-----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, VcyOFonnHwiIT/qrXjqmaLY+E2nseCPi6wS17ISrEXk8gznPQkdniZ4+wqoPw/tK FO3wf3jUrZyEPkMKfkdesg== 0000700565-05-000071.txt : 20050311 0000700565-05-000071.hdr.sgml : 20050311 20050311170917 ACCESSION NUMBER: 0000700565-05-000071 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050311 DATE AS OF CHANGE: 20050311 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13368 FILM NUMBER: 05676232 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 FORMER COMPANY: FORMER CONFORMED NAME: FIRST-MID ILLINOIS BANCSHARES INC DATE OF NAME CHANGE: 19920703 10-K 1 form10k_dec04.txt 2004 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, 2004 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. [ ] Indicate by check mark whether the Company is an accelerated filer (as defined in Exchange Act Rule 12b-2) YES [X] NO [ ] The aggregate market value of the outstanding common stock, other than shares held by persons who may be deemed affiliates of the Company, as of the last business day of the Company's most recently completed second fiscal quarter was approximately $149,077,000. As of March 9, 2005, 4,437,447 shares of the Company's common stock, $4.00 par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Document Into Form 10-K Part: Portions of the Proxy Statement for 2005 Annual Meeting of Shareholders to be held on May 25, 2005 III First Mid-Illinois Bancshares, Inc. Form 10-K Table of Contents Page Part I Item 1 Business 3 Item 2 Properties 9 Item 3 Legal Proceedings 11 Item 4 Submission of Matters to a Vote of Security Holders 11 Part II Item 5 Market for Company's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 12 Item 6 Selected Financial Data 14 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 7A Quantitative and Qualitative Disclosures About Market Risk 35 Item 8 Financial Statements and Supplementary Data 37 Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 62 Item 9A Controls and Procedures 62 Item 9B Other Information 64 Part III Item 10 Directors and Executive Officers of the Company 64 Item 11 Executive Compensation 64 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 64 Item 13 Certain Relationships and Related Transactions 65 Item 14 Principal Accountant Fees and Services 65 Part IV Item 15 Exhibit and Financial Statement Schedules 66 67 Exhibit Index 68 PART I ITEM 1. BUSINESS Company and Subsidiaries First Mid-Illinois Bancshares, Inc. (the "Company") is a financial holding company. The Company is engaged in the business of banking through its wholly owned subsidiary, First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank"). The Company provides data processing services to affiliates through another wholly owned subsidiary, Mid-Illinois Data Services, Inc. ("MIDS"). The Company offers insurance products and services to customers through its wholly owned subsidiary, The Checkley Agency, Inc. ("Checkley"). The Company also wholly owns a statutory business trust, First Mid-Illinois Statutory Trust I (the "Trust"). 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 wholly owned subsidiary of the Company. In connection with the Heartland acquisition, $3.1 million of Series A perpetual, cumulative, non-voting, convertible, preferred stock was issued to directors and certain senior officers of the Company in a private placement. On October 4, 1994, First Mid Bank acquired all of the outstanding stock of Downstate Bancshares, Inc. ("DBI"), which owned all of the stock of Downstate National Bank ("DNB"). DNB operated branch locations in Altamont and Effingham, Illinois. Immediately following the acquisition, DBI was dissolved and DNB was merged with and into First Mid Bank with First Mid Bank being the surviving entity. In December 1994, Heartland (formerly known as Heartland Federal Savings and Loan Association) converted from a federally chartered stock savings association to a state-chartered savings bank and changed its name to Heartland Savings Bank. On March 7, 1997, First Mid Bank acquired the Charleston, Illinois branch location and the customer base of First of America Bank. This cash acquisition added approximately $28 million to total deposits, $.5 million to loans, $1.3 million to premises and equipment and $3.8 million to intangible assets. In November 1997, Heartland merged with and into First Mid Bank with First Mid Bank being the surviving entity. On May 7, 1999, the Company acquired the Monticello, Taylorville and DeLand branch offices and deposit base of Bank One Illinois, N.A. This cash acquisition added approximately $64 million to total deposits, $10 million to loans, $1.7 million to premises and equipment and $6.5 million to intangible assets. This acquisition was accounted for using the purchase method of accounting whereby the acquired assets and deposits of the branches were recorded at their fair values as of the acquisition date. On April 17, 2000, the Company opened a de novo branch in Decatur, Illinois. On September 5, 2000, the Company opened a banking center in the Student Union of Eastern Illinois University in Charleston, Illinois. On April 20, 2001, First Mid Bank acquired all of the outstanding stock of American Bank of Illinois in Highland ("American Bank") and merged American Bank with and into First Mid Bank with First Mid Bank being the surviving entity. On January 29, 2002, the Company acquired all of the outstanding stock of Checkley, an insurance agency located in Mattoon. On November 13, 2002, the Company opened a de novo branch in Champaign, Illinois. On November 15, 2002, the Company opened a de novo branch in Maryville, Illinois. Description of Business First Mid Bank conducts a general banking business encompassing most of the services, both consumer and commercial, which banks may lawfully provide, including the following principal services: the acceptance of deposits to demand, savings and time accounts and the servicing of such accounts; commercial, industrial, agricultural, consumer and real estate lending, including installment, credit card, personal lines of credit and overdraft protection; safe deposit box operations; and an extensive variety of additional services tailored to the needs of customers, such as traveler's checks and cashiers' checks, foreign currency, and other special services. First Mid Bank also provides services to its customers through its trust department and investment center. Loans, both commercial and consumer, are provided on either a secured or unsecured basis to corporations, partnerships and individuals. Commercial lending covers such categories as business, industry, capital, construction, agriculture, inventory and real estate. First Mid Bank's retail loan department makes direct loans to consumers and some commercial customers, and purchases retail obligations from retailers, primarily without recourse. Retail lending covers such categories as residential real estate, automobile, and debt consolidation loans. First Mid Bank conducts its business in the middle of some of the richest farmland in the world. Accordingly, First Mid Bank provides a wide range of financial services to farmers and agribusiness within their respective markets. The farm management department, headquartered in Mattoon, Illinois, has approximately 33,000 acres under management and is the largest management operation in the area, ranking in the top 100 firms nationwide. First Mid Bank is the largest supplier of farm credit in the Company's market area with $91.5 million in agriculture-related loans at December 31, 2004. The farm credit products offered by First Mid Bank include real estate loans, as well as machinery and equipment loans, production loans, inventory financing and lines of credit. First Mid Bank had total assets of $820,586,000 and stockholders' equity of $78,251,000 at December 31, 2004. Employees The Company, MIDS, Checkley and First Mid Bank, collectively, employed 317 people on a full-time equivalent basis as of December 31, 2004. The Company places a high priority on staff development, which involves extensive