 Based on scheduled principal repayments. Includes demand loans, past due loans and overdrafts.
As of December 31, 1999, loans with maturities over one year consisted of $236,396,000 in fixed rate loans and $34,706,000 in variable rate loans. The loan maturities noted above are based on the contractual provisions of the individual loans. The Company has no general policy regarding rollovers and borrower requests, which are handled on a case-by-case basis. NONPERFORMING LOANS Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due ninety days or more as to interest or principal payments; and loans not included in (a) and (b) above which are defined as "renegotiated loans". The following table presents information concerning the aggregate amount of nonperforming loans (in thousands):
December 31, 1999 1998 1997 1996 1995 Nonaccrual loans $1,430 $1,783 $1,194 $ 790 $ 636 Loans past due ninety days or more and still accruing 366 609 145 575 554 Renegotiated loans which are performing in accordance with revised terms 81 90 346 580 604 Total Nonperforming Loans $1,877 $2,482 $1,685 $1,945 $1,794
At December 31, 1999,approximately $872,000 of the nonperforming loans resulted from four individual, collateral dependent, commercial loans to a single borrower. Management has not identified any exposure associated with the $1,430,000 nonaccrual loans. This was considered in determining the adequacy of the allowance for possible loan losses at December 31, 1999. Interest income that would have been reported if nonaccrual and renegotiated loans had been performing totaled $131,000, $189,000 and $162,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Interest income that was included in income totaled $7,000, $7,000 and $32,000 for the same periods. The Company's policy generally is to discontinue the accrual of interest income on any loan for which principal or interest is ninety days past due and when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. LOAN QUALITY AND ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents management's best estimate of the reserve necessary to adequately cover losses that could ultimately be realized from current loan exposures. The provision for loan losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate allowance for loan losses. In determining the adequacy of the allowance for loan losses, and therefore the provision to be charged to current earnings, management relies predominantly on a disciplined credit review and approval process which extends to the full range of the Company's credit exposure. The review process is directed by overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Once identified, the magnitude of exposure to individual borrowers is quantified in the form of specific allocations of the allowance for loan losses. Collateral values are considered by management in the determination of such specific allocations. Additional factors considered by management in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and renegotiated loans and the current economic conditions in the region where the Company operates. Management recognizes that there are risk factors which are inherent in the Company's loan portfolio. All financial institutions face risk factors in their loan portfolios because risk exposure is a function of the business. The Company's operations (and therefore its loans) are concentrated in east central Illinois, an area where agriculture is the dominant industry. Accordingly, lending and other business relationships with agriculture-based businesses are critical to the Company's success. At December 31, 1999, the Company's loan portfolio included $59.5 million of loans to borrowers whose businesses are directly related to agriculture. The balance increased $8.6 million from $50.9 million at December 31, 1998. While the Company adheres to sound underwriting practices including collateralization of loans, an extended period of low commodity prices could nevertheless result in an increase in the level of problem agriculture loans. Loan loss experience for the years ending December 31, are summarized as follows (dollars in thousands):
1999 1998 1997 1996 1995 Average loans outstanding, net of unearned income $358,948 $348,055 $355,167 $326,302 $294,220 Allowance-beginning of year $ 2,715 $ 2,636 $ 2,684 $ 2,814 $ 2,608 Balance of acquired branches 150 - - - - Charge-offs: Commercial, financial and agricultural 511 382 588 238 18 Real estate-mortgage 17 21 69 6 111 Installment 98 152 145 131 57 Total charge-offs 626 555 802 375 186 Recoveries: Commercial, financial and agricultural 69 28 28 53 73 Real estate-mortgage 3 30 1 - - Installment 28 26 25 45 39 Total recoveries 100 84 54 98 112 Net charge-offs 526 471 748 277 74 Provision for loan losses 600 550 700 147 280 Allowance-end of year $ 2,939 $ 2,715 $ 2,636 $ 2,684 $ 2,814 Ratio of net charge-offs to average loans .15% .14% .21% .08% .03% Ratio of allowance for loan losses to loans outstanding (less unearned interest at end of period) .76% .78% .74% .77% .90% Ratio of allowance for loan losses to nonperforming loans 156.6% 109.4% 156.4% 138.0% 156.8%
The Company minimizes credit risk by adhering to sound underwriting and credit review policies. These policies are reviewed at least annually, and changes are approved by the board of directors. Senior management is actively involved in business development efforts and the maintenance and monitoring of credit underwriting and approval. The loan review system and controls are designed to identify, monitor and address asset quality problems in an accurate and timely manner. On a monthly basis, the board of directors reviews the status of problem loans. In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for loan losses. During 1999, the Company had net charge-offs of $526,000, compared to $471,000 in 1998 and $748,000 in 1997. At December 31, 1999, the allowance for loan losses amounted to $2,939,000, or .76% of total loans, and 156.6% of nonperforming loans. At December 31, 1998, the allowance was $2,715,000, or .78% of total loans, and 109.4% of nonperforming loans. The allowance for loan losses, in management's judgment, is allocated as follows to cover potential loan losses (in thousands):
December 31, 1999 1998 1997 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 $ 242 70.4% $ 264 70.1% $ 245 70.4% Commercial, financial and agricultural 1,997 23.0% 1,961 22.5% 1,699 20.6% Installment 181 6.3% 166 7.2% 192 8.2% Other - .3% - .2% - .8% Total allocated 2,420 2,391 2,136 Unallocated 519 N/A 324 N/A 500 N/A Allowance at end of year $2,939 100.0% $2,715 100.0% $2,636 100.0%
December 31, 1996 1995 ALLOWANCE % OF ALLOWANCE % OF FOR LOANS FOR LOANS LOAN TO TOTAL LOAN TO TOTAL LOSSES LOANS LOSSES LOANS Real estate-mortgage $ 434 69.3% $ 314 68.8% Commercial, financial and agricultural 1,854 21.5% 1,554 21.5% Installment 152 8.7% 131 9.1% Other - .5% - .6% Total allocated 2,440 1,999 Unallocated 244 N/A 815 N/A Allowance at end of year $2,684 100.0% $2,814 100.0%
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. Possible loan losses due to the Year 2000 issue have been considered in this allocation calculation. SECURITIES The Company's overall investment goal is to maximize earnings while maintaining liquidity in securities having minimal credit risk. The types and maturities of securities purchased are primarily based on the Company's current and projected liquidity and interest rate sensitivity positions. The following table sets forth the year-end amortized cost of the securities for the last three years (in thousands):
DECEMBER 31, 1999 1998 1997 % OF % OF % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 92,180 58% $ 91,069 58% $ 80,509 67% Obligations of states and political subdivisions 30,281 19 27,674 18 12,820 11 Mortgage-backed securities 32,578 21 35,209 22 23,272 20 Other securities 2,579 2 2,509 2 2,747 2 Total securities $157,618 100% $156,461 100% $119,348 100%
At December 31, 1999, there was no material change to the mix of the investment portfolio from December 31, 1998, except for the decrease in mortgage-backed securities due to scheduled and prepayments of principal. 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, 1999 (dollars in thousands) and the weighted average yield for each range of maturities. Mortgage-backed securities are aged according to their weighted average life. All other securities are shown at their contractual maturity.
ONE AFTER 1 AFTER 5 AFTER YEAR THROUGH THROUGH TEN OR LESS 5 YEARS 10 YEARS YEARS TOTAL Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 2,004 $60,327 $25,672 $ 4,177 $ 92,180 Obligations of state and political subdivisions 2,288 1,015 12,000 12,846 28,149 Mortgage-backed securities 1,333 13,228 14,324 3,693 32,578 Other securities - - - 2,579 2,579 Total Investments $ 5,625 $74,570 $51,996 $23,295 $155,486 Weighted average yield 5.84% 5.81% 5.86% 4.85% 5.79% Full tax-equivalent yield 7.06% 5.84% 6.40% 6.18% 6.23% Held-to-maturity: Obligations of state and political subdivisions $ 375 $ 946 $ 145 $ 666 $ 2,132 Weighted average yield 5.04% 5.08% 5.59% 5.46% 5.23% Full tax-equivalent yield 7.13% 7.17% 7.11% 7.02% 7.11%
The weighted average yields are calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. Full tax-equivalent yields have been calculated using a 34% tax rate. The maturities of, and yields on, mortgage-backed securities have been calculated using actual repayment history. However, where securities have call features, and have a market value in excess of par value, the call date has been used to determine the expected maturity. With the exception of obligations of the U.S. Treasury and other U.S. Government agencies and corporations, there were no investment securities of any single issuer the book value of which exceeded 10% of stockholders' equity at December 31, 1999. DEPOSITS Funding the Company's earning assets is substantially provided by a combination of consumer, commercial and public fund deposits. The Company continues to focus its strategies and emphasis on retail core deposits, the major component of funding sources. The following table sets forth the average deposits and weighted average rates at December 31, 1999, 1998 and 1997 (dollars in thousands):
1999 1998 1997 WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE AMOUNT RATE Demand deposits: Non-interest bearing $ 60,557 - $ 59,069 - $ 52,660 - Interest bearing 147,753 2.58% 125,586 2.93% 125,666 2.93% Savings 40,875 2.31% 37,831 2.26% 38,642 2.59% Time deposits 225,451 5.09% 222,562 5.51% 226,431 5.50% Total average deposits $474,636 3.42% $445,048 3.77% $443,399 3.87%
The following table sets forth the maturity of time deposits of $100,000 or more (in thousands): December 31, 1999 1998 1997 3 months or less $ 16,915 $ 21,510 $ 21,715 Over 3 through 6 months 11,708 8,285 12,287 Over 6 through 12 months 11,444 4,608 6,438 Over 12 months 3,854 8,995 10,293 Total $ 43,921 $ 43,398 $ 50,733 Total deposit balances increased by approximately $35 million during 1999 primarily due to the acquisition of the deposits from the Monticello, Taylorville and DeLand branches. OTHER BORROWINGS Other borrowings consist of securities sold under agreements to repurchase, Federal Home Loan Bank ("FHLB") advances, and federal funds purchased. Information relating to other borrowings for the last three years is presented below (in thousands):
1999 1998 1997 At December 31: Securities sold under agreements to repurchase $32,308 $26,018 $10,780 Federal Home Loan Bank advances: Overnight 3,000 - - Fixed term - due after one year 18,500 19,500 7,000 Federal funds purchased 1,175 - - Total $54,983 $45,518 $17,780 Average interest rate at year end 4.86% 4.51% 5.01% Maximum Outstanding at Any Month-end Securities sold under agreements to repurchase $32,308 $26,018 $17,710 Federal Home Loan Bank advances: Overnight 18,000 5,500 23,733 Fixed term - due in one year or less - - 16,000 Fixed term - due after one year 20,500 20,500 9,000 Federal funds purchased 1,175 5,750 - Total $71,983 $57,767 $66,443 Averages for the Year Securities sold under agreements to repurchase $22,063 $ 9,717 $10,806 Federal Home Loan Bank advances: Overnight 1,486 236 6,933 Fixed term - due in one year or less - - 3,455 Fixed term - due after one year 17,116 18,504 6,833 Federal funds purchased 345 364 502 Total $41,010 $28,821 $28,529 Average interest rate during the year 4.65% 5.07% 5.02%
Securities sold under agreements to repurchase are short- term obligations of First Mid Bank. First Mid Bank collateralizes these obligations with certain government securities which are direct obligations of the United States or one of its agencies. First Mid Bank offers these retail repurchase agreements as a cash management service to its corporate customers. Federal Home Loan Bank advances represent borrowings by First Mid Bank to economically fund agricultural loan demand. This loan demand was previously funded primarily through deposits by the State of Illinois. The fixed term advances consists primarily of $13.5 million which First Mid Bank is using to fund agricultural loans. $10.0 million is a 10-year maturity with a one year call option by the Federal Home Loan Bank. The advance bears interest at a rate of 4.85%. $3.5 million is a 10-year maturity which is callable quarterly after one year. The advance bears interest at a rate of 5.00%. INTEREST RATE SENSITIVITY The Company seeks to maximize its net interest margin within an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to favorable or unfavorable movements in interest rates. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of assets differ significantly from the maturity or repricing characteristics of liabilities. The Company monitors its interest rate sensitivity position to maintain a balance between rate sensitive assets and rate sensitive liabilities. This balance serves to limit the adverse effects of changes in interest rates. The Company's asset/liability management committee oversees the interest rate sensitivity position and directs the overall allocation of funds in an effort to maintain a cumulative one- year gap to earning assets ratio of less than 30% of total earning assets. In the banking industry, a traditional measurement of interest rate sensitivity is known as "GAP" analysis, which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. The following table sets forth the Company's interest rate repricing gaps for selected maturity periods at December 31, 1999 (in thousands):
NUMBER OF MONTHS UNTIL NEXT REPRICING OPPORTUNITY INTEREST EARNING ASSETS: 0-1 1-3 3-6 6-12 12+ Federal funds sold $ 710 $ - $ - $ - $ - Taxable investment securities 18,894 8,840 2,240 9,370 83,723 Nontaxable investment securities - 583 200 2,309 26,130 Loans 57,798 26,139 27,776 42,722 233,884 Total $ 77,402 $ 35,562 $ 30,216 $ 54,401 $ 343,737 INTEREST BEARING LIABILITIES: Savings and N.O.W. accounts 145,950 - - - - Money market accounts 51,945 - - - - Other time deposits 24,889 50,485 45,346 60,213 45,628 Other borrowings 45,263 3,500 5,000 - 45 Long-term debt 4,325 - - - - Total $ 272,372 $ 53,985 $ 50,346 $ 60,213 $ 45,673 Periodic GAP $(194,970) $(18,423) $(20,130) $ (5,812) $ 298,064 Cumulative GAP $(194,970) $(213,393) $(233,523) $(239,335) $ 58,729 GAP as a % of interest earning assets: Periodic (36.0%) (3.4%) (3.7%) (1.1%) 55.1% Cumulative (36.0%) (39.4%) (43.1%) (44.2%) 10.8%