training, including customer service training. New employees are selected on the basis of both technical skills and customer service capabilities. None of the employees are covered by a collective bargaining agreement with the Company. The Company offers a variety of employee benefits and management considers its employee relations to be excellent. The Company actively competes in all areas in which First Mid Bank presently does business. First Mid Bank competes for commercial and individual deposits, loans, and trust business with many east central Illinois banks, savings and loan associations, and credit unions. The principal methods of competition in the banking and financial services industry are quality of services to customers, ease of access to facilities, and pricing of services, including interest rates paid on deposits, interest rates charged on loans, and fees charged for fiduciary and other banking services. First Mid Bank operates facilities in the Illinois counties of Bond, Champaign, Christian, Coles, Cumberland, Douglas, Effingham, Macon, Madison, Moultrie, and Piatt. Each facility primarily serves the community in which it is located. First Mid Bank serves seventeen different communities with twenty-four separate locations in the towns of Altamont, Arcola, Champaign, Charleston, Decatur, DeLand, Effingham, Highland, Maryville, Mattoon, Monticello, Neoga, Pocahontas, Sullivan, Taylorville, Tuscola, and Urbana, Illinois. Within the areas of service, there are numerous competing financial institutions and financial services companies. Website The Company maintains a website at www.firstmid.com. All periodic and current reports of the Company and amendments to these reports filed with the Securities and Exchange Commission ("SEC") can be accessed, free of charge, through this website as soon as reasonably practicable after these materials are filed with the SEC. SUPERVISION AND REGULATION General Financial institutions, financial services companies, and their holding companies are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities including, but not limited to, the Office of the Comptroller of the Currency (the "OCC"), the Federal Reserve Board, the Federal Deposit Insurance Corporation (the "FDIC"), the Internal Revenue Service and state taxing authorities. Any change in applicable laws, regulations or regulatory policies may have material effect on the business, operations and prospects of the Company and First Mid Bank. The Company is unable to predict the nature or extent of the effects that fiscal or monetary policies, economic controls or new federal or state legislation may have on its business and earnings in the future. Federal and state laws and regulations generally applicable to financial institutions and financial services companies, such as the Company and its subsidiaries, regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and its subsidiaries establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC's deposit insurance funds and the depositors, rather than the stockholders, of financial institutions. The following references to material statutes and regulations affecting the Company and its subsidiaries are brief summaries thereof and do not purport to be complete, and are qualified in their entirety by reference to such statutes and regulations. Any change in applicable law or regulations may have a material effect on the business of the Company and its subsidiaries. Financial Modernization Legislation On November 12, 1999, the President signed into law the Gramm-Leach-Bliley Act (the "GLB Act"). The GLB Act significantly changes financial services regulation by expanding permissible non-banking activities of bank holding companies and removing certain barriers to affiliations among banks, insurance companies, securities firms and other financial services entities. These activities and affiliations can be structured through a holding company structure or, in the case of many of the activities, through a financial subsidiary of a bank. The GLB Act also establishes a system of federal and state regulation based on functional regulation, meaning that primary regulatory oversight for a particular activity generally resides with the federal or state regulator having the greatest expertise in the area. Banking is supervised by banking regulators, insurance by state insurance regulators and securities activities by the SEC and state securities regulators. In addition, the GLB Act establishes a minimum federal standard of financial privacy by, among other provisions, requiring banks to adopt and disclose privacy policies with respect to consumer information and setting forth certain rules with respect to consumer information and setting forth certain rules with respect to the disclosure to third parties of consumer information. The GLB Act also requires the disclosure of agreements reached with community groups that relate to the Community Reinvestment Act, and contains various other provisions designed to improve the delivery of financial services to consumers while maintaining an appropriate level of safety in the financial services industry. The GLB Act repeals the anti-affiliation provisions of the Glass-Steagall Act and revises the Bank Holding Company Act of 1956 (the "BHCA") to permit qualifying holding companies, called "financial holding companies," to engage in, or to affiliate with companies engaged in, a full range of financial activities, including banking, insurance activities (including insurance portfolio investing), securities activities, merchant banking and additional activities that are "financial in nature," incidental to financial activities or, in certain circumstances, complementary to financial activities. A bank holding company's subsidiary banks must be "well-capitalized" and "well-managed" and have at least a "satisfactory" Community Reinvestment Act rating for the bank holding company to elect status as a financial holding company. A significant component of the GLB Act's focus on functional regulation relates to the application of federal securities laws and SEC oversight of some bank securities activities previously exempt from broker-dealer registration. Among other things, the GLB Act amends the definitions of "broker" and "dealer" under the Securities Exchange Act of 1934 to remove the blanket exemption for banks. Banks now may conduct securities activities without broker-dealer registration only if the activities fall within a set of activity-based exemptions designed to allow banks to conduct only those activities traditionally considered to be primarily banking or trust activities. Securities activities outside these exemptions, as a practical matter, need to be conducted by registered broker-dealer affiliate. The SEC issued interim final rules to define certain terms in, and grant additional exemptions from, the provisions of the GLB Act in May 2001. By several orders, the SEC extended the blanket exemption for banks from the definition of "broker" and "dealer" while it has considered amendments to the interim final rules. On February 13, 2003, the SEC adopted amendments to its rules relating to the "dealer" exemption for banks, and banks have been required to comply with those rules since September 30, 2003. On June 17, 2004 the SEC proposed new rules and exemptions relating to bank brokerage activities as Regulation B, which would replace the interim final rules. The SEC has extended the blanket exemption for banks from the definition of "broker" until March 31, 2005. If Regulation B is adopted as proposed banks would be exempted from the term "broker" until January 1, 2006. The GLB Act also amends the Investment Advisers Act of 1940 to require the registration of banks that act as investment advisers for mutual funds. Anti-Terrorism Legislation On October 26, 2001, the President signed into law the USA Patriot Act of 2001, which contains the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the "IMLAFA"). The IMLAFA contains anti-money laundering measures affecting insured depository institutions, broker-dealers, and certain other financial institutions. The IMLAFA requires U.S. financial institutions to adopt policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on financial institutions' operations. The Company has established policies and procedures to ensure compliance with the IMLAFA and the related regulations. The Company has designated an officer solely responsible for ensuring compliance with existing regulations and monitoring changes to the regulations as they occur. The Company General. As a registered bank holding company under the BHCA and as a registered financial holding company under that GLB Act, the Company is subject to regulation by the Federal Reserve Board. In accordance with Federal Reserve Board policy, the Company is expected to act as a source of financial strength to First Mid Bank and to commit resources to support First Mid Bank in circumstances where the Company might not do so absent such policy. The Company is subject to inspection, examination, and supervision by the Federal Reserve Board. Activities. As a bank holding company that has elected to become a financial holding company, the Company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. A bank holding company that is not also a financial holding company is limited to engaging in banking and such other activities as determined by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. No Federal Reserve Board approval is required for the Company to acquire a company (other than a bank holding company, bank, or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. However, the Company generally must give the Federal Reserve Board after-the-fact notice of these activities. Prior Federal Reserve Board approval is required before the Company may acquire beneficial ownership or control of more than 5% of the voting shares of substantially all of the assets of a bank holding company, bank, or savings association. If any subsidiary bank of the Company ceases to be "well-capitalized" or "well-managed" under applicable regulatory standards, the Federal Reserve Board may, among other actions, order the Company to divest its depository institution. Alternatively, the Company may elect to conform its activities to those permissible for a bank holding company that is not also a financial holding company. If any subsidiary bank of the Company receives a rating under the Community Reinvestment Act of less than satisfactory, the Company will be prohibited, until the rating is raised to satisfactory or better, from engaging in new activities or acquiring companies other than bank holding companies, banks, or savings associations. The Company became a financial holding company effective December 14, 2001. It continues to maintain its status as a bank holding company for purposes of other Federal Reserve Board regulations. Capital Requirements. Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve Board capital adequacy guidelines. The Federal Reserve Board's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: a risk-based requirement expressed as a percentage of total risk-weighted assets, and a leverage requirement expressed as a percentage of total assets. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated companies, with minimum requirements of at least 4% for all others. For purposes of these capital standards, Tier 1 capital consists primarily of permanent stockholders' equity less intangible assets (other than certain mortgage servicing rights and purchased credit card relationships), and total capital means Tier 1 capital plus certain other debt and equity instruments which do not qualify as Tier 1 capital, limited amounts of unrealized gains on equity securities and a portion of the Company's allowance for loan and lease losses. The risk-based and leverage standards described above are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve Board's capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels. As of December 31, 2004, 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 11.71% and a leverage ratio of 7.99%. First Mid Bank General. First Mid Bank is a national bank, chartered under the National Bank Act. The FDIC insures the deposit accounts of First Mid Bank. As a national bank, First Mid Bank is a member of the Federal Reserve System and is subject to the examination, supervision, reporting and enforcement requirements of the OCC, as the primary federal regulator of national banks, and the FDIC, as administrator of the deposit insurance fund. Deposit Insurance. As an FDIC-insured institution, First Mid Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their respective levels of capital and results of supervisory evaluations. Institutions classified as well capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. The FDIC makes risk classification of all insured institutions for each semi-annual assessment period. During the year ended December 31, 2004, FDIC assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment period beginning January 1, 2005, 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 2005, 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 2005 debt service assessment was .0144%. 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, 2004, First Mid Bank paid supervisory fees to the OCC totaling $176,000. Capital Requirements. The OCC has established the following minimum capital standards for national banks, such as First Mid Bank: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with minimum requirements of at least 4% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. For purposes of these capital standards, Tier 1 capital and total capital consists of substantially the same components as Tier 1 capital and total capital under the Federal Reserve Board's capital guidelines for bank holding companies (See "The Company-Capital Requirements"). The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, the regulations of the OCC provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. During the year ended December 31, 2004, 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, 2004, First Mid Bank exceeded its minimum regulatory capital requirements with a risk-based capital ratio of 11.88% and a leverage ratio of 8.08%. 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, 2004. As of December 31, 2004, approximately $14.8 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 that such payment would constitute an unsafe or unsound practice. Affiliate and Insider Transactions. First Mid Bank is subject to certain restrictions under Federal law, including Regulation W, on extensions of credit to the Company and its subsidiaries, on investments in the stock or other securities of the Company and its subsidiaries and the acceptance of the stock or other securities of the Company or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by First Mid Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal stockholders of the Company, and to "related interests" of such directors, officers and principal stockholders. The Bank is subject to restrictions under federal law that limit certain transactions with the Company, including loans, other extensions of credit, investments or asset purchases. Such transactions by a banking subsidiary with any one affiliate are limited in amount to 10 percent of the bank's capital and surplus and, with all affiliates together, to an aggregate of 20 percent of the bank's capital and surplus. Furthermore, such loans and extensions of credit, as well as certain other transactions, are required to be secured in specified amounts. These and certain other transactions, including any payment of money to the Company, must be on terms and conditions that are or in good faith would be offered to nonaffiliated companies. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its subsidiaries or a principal stockholder of the Company may obtain credit from banks with which First Mid Bank maintains a correspondent relationship. Safety and Soundness Standards. The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. In general, the guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution's primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. The preamble to the guidelines states that the agencies expect to require a compliance plan from an institution whose failure to meet one or more of the guidelines are of such severity that it could threaten the safety and soundness of the institution. Failure to submit an acceptable plan, or failure to comply with a plan that has been accepted by the appropriate federal regulator, would constitute grounds for further enforcement action. Supplemental Item - Executive Officers of the Company The executive officers of the Company are elected annually by the Company's board of directors and are identified below. Name (Age) Position With Company - -------------------------------------------------------------------------------- William S. Rowland (58) Chairman of the Board of Directors, President and Chief Executive Officer Michael L. Taylor (36) Vice President and Chief Financial Officer John W. Hedges (57) President, First Mid Bank Laurel G. Allenbaugh (45) Vice President Christie L. Wright (48) Vice President, Secretary/Treasurer Stanley E. Gilliland (60) Vice President Robert J. Swift, Jr. (53) Vice President Kelly A. Downs (37) Vice President William S. Rowland, age 58, has been Chairman of the Board of Directors, President and Chief Executive Officer of the Company since May 1999. He served as Executive Vice President of the Company from 1997 to 1999 and as Treasurer and Chief Financial Officer from 1989 to 1999. He also serves as Chairman of the Board of Directors and Chief Executive Officer of First Mid Bank. Michael L. Taylor, age 36, has been the Vice President and Chief Financial Officer of the Company since May 2000. He was with AMCORE Bank in Rockford, Illinois from 1996 to 2000. John W. Hedges, age 57, has been the President of First Mid Bank since September 1999. He was with National City Bank in Decatur, Illinois from 1976 to 1999. Laurel G. Allenbaugh, age 45, has been Vice President of Operations since February 2000. She served as Controller of the Company and First Mid Bank from 1990 to February 2000 and has been President of MIDS since 1998. Christie L. Wright, age 48, has been Vice President of Investments since 1995 and Secretary and Treasurer since 1998. Stanley E. Gilliland, age 60, has been Vice President of Lending of the Company since 1985, and has been Executive Vice President of Lending for First Mid Bank since 1990. Robert J. Swift, Jr., age 53, has been Vice President of the Trust and Financial Services Department of the Company since August 2000. He was with Central Trust Bank in Jefferson City, Missouri from 1989 to 2000. Kelly A. Downs, age 37, has been Vice President of Human Resources since 2001. ITEM 2. PROPERTIES The Company or First Mid Bank own all of the following properties except those specifically identified as being leased. First Mid Bank Mattoon First Mid Bank's main office is located at 1515 Charleston Avenue, Mattoon, Illinois. The office building consists of a one-story structure with occupied basement, which was opened in 1965 with approximately 36,000 square feet of office space, four walk-in teller stations, and four sit-down teller stations. Adjacent to this building is a parking lot with parking for approximately one hundred cars. A drive-up facility with nine drive-up lanes and a drive-up automated teller machine ("ATM"), is located across the street from First Mid Bank's main office. First Mid Bank has a facility at 333 Broadway Avenue East, Mattoon, Illinois. The one-story office building contains approximately 7,600 square feet of office space. The main floor provides space for five teller windows, two private offices, a safe deposit vault and four drive-up lanes. There is adequate parking located adjacent to the building. A drive-up ATM is located adjacent to the building. First Mid Bank leases a facility at 1504-A Lakeland Boulevard, Mattoon, Illinois that provides space for three tellers, two drive-up lanes and a drive-up ATM. First Mid Bank owns a facility located at 1520 Charleston Avenue, Mattoon, Illinois, which is used as the Corporate Headquarters of the Company and is used by MIDS for its data processing and back room operations for the Company and First Mid Bank. The office building consists of a two-story structure with an occupied basement that has approximately 20,000 square feet of office space. The Company owns a facility at 1500 Wabash Avenue, Mattoon, Illinois, which is used by the deposit services department of First Mid Bank. The office building consists of a two-story structure with a basement that has approximately 11,200 square feet of office space. There are four additional ATMs located in Mattoon. They are located in the Administration building of Lake Land College, in the main lobby of Sarah Bush Lincoln Health Center, at R.R. Donnelley & Sons Co. on North Route 45 and County Market at 2000 Western Avenue. Sullivan First Mid Bank operates two locations in Sullivan, Illinois. The main office is located at 200 South Hamilton Street, Sullivan, Illinois. Its office building is a one-story structure containing approximately 11,400 square feet of office space with five tellers, six private offices and four drive-up lanes. Adequate customer parking is available on two sides of the main office building. The second office is a leased facility at 435 South Hamilton, Sullivan, Illinois in the IGA. The facility has two teller stations, a vault, an ATM and a night depository. There is also a walk-up ATM located in the Sullivan Citgo Station at 105 West Jackson. Neoga First Mid Bank's office in Neoga, Illinois, is located at 102 East Sixth Street, Neoga, Illinois. The building consists of a one-story structure containing approximately 4,000 square feet of office space. The main office building provides space for four tellers in the lobby of the building, two drive-up tellers, four private offices, two night depositories, and an ATM. Adequate customer parking is available on three sides of the main office building. During 1996, an adjacent building with approximately 400 square feet was purchased and was subsequently donated to the Neoga Food Pantry in 2004. Tuscola First Mid Bank operates an office in Tuscola, Illinois, which is located at 410 South Main Street. The all brick building consists of a one-story structure with approximately 4,000 square feet of office space. This main office building provides for four lobby tellers, two drive-up tellers, four private offices, a conference room, four drive-through lanes, including one with a drive-up ATM and one with a drive-up night depository. Adequate customer parking is available outside the main entrance. Charleston First Mid Bank has three offices in Charleston, Illinois. The main office, acquired in March 1997, is located at 500 West Lincoln Avenue, Charleston, Illinois. This one-story facility contains approximately 8,400 square feet with five teller stations, eight private offices and four drive-up lanes. A second facility is located at 701 Sixth Street, Charleston, Illinois. It is a one-story facility with an attached two-bay drive-up structure and consists of approximately 5,500 square feet of office space. Adequate parking is available to serve its customers. The office space is comprised of three teller stations, three private offices, storage area, and a night depository. Approximately 2,200 square feet of this building is rented out to non-affiliated companies. The third facility consists of approximately 400 square feet of leased space at the Martin Luther King Student Union on the Eastern Illinois University campus. The facility has two walk-up teller stations and two sit-down teller/CSR stations. Seven ATMs are located in Charleston. One drive-up ATM is located in the parking lot of the facility at 500 West Lincoln Avenue, one in the parking lot of Save-A-Lot at 1400 East Lincoln Avenue, and one drive-up ATM is located in the parking lot of the Sixth Street facility. The fourth is an off-site walk-up ATM