At December 31, 1999, the Company was liability sensitive on a cumulative basis through the twelve- month time horizon. Accordingly, future increases in interest rates could have an unfavorable effect on the net interest margin. The Company's ability to lag the market in repricing deposits in a rising interest rate environment eases the implied liability sensitivity of the Company. Interest rate sensitivity using a static GAP analysis basis is only one of several measurements of the impact of interest rate changes on net interest income used by the Company. Its actual usefulness in assessing the effect of changes in interest rates varies with the constant changes which occur in the composition of the Company's earning assets and interest-bearing liabilities. For this reason, the Company uses financial models to project interest income under various rate scenarios and assumptions relative to the prepayments, reinvestment and roll overs of assets and liabilities, of which First Mid Bank represents substantially all of the Company's rate sensitive assets and liabilities. CAPITAL RESOURCES At December 31, 1999, stockholders' equity increased $1,038,000 or 2.1% to $51,518,000 from $50,480,000 as of December 31, 1998. During 1999, net income contributed $5,232,000 to equity before the payment of dividends to common and preferred stockholders of $1,372,000. The change in the market value of available-for-sale investment securities decreased stockholders' equity by $3,526,000, net of tax. STOCK PLANS DEFERRED COMPENSATION PLAN Effective September 30, 1998, the Company adopted the provisions of the Emerging Issues Task Force Issue No. 97-14, "ACCOUNTING FOR DEFERRED COMPENSATION ARRANGEMENTS WHERE AMOUNTS EARNED ARE HELD IN A RABBI TRUST AND INVESTED" ("EITF 97- 14") for purposes of the First Mid- Illinois Bancshares, Inc. Deferred Compensation Plan ("DCP"). At December 31, 1999, the Company classified the cost basis of its common stock issued and held in trust in connection with the DCP of approximately $1,123,000 as treasury stock. The Company also classified the cost basis of its related deferred compensation obligation of approximately $1,123,000 as an equity instrument (deferred compensation). The DCP was effective as of June, 1984, in which the purpose is to enable directors, advisory directors, and key officers the opportunity to defer a portion of the fees and cash compensation paid by the Company as a means of maximizing the effectiveness and flexibility of compensation arrangements. During 1996, the Company began issuing common stock for participants of the DCP. The Company issued, pursuant to DCP: * 5,820 common shares during 1999 * 4,677 common shares during 1998 * 11,403 common shares during 1997 FIRST RETIREMENT AND SAVINGS PLAN The First Retirement and Savings Plan ("401k plan") was effective beginning in 1985. Employees are eligible to participate in the 401k plan after six months of service to the Company. During 1996, the Company began issuing common stock as an investment option for participants of the 401k plan. The Company issued, pursuant to the 401k plan: * 3,275 common shares during 1999 * 21,579 common shares during 1998 * 44,893 common shares during 1997 DIVIDEND REINVESTMENT PLAN The Dividend Reinvestment Plan ("DRIP") was effective as of October, 1994. The purpose of the DRIP is to provide participating stockholders with a simple and convenient method of investing cash dividends paid by the Company on its shares of common and preferred shareholders into newly-issued common shares of the Company. All holders of record of the Company's common or preferred stock are eligible to voluntarily participate in the DRIP. The DRIP is administered by Harris Trust and Savings Bank and offers a way to increase one's investment in the Company. Of the $1,372,000 in common and preferred stock dividends paid during 1999, $748,000 or 54.5% was reinvested into shares of common stock of the Company through the DRIP. For the last three years, events that resulted in common shares being reinvested in the DRIP: * during 1999, 500 common shares were issued from stock options that were granted in December, 1998 and exercised in May, 1999 * during 1999, 181,484 common shares were issued from converting 449 preferred shares * during 1999, 21,023 common shares were issued from common and preferred stock dividends * during 1998, 1,000 common shares were issued from stock options that were granted in October, 1997 and December, 1997 and exercised in August, 1998 * during 1998, 2,425 common shares were issued from converting 6 preferred shares * during 1998, 20,837 common shares were issued from common and preferred stock dividends * during 1997, 32,781 common shares were issued from common and preferred 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 100,000 shares have been authorized under the SI Plan. Options to acquire shares will be awarded at an exercise price equal to the fair market value of the shares on the date of grant. Options to acquire shares have a 10- year term. Options granted to employees vest over a four year period and those options granted to directors vest at the time they are issued. The following stock options have been awarded by the Company: * granted 19,500 options at an option price of $23.51 in October, 1997 * 500 were exercised in August, 1998 * 1,000 were canceled in December, 1999 * granted 11,500 options at an option price of $33.73 in December, 1997 * 500 were exercised in August, 1998 * 1,500 were canceled in December, 1999 * granted 11,500 options at an option price of $35.00 in December, 1998 * 500 were exercised in May, 1999 * 2,000 were canceled in December, 1999 * granted 9,500 options at an option price of $34.50 in December, 1999 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, 1999, 1998, and 1997. STOCK REPURCHASE PROGRAM On August 5, 1998, the Company announced a stock repurchase program of up to 3% of its common stock. The shares will be repurchased at market. During 1999, 9,696 shares (.4%) at a total price of $337,000 were repurchased by the Company and 13,539 shares (.7%) at a total price of $507,000 were purchased in 1998. Treasury Stock is further affected by activity in the Deferred Compensation Plan. The Company and First Mid Bank have capital ratios above the regulatory capital requirements. These requirements call for a minimum total risk-based capital ratio of 8% and a minimum leverage ratio of 3% for the most highly- rated banks that do not expect significant growth. All other institutions are required to maintain a ratio of Tier 1 capital to total risk-weighted assets of 4% to 5% depending on their particular circumstances and risk profiles. At December 31, 1999, the Company's leverage ratio was 6.96%. A tabulation of the Company's and First Mid Bank's capital ratios as of December 31, 1999 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) 11.18% 11.98% 6.96% First Mid-Illinois Bank & Trust, N.A. 11.59% 12.40% 7.19%
Banks and bank holding companies are generally expected to operate at or above the minimum capital requirements. These ratios are in excess of regulatory minimums and will allow the Company to operate without capital adequacy concerns. LIQUIDITY Liquidity represents the ability of the Company and its subsidiaries to meet the requirements of customers for loans and deposit withdrawals. Liquidity management focuses on the ability to obtain funds economically for these purposes and to maintain assets which may be converted into cash at minimal costs. Other sources for cash include deposits of the State of Illinois and Federal Home Loan Bank advances. At December 31, 1999, the excess collateral at the Federal Home Loan Bank will support approximately $79 million of additional advances. Management monitors its expected liquidity requirements carefully, focusing primarily on cash flows from: * lending activities, including loan commitments, letters of credit and mortgage prepayment assumptions * deposit activities, including seasonal demand of private and public funds * investing activities, including prepayments of mortgage-backed securities and call assumptions on U.S. Government Treasuries and Agencies * operating activities, including schedule debt repayments and dividends to shareholders EFFECTS OF INFLATION Unlike industrial companies, virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or experience the same magnitude of changes as goods and services, since such prices are effected by inflation. In the current economic environment, liquidity and interest rate adjustments are features of the Company's assets and liabilities which are important to the maintenance of acceptable performance levels. The Company attempts to maintain a balance between monetary assets and monetary liabilities, over time, to offset these potential effects. FUTURE ACCOUNTING CHANGES Statement of Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," ("SFAS 133") was issued by the FASB in September 1998. SFAS 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss is reported in earnings immediately. Accounting for foreign currency hedges is similar to the accounting for fair value and cash flow hedges. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change. During September, 1999, the FASB issued the Statement of Financial Accounting Standards No. 137, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - - - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133 -- AN AMENDMENT OF FASB STATEMENT NO. 133," ("SFAS 137") that delays SFAS 133 until fiscal years beginning after June 15, 2000. Adoption of SFAS 133 is not expected to have a material impact on the Company's financial statements. THE YEAR 2000 ISSUE The Company placed a high priority on ensuring technological systems would function properly through the century date change of the year 2000. Testing and implementation activities of mission critical applications began in 1997 and have continued into the year 2000. The Company experienced no technological difficulties from internal systems, and all critical vendor and out-sourced applications functioned properly through the century date change. Additionally, the Company prepared for potential deposit runoff by increasing liquid assets; however, no significant deposit outflow due to the year 2000 was experienced. The Company is not aware of any customer or vendor problems occurring. Year 2000 expenditures amounted to approximately $125,000, all of which were expensed as incurred. This amount includes the cost of purchasing licenses for software programming tools but does not reflect the cost of time of internal staff which is significant. Because of the priority given to the year 2000 work by the Company, some other technology- related projects have been delayed. However, such delays are not expected to have a material effect on the ongoing business operations of the Company. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk arises primarily from interest rate risk inherent in its lending, investing and deposit taking activities, 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. Managements' Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Sensitivity." Based on the financial analysis performed as of December 31, 1999, 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, 1999 Income Margin Equity Prime rate is 8.50% (000) 1999=3.80% 1999=11.20% Prime rate increase of: 200 basis points to 10.50% $ (1,377) (6.05)% (2.38)% 100 basis points to 9.50% (585) (2.63)% (1.00)% Prime rate decrease of: 200 basis points to 6.50% (365) (1.61)% (.62)% 100 basis points to 7.50% 111 .53% .18% The following table shows the same analysis performed as of December 31, 1998. Increase (Decrease) In Net Interest Net Interest Return On DECEMBER 31, 1998 Income Margin Equity Prime rate is 7.75% (000) 1998=3.77% 1998=11.18% Prime rate increase of: 200 basis points to 9.75% $ (395) (1.88)% (.71)% 100 basis points to 8.75% (175) (.83)% (.31)% Prime rate decrease of: 200 basis points to 5.75% (191) (.91)% (.34)% 100 basis points to 6.75% (87) (.42)% (.16)% The First Mid Bank's board of directors has adopted an interest rate risk policy which establishes maximum decreases in the percentage change in net interest margin of 5% in a 100 basis point rate shift and 10% in a 200 basis point rate shift. No assurance can be given that the actual net interest margin (percentage) or net interest income would increase or decrease by such amounts in response to a 100 or 200 basis point increase or decrease in the prime rate. Interest rate sensitivity analysis is also used to measure the Company's interest risk by computing estimated changes in net portfolio value ("NPV") of its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained two percent increase or decrease in market interest rates. The following tables present, in thousands, First Mid Bank's projected change in NPV for the various rate shock levels at December 31, 1999 and December 31, 1998. 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, 1999 Estimated Changes In NPV As A Interest Rates Estimated % of PV Amount Percent (basis points) NPV of Assets of Change of Change +200 bp $48,571 8.36% $(4,407) (8.38)% 0 bp 52,546 8.78% -200 bp 56,980 9.26% 4,002 7.62% DECEMBER 31, 1998 Estimated Changes In NPV As A Interest Rates Estimated % of PV Amount Percent (basis points) NPV of Assets of Change of Change +200 bp $47,822 8.66% $(4,215) (8.10)% 0 bp 52,037 9.42% -200 bp 55,376 10.03% 3,339 6.42% As indicated above, at December 31, 1999, in the event of a sudden and sustained increase in prevailing market interest rates, First Mid Bank's NPV would be expected to decrease, and that in the event of a sudden and sustained decrease in prevailing market interest rates, First Mid Bank's NPV would be expected to increase. At December 31, 1999, First Mid Bank's estimated changes in NPV were within the industry guidelines which normally allow a change in capital of +/-10% from the base case scenario. The NPV calculation is based on the net present value of discounted cash flows utilizing market prepayment assumptions and market rates of interest provided by Bloomberg quotations. Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions First Mid Bank may undertake in response to changes in interest rates. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. Actual values may differ from those projections set forth in the table, should market conditions vary from assumptions used in the preparation of the table. Certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In addition, the proportion of adjustable-rate loans in First Mid Bank's portfolio 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, 1999 and 1998 (In thousands, except share data) 1999 1998 ASSETS Cash and due from banks (note 4): Non-interest bearing $ 21,054 $ 14,669 Interest bearing 78 103 Federal funds sold 710 7,000 Cash and cash equivalents 21,842 21,772 Investment securities (note 5): Available-for-sale, at fair value 150,157 153,534 Held-to-maturity, at amortized cost (estimated fair value of $2,077 and $3,389 at December 31, 1999 and 1998, respectively) 2,132 3,322 Loans (note 6) 388,319 349,065 Less allowance for loan losses (note 7) 2,939 2,715 Net loans 385,380 346,350 Premises and equipment, net (note 8) 16,153 13,226 Accrued interest receivable 5,933 5,742 Intangible assets, net (notes 3 and 9) 13,340 7,787 Other assets (note 17) 6,166 2,930 TOTAL ASSETS $601,103 $554,663 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits (note 10): Non-interest bearing $ 60,555 $ 62,357 Interest bearing 424,456 387,279 Total deposits 485,011 449,636 Accrued interest payable 2,296 2,091 Federal funds purchased (note 11) 1,175 - Securities sold under agreements to repurchase (notes 5 and 11) 32,308 26,018 Federal Home Loan Bank advances (note 11) 21,500 19,500 Long-term debt (note 12) 4,325 4,700 Other liabilities (note 17) 2,970 2,238 TOTAL LIABILITIES 549,585 504,183 Stockholders' Equity Series A convertible preferred stock; no par value; authorized 1,000,000 shares in 1998; issued 614 shares in 1998 with stated value of $5,000 per share - 3,070 Common stock, $4 par value; authorized 6,000,000 shares; issued 2,302,022 shares in 1999 and 2,023,227 shares in 1998 9,208 8,093 Additional paid-in-capital 11,608 8,562 Retained earnings 34,835 31,025 Deferred compensation 1,123 950 Accumulated other comprehensive income (loss) (3,265) 261 Less treasury stock at cost, 25,235 shares in 1999 and 15,539 shares in 1998 (1,991) (1,481) TOTAL STOCKHOLDERS' EQUITY 51,518 50,480 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $601,103 $554,663 See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1999, 1998 and 1997 (In thousands, except per share data) 1999 1998 1997 