located in the Student Union at Eastern Illinois University and the fifth is a walk-up ATM located in Lantz Arena at Eastern Illinois University. The sixth ATM is a drive-up unit located on the Eastern Illinois University campus in a parking lot at the corner of Ninth Street and Roosevelt and the seventh is a drive-up unit located on the Eastern Illinois University campus in a parking lot at the corner of Fourth Street and Roosevelt. Champaign First Mid Bank leases a facility at 2229 South Neil Street, Champaign, Illinois. The office space, comprised of approximately 3,496 square feet, contains six lobby teller windows, two drive-up lanes, one drive-up ATM, a night depository, four private offices, and a conference room. Adequate customer parking is available to serve customers. Urbana First Mid Bank owns a facility located at 601 South Vine Street, Urbana, Illinois. Its office building consists of a one-story structure and contains approximately 3,600 square feet. The office building provides space for three tellers, two private offices and two drive-up lanes. An ATM machine is located in front of the building. An adequate customer parking lot is located on the south side of the building. Effingham First Mid Bank operates a facility at 902 North Keller Drive, Effingham, Illinois. The building is a two-story structure with approximately 4,000 square feet of office space. This office space consists of four teller stations, three drive-up teller lanes, five private offices and a night depository. Adequate parking is available to customers in front of the facility. First Mid Bank also owns property at 900 North Keller Drive, Effingham, Illinois that provides additional customer parking along with a drive-up ATM. Altamont First Mid Bank has a banking facility located at 101 West Washington Street, Altamont, Illinois. This building is a one-story structure that has approximately 4,300 square feet of office space. The office space consists of nine teller windows, three drive-up teller lanes (one of which facilitates an ATM), seven private offices, one conference room and a night depository. Adequate parking is available on three sides of the building. Arcola First Mid Bank leases a facility at 324 South Chestnut Street, Arcola, Illinois. This building is a one-story structure with approximately 1,140 square feet of office space. This office space consists of two lobby teller stations, one loan station, two drive-up teller lanes, one private office and a night depository. A drive-up ATM lane is available adjacent to the teller lanes. Adequate parking is available to customers in front of the facility. There are also two additional ATMs located at the Arcola Citgo Station on Route 133 at Interstate Five and the Arthur Citgo Station at 209 North Vine. Monticello First Mid Bank has two offices in Monticello. The main facility is located on the northeast corner of the historic town square at 100 West Washington Street. This building is a two-story structure that has 8,000 square feet of office space consisting of five teller stations, seven private offices, and a night depository. The second floor is furnished and is currently being leased to a wholesale pharmacy company and the basement is used for storage. Adequate parking is available to customers in back of the facility. A second facility is located at 219 West Center Street, Monticello, Illinois. It is a one-story facility with two lobby teller stations and an attached two-bay drive-up structure with a drive-up ATM and a night depository. Adequate parking is available to serve its customers. DeLand First Mid Bank has an office at 220 North Highway Avenue, 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 North Main Street, Taylorville, Illinois. This one-story building has approximately 3,700 square feet with five teller stations, three private offices, one drive-up lane, and a finished basement. A drive-up ATM is located in the parking lot and adequate customer parking is available adjacent to the building. Decatur First Mid Bank leases a facility at 111 E. Main Street, Decatur, Illinois. The office space comprised of 4,340 square feet contains three lobby teller windows, two drive-up lanes, a night depository, three private offices, safe deposit and loan vaults, and a conference room. Customer parking is available adjacent to the building. Highland First Mid Bank owns a facility located at 12616 State Route 143, Highland, Illinois. The building is a two-story structure with approximately 6,720 square feet of office space, a portion of which is leased to an unaffiliated business. This office space consists of a customer service area and teller windows, three drive-up teller lanes, an ATM and four private offices. Adequate parking is available to serve customers. Pocahontas First Mid Bank owns a facility located at 103 Park Street, Pocahontas, Illinois. The building is a one-story brick structure with approximately 3,360 square feet of office space. This office space consists of a customer processing room, three private offices and three bank vaults. Adequate parking is available to serve customers. Maryville First Mid leases a facility at 2930 North Center Street, Maryville, Illinois. The office space, comprised of approximately 6,684 square feet, contains four lobby teller windows, including one sit-down teller, two drive-up lanes, one drive-up ATM, a night depository, three private offices, a vault, and a conference room. Adequate customer parking is available to serve customers. ITEM 3. LEGAL PROCEEDINGS Since First Mid Bank acts as a depository of funds, it is named from time to time as a defendant in lawsuits (such as garnishment proceedings) involving claims to the ownership of funds in particular accounts. Management believes that all such litigation as well as other pending legal proceedings, in which the Company is involved, constitute ordinary routine litigation incidental to the business of the Company and that such litigation will not materially adversely affect the Company's consolidated financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER OF PURCHASES OF EQUITY SECURITIES The Company's common stock was held by approximately 673 shareholders of record as of December 31, 2004 and is included for quotation on the over-the-counter electronic bulletin board. The following table shows, for the indicated periods, the range of reported prices per share of the Company's common stock. These quotations represent inter-dealer prices without retail mark-ups, mark-downs or commissions and do not necessarily represent actual transactions. Quarter High Low ------------------- ------------- ------------- 2004 4th 41 36 3/4 3rd 37 32 5/6 2nd 33 2/3 32 1st 33 4/9 31 2003 4th 31 1/6 29 5/6 3rd 32 21 2/3 2nd 22 2/3 19 1/4 1st 19 1/2 18 The following table sets forth the cash dividends per share on the Company's common stock for the last two years. Dividend Date Declared Date Paid per Share ----------------------------------------------------------------- 12-14-2004 1-07-2005 $.24 4-27-2004 6-18-2004 $.21 12-16-2003 1-09-2004 $.27 4-22-2003 6-13-2003 $.16 On July 16, 2004, the Company effected a three-for-two stock split in the form of a 50% stock dividend. Par value remained at $4 per share. All share and per share amounts have been restated for years prior to 2004 to give retroactive recognition to the stock split. The Company's shareholders are entitled to receive such dividends as are declared by the Board of Directors, which considers payment of dividends semi-annually. The ability of the Company to pay dividends, as well as fund its operations, is dependent upon receipt of dividends from First Mid Bank. Regulatory authorities limit the amount of dividends that can be paid by First Mid Bank without prior approval from such authorities. For further discussion of First Mid Bank's dividend restrictions, see Note 16 - "Dividend Restrictions" herein. The Board of Directors of the Company declared cash dividends semi-annually during the two years ended December 31, 2004. The following table summarizes share repurchase activity for the fourth quarter of 2004:
ISSUER PURCHASES OF EQUITY SECURITIES - --------------------------------------------------------------------------------------------------------------------------- Period (d) Approximate Dollar (a)Total (c) Total Number of Value of Shares that Number of (b) Average Shares Purchased as Part May Yet Be Purchased Shares Price Paid of Publicly Announced Under the Plans or Purchased per Share Plans or Programs Programs - ----------------------------------------- --------------- ------------- -------------------------- ------------------------ October 1, 2004 - October 31, 2004 -- -- -- $5,192,000 November 1, 2004 - November 30, 2004 5,333 $36.95 5,333 $4,994,000 December 1, 2004 - December 31, 2004 17,537 $39.23 17,537 $4,306,000 --------------- ------------- -------------------------- ------------------------ Total 22,870 $38.70 22,870 $4,306,000 =============== ============= ========================== ========================
On August 5, 1998, the Company announced a stock repurchase program of up to 3% of its common stock. In March 2000, the Board of Directors approved the repurchase of an additional 5% of the Company's common stock. In September 2001, the Board of Directors authorized the repurchase of $3 million additional shares of the authorized common stock and in August 2002, the Board of Directors authorized the repurchase of $5 million additional shares of the Company's common stock. In September 2003, the Board of Directors approved the repurchase of $10 million of additional shares of the Company's stock and on April 27, 2004, the Board approved the repurchase of an additional $5 million of shares of the Company's common stock, bringing the aggregate total to 8% of the Company's common stock plus $23 million of additional shares. ITEM 6. SELECTED FINANCIAL DATA The following sets forth a five-year comparison of selected financial data. (dollars in thousands, except per share data) 2004 2003 2002 2001 2000 -------- -------- -------- -------- -------- Summary of Operations Interest income $40,024 $38,938 $41,387 $45,506 $44,191 Interest expense 11,644 11,896 14,661 21,590 22,573 -------- -------- -------- -------- -------- Net interest income 28,380 27,042 26,726 23,916 21,618 Provision for loan losses 588 1,000 1,075 600 550 Other income 11,639 12,255 10,394 8,279 6,690 Other expense 25,139 24,530 24,006 22,039 20,063 -------- -------- -------- -------- -------- Income before income taxes 14,292 13,767 12,039 9,556 7,695 Income tax expense 4,541 4,674 4,005 3,040 2,035 -------- -------- -------- -------- -------- Net income $ 9,751 $ 9,093 $ 8,034 $ 6,516 $ 5,660 ======== ======== ======== ======== ======== Per Common Share Data (1) Basic earnings per share $ 2.17 $ 1.92 $ 1.60 $ 1.29 $1.11 Diluted earnings per share 2.13 1.88 1.58 1.28 1.11 Dividends per common share .45 .43 .33 .29 .26 Book value per common share 15.53 15.02 13.97 12.64 11.45 Financial Ratios Net interest margin 3.75% 3.75% 3.99% 3.87% 3.84% Return on average assets 1.20% 1.17% 1.11% .97% .92% Return on average common equity 14.24% 13.11% 11.82% 10.56% 10.55% Dividend payout ratio 20.92% 22.57% 20.92% 22.28% 23.53% Average equity to average assets 8.44% 8.94% 9.36% 9.20% 8.70% Capital to risk-weighted assets 11.71% 10.61% 10.35% 11.23% 11.74% Year End Balances Total assets $826,728 $793,981 $776,240 $705,979 $642,999 Net loans 593,228 548,398 496,141 469,541 426,026 Total deposits 650,240 614,992 613,452 559,420 503,985 Total equity 69,154 70,595 66,807 63,925 57,727 Average Balances Total assets $811,061 $776,072 $727,986 $670,890 $616,855 Net loans 568,271 520,962 479,957 450,466 406,505 Total deposits 638,445 611,982 573,670 540,209 491,584 Total equity 68,459 69,349 67,989 61,714 53,674 (1) All share and per share data have been restated to reflect the 3-for-2 stock splits effective July 16, 2004 and November 16, 2001. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of the Company and its subsidiaries for the years ended December 31, 2004, 2003 and 2002. 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. For the Years Ended December 31, 2004, 2003, and 2002 Overview This overview of management's discussion and analysis highlights selected information in this document and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources, and critical accounting estimates, you should carefully read this entire document. These have an impact on the Company's financial condition and results of operations. Net income was $9.8 million, $9.1 million, and $8.0 million and diluted earnings per share was $2.13, $1.88, and $1.58 for the years ended December 31, 2004, 2003, and 2002, respectively. The increase in net income was primarily the result of higher net interest income. The increase in earnings per share was the result of improved net income and a decrease in the number of shares outstanding due to share repurchases made through our stock buy-back program. During 2004, the Company acquired 319,618 shares for a total investment of $10,365,000. The following table shows the Company's annualized performance ratios for the years ended December 31, 2004, 2003 and 2002: 2004 2003 2002 ---------- ---------- ---------- Return on average assets 1.20% 1.17% 1.11% Return on average equity 14.24% 13.11% 11.82% Average equity to average 8.44% 8.94% 9.36% assets During the fourth quarter of 2004, the Company revised its estimates for deferred net loan fees and costs, deferred compensation liabilities and accrued income taxes and adjusted its 2004 earnings accordingly. The net effect of these adjustments increased 2004 reported earnings by $147,000 or $.04 per diluted share. Total assets at December 31, 2004, 2003, and 2002 were $826.7 million, $794 million, and $776.2 million, respectively. This growth was a result of the Company's strategic focus on commercial and commercial real estate lending and de novo expansion into the new markets of Maryville and Champaign. Net loan balances were $593.2 million at December 31, 2004, an increase of $44.8 million, or 8%, from $548.4 million at December 31, 2003 and $496.1 million at December 31, 2002. Total deposit balances increased to $650.2 million at December 31, 2004 from $615.0 million at December 31, 2003 and $613.5 million at December 31, 2002. Net interest margin, defined as net interest income divided by average interest-earning assets, was 3.75% for 2004 and 2003, and 3.99% in 2002. The decline in net interest margin from 2002 is a result of various factors in the Company's market area including: a competitive environment for quality lending and deposit relationships; a flattening of the interest rate yield curve whereby rates on short-term financial instruments have increased faster than rates on longer term instruments; a decision by management to shorten maturities on interest-earning assets to position the Company for a sustained period of overall higher interest rates; a commitment by management to not incur an inordinate amount of credit risk; and increased amortization charges on mortgage-backed securities resulting from a relatively high level of refinancings by homeowners. While the net interest margin declined between 2002 and 2003 and remained flat between 2003 and 2004, net interest income increased from $26.7 million in 2002 to $27.0 million in 2003 and to $28.4 million in 2004. This increase was the result of management's business development efforts that led to higher levels of average interest-earning assets of $669.9 million in 2002, $721.7 million in 2003 and $756.8 million in 2004. This growth offset the factors previously mentioned which led to margin compression and led to higher levels of net interest income. The ability of the Company to continue to grow net interest income is largely dependent on management's ability to succeed in its overall business development efforts. Management expects these efforts to continue but will not compromise credit quality and prudent management of the maturities of interest-earning assets and interest-paying liabilities in order to achieve growth. Noninterest income decreased $.7 million, or 5.7%, to $11.6 million in 2004 compared to $12.3 million in 2003 and $10.4 million in 2002. The primary cause of this decrease was a decline in mortgage banking revenue from $1,673,000 in 2003 to $522,000 in 2004 due to the slowing of refinancings in early 2004. Also, the Company received $370,000 in gains on the sale of securities during 2003, compared to $92,000 in gains on the sale of securities during 2004. These declines were partially offset by an increase in trust and brokerage revenues due to improvement in equity prices and growth in new business and an increase in service charges due to greater overdraft charges. Noninterest expenses increased 2.5% or $.6 million, to $25.1 million in 2004 compared to $24.5 million in 2003 and $24.0 million in 2002. The primary factor in the expense increase was increased salaries and benefits expense, increases in marketing and promotion expense due to new products rolled out in 2004 and increases in accounting and legal professional fees incurred in implementing the requirements of the Sarbanes-Oxley Act of 2002. Following is a summary of the factors that contributed to the changes in net income (in thousands): 2004 vs 2003 2003 vs 2002 ------------------- ------------------ Net interest income $1,338 $316 Provision for loan losses 412 75 Other income, including securities (616) 1,861 transactions Other expenses (609) (524) Income taxes 133 (669) ------------------- ------------------ Increase in net income $ 658 $1,059 =================== ================== Credit quality is an area of importance to the Company and 2004 reflected favorable results in this area. Total nonperforming loans were $3.1 million at December 31, 2004, compared to $3.3 million at December 31, 2003. As a result, the Company's provision for loan loss for 2004 was $588,000 compared to $1,000,000 for 2003. At December 31, 2004, the composition of the loan portfolio remained similar to 2003. In 2004, net charge-offs were $393,000 or .07% of average loans compared to $297,000 or .06% of average loans in 2003. During 2004, the Company received a recovery of $68,500 on two commercial real estate loans of a single borrower. During 2003, the Company received a recovery of $382,000 on two commercial loans of a single borrower. Loans secured by both commercial and residential real estate comprised 71% of the loan portfolio as of December 31, 2004 and 2003. The Company's capital position remains strong and the Company has consistently maintained regulatory capital ratios above the "well-capitalized" standards. The Company's Tier 1 capital ratio to risk weighted assets ratio at December 31, 2004, 2003, and 2002 was 10.94%, 9.83%, and 9.64%, respectively. The Company's total capital to risk weighted assets ratio at December 31, 2004, 2003, and 2002 was 11.71%, 10.61%, and 10.35%, respectively. The increase in 2004 was the result of the issuance of trust preferred securities by First Mid-Illinois Statutory Trust I ("Trust"), which qualify as Tier I capital for the Company under Federal Reserve Board guidelines. The Trust invested the proceeds of the issuance in junior subordinated debentures of the Company. This was partially offset by a decline in equity as a result of the increase in the number of shares repurchased under the Company's stock repurchase program. The increase in 2003 was primarily the result of an increase in retained earnings due to First Mid Bank's increase in net income. The Company's liquidity position remains sufficient to fund operations and meet the requirements of borrowers, depositors, and creditors. The Company maintains various sources of liquidity to fund its cash needs. See "Liquidity" herein for a full listing of its sources and anticipated significant contractual obligations. The Company enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, letters of credit and other commitments to extend credit. The total outstanding commitments at December 31, 2004, 2003 and 2002 were $94.2 million, $87.8 million and $86.9 million, respectively. See Note 12 - "Disclosure of Fair Values of Financial Instruments" and Note 17 - "Commitments and Contingent Liabilities" herein for further information. Critical Accounting Policies The Company has established various accounting policies that govern the application of accounting principles generally accepted in the United States in the preparation of the Company's financial statements. The significant accounting policies of the Company are described in the footnotes to the consolidated financial statements. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and assumptions, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company. The Company believes the allowance for loan losses is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of its consolidated financial statements. In estimating the allowance for loan losses, management utilizes historical experience, as well as other factors, including the effect of changes in the local real estate market on collateral values, the effect on the loan portfolio of current economic indicators and their probable impact on borrowers, and increases or decreases in nonperforming and impaired loans. Changes in these factors may cause management's estimate of the allowance to increase or decrease and result in adjustments to the Company's provision for loan losses. See "Loan Quality and Allowance for Loan Losses" and Note 1 - "Summary of Significant Accounting Policies" herein for a detailed description of the Company's estimation process and methodology related to the allowance for loan losses. Mergers and Acquisitions On January 29, 2002, the Company acquired all of the issued and outstanding stock of Checkley, an insurance agency headquartered in Mattoon, Illinois. Checkley was purchased for cash with a portion ($750,000) paid at closing and the remainder ($1,000,000) to be paid pursuant to a promissory note over a five-year period ending January 2007. Checkley operates as a separate subsidiary of the Company and provides customers with commercial property, casualty, life, auto and home insurance. In order to facilitate this acquisition, the Company became a financial holding company under the GLB Act on December 14, 2001. The results of Checkley's operations are included in the consolidated financial statements since the acquisition date. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands): At January 29, 2002: ----------------------------------------------------- Current assets $643 Property and equipment 76 Intangible assets 1,904 --------------- Total assets acquired 2,623 Current liabilities (771) Debt (20) ---------------- Total liabilities (791) ---------------- Net assets acquired $1,832 ================ The Company recorded $1,904,000 of acquired intangible assets. The identified intangible assets were allocated to customer lists and are being amortized over a period of ten years. Results of Operations Net Interest Income The largest source of operating revenue for the Company is net interest income. Net interest income represents the difference between total interest income earned on earning assets and total interest expense paid on interest-bearing liabilities. The amount of interest income is dependent upon many factors, including the volume and mix of earning assets, the general level of interest rates and the dynamics of changes in interest rates. The cost of funds necessary to support earning assets varies with the volume and mix of interest-bearing liabilities and the rates paid to attract and retain such funds. The Company's average balances, interest income and expense and rates earned or paid for major balance sheet categories are set forth in the following table (dollars in thousands):