INTEREST INCOME: Interest and fees on loans $29,785 $29,072 $30,040 Interest on investment securities: Taxable 7,425 7,052 6,759 Exempt from federal income tax 1,403 843 701 Interest on federal funds sold 485 451 230 Interest on deposits with other financial institutions 70 33 75 Total interest income 39,168 37,451 37,805 INTEREST EXPENSE: Interest on deposits (note 10) 16,229 16,786 17,147 Interest on securities sold under agreements to repurchase 948 1,008 488 Interest on Federal Home Loan Bank advances 942 435 1,018 Interest on Federal funds purchased 18 19 26 Interest on long-term debt (note 12) 278 378 452 Total interest expense 18,415 18,626 19,131 Net interest income 20,753 18,825 18,674 Provision for loan losses (note 7) 600 550 700 Net interest income after provision for loan losses 20,153 18,275 17,974 OTHER INCOME: Trust revenues 1,912 1,746 1,663 Brokerage revenues 456 304 464 Service charges 2,317 1,919 1,804 Securities gains(losses), net (note 5) 8 154 (6) Mortgage banking income 624 1,121 491 Other 1,386 1,096 1,005 Total other income 6,703 6,340 5,421 OTHER EXPENSE: Salaries and employee benefits (note 15) 9,616 8,645 7,922 Net occupancy expense 1,323 1,179 1,116 Equipment rentals, depreciation and maintenance 2,114 1,768 1,666 Federal deposit insurance premiums 104 107 40 Amortization of intangible assets (note 9) 1,024 764 709 Stationary and supplies 642 657 692 Legal and professional 1,232 920 890 Marketing and promotion 643 500 529 Other 2,689 2,579 2,475 Total other expense 19,387 17,119 16,039 Income before income taxes 7,469 7,496 7,356 Income taxes (note 17) 2,237 2,434 2,630 Net income $ 5,232 $ 5,062 $ 4,726 Per common share data: Basic earnings per share $ 2.40 $ 2.39 $ 2.30 Diluted earnings per share 2.29 2.24 2.17 See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the years ended December 31, 1999, 1998 and 1997 (In thousands, except share and per share data) ACCUMULATED ADDITIONAL OTHER PREFERRED COMMON PAID-IN- RETAINED DEFERRED COMPREHENSIVE TREASURY STOCK STOCK CAPITAL EARNINGS COMPENSATION INCOME(LOSS) STOCK TOTAL DECEMBER 31, 1996 $ 3,100 $ 3,771 $ 5,463 $ 27,578 $ - $ 16 $ (24) $ 39,904 Comprehensive income: Net income - - - 4,726 - - - 4,726 Net unrealized change in available-for- sale investment securities - - - - - 284 - 284 Total Comprehensive Income 5,010 Cash dividends on preferred stock ($462.50 per share) - - - (286) - - - (286) Cash dividends on common stock ($.46 per - - - (895) - - - (895) share) Issuance of 32,781 common shares pursuant to the Dividend Reinvestment Plan - 96 559 - - - - 655 Issuance of 11,403 common shares pursuant to the Deferred Compensation Plan - 34 206 - - - - 240 Issuance of 44,893 common shares pursuant to the First Retirement & Savings Plan - 138 810 - - - - 948 Stock split in the form of a 100% stock dividend (2-for-1) - 3,852 - (3,852) - - - - December 31, 1997 3,100 7,891 7,038 27,271 - 300 (24) 45,576 Comprehensive income: Net income - - - 5,062 - - - 5,062 Net unrealized change in available-for- sale investment securities - - - - - (39) - (39) Total Comprehensive Income 5,023 Cash dividends on preferred stock ($462.50 per share) - - - (285) - - - (285) Cash dividends on common stock ($.51 per - - - (1,023) - - - (1,023) share) Issuance of 20,837 common shares pursuant to the Dividend Reinvestment Plan - 83 666 - - - - 749 Issuance of 4,677 common shares pursuant to the Deferred Compensation Plan - 19 150 - - - - 169 Issuance of 21,579 common shares pursuant to the First Retirement & Savings Plan - 86 663 - - - - 749 Conversion of 6 preferred shares into 2,425 common shares (30) 10 20 - - - - - Purchase of 13,539 treasury shares - - - - - - (507) (507) Deferred compensation - - - - 950 - (950) - Issuance of 1,000 common shares pursuant to the exercise of stock options - 4 25 - - - - 29 December 31, 1998 $ 3,070 $ 8,093 $ 8,562 $ 31,025 $ 950 $ 261 $ (1,481) $ 50,480
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued) For the years ended December 31, 1999, 1998 and 1997 (In thousands, except share and per share data) ACCUMULATED ADDITIONAL OTHER PREFERRED COMMON PAID-IN- RETAINED DEFERRED COMPREHENSIVE TREASURY STOCK STOCK CAPITAL EARNINGS COMPENSATION INCOME(LOSS) STOCK TOTAL December 31, 1998 $ 3,070 $ 8,093 $ 8,562 $ 31,025 $ 950 $ 261 $ (1,481) $ 50,480 Comprehensive income: Net income - - - 5,232 - - - 5,232 Net unrealized change in available-for- sale investment securities - - - - - (3,526) - (3,526) Total Comprehensive Income 1,706 Cash dividends on preferred stock ($462.50 per share) - - - (232) - - - (232) Cash dividends on common stock ($.55 per share) - - - (1,190) - - - (1,190) Issuance of 21,023 common shares pursuant to the Dividend Reinvestment Plan - 84 663 - - - - 747 Issuance of 5,820 common shares pursuant to the Deferred Compensation Plan - 23 185 - - - - 208 Issuance of 3,275 common shares pursuant to the First Retirement & Savings Plan - 13 105 - - - - 118 Conversion of 614 preferred shares into 248,177 common shares (3,070) 993 2,077 - - - - - Purchase of 9,696 treasury shares - - - - - - (337) (337) Deferred compensation - - - - 173 - (173) - Issuance of 500 common shares pursuant to the exercise of stock options - 2 16 - - - - 18 December 31, 1999 $ - $ 9,208 $11,608 $34,835 $ 1,123 $(3,265) $(1,991) $51,518 See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1999, 1998 and 1997 (In thousands) 1999 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,232 $ 5,062 $ 4,726 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 600 550 700 Depreciation, amortization and accretion, net 2,474 2,072 1,864 (Gain) loss on sale of securities, net (8) (154) 6 (Gain) loss on sale of other real property owned, net (70) 172 199 Gain on sale of mortgage loans held for sale, net (552) (906) (390) Deferred income taxes (293) (92) (495) Increase in accrued interest receivable (191) (375) (138) Increase (decrease) in accrued interest payable 205 (138) 573 Origination of mortgage loans held for sale (28,998) (76,000) (30,531) Proceeds from sale of mortgage loans held for sale 36,944 70,164 29,605 (Increase) decrease in other assets (3,050) 1,626 (1,077) Increase (decrease) in other liabilities 2,687 (1,298) 461 Net cash provided by operating activities 14,980 683 5,503 CASH FLOWS FROM INVESTING ACTIVITIES: Capitalization of mortgage servicing rights (47) (78) (103) Purchases of premises and equipment (2,731) (2,091) (1,458) Net (increase) decrease in loans (37,055) 15,429 (8,978) Proceeds from sales of: Securities available-for-sale 721 10,485 9,983 Proceeds from maturities of: Securities available-for-sale 34,275 63,718 31,463 Securities held-to-maturity 447 728 723 Purchases of: Securities available-for-sale (36,164) (111,174) (43,718) Securities held-to-maturity (332) (799) (170) Purchase of financial organization, net of cash received 46,441 - 22,416 Net cash provided by (used in) investing activities 5,555 (23,782) 10,158 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits (28,938) (7,962) 16,166 Increase in federal funds purchased 1,175 - - Increase(decrease) in repurchase agreements 6,290 15,238 (7,580) Increase(decrease) in FHLB advances 3,000 - (37,426) Repayment of long-term debt (1,375) (2,500) (1,000) Proceeds from issuance of long-term debt - 13,500 13,000 Proceeds from issuance of common stock 344 947 1,188 Purchase of treasury stock (337) (507) - Dividends paid on preferred stock (110) (32) (32) Dividends paid on common stock (514) (474) (427) Net cash provided by (used in) financing activities (20,465) 18,210 (16,111) Increase (decrease) in cash and cash equivalents 70 (4,889) (450) Cash and cash equivalents at beginning of year 21,772 26,661 27,111 Cash and cash equivalents at end of year $21,842 $21,772 $26,661 ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $18,620 $18,488 $19,704 Income taxes 2,539 2,918 3,000 Loans transferred to real estate owned 442 506 578 Dividends reinvested in common shares 748 749 655 See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING AND CONSOLIDATION The accompanying consolidated financial statements include the accounts of First Mid-Illinois Bancshares, Inc. ("Company") and its wholly-owned subsidiaries: Mid-Illinois Data Services, Inc. ("MIDS") and First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank") and its wholly-owned subsidiary First Mid-Illinois Insurance Services, Inc. ("First Mid Insurance"). All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the 1998 and 1997 consolidated financial statements have been reclassified to conform with the 1999 presentation. The accounting and reporting policies of the Company conform to generally accepted accounting principles and to general practices within the banking industry. The following is a description of the more significant of these policies. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. CASH EQUIVALENTS For purposes of reporting cash flows, cash equivalents include amounts due from banks and Federal funds sold. Generally, Federal funds are sold for one-day periods. INVESTMENT SECURITIES The Company classifies its debt securities into one or more of three categories: held-to-maturity, available-for-sale, or trading. Held-to-maturity securities are those which management has the positive intent and ability to hold to maturity. Available-for-sale securities are those securities which management may sell prior to maturity as a result of changes in interest rates, prepayment factors, or as part of the Company's overall asset and liability strategy. Trading securities are those securities bought and held principally for the purpose of selling them in the near term. The Company has no securities designated as trading. Held-to-maturity securities are recorded at cost adjusted for amortization of premium and accretion of discount to the earlier of the call date or maturity date using the interest method. Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related income tax effect, are excluded from income and reported as a separate component of stockholders' equity. If a decrease in the market value of a security is expected to be other than temporary, then the security is written down to its fair value through a charge to income. Realized gains and losses on the sale of investment securities are recorded using the specific identification method. LOANS Loans are stated at the principal amount outstanding less unearned discount, net of the allowance for loan losses. Interest on substantially all loans is credited to income based on the principal amount outstanding. The Company's policy is to generally discontinue the accrual of interest income on any loan for which principal or interest is ninety days past due and when, in the opinion of management, there is reasonable doubt as to the timely collectibility of interest or principal. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collectibility of interest or principal. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in the loan portfolio. The allowance is based on a continuing review of the loan portfolio, the underlying value of the collateral securing the loans, current economic conditions and past loan loss experience. Loans which are deemed to be uncollectible are charged to the allowance. The provision for loan losses and recoveries are credited to the allowance. Management, considering current information and events regarding the borrowers' ability to repay their obligations, considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the note agreement, including principal and interest. The amount of the impairment is measured based on the fair value of the collateral, if the loan is collateral dependent, or alternatively, at the present value of expected future cash flows discounted at the loan's effective interest rate. Interest income on impaired loans is recorded when cash is received and only if principal is considered to be fully collectible. PREMISES AND EQUIPMENT Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization is determined principally by the straight-line method over the estimated useful lives of the assets. INTANGIBLE ASSETS Intangible assets generally arise from business combinations which the Company accounted for as purchases. Such assets consist of the excess of the purchase price over the fair market value of net assets acquired, with specific amounts assigned to core deposit relationships of acquired businesses. Intangible assets are amortized by the straight-line and accelerated methods over various periods of up to twenty years. Management reviews intangible assets for possible impairment when there is a significant event that detrimentally effects operations. PREFERRED STOCK In connection with the Company's acquisition of Heartland Savings Bank ("Heartland") in 1992, $3.1 million of Series A perpetual, cumulative, non- voting, convertible, preferred stock was issued to directors and certain senior officers of the Company pursuant to a private placement. 620 shares of the preferred stock were sold at a stated value of $5,000 per share with such shares bearing a dividend rate of 9.25%. The preferred stock could be converted at any time, at the option of the preferred stockholder, into common shares at the conversion ratio of 404.2 shares of common stock for each share of preferred. The Company also had the right, any time after July 1, 1998, and upon giving at least thirty days prior notice, to redeem all (but not less than all) of the preferred stock at a cash value of $5,000 per share plus any accrued but unpaid dividends. The Company also had the right at any time after July 1, 1998, and upon giving at least thirty days prior notice, to require the conversion of all (but not less than all) of the preferred stock into common stock at the conversion ratio. Effective November 15, 1999, the 614 remaining shares of preferred stock were converted, at the election of the Company, into 248,177 shares of common stock. MORTGAGE BANKING ACTIVITIES First Mid Bank originates residential mortgage loans both for its portfolio and for sale into the secondary market. Included in mortgage banking income are gains or losses on the sale of loans and servicing fee income. Loans that are originated and held for sale are carried at the lower of aggregate amortized cost or estimated market value. Gains or losses from loan sales are computed using the specific identification method and are included in mortgage banking income in the Consolidated Statements of Income. The Company recognizes as separate assets the rights to service mortgage loans for others, however those rights are acquired. Originated Mortgage Servicing Rights ("OMSRs") are amortized in proportion to and over the period of estimated net servicing income. For the year ended December 31, 1999 1998 1997 Capitalized mortgage servicing rights $47,000 $78,000 $103,000 Amortization expense $62,000 $75,000 $65,000 The balance of mortgage servicing rights was $199,000 and $214,000 at December 31, 1999 and 1998, respectively. INCOME TAXES The Company and its subsidiaries file consolidated Federal and State income tax returns with each organization computing its taxes on a separate company basis. Amounts provided for income tax expense are based on income reported for financial statement purposes rather than amounts currently payable under tax laws. Deferred tax assets and liabilities are recognized for future tax consequences attributable to the temporary differences existing between the financial statement carrying amounts of assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards. To the extent that current available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as an increase or decrease in income tax expense in the period such change is enacted. TRUST DEPARTMENT ASSETS Property held for customers in fiduciary or agency capacities is not included in the accompanying consolidated balance sheets since such items are not assets of the Company or its subsidiaries. STOCK SPLIT On May 22, 1997, the Company declared a two-for-one stock split in the form of a 100% stock dividend. Par value remained at $4 per share. The stock split increased the Company's outstanding common shares from 962,836 to 1,925,672 shares. All references in the consolidated financial statements and notes thereto as to the number of common shares, per common share amounts and market prices of the Company's common stock have been restated giving retroactive recognition to the stock split. COMPREHENSIVE INCOME The Company's comprehensive income for the years ended December 31, 1999, 1998 and 1997 is as follows: (in thousands) 1999 1998 1997 Net income $5,232 $5,062 $4,726 Other comprehensive income: Unrealized gains(losses) during the period (5,334) 95 424 Reclassification adjustment for net (gains)losses realized in net income (8 (154) 6 Tax effect 1,816 20 (146) Comprehensive income $1,706 $5,023 $5,010 NOTE 2 - EARNINGS PER SHARE The Company follows Financial Accounting Standards Board's Statement No. 128, "EARNINGS PER SHARE" ("SFAS 128") in which income for Basic Earnings per Share ("EPS") is adjusted for dividends attributable to preferred stock and is based on the weighted average number of common shares outstanding. Diluted EPS is computed by using the weighted average number of common shares outstanding, increased by the assumed conversion of the convertible preferred stock and the assumed conversion of the stock options. The components of basic and diluted earnings per common share for the years ended December 31, 1999, 1998, and 1997 are as follows:
1999 1998 1997 BASIC EARNINGS PER SHARE: Net income $5,232,000 $5,062,000 $4,726,000 Less preferred stock dividends (304,000) (285,000) (286,000) Net income available to common stockholders $4,928,000 $4,777,000 $4,440,000 Weighted average common shares outstanding 2,055,905 1,999,767 1,928,727 Basic Earnings per Common Share $2.40 $2.39 $2.30 DILUTED EARNINGS PER SHARE: Net income available to common stockholders $4,928,000 $4,777,000 $4,440,000 Assumed conversion of preferred stock 304,000 285,000 286,000 Net income available to common stock- holders after assumed conversion $5,232,000 $5,062,000 $4,726,000 Weighted average common shares outstanding 2,055,905 1,999,767 1,928,727 Assumed conversion of stock options 7,409 8,149 447 Assumed conversion of preferred stock 216,901 249,122 250,604 Diluted weighted average common shares outstanding 2,280,216 2,257,038 2,179,778 Diluted Earnings per Common Share $2.29 $2.24 $2.17
NOTE 3 - MERGERS AND ACQUISITIONs 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. The operating results have been combined with those of the Company since May 7, 1999. In November, 1997, Heartland merged with and into First Mid Bank. Prior to the merger, Heartland was a wholly-owned subsidiary of the Company. Therefore, the merger had no effect on the Company's financial position and results of its operations. On March 7, 1997, the Company acquired the Charleston, Illinois branch location and the deposit base of First of America Bank. This cash acquisition added approximately $28 million to total deposits, $500,000 to loans, $1.3 million to premises and equipment and $3.8 million to intangible assets. The acquisition of the branch was accounted for using the purchase method of accounting whereby the acquired assets and deposits of the branch were recorded at their fair values as of the acquisition date. The operating results have been combined with those of the Company since March 7, 1997. NOTE 4 - CASH AND DUE FROM BANKS Aggregate cash and due from bank balances of $236,000 at December 31, 1999 and 1998, were maintained in satisfaction of statutory reserve requirements of the Federal Reserve Bank. NOTE 5 - INVESTMENT SECURITIES The amortized cost, gross unrealized gains and losses and estimated fair values for available-for-sale and held-to-maturity securities by major security type at December 31, 1999 and 1998 were as follows (in thousands):
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR 1999 COST GAINS LOSSES VALUE Available-for-sale: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 92,180 $ - $(3,748) $ 88,432 Obligations of states and political subdivisions 28,149 49 (1,108) 27,090 Mortgage-backed securities 32,578 58 (580) 32,056 Federal Home Loan Bank stock 1,913 - - 1,913 Other securities 666 - - 666 Total available-for-sale $155,486 $ 107 $(5,436) $150,157 Held-to-maturity: Obligations of states and political subdivisions $ 2,132 $ 8 $ (63) $ 2,077 1998 Available-for-sale: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 91,069 $ 333 $ (413) $ 90,989 Obligations of states and political subdivisions 24,352 481 (48) 24,785 Mortgage-backed securities 35,209 142 (100) 35,251 Federal Home Loan Bank stock 1,843 - - 1,843 Other securities 666 - - 666 Total available-for-sale $153,139 $ 956 $ (561) $153,534 Held-to-maturity: Obligations of states and political subdivisions $ 3,322 $ 67 - $ 3,389
Proceeds from sales of investment securities and realized gains and losses were as follows during the years ended December 31, 1999, 1998 and 1997 (in thousands): 1999 1998 1997 Proceeds from sales $ 721 $ 10,485 $ 9,983 Gross gains 8 157 20 Gross losses - 3 26 Maturities of investment securities were as follows at December 31, 1999 (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. AMORTIZED ESTIMATED COST FAIR VALUE Available-for-sale: Due in one year or less $ 4,292 $ 4,305 Due after one-five years 61,342 59,361 Due after five-ten years 37,672 36,288 Due after ten years 19,602 18,147 122,908 118,101 Mortgage-backed securities 32,578 32,056 Total available-for-sale $155,486 $150,157 Held-to-maturity: Due in one year or less $ 375 $ 377 Due after one-five years 946 950 Due after five-ten years 145 145 Due after ten-years 666 605 Total held-to-maturity $ 2,132 $ 2,077 Total investment securities $157,618 $152,234 Investment securities carried at approximately $124,368,000 and $93,947,000 at December 31, 1999 and 1998 respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law. NOTE 6 - LOANS A summary of loans at December 31, 1999 and 1998 follows (in thousands): 1999 1998 Commercial, financial and agricultural $ 89,194 $ 78,617 Real estate-mortgage 273,293 244,501 Installment 24,659 25,573 Other 1,349 791 Total gross loans 388,495 349,482 Less unearned discount 176 417 Net loans $388,319 $349,065 The real estate mortgage loan balance in the above table includes loans held for sale of $1,349,000 and $8,743,000 at December 31, 1999 and 1998, respectively. Certain officers, directors and principal stockholders of the Company and its subsidiaries, their immediate families or their affiliated companies have loans with one or more of the subsidiaries. These loans are made in the ordinary course of business on substantially the same terms, including interest and collateral, as those prevailing for comparable transactions with others and do not involve more than the normal risk of collectibility. Loans to related parties totaled approximately $11,310,000 at December 31, 1999 and $12,959,000 at December 31, 1998. Activity during 1999 was as follows (in thousands): Balance at December 31, 1998 $12,959 New loans 1,922 Loan repayments (3,571) Balance at December 31, 1999 $11,310 The aggregate principal balances of nonaccrual, past due and renegotiated loans were as follows at December 31, 1999 and 1998(in thousands): 1999 1998 Nonaccrual loans $1,430 $1,783 Loans past due ninety days or more and still accruing 366 609 Renegotiated loans which are performing in accordance with revised terms 81 90 Interest income which would have been recorded under the original terms of such nonaccrual or renegotiated loans totaled $131,000, $189,000 and $162,000 in 1999, 1998 and 1997, respectively. The amount of interest income which was recorded amounted to $7,000 in 1999, $7,000 in 1998 and $32,000 in 1997. Impaired loans are defined as those loans where it is probable that amounts due according to contractual terms, including principal and interest, will not be collected. Both nonaccrual and renegotiated loans meet this definition. The Company evaluates all individual loans on nonaccrual or renegotiated with a balance over $100,000 for impairment. Impaired loans are measured by the Company at the present value of expected future cash flows or, alternatively, if the loan is collateral dependant, at the fair value of the collateral. Known losses of principal on these loans have been charged off. Interest income on nonaccrual loans is recognized only at the time cash is received. Interest income on renegotiated loans is recorded according to the most recently agreed upon contractual terms. The following table presents information on impaired loans (in thousands). At December 31, 1999 1998 Impaired loans for which an allowance has been provided $ - $1,043 Impaired loans for which no allowance has been provided 1,427 830 Total loans determined to be impaired $1,427 $1,873 Allowance on impaired loans $ - $ 250 For the year ended December 31, 1999 1998 1997 Average recorded investment in impaired loans $1,692 $2,002 $1,131 Cash basis interest income recognized from impaired loans 7 7 32 First Mid Bank enters into financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit in accordance with line of credit agreements and/or mortgage commitments and standby letters of credit. Standby letters of credit are conditional commitments issued by a bank to guarantee the performance of a customer to a third-party. First Mid Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by First Mid Bank upon an extension of credit, is based on management's evaluation of the credit worthiness of the borrower. Collateral varies but generally includes assets such as property, equipment and receivables. At December 31, 1999 and 1998, respectively, the Company had $64,419,000 and $53,349,000 of outstanding commitments to extend credit and $1,046,000 and $750,000 of standby letters of credit. Management does not believe that any significant losses will be incurred in connection with such instruments. Most of the Company's business activities are with customers located within east central Illinois. At December 31, 1999 and 1998, the Company's loan portfolio included approximately $59,532,000 and $50,888,000, 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, 1999, 1998 and 1997 was approximately $51,905,000, $55,452,000 and $62,784,000, respectively. NOTE 7 - ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses were as follows during the three year period ended December 31,1999 (in thousands): 1999 1998 1997 Balance, beginning of year $2,715 $2,636 $2,684 Provision for loan losses 600 550 700 Acquired branches 150 - - Recoveries 100 84 54 Charge offs (626) (555) (802) Balance, end of year $2,939 $2,715 $2,636 NOTE 8 - PREMISES AND EQUIPMENT, NET Premises and equipment at December 31, 1999 and 1998 consisted of (in thousands): 1999 1998 Land $ 2,993 $ 2,781 Buildings and improvements 12,574 10,317 Furniture and equipment 8,168 6,911 Leasehold improvements 356 353 Construction in progress 54 362 Subtotal 24,145 20,724 Accumulated depreciation and amortization 7,992 7,498 Total $16,153 $13,226 Depreciation expense was $1,562,000, $1,221,000 and $1,168,000 for the years ended December 31, 1999, 1998 and 1997, respectively. NOTE 9 - INTANGIBLE ASSETS Intangible assets, net of accumulated amortization, at December 31, 1999 and 1998 consisted of (in thousands): 1999 1998 Excess of cost over fair market value of acquired businesses $11,369 $ 6,348 Core deposit premiums 1,971 1,439 Total $13,340 $ 7,787 Amortization expense was $1,024,000, $764,000 and $709,000 for the years ended December 31, 1999, 1998 and 1997, respectively. NOTE 10 - DEPOSITS As of December 31, 1999 and 1998, deposits consisted of (in thousands): 1999 1998 Demand deposits: Non-interest bearing $ 60,555 $ 62,357 Interest bearing 105,076 88,191 Savings 40,294 36,532 Money market 51,945 38,383 Time deposits 227,141 224,173 Total deposits $485,011 $449,636 Total interest expense on deposits for the years ended December 31, 1999, 1998 and 1997 was as follows (in thousands): 1999 1998 1997 Interest-bearing demand $ 2,230 $ 2,189 $ 2,210 Savings 944 856 999 Money market 1,579 1,486 1,474 Time deposits 11,476 12,255 12,464 Total $16,229 $16,786 $17,147 As of December 31, 1999, 1998 and 1997, the aggregate amount of time deposits in denominations of more than $100,000 and the total interest expense on such deposits was as follows (in thousands): 1999 1998 1997 Outstanding $43,921 $43,398 $50,733 Interest expense for the year 2,079 2,397 2,676 The following table shows the amount of maturities for all time deposits as of December 31, 1999 (in thousands): less than 1 year $185,006 1 year to 2 years 26,984 2 years to 3 years 7,509 3 years to 4 years 4,068 over 4 years 3,574 total $227,141 NOTE 11 - OTHER BORROWINGS As of December 31, 1999 and 1998 other borrowings consisted of (in thousands): 1999 1998 Securities sold under agreements to repurchase $32,308 $26,018 Federal funds purchased 1,175 - Federal Home Loan Bank advances: Overnight advances 3,000 - Fixed term advances 18,500 19,500 Total $54,983 $45,518 The Federal Home Loan Bank Advances consist of the following: * $10 million advance at 4.85% with a 10-year maturity, due January 8, 2008, one year call option (called on January 10, 2000) * $3.5 million advance at 5.00% with a 10-year maturity, due May 29, 2008, callable quarterly after May, 1999 * $5 million advance at 5.20% with a 10-year maturity, due October 7, 2009, callable quarterly after April, 2000 * $3 million overnight advance at 4.74% 1999 1998 1997 Securities sold under agreements to repurchase: Maximum outstanding at any month-end $32,308 $26,018 $17,710 Average amount outstanding for the year 22,063 9,717 10,806 First Mid Bank has collateral pledge agreements whereby it has agreed to keep on hand at all time, free of all other pledges, liens, and encumbrances, whole first mortgages on improved residential property with unpaid principal balances aggregating no less than 167% of the outstanding advances from the Federal Home Loan Bank. The securities underlying the repurchase agreements are under the Company's control. NOTE 12 - LONG-TERM DEBT The Company had a long-term debt balance of $4,700,000 as of December 31, 1998. This loan had a floating interest rate of 1.25% over the Federal funds rate with interest due quarterly and an effective interest rate of 6.13%. Quarterly principal payments were due in various amounts. During 1999, the Company entered into a revolving credit agreement that includes the prior long-term debt balance and has a total commitment amount as shown in the table below. The balance of this debt at December 31, 1999, was $4,325,000 with an effective interest rate of 6.58%. 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. Commitment Period $6,000,000 1/1/00 - 12/31/00 $5,000,000 1/1/01 - 12/31/01 $4,000,000 1/1/02 - 12/31/02 $3,000,000 1/1/03 - 12/31/03 The outstanding balance matures December 31, 2003. The Company and First Mid Bank were in compliance with the existing covenants at December 31, 1999 and 1998. NOTE 13 - REGULATORY CAPITAL The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Bank holding companies follow minimum regulatory requirements established by the Federal Reserve Board, First Mid Bank follows similar minimum regulatory requirements established for national banks by the Office of the Comptroller of the Currency. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Quantitative measures established by each regulatory agency to ensure capital adequacy require the reporting institutions to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk- weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 1999 and 1998, that all capital adequacy requirements have been met. As of December 31, 1999 and 1998, the most recent notification from the primary regulators categorized the Company and First Mid Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios must be maintained as set forth in the table. At December 31, 1999, there are no conditions or events since that notification that management believes have changed these categories.
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO DECEMBER 31, 1999 Total Capital (to risk-weighted assets) Company $ 44,381 11.98% $ 29,648 > 8.00% $ 37,060 > 10.00% First Mid Bank 45,409 12.40 29,305 > 8.00 36,631 > 10.00 Tier 1 Capital (to risk-weighted assets) Company 41,442 11.18 14,824 > 4.00 22,236 > 6.00 First Mid Bank 42,470 11.59 14,652 > 4.00 21,979 > 6.00 Tier 1 Capital (to average assets) Company 41,442 6.96 24,347 > 4.00 30,434 > 5.00 First Mid Bank 42,470 7.19 23,630 > 4.00 29,538 > 5.00
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO DECEMBER 31, 1998 Total Capital (to risk-weighted assets) Company $ 45,218 13.89% $ 26,036 > 8.00% $ 32,545 > 10.00% First Mid Bank 46,704 14.46 25,831 > 8.00 32,289 > 10.00 Tier 1 Capital (to risk-weighted assets) Company 42,503 13.06 13,018 > 4.00 19,527 > 6.00 First Mid Bank 43,989 13.62 12,916 > 4.00 19,373 > 6.00 Tier 1 Capital (to average assets) Company 42,503 7.90 21,528 > 4.00 26,910 > 5.00 First Mid Bank 43,989 8.20 21,448 > 4.00 26,810 > 5.00
NOTE 14 - DISCLOSURE OF FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 "DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS," ("SFAS 107"), requires the disclosure of the estimated fair value of financial instrument assets and liabilities. For the Company, as for most financial institutions, most of the assets and liabilities are considered financial instruments as defined in SFAS 107. However, many of the Company's financial instruments lack an available trading market as characterized by a willing buyer and seller engaging in an exchange transaction. Additionally, the Company's general practice and intent is to hold its financial instruments until maturity and not to engage in trading or sales activity. Accordingly, significant assumptions and estimations as well as present value calculations were used by the Company for purposes of the SFAS 107 disclosure. Future changes in these assumptions or methodologies may have a material effect on estimated fair values. Estimated fair values have been determined by the Company using the best available information and an estimation methodology suitable for each category of financial instrument. The estimation methodology used, the estimated fair values and the carrying amount at December 31, 1999 and 1998 were as follows (in thousands): Financial instruments for which an active secondary market exists have been valued using quoted available market prices.
1999 1998 FAIR CARRYING FAIR CARRYING VALUE AMOUNT VALUE AMOUNT Cash and cash equivalents $ 21,842 $ 21,842 $ 21,772 $ 21,772 Investments available-for-sale 150,157 150,157 153,534 153,534 Investments held-to-maturity 2,132 2,077 3,389 3,322
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.
1999 1998 FAIR CARRYING FAIR CARRYING VALUE AMOUNT VALUE AMOUNT Deposits with stated maturities $226,559 $226,559 $224,951 $223,616 Securities sold under agreements to repurchase 32,243 32,308 25,973 26,018 Federal Home Loan Bank advances 21,437 21,500 19,040 19,500
Financial instrument liabilities without stated maturities and floating rate long-term debt have estimated fair values equal to both the amount payable on demand and the carrying amount.
1999 1998 FAIR CARRYING FAIR CARRYING VALUE AMOUNT VALUE AMOUNT Deposits with no stated maturity $258,037 $258,037 $226,387 $226,387 Federal funds purchased 1,175 1,175 - - Floating rate long-term debt 4,325 4,325 4,700 4,700
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.
1999 1998 FAIR CARRYING FAIR CARRYING VALUE AMOUNT VALUE AMOUNT Net loan portfolio $380,203 $385,380 $348,460 $346,350
The notional amount of off-balance sheet items such as unfunded loan commitments and stand-by letters of credit generally approximate their estimated fair values. NOTE 15 - RETIREMENT PLAN The Company has a defined contribution retirement plan which covers substantially all employees and which provides for base contributions of 4% of compensation and a matching contribution by the Company of up to 50% of the first 4% of voluntary employee contributions. Employee contributions are limited to 15% of compensation. The total expense for the plan amounted to $405,000, $369,000 and $352,000 in 1999, 1998 and 1997, respectively. NOTE 16 - STOCK OPTION PLAN The Company established a Stock Incentive Plan ("SI Plan") intended to provide a means whereby directors and certain officers can acquire shares of the Company's common stock. A maximum of 100,000 shares have been authorized under the SI Plan. Options to acquire shares will be awarded at an exercise price equal to the fair market value of the shares on the date of grant. Options to acquire shares have a 10-year term. Options granted to employees vest over a four year period and those options granted to directors vest at the time they are issued. A summary of the status of stock options under the SI plan at December 31, 1999, 1998 and 1997 and changes during the years then ended are presented in the following table: WEIGHTED AVERAGE EXERCISE SHARES PRICE Outstanding at December 31, 1996 - $ - Granted 31,000 27.30 Outstanding at December 31, 1997 31,000 $ 27.30 Granted 11,500 35.00 Exercised (1,000) 28.62 Outstanding at December 31, 1998 41,500 $ 29.40 Granted 9,500 34.50 Canceled (4,500) 32.02 Exercised (500) 35.00 Outstanding at December 31, 1999 46,000 $ 30.14 The Company applies APB Opinion No. 25 in accounting for the SI Plan and, accordingly, compensation cost based on fair value at grant date has not been recognized for its stock options in the consolidated financial statements. The Company has presented pro forma compensation cost based on the fair value at grant date for its stock options under Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" in the following table: For the years ended December 31, (in thousands) 1999 1998 1997 Net income: As reported $5,232 $5,062 $4,726 Pro forma 5,228 5,030 4,713 Basic Earnings Per Share: As reported $ 2.40 $ 2.39 $ 2.30 Pro forma $ 2.39 $ 2.37 $ 2.30 Diluted Earnings Per Share: As reported $ 2.29 $ 2.24 $ 2.17 Pro forma $ 2.29 $ 2.23 $ 2.16 The fair value of options granted is estimated on the grant date using the Black-Scholes option- pricing model. The following assumptions were used in estimating the fair value for options granted in 1999, 1998 and 1997. 1999 1998 1997 Dividend yield 1.6% 1.3% 1.9% Risk free interest rate 6.93% 5.25% 5.22% Weighted average expected life 9.3 yrs 6.5 yrs 5.9 yrs Expected volatility 13% 20% 35% The weighted average per share fair values of options granted in 1999, 1998 and 1997 was $13.47, $9.22 and $2.67, respectively. NOTE 17 - INCOME TAXES The components of Federal and State income tax expense (benefit) for the years ended December 31, 1999, 1998 and 1997 were as follows (in thousands): 1999 1998 1997 Current Federal $2,386 $2,369 $2,845 State 144 157 280 Total Current 2,530 2,926 3,125 Deferred Federal (267) (81) (434) State (26) (11) (61) Total Deferred (293) (92) (495) Total $2,237 $2,434 $2,630 Recorded income tax expense differs from the expected tax expense (computed by applying the applicable statutory U.S. Federal tax rate of 34% to income before income taxes). The principal reasons for this difference are as follows (in thousands): 1999 1998 1997 Expected income taxes $2,539 $2,549 $2,501 Effects of: Tax-exempt income (562) (348) (263) Nondeductible interest expense 70 38 31 Goodwill amortization 120 120 120 State deduction, net of federal taxes 78 96 137 Other items, net (8) (21) 104 Total $2,237 $2,434 $2,630 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, 1999 and 1998 are presented below (in thousands): 1999 1998 Deferred tax assets: Allowance for loan losses $ 1,088 $ 848 Available-for-sale investment securities 2,065 - Capital loss - 43 Deferred compensation 361 399 Other, net 177 151 Total gross deferred tax assets $ 3,691 $ 1,441 Deferred tax liabilities: Depreciation $ 558 $ 589 Available-for-sale investment securities - 134 Purchase accounting 13 57 Other, net 100 134 Total gross deferred tax liabilities $ 671 $ 914 Net deferred tax assets $ 3,020 $ 527 Deferred tax assets and deferred tax liabilities are recorded in other assets and other liabilities, respectively, on the consolidated balance sheets. No valuation allowance related to deferred tax assets has been recorded at December 31, 1999 and 1998 as management believes it is more likely than not that the deferred tax assets will be fully realized. NOTE 18 - DIVIDEND RESTRICTIONS Banking regulations impose restrictions on the ability of First Mid Bank to pay dividends to the Company. At December 31, 1999, regulatory approval would have been required for aggregate dividends from First Mid Bank to the Company in excess of approximately $7.8 million. The amount of such dividends that could be paid is further restricted by the limitations of sound and prudent banking principles. NOTE 19 - COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, there are various outstanding commitments and contingent liabilities such as guarantees, commitments to extend credit, claims and legal actions which are not reflected in the accompanying consolidated financial statements. In the opinion of management, no significant losses are anticipated as a result of these matters. NOTE 20 - PARENT COMPANY ONLY FINANCIAL STATEMENTS Presented below are condensed balance sheets, statements of income and cash flows for the Parent Company (in thousands): FIRST MID-ILLINOIS BANCSHARES, INC. (PARENT COMPANY) BALANCE SHEETS: December 31, 1999 1998 Assets Cash $ 823 $ 1,121 Premises and equipment, net 8 42 Investment in subsidiaries 53,222 52,693 Other Assets 2,563 2,000 Total Assets $56,616 $55,856 Liabilities and Stockholders' equity Liabilities Dividends payable $ 684 $ 633 Long-term debt 4,325 4,700 Other liabilities 89 43 Total Liabilities 5,098 5,376 Stockholders' equity 51,518 50,480 Total Liabilities and Stockholders' equity $56,616 $55,856
FIRST MID-ILLINOIS BANCSHARES, INC. (PARENT COMPANY) STATEMENTS OF INCOME: YEARS ENDED DECEMBER 31, 1999 1998 1997 Income: Dividends from subsidiaries $1,875 $1,875 $ 756 Other income 155 111 120 2,030 1,986 876 Operating expenses 1,323 1,203 1,203 Income (loss) before income taxes and equity in undistributed earnings of subsidiaries 707 783 (327) Income tax benefit 471 454 385 Income before equity in undistributed earnings of subsidiaries 1,178 1,237 58 Equity in undistributed earnings of subsidiaries 4,054 3,825 4,668 Net income $5,232 $5,062 $4,726
FIRST MID-ILLINOIS BANCSHARES, INC. (PARENT COMPANY) STATEMENTS OF CASH FLOWS: YEARS ENDED DECEMBER 31, 1999 1998 1997 Cash flows from operating activities: Net income $5,232 $5,062 $4,726 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation, amortization, accretion, net 4 7 7 Equity in undistributed earnings of subsidiaries (4,054) (3,825) (4,668) (Increase) decrease in other assets (533) 910 (445) Increase (decrease) in other liabilities 45 (522) (67) Net cash provided by (used in) operating activities 694 1,632 (447) Net cash used in investing activities: Purchases of equipment - - (13) Net cash used in investing activities - - (13) Cash flows from financing activities: Repayment of long-term debt (375) (1,500) (1,000) Proceeds from issuance of long-term debt - - 1,000 Proceeds from issuance of common stock 344 947 1,188 Purchase of treasury stock (337) (507) - Dividends paid on preferred stock (110) (32) (32) Dividends paid on common stock (514) (474) (427) Net cash provided by (used in) financing activities (992) (1,566) 729 Increase (decrease) in cash (298) 66 269 Cash at beginning of year 1,121 1,055 786 Cash at end of year $ 823 $1,121 $1,055
STATEMENT OF RESPONSIBILITY FOR FINANCIAL DATA Management is responsible for the integrity of all the financial data included in this Annual Report. The financial statements and related notes are prepared in accordance with generally accepted accounting principles, which in the judgement of management are appropriate in the circumstances. Financial information elsewhere in this Report is consistent with that in the financial statements. Management maintains a system of internal accounting control, including an internal audit program, which provides reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, transactions are properly authorized and accounting records are reliable for the preparation of financial statements. The foundation of the system of internal accounting control rests upon careful selection and training of personnel, segregation of responsibilities and application of formal policies and procedures that are consistent with the highest standards of business conduct. The system of internal accounting control is being continuously modified and improved in response to changes in business conditions and operations. The board of directors has an audit committee comprised of six outside directors. The Committee meets periodically with the independent auditors, the internal auditors and management to ensure that the system of internal accounting control is being properly administered and that financial data is being properly reported. The committee reviews the scope and timing of both the internal and external audits, including recommendations made with respect to the system of internal accounting control by the independent auditors. The consolidated financial statements, as identified in the accompanying Independent Auditors' Report, have been audited by KPMG LLP, independent certified public accountants. The audits were conducted in accordance with generally accepted auditing standards, which included tests of the accounting records and other auditing procedures considered necessary to formulate an opinion as to the fairness, in all material respects, of the consolidated financial statements. William S. Rowland Chairman and Chief Executive Officer Laurel G. Allenbaugh Vice President and Principal Accounting Officer INDEPENDENT AUDITORS' REPORT The Board of Directors First Mid-Illinois Bancshares, Inc. Mattoon, Illinois: We have audited the accompanying consolidated balance sheets of First Mid- Illinois Bancshares, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Mid-Illinois Bancshares, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles. KPMG LLP Chicago, Illinois January 28, 2000 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information called for by Item 10 with respect to directors and director nominees is incorporated by reference to the Company's 2000 Proxy Statement under the caption "Proposal 1 - Election of Directors." The information called for by Item 10 with respect to executive officers is incorporated by reference to Part I hereof under the caption "Supplemental Item - - Executive Officers of the Company." ITEM 11. EXECUTIVE COMPENSATION The information called for by Item 11 is incorporated by reference to the Company's 2000 Proxy Statement under the caption "Executive Compensation," "Common Stock Price Performance Graph" and "Directors' Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by Item 12 is incorporated by reference to the Company's 2000 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 2000 Proxy Statement under the caption "Transactions with Management." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) and (2) -- Financial Statements and Financial Statement Schedules The following consolidated financial statements and financial statement schedules of the Company are filed as part of this document under Item 8. Financial Statements and Supplementary Data: * Consolidated Balance Sheets -- December 31, 1999 and 1998 * Consolidated Statements of Income -- For the Years Ended December 31, 1999, 1998 and 1997 * Consolidated Statements of Changes in Stockholders' Equity -- For the Years Ended December 31, 1999, 1998 and 1997 * Consolidated Statements of Cash Flows -- For the Years Ended December 31, 1999, 1998 and 1997 (a)(3) -- Exhibits The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit Index which follows the Signature Page and immediately precedes the exhibits filed. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1999. 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 21, 2000 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 21{st} day of March, 2000, 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 (Principal Executive Officer) and Director /S/ LAUREL G. ALLENBAUGH Laurel G. Allenbaugh, Vice President (Principal Financial and Accounting Officer) /S/ CHARLES A. ADAMS Charles A. Adams, Director /S/ KENNETH R. DIEPHOLZ Kenneth R. Diepholz, Director Steven L. Grissom, Director Richard A. Lumpkin, Director /S/ DANIEL E. MARVIN, JR. Daniel E. Marvin, Jr., Director /S/ GARY W. MELVIN Gary W. Melvin, Director /S/ RAY A. SPARKS Ray A. Sparks, Director EXHIBIT INDEX TO FORM 10-K REGISTRATION STATEMENT EXHIBIT NUMBER DESCRIPTION AND FILING OR INCORPORATION REFERENCE 3.1 RESTATED CERTIFICATE OF INCORPORATION AND AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION OF FIRST MID-ILLINOIS BANCSHARES, INC. Incorporated by reference to Exhibit 3(a) to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987 (File No. 0-13688) 3.2 RESTATED BYLAWS OF FIRST MID-ILLINOIS BANCSHARES, INC. Incorporated by reference to Exhibit 3(b) to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987 (File No 0-13368) 4.1 RIGHTS AGREEMENT, DATED AS OF SEPTEMBER 21, 1999, BETWEEN FIRST MID- ILLINOIS BANCSHARES, INC. AND HARRIS TRUST AND SAVINGS BANK, AS RIGHTS AGENT Incorporated by reference to Exhibit 4.1 to First Mid-Illinois Bancshares, Inc.'s Registration Statement on Form 8-A filed with the SEC on September 22, 1999 10.1 EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND WILLIAM S. ROWLAND (Filed herewith) 10.2 EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND JOHN W. HEDGES (Filed herewith) 10.3 DEFERRED COMPENSATION PLAN Incorporated by reference to Exhibit 10.4 to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998 (File No 0-13368) 10.4 1997 STOCK INCENTIVE PLAN Incorporated by reference to Exhibit 10.5 to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998 (File No 0-13368) 11.1 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE (Filed herewith) 21.1 SUBSIDIARIES OF THE COMPANY (Filed herewith) 23.1 CONSENT OF KPMG LLP (Filed herewith) 27.1 FINANCIAL DATA SCHEDULE (Filed herewith) EXHIBIT 10.1 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into this 1{st} day of June, 1999, by and between First Mid-Illinois Bancshares, Inc. ("the Company"), a corporation with its principal place of business located in Mattoon, Illinois, and William S. Rowland ("Executive"). In consideration of the promises and mutual covenants and agreements contained herein, the parties hereto acknowledge and agree as follows: ARTICLE ONE TERM AND NATURE OF AGREEMENT 1.01 TERM OF AGREEMENT. The term of this Agreement shall commence as of June 1, 1999 and shall continue for three years, until May 31, 2002. Thereafter, unless Executive's employment with the Company has been previously terminated, Executive shall continue his employment with the Company on an at will basis and, except as provided in Articles Five, Six and Seven, this Agreement shall terminate unless extended by mutual written agreement. 1.02 EMPLOYMENT AS PRESIDENT AND CEO. The Company agrees to employ Executive as President and Chief Executive Officer commencing June 1, 1999 and Executive accepts such employment by the Company on the terms and conditions herein set forth. The duties of Executive shall be determined by the Company's Board of Directors and Executive shall adhere to the policies and procedures of the Company and shall follow the supervision and direction of the Board in the performance of such duties. During the term of his employment, Executive agrees to devote his full working time, attention and energies to the diligent and satisfactory performance of his duties hereunder. Executive shall not, while he is employed by the Company, engage in any activity which would (a) interfere with, or have an adverse effect on, the reputation, goodwill or any business relationship of the Company or any of its subsidiaries; (b) result in economic harm to the Company or any of its subsidiaries; or (c) result in a breach of Section Six of the Agreement. 1.03 SERVICE AS CHAIRMAN. The Company shall use its best efforts to continue Executive's position as Chairman of the Board of Directors of the Company during the term of his employment to which position he was elected as of June 1, 1999. ARTICLE TWO COMPENSATION AND BENEFITS While Executive is employed with the Company during the term of this Agreement, the Company shall provide Executive with the following compensation and benefits: 2.01 BASE SALARY. The Company shall pay Executive an annual base salary of $150,000 per fiscal year, payable in accordance with the Company's customary payroll practices for executive employees. The Board may review and adjust Executive's base salary from year to year; provided, however, that during the term of Executive's employment, the Company shall not decrease Executive's base salary. 2.02 INCENTIVE COMPENSATION PLAN. Executive shall continue to participate in the First Mid-Illinois Bancshares, Inc. Incentive Compensation Plan in accordance with the terms and conditions of such Plan. Pursuant to the Plan, Executive shall have an opportunity to receive incentive compensation of up to a maximum of 35% of Executive's annual base salary. The incentive compensation payable for a particular fiscal year will be based upon the attainment of the performance goals in effect under the Plan for such year and will be paid in accordance with the terms of the Plan and at the sole discretion of the Board. 2.03 DEFERRED COMPENSATION PLAN. Executive shall be eligible to participate in the First Mid-Illinois Bancshares, Inc. Deferred Compensation Plan in accordance with the terms and conditions of such Plan. 2.04 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. Executive shall continue to participate in the First Mid-Illinois Bancshares, Inc. Supplemental Executive Retirement Plan. Upon presentation of sufficient evidence of insurability, Executive's Participation Agreement under such Plan shall be amended to provide for an (a) increase in the maximum retirement benefit payable under the Plan upon Executive's retirement at age 63 from $25,000 per year to $50,000 per year; and (b) unreduced benefits commencing at age 63. All other provisions of the Plan shall remain unchanged. 2.05 STOCK OPTION PLAN. Executive shall continue to participate in the First Mid- Illinois Bancshares, Inc. 1997 Stock Incentive Plan. The Company shall grant Executive an incentive stock option under the Plan to purchase 2,000 shares of common stock of the Company. Such option shall be granted as of the first day of the term of this Agreement and shall be in addition to any other options that would otherwise be granted by the Company to Executive under such Plan. 2.06 VACATION. Executive shall be entitled to four (4) weeks of paid vacation each year during the term of this Agreement. 2.07 FRINGE BENEFITS. The Company shall provide the following additional fringe benefits to Executive: (a) Use of a Company-owned or leased vehicle for professional and personal use. (b) An amount equal to the annual dues for a Class "H" membership at the Mattoon Golf and Country Club. (c) Use of a cellular phone for work-related calls and calls associated with Internet connection for Executive's home. 2.08 OTHER BENEFITS. Executive shall be eligible (to the extent he qualifies) to participate in any other retirement, health, accident and disability insurance, or similar employee benefit plans as may be maintained from time to time by the Company for its other executives or employees subject to and on a consistent basis with the terms, conditions and overall administration of such plans. 2.09 BUSINESS EXPENSES. Executive shall be entitled to reimbursement by the Company for all reasonable expenses actually and necessarily incurred by him on its behalf in the course of his employment hereunder and in accordance with expense reimbursement plans and policies of the Company from time to time in effect for executive employees. 2.10 WITHHOLDING. All salary, incentive compensation and other benefits provided to Executive pursuant to this Agreement shall be subject to withholding for federal, state or local taxes, amounts withheld under applicable employee benefit plans, policies or programs, and any other amounts that may be required to be withheld by law, judicial order or otherwise or by agreement with, or consent of, Executive. ARTICLE THREE DEATH OF EXECUTIVE This Agreement shall terminate prior to the end of the term described in Section 1.01 upon Executive's termination of employment with the Company due to his death. Upon Executive's termination due to death, the Company shall pay Executive's estate the amount of Executive's base salary and his accrued but unused vacation time earned through the date of such death and any incentive compensation earned for the preceding fiscal year that is not yet paid as of the date of such death. ARTICLE FOUR TERMINATION OF EMPLOYMENT Executive's employment with the Company may be terminated by Executive or by the Company at any time for any reason. Upon Executive's termination of employment prior to the end of the term of the Agreement, the Company shall pay Executive as follows: 4.01 TERMINATION BY THE COMPANY FOR OTHER THAN CAUSE. If the Company terminates Executive's employment for any reason other than Cause, the Company shall pay Executive the following: (a) An amount equal to Executive's monthly base salary in effect at the time of such termination of employment for a period of twelve (12) months thereafter. Such amount shall be paid to Executive periodically in accordance with the Company's customary payroll practices for executive employees. (b) The base salary and accrued but unused paid vacation time earned through the date of termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. (c) Continued coverage for Executive and/or Executive's family under the Company's health plan pursuant to Title I, Part 6 of the Employee Retirement Income Security Act of 1974 ("COBRA") and for such purpose the date of Executive's termination of employment shall be considered the date of the "qualifying event" as such term is defined by COBRA. During the twelve month period beginning on the date of such termination, the Executive shall be charged for such coverage in the amount that he would have paid for such coverage had he remained employed by the Company, and for the duration of the COBRA period, the Executive shall be charged for such coverage in accordance with the provisions of COBRA. For purposes of this Agreement, "Cause" shall mean Executive's (i) conviction in a court of law of (or entering a plea of guilty or no contest to) any crime or offense involving fraud, dishonesty or breach of trust or involving a felony; (ii) performance of any act which, if known to the customers, clients, stockholders or regulators of the Company, would materially and adversely impact the business of the Company; (iii) act or omission that causes a regulatory body with jurisdiction over the Company to demand, request, or recommend that Executive be suspended or removed from any position in which Executive serves with the Company; (iv) substantial nonperformance of any of his obligations under this Agreement; (v) misappropriation of or intentional material damage to the property or business of the Company or any affiliate; or (vi) breach of Article Five or Six of this Agreement. 4.02 TERMINATION FOLLOWING A CHANGE IN CONTROL. Notwithstanding Section 4.01, if, following a Change in Control, Executive's employment is terminated by the Company (or any successor thereto) for any reason other than Cause, or if Executive terminates his employment because of a decrease in his then current base salary or a substantial diminution in his position and responsibilities, the Company (or any successor thereto) shall pay Executive the following: (a) Two times Executive's annual base salary in effect at the time of such termination. Such amount shall be paid, at Executive's election, in either a lump sum payment as soon as practicable following the date of such termination or periodically in accordance with the Company's or successor's customary payroll practices for executive employees. (b) An amount equal to the incentive compensation earned by or paid to Executive for the fiscal year immediately preceding the year in which Executive's termination of employment occurs. Such amount shall be paid to Executive in a lump sum as soon as practicable after the date of his termination. (c) The base salary and accrued but unused paid vacation time earned through the date of termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. (d) Continued coverage for Executive and/or Executive's family under the Company's health plan pursuant to Title I, Part 6 of the Employee Retirement Income Security Act of 1974 ("COBRA") and for such purpose the date of Executive's termination of employment shall be considered the date of the "qualifying event" as such term is defined by COBRA. During the twelve month period beginning on the date of such termination, the Executive shall be charged for such coverage in the amount that he would have paid for such coverage had he remained employed by the Company, and for the duration of the COBRA period, the Executive shall be charged for such coverage in accordance with the provisions of COBRA. For purposes of this Agreement, "Change in Control" shall have the meaning as set forth in the First Mid-Illinois Bancshares, Inc. 1997 Stock Incentive Plan. 4.03 OTHER TERMINATION OF EMPLOYMENT. If the Company terminates Executive's employment for Cause, or if Executive terminates his employment for any reason other than as described in Section 4.02 above, the Company shall pay Executive the base salary and accrued but unused paid vacation time earned through the date of such termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. ARTICLE FIVE CONFIDENTIAL INFORMATION 5.01 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. During his employment with Company, and after his termination of such employment with the Company, Executive shall not, in any form or manner, directly or indirectly, use, divulge, disclose or communicate to any person, entity, firm, corporation or any other third party, any Confidential Information, except as required in the performance of Executive's duties hereunder, as required by law or as necessary in conjunction with legal proceedings. 5.02 DEFINITION OF CONFIDENTIAL INFORMATION. For the purposes of this Agreement, the term "Confidential Information" shall mean any and all information either developed by Executive during his employment with the Company and used by the Company or its affiliates or developed by or for the Company or its affiliates of which Executive gained knowledge by reason of his employment with the Company that is not readily available in or known to the general public or the industry in which the Company or any affiliate is or becomes engaged. Such Confidential Information shall include, but shall not be limited to, any technical or non-technical data, formulae, compilations, programs, devices, methods, techniques, procedures, manuals, financial data, business plans, lists of actual or potential customers, lists of employees and any information regarding the Company's or any affiliate's products, marketing or database. The Company and Executive acknowledge and agree that such Confidential Information is extremely valuable to the Company and may constitute trade secret information under applicable law. In the event that any part of the Confidential Information becomes generally known to the public through legitimate origins (other than by the breach of this Agreement by Executive or by other misappropriation of the Confidential Information), that part of the Confidential Information shall no longer be deemed Confidential Information for the purposes of this Agreement, but Executive shall continue to be bound by the terms of this Agreement as to all other Confidential Information. 5.03 DELIVERY UPON TERMINATION. Upon termination of Executive's employment with the Company for any reason, Executive shall promptly deliver to the Company all correspondence, files, manuals, letters, notes, notebooks, reports, programs, plans, proposals, financial documents, and any other documents or data concerning the Company's or any affiliate's customers, database, business plan, marketing strategies, processes or other materials which contain Confidential Information, together with all other property of the Company or any affiliate in Executive's possession, custody or control. ARTICLE SIX NON-COMPETE AND NON-SOLICITATION COVENANTS 6.01 COVENANT NOT TO COMPETE. During the term of this Agreement and for a period of two years following the later of (i) the termination of Executive's employment for any reason or (ii) the last day of the term of the Agreement, Executive shall not, on behalf of himself or on behalf of another person, corporation, partnership, trust or other entity, within the counties of Coles, Moultrie, Douglas, Cumberland, Effingham, Champaign, Christian or Piatt, Illinois, or any other county in which the Company or any affiliate conducts business: (a) Directly or indirectly own, manage, operate, control, participate in the ownership, management, operation or control of, be connected with or have any financial interest in, or serve as an officer, employee, advisor, consultant, agent or otherwise to any person, firm, partnership, corporation, trust or other entity which owns or operates a business similar to that of the Company or its affiliates. (b) Solicit for sale, represent, and/or sell Competing Products to any person or entity who or which was the Company's customer or client during the last two years of Executive's employment. "Competing Products," for purposes of this Agreement, means products or services which are similar to, compete with, or can be used for the same purposes as products or services sold or offered for sale by the Company or any affiliate or which were in development by the Company or any affiliate within the last two years of Executive's employment. 6.02 COVENANT NOT TO SOLICIT. For a period of two years following the later of (i) the termination of Executive's employment for any reason or (ii) the last day of the term of this Agreement, Executive shall not: (a) Attempt in any manner to solicit from any client or customer business of the type performed by the Company or any affiliate or persuade any client or customer of the Company or any affiliate to cease to do such business or to reduce the amount of such business which any such client or customer has customarily done or contemplates doing with the Company or any affiliate, whether or not the relationship between the Company or affiliate and such client or customer was originally established in whole or in part through Executive's efforts. (b) Render any services of the type rendered by the Company or any affiliate for any client or customer of the Company. (c) Solicit or encourage, or assist any other person to solicit or encourage, any employees, agents or representatives of the Company or an affiliate to terminate or alter their relationship with the Company or any affiliate. (d) Do or cause to be done, directly or indirectly, any acts which may impair the relationship between the Company or any affiliate with their respective clients, customers or employees. ARTICLE SEVEN REMEDIES Executive acknowledges that compliance with the provisions of Articles Five and Six herein is necessary to protect the business, goodwill and proprietary information of the Company and that a breach of these covenants will irreparably and continually damage the Company for which money damages may not be inadequate. Consequently, Executive agrees that, in the event that he breaches or threatens to breach any of these provisions, the Company shall be entitled to both (a) a temporary, preliminary or permanent injunction in order to prevent the continuation of such harm; and (b) money damages insofar as they can be determined. In addition, the Company will cease payment of all compensation and benefits under Articles Three and Four hereof. In the event that any of the provisions, covenants, warranties or agreements in this Agreement are held to be in any respect an unreasonable restriction upon the Executive or are otherwise invalid, for whatsoever cause, then the court so holding shall reduce, and is so authorized to reduce, the territory to which it pertains and/or the period of time in which it operates, or the scope of activity to which it pertains or effect any other change to the extent necessary to render any of the restrictions of this Agreement enforceable. ARTICLE EIGHT MISCELLANEOUS 8.01 SUCCESSORS AND ASSIGNABILITY. (a) No rights or obligations of the Company under this Agreement may be assigned or transferred except that the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) No rights or obligations of Executive under this Agreement may be assigned or transferred by Executive other than his rights to payments or benefits hereunder which may be transferred only by will or the laws of descent and distribution. 8.02 ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and may not be modified except in writing by the parties hereto. Furthermore, the parties hereto specifically agree that all prior agreements, whether written or oral, relating to Executive's employment by the Company shall be of no further force or effect from and after the date hereof. 8.03 SEVERABILITY. If any phrase, clause or provision of this Agreement is deemed invalid or unenforceable, such phrase, clause or provision shall be deemed severed from this Agreement, but will not affect any other provisions of this Agreement, which shall otherwise remain in full force and effect. If any restriction or limitation in this Agreement is deemed to be unreasonable, onerous or unduly restrictive, it shall not be stricken in its entirety and held totally void and unenforceable, but shall be deemed rewritten and shall remain effective to the maximum extent permissible within reasonable bounds. 8.04 CONTROLLING LAW AND JURISDICTION. This Agreement shall be governed by and interpreted and construed according to the laws of the State of Illinois. The parties hereby consent to the jurisdiction of the state and federal courts in the State of Illinois in the event that any disputes arise under this Agreement. 8.05 NOTICES. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (a) on the date of service if served personally on the party to whom notice is to be given; (b) on the day after delivery to an overnight courier service; (c) on the day of transmission if sent via facsimile to the facsimile number given below; or (d) on the third day after mailing, if mailed to the party to whom notice is to be given, by first class mail, registered or certified, postage prepaid and properly addressed, to the party as follows: If to Executive: WILLIAM S. ROWLAND Facsimile: _______________ If to the Company: First Mid-Illinois Bancshares, Inc. 1515 Charleston Avenue Mattoon IL 61938 Facsimile: 217-258-0485 Attention: Chairman of Compensation Committee Any party may change its address for the purpose of this Section by giving the other party written notice of its new address in the manner set forth above. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. FIRST MID-ILLINOIS BANCSHARES, INC. By: /S/ KENNETH R. DIEPHOLZ Kenneth R. Diepholz Title: CHAIRMAN OF THE COMPENSATION COMMITTEE/FMIB EXECUTIVE: /S/ WILLIAM S. ROWLAND EXHIBIT 10.2 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into this 1{st} day of October, 1999, by and between First Mid- Illinois Bancshares, Inc. ("the Company"), a corporation with its principal place of business located in Mattoon, Illinois, and John W. Hedges ("Executive"). In consideration of the promises and mutual covenants and agreements contained herein, the parties hereto acknowledge and agree as follows: ARTICLE ONE TERM AND NATURE OF AGREEMENT 1.01 TERM OF AGREEMENT. The term of this Agreement shall commence as of October 1, 1999 and shall continue for three years, until September 30, 2002. Thereafter, unless Executive's employment with the Company has been previously terminated, Executive shall continue his employment with the Company on an at will basis and, except as provided in Articles Five, Six and Seven, this Agreement shall terminate unless extended by mutual written agreement. 1.02 EMPLOYMENT. The Company agrees to employ Executive as President of First Mid- Illinois Bank & Trust, N.A. commencing October 1, 1999 and Executive accepts such employment by the Company on the terms and conditions herein set forth. The duties of Executive shall be determined by the Company's Board of Directors and Executive shall adhere to the policies and procedures of the Company and shall follow the supervision and direction of the Board in the performance of such duties. During the term of his employment, Executive agrees to devote his full working time, attention and energies to the diligent and satisfactory performance of his duties hereunder. Executive shall not, while he is employed by the Company, engage in any activity which would (a) interfere with, or have an adverse effect on, the reputation, goodwill or any business relationship of the Company or any of its subsidiaries; (b) result in economic harm to the Company or any of its subsidiaries; or (c) result in a breach of Section Six of the Agreement. ARTICLE TWO COMPENSATION AND BENEFITS While Executive is employed with the Company during the term of this Agreement, the Company shall provide Executive with the following compensation and benefits: 2.01 BASE SALARY. The Company shall pay Executive an annual base salary of $110,000 per fiscal year, payable in accordance with the Company's customary payroll practices for executive employees. The Board may review and adjust Executive's base salary from year to year; provided, however, that during the term of Executive's employment, the Company shall not decrease Executive's base salary. 2.02 INCENTIVE COMPENSATION PLAN. Executive shall continue to participate in the First Mid-Illinois Bancshares, Inc. Incentive Compensation Plan in accordance with the terms and conditions of such Plan. Pursuant to the Plan, Executive shall have an opportunity to receive incentive compensation of up to a maximum of 25% of Executive's annual base salary. The incentive compensation payable for a particular fiscal year will be based upon the attainment of the performance goals in effect under the Plan for such year and will be paid in accordance with the terms of the Plan and at the sole discretion of the Board. 2.03 DEFERRED COMPENSATION PLAN. Executive shall be eligible to participate in the First Mid-Illinois Bancshares, Inc. Deferred Compensation Plan in accordance with the terms and conditions of such Plan. 2.04 VACATION. Executive shall be entitled to three (3) weeks of paid vacation each year during the term of this Agreement. 2.05 FRINGE BENEFITS. The Company shall provide the following additional fringe benefits to Executive: (c) Use of a Company-owned or leased vehicle for professional and personal use. (d) An amount equal to the annual dues for a Class "H" membership at the Mattoon Golf and Country Club. (e) Use of a cellular phone for work-related calls and calls associated with Internet connection for Executive's home. 2.06 OTHER BENEFITS. Executive shall be eligible (to the extent he qualifies) to participate in any other retirement, health, accident and disability insurance, or similar employee benefit plans as may be maintained from time to time by the Company for its other executives or employees subject to and on a consistent basis with the terms, conditions and overall administration of such plans. 2.07 BUSINESS EXPENSES. Executive shall be entitled to reimbursement by the Company for all reasonable expenses actually and necessarily incurred by him on its behalf in the course of his employment hereunder and in accordance with expense reimbursement plans and policies of the Company from time to time in effect for executive employees. 2.08 WITHHOLDING. All salary, incentive compensation and other benefits provided to Executive pursuant to this Agreement shall be subject to withholding for federal, state or local taxes, amounts withheld under applicable employee benefit plans, policies or programs, and any other amounts that may be required to be withheld by law, judicial order or otherwise or by agreement with, or consent of, Executive. ARTICLE THREE DEATH OF EXECUTIVE This Agreement shall terminate prior to the end of the term described in Section 1.01 upon Executive's termination of employment with the Company due to his death. Upon Executive's termination due to death, the Company shall pay Executive's estate the amount of Executive's base salary and his accrued but unused vacation time earned through the date of such death and any incentive compensation earned for the preceding fiscal year that is not yet paid as of the date of such death. ARTICLE FOUR TERMINATION OF EMPLOYMENT Executive's employment with the Company may be terminated by Executive or by the Company at any time for any reason. Upon Executive's termination of employment prior to the end of the term of the Agreement, the Company shall pay Executive as follows: 4.01 TERMINATION BY THE COMPANY FOR OTHER THAN CAUSE. If the Company terminates Executive's employment for any reason other than Cause, the Company shall pay Executive the following: (a) An amount equal to Executive's monthly base salary in effect at the time of such termination of employment for a period of twelve (12) months thereafter. Such amount shall be paid to Executive periodically in accordance with the Company's customary payroll practices for executive employees. (b) The base salary and accrued but unused paid vacation time earned through the date of termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. (c) Continued coverage for Executive and/or Executive's family under the Company's health plan pursuant to Title I, Part 6 of the Employee Retirement Income Security Act of 1974 ("COBRA") and for such purpose the date of Executive's termination of employment shall be considered the date of the "qualifying event" as such term is defined by COBRA. During the twelve month period beginning on the date of such termination, the Executive shall be charged for such coverage in the amount that he would have paid for such coverage had he remained employed by the Company, and for the duration of the COBRA period, the Executive shall be charged for such coverage in accordance with the provisions of COBRA. For purposes of this Agreement, "Cause" shall mean Executive's (i) conviction in a court of law of (or entering a plea of guilty or no contest to) any crime or offense involving fraud, dishonesty or breach of trust or involving a felony; (ii) performance of any act which, if known to the customers, clients, stockholders or regulators of the Company, would materially and adversely impact the business of the Company; (iii) act or omission that causes a regulatory body with jurisdiction over the Company to demand, request, or recommend that Executive be suspended or removed from any position in which Executive serves with the Company; (iv) substantial nonperformance of any of his obligations under this Agreement; (v) misappropriation of or intentional material damage to the property or business of the Company or any affiliate; or (vi) breach of Article Five or Six of this Agreement. 4.02 TERMINATION FOLLOWING A CHANGE IN CONTROL. Notwithstanding Section 4.01, if, following a Change in Control, Executive's employment is terminated by the Company (or any successor thereto) for any reason other than Cause, or if Executive terminates his employment because of a decrease in his then current base salary or a substantial diminution in his position and responsibilities, the Company (or any successor thereto) shall pay Executive the following: (a) Two times Executive's annual base salary in effect at the time of such termination. Such amount shall be paid, at Executive's election, in either a lump sum payment as soon as practicable following the date of such termination or periodically in accordance with the Company's or successor's customary payroll practices for executive employees. (b) An amount equal to the incentive compensation earned by or paid to Executive for the fiscal year immediately preceding the year in which Executive's termination of employment occurs. Such amount shall be paid to Executive in a lump sum as soon as practicable after the date of his termination. (c) The base salary and accrued but unused paid vacation time earned through the date of termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. (d) Continued coverage for Executive and/or Executive's family under the Company's health plan pursuant to Title I, Part 6 of the Employee Retirement Income Security Act of 1974 ("COBRA") and for such purpose the date of Executive's termination of employment shall be considered the date of the "qualifying event" as such term is defined by COBRA. During the twelve month period beginning on the date of such termination, the Executive shall be charged for such coverage in the amount that he would have paid for such coverage had he remained employed by the Company, and for the duration of the COBRA period, the Executive shall be charged for such coverage in accordance with the provisions of COBRA. For purposes of this Agreement, "Change in Control" shall have the meaning as set forth in the First Mid-Illinois Bancshares, Inc. 1997 Stock Incentive Plan. 4.03 OTHER TERMINATION OF EMPLOYMENT. If the Company terminates Executive's employment for Cause, or if Executive terminates his employment for any reason other than as described in Section 4.02 above, the Company shall pay Executive the base salary and accrued but unused paid vacation time earned through the date of such termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. ARTICLE FIVE CONFIDENTIAL INFORMATION 5.01 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. During his employment with Company, and after his termination of such employment with the Company, Executive shall not, in any form or manner, directly or indirectly, use, divulge, disclose or communicate to any person, entity, firm, corporation or any other third party, any Confidential Information, except as required in the performance of Executive's duties hereunder, as required by law or as necessary in conjunction with legal proceedings. 5.02 DEFINITION OF CONFIDENTIAL INFORMATION. For the purposes of this Agreement, the term "Confidential Information" shall mean any and all information either developed by Executive during his employment with the Company and used by the Company or its affiliates or developed by or for the Company or its affiliates of which Executive gained knowledge by reason of his employment with the Company that is not readily available in or known to the general public or the industry in which the Company or any affiliate is or becomes engaged. Such Confidential Information shall include, but shall not be limited to, any technical or non-technical data, formulae, compilations, programs, devices, methods, techniques, procedures, manuals, financial data, business plans, lists of actual or potential customers. Lists of employees and any information regarding the Company's or any affiliate's products, marketing or database. The Company and Executive acknowledge and agree that such Confidential Information is extremely valuable to the Company and may constitute trade secret information under applicable law. In the event that any part of the Confidential Information becomes generally known to the public through legitimate origins (other than by the breach of this Agreement by Executive or by other misappropriation of the Confidential Information), that part of the Confidential Information shall no longer be deemed Confidential Information for the purposes of this Agreement, but Executive shall continue to be bound by the terms of this Agreement as to all other Confidential Information. 5.03 DELIVERY UPON TERMINATION. Upon termination of Executive's employment with the Company for any reason, Executive shall promptly deliver to the Company all correspondence, files, manuals, letters, notes, notebooks, reports, programs, plans, proposals, financial documents, and any other documents or data concerning the Company's or any affiliate's customers, database, business plan, marketing strategies, processes or other materials which contain Confidential Information, together with all other property of the Company or any affiliate in Executive's possession, custody or control. ARTICLE SIX NON-COMPETE AND NON-SOLICITATION COVENANTS 6.01 COVENANT NOT TO COMPETE. During the term of this Agreement and for a period of two years following the later of (i) the termination of Executive's employment for any reason or (ii) the last day of the term of the Agreement, Executive shall not, on behalf of himself or on behalf of another person, corporation, partnership, trust or other entity, within the counties of Coles, Moultrie, Douglas, Cumberland, Effingham, Champaign, Christian or Piatt, Illinois: (a) Directly or indirectly own, manage, operate, control, participate in the ownership, management, operation or control of, be connected with or have any financial interest in, or serve as an officer, employee, advisor, consultant, agent or otherwise to any person, firm, partnership, corporation, trust or other entity which owns or operates a business similar to that of the Company or its affiliates. (b) Solicit for sale, represent, and/or sell Competing Products to any person or entity who or which was the Company's customer or client during the last two years of Executive's employment. "Competing Products," for purposes of this Agreement, means products or services which are similar to, compete with, or can be used for the same purposes as products or services sold or offered for sale by the Company or any affiliate or which were in development by the Company or any affiliate within the last two years of Executive's employment. 6.02 COVENANT NOT TO SOLICIT. For a period of two years following the later of (i) the termination of Executive's employment for any reason or (ii) the last day of the term of this Agreement, Executive shall not: (a) Attempt in any manner to solicit from any client or customer business of the type performed by the Company or any affiliate or persuade any client or customer of the Company or any affiliate to cease to do such business or to reduce the amount of such business which any such client or customer has customarily done or contemplates doing with the Company or any affiliate, whether or not the relationship between the Company or affiliate and such client or customer was originally established in whole or in part through Executive's efforts. (b) Render any services of the type rendered by the Company or any affiliate for any client or customer of the Company. (c) Solicit or encourage, or assist any other person to solicit or encourage, any employees, agents or representatives of the Company or an affiliate to terminate or alter their relationship with the Company or any affiliate. (d) Do not cause to be done, directly or indirectly, any acts which may impair the relationship between the Company or any affiliate with their respective clients, customers or employees. ARTICLE SEVEN REMEDIES Executive acknowledges that compliance with the provisions of Articles Five and Six herein is necessary to protect the business, goodwill and proprietary information of the Company and that a breach of these covenants will irreparably and continually damage the Company for which money damages may not be inadequate. Consequently, Executive agrees that, in the event that he breaches or threatens to breach any of these provisions, the Company shall be entitled to both (a) a temporary, preliminary or permanent injunction in order to prevent the continuation of such harm; and (b) money damages insofar as they can be determined. In addition, the Company will cease payment of all compensation and benefits under Articles Three and Four hereof. In the event that any of the provisions, covenants, warranties or agreements in this Agreement are held to be in any respect an unreasonable restriction upon the Executive or are otherwise invalid, for whatsoever cause, then the court so holding shall reduce, and is so authorized to reduce, the territory to which it pertains and/or the period of time in which it operates, or the scope of activity to which it pertains or effect any other change to the extent necessary to render any of the restrictions of this Agreement enforceable. ARTICLE EIGHT MISCELLANEOUS 8.01 SUCCESSORS AND ASSIGNABILITY. (a) No rights or obligations of the Company under this Agreement may be assigned or transferred except that the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) No rights or obligations of Executive under this Agreement may be assigned or transferred by Executive other than his rights to payments or benefits hereunder which may be transferred only by will or the laws of descent and distribution. 8.02 ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and may not be modified except in writing by the parties hereto. Furthermore, the parties hereto specifically agree that all prior agreements, whether written or oral, relating to Executive's employment by the Company shall be of no further force or effect from and after the date hereof. 8.03 SEVERABILITY. If any phrase, clause or provision of this Agreement is deemed invalid or unenforceable, such phrase, clause or provision shall be deemed severed from this Agreement, but will not affect any other provisions of this Agreement, which shall otherwise remain in full force and effect. If any restriction or limitation in this Agreement is deemed to be unreasonable, onerous or unduly restrictive, it shall not be stricken in its entirety and held totally void and unenforceable, but shall be deemed rewritten and shall remain effective to the maximum extent permissible within reasonable bounds. 8.04 CONTROLLING LAW AND JURISDICTION. This Agreement shall be governed by and interpreted and construed according to the laws of the State of Illinois. The parties hereby consent to the jurisdiction of the state and federal courts in the State of Illinois in the event that any disputes arise under this Agreement. 8.05 NOTICES. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (a) on the date of service if served personally on the party to whom notice is to be given; (b) on the day after delivery to an overnight courier service; (c) on the day of transmission if sent via facsimile to the facsimile number given below; or (d) on the third day after mailing, if mailed to the party to whom notice is to be given, by first class mail, registered or certified, postage prepaid and properly addressed, to the party as follows: If to Executive: __________________________ __________________________ __________________________ Facsimile: _______________ If to the Company: First Mid-Illinois Bancshares, Inc. 1515 Charleston Avenue Mattoon IL 61938 Facsimile: 217-258-0485 Attention: Chairman Any party may change its address for the purpose of this Section by giving the other party written notice of its new address in the manner set forth above. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. FIRST MID-ILLINOIS BANCSHARES, INC. By: /S/ WILLIAM S. ROWLAND William S. Rowland Title: CHAIRMAN OF THE BOARD EXECUTIVE: /S/ JOHN W. HEDGES 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, 1999, 1998, and 1997 are as follows:
1999 1998 1997 BASIC EARNINGS PER SHARE: Net income $5,232,000 $5,062,000 $4,726,000 Less preferred stock dividends (304,000) (285,000) (286,000) Net income available to common stockholders $4,928,000 $4,777,000 $4,440,000 Weighted average common shares outstanding 2,055,905 1,999,767 1,928,727 Basic Earnings per Common Share $2.40 $2.39 $2.30 DILUTED EARNINGS PER SHARE: Net income available to common stockholders $4,928,000 $4,777,000 $4,440,000 Assumed conversion of preferred stock 304,000 285,000 286,000 Net income available to common stock- holders after assumed conversion $5,232,000 $5,062,000 $4,726,000 Weighted average common shares outstanding 2,055,905 1,999,767 1,928,727 Assumed conversion of stock options 7,409 8,149 447 Assumed conversion of preferred stock 216,901 249,122 250,604 Diluted weighted average common shares outstanding 2,280,216 2,257,038 2,179,778 Diluted Earnings per Common Share $2.29 $2.24 $2.17
EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY First Mid-Illinois Bank & Trust, N.A. (a national banking association) Mid-Illinois Data Services, Inc. (a Delaware corporation) First Mid-Illinois Insurances, Inc. (an Illinois corporation; 100% owned by First Mid Bank) EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors First Mid-Illinois Bancshares, Inc.: RE: Registration Statements Registration No. 033-84404 on Form S-3 Registration No. 033-64061 on Form S-8 Registration No. 033-64139 on Form S-8 Registration No. 333-69673 on Form S-8 We consent to incorporation by reference in the subject Registration Statements on Forms S-3 and S-8 of First Mid-Illinois Bancshares, Inc. of our report dated January 21, 2000, relating to the consolidated balance sheets of First Mid-Illinois Bancshares, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999, which report appears in the December 31, 1999 annual report on Form 10-K of First Mid-Illinois Bancshares, Inc. KPMG LLP Chicago, Illinois March 21, 2000 EX-27 2 FDS 12/31/99
9 1000 12-MOS DEC-31-1999 DEC-31-1999 21054 78 710 0 150157 2132 2077 388319 2939 601103 485011 33483 5266 25825 0 0 9208 42310 601103 29785 8828 555 39168 16229 18415 20753 600 8 19387 7469 7469 0 0 5232 2.40 2.29 4.09 1430 366 81 0 2715 626 100 2939 2939 0 519
-----END PRIVACY-ENHANCED MESSAGE-----