Year Ended Year Ended Year Ended December 31, 2004 December 31, 2003 December 31, 2002 ------------------------------------------------------------------------------------ Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------------------------------------------------------------------------------ ASSETS Interest-bearing deposits $ 4,729 $ 75 1.59% $ 10,715 $ 112 1.05% $9,933 $ 137 1.38% Federal funds sold 8,813 103 1.17% 16,285 164 1.01% 13,164 199 1.51% Investment securities Taxable 143,568 4,860 3.39% 141,120 4,961 3.52% 134,118 6,014 4.48% Tax-exempt 26,814 1,193 4.45% 28,467 1,266 4.45% 28,894 1,311 4.54% Loans (1) 572,836 33,793 5.90% 525,095 32,435 6.18% 483,764 33,726 6.97% ------------------------------------------------------------------------------------ Total earning assets 756,760 40,024 5.29% 721,682 38,938 5.40% 669,873 41,387 6.18% ------------------------------------------------------------------------------------ Cash and due from banks 18,870 18,464 18,450 Premises and equipment 15,692 16,578 16,498 Other assets 24,304 23,481 26,972 Allowance for loan losses (4,565) (4,133) (3,807) ---------- ----------- ---------- Total assets $811,061 $776,072 $727,986 ========== =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits Demand deposits $230,300 1,568 0.68% $219,809 1,778 0.81% $200,653 2,667 1.33% Savings deposits 61,144 236 0.39% 56,402 302 0.54% 51,634 799 1.55% Time deposits 261,564 7,318 2.80% 250,403 7,671 3.06% 242,301 8,787 3.63% Securities sold under agreements to repurchase 55,645 455 0.82% 47,795 272 0.57% 34,389 345 1.00% FHLB advances 27,117 1,484 5.47% 31,094 1,632 5.25% 36,974 1,863 5.04% Federal funds purchased 218 3 1.38% 14 - 0.00% 299 6 2.01% Subordinated debentures 8,704 382 4.39% - - - - - - Other debt 7,161 198 2.76% 9,411 241 2.56% 6,088 194 3.19% ------------------------------------------------------------------------------------ Total interest-bearing liabilities 651,853 11,644 1.79% 614,928 11,896 1.93% 572,338 14,661 2.56% ------------------------------------------------------------------------------------ Demand deposits 85,437 85,368 79,082 Other liabilities 5,312 6,427 8,577 Stockholders' equity 68,459 69,349 67,989 ---------- ----------- ---------- Total liabilities & equity $811,061 $776,072 $727,986 ========== =========== ========== Net interest income $28,380 $27,042 $26,726 ========== ========== ========== Net interest spread 3.50% 3.47% 3.62% Impact of non-interest bearing funds .25% .28% .37% ---------- ---------- ---------- Net yield on interest-earning assets 3.75% 3.75% 3.99% ========== ========== ==========
(1) 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 for the past two years (in thousands):
2004 Compared to 2003 2003 Compared to 2002 Increase - (Decrease) Increase - (Decrease) ----------------------------------------------------------- Total Total Change Volume (1) Rate (1) Change Volume (1) Rate (1) ----------------------------------------------------------- Earning Assets: Interest-bearing deposits $(37) $ (466) $429 $(25) $ 13 $(38) Federal funds sold (61) (93) 32 (35) 87 (122) Investment securities: Taxable (101) 90 (191) (1,053) 339 (1,392) Tax-exempt (73) (74) 1 (45) (19) (26) Loans (2) 1,358 2,707 (1,349) (1,291) 3,953 (5,244) ----------------------------------------------------------- Total interest income 1,086 2,164 (1,078) (2,449) 4,373 (6,822) ----------------------------------------------------------- Interest-Bearing Liabilities: Interest-bearing deposits Demand deposits (210) 89 (299) (889) 288 (1,177) Savings deposits (66) 29 (95) (497) 82 (579) Time deposits (353) 391 (744) (1,116) 302 (1,418) Securities sold under agreements to repurchase 183 50 133 (73) 699 (772) FHLB advances (148) (219) 71 (231) (314) 83 Federal funds purchased 3 1 2 (6) (3) (3) Subordinated debentures 382 382 - - - - Other debt (43) (64) 21 47 73 (26) ----------------------------------------------------------- Total interest expense (252) 659 (911) (2,765) 1,127 (3,892) ----------------------------------------------------------- Net interest income $1,338 $1,505 $(167) $ 316 $3,246 $(2,930) ===========================================================
(1) Changes attributable to the combined impact of volume and rate have been allocated proportionately to the change due to volume and the change due to rate. (2) Nonaccrual loans are not material and have been included in the average balances. Net interest income increased $1,338,000, or 4.9% in 2004, compared to an increase of $316,000, or 1.2% in 2003. The increase in net interest income in 2004 and 2003 was primarily due to growth in interest-earning assets and the lower rates paid on interest-bearing liabilities. The asset growth was primarily in commercial real estate loan balances. In 2004, average earning assets increased by $35 million, or 4.9%, and average interest-bearing liabilities increased $36.9 million or 6.0% compared with 2003. In 2003, average earning assets increased by $51.8 million or 7.7%, and average interest-bearing liabilities increased $42.6 million or 7.4% compared with 2002. Changes in average balances are shown below: * Average loans increased by $47.7 million or 9.0% in 2004 compared to 2003. In 2003, average loans increased by $41.3 million or 8.5% compared to 2002. * Average securities increased by $.8 million or .5% in 2004 compared to 2003. In 2003, average securities increased by $6.6 million or 4.1% compared to 2002. * Average interest-bearing deposits increased by $26.4 million or 5.0% in 2004 compared to 2003. In 2003, average interest-bearing deposits increased by $32.0 million or 6.5% compared to 2002. * Average securities sold under agreements to repurchase increased by $7.9 million or 16.5% in 2004 compared to 2003. In 2003, average securities sold under agreements to repurchase increased by $13.4 million or 39.0% compared to 2002. * Average borrowings and other debt increased by $2.7 million or 6.7% in 2004 compared to 2003. In 2003, average borrowings and other debt decreased by $2.8 million or 6.5% compared to 2002. * Federal funds rate increased to 2.25% at December 31, 2004 from 1.00% at December 31, 2003 and from 1.25% at December 31, 2002. * Net interest margin remained at 3.75% in 2004 compared to 2003 and decreased from 3.99% in 2002. Asset yields decreased by 11 basis points in 2004, while interest-bearing liabilities decreased by 14 basis points. To compare the tax-exempt yields on interest-earning assets to taxable yields, the Company also computes non-GAAP net interest income on a tax equivalent basis (TE) where the interest earned on tax-exempt securities is adjusted to an amount comparable to interest subject to normal income taxes assuming a federal tax rate of 34% (referred to as the tax equivalent adjustment). The TE adjustments to net interest income for 2004, 2003 and 2002 were $615,000, $652,000 and $675,000, respectively. The net yield on interest-earning assets (TE) was 3.83% in 2004, 3.84% in 2003 and 4.09% in 2002. Provision for Loan Losses The provision for loan losses in 2004 was $588,000 compared to $1,000,000 in 2003 and $1,075,000 in 2002. The decrease in the provision was primarily due to a decrease in non-performing loans and a low level of net charge-offs. Net charge-offs were $393,000 during 2004, $297,000 during 2003, and $1,054,000 during 2002. For information on loan loss experience and nonperforming loans, see "Nonperforming Loans" and "Loan Quality and Allowance for Loan Losses" herein. Other Income An important source of the Company's revenue is derived from other income. The following table sets forth the major components of other income for the last three years (in thousands): $ Change From Prior Year ---------- ---------- ---------- ---------------------- 2004 2003 2002 2004 2003 ---------- ---------- ---------- ---------- ----------- Trust $2,254 $1,992 $1,855 $ 262 $ 137 Brokerage 428 283 265 145 18 Insurance commissions 1,447 1,476 1,257 (29) 219 Service charges 4,746 4,484 3,799 262 685 Securities gains 92 370 223 (278) 147 Mortgage banking 522 1,673 1,272 (1,151) 401 Other 2,150 1,977 1,723 173 254 ---------- ---------- ---------- ---------- ----------- Total other income $11,639 $12,255 $10,394 $(616) $1,861 ========== ========== ========== ========== =========== Total non-interest income decreased to $11,639,000 in 2004 compared to $12,255,000 in 2003 and $10,394,000 in 2002. The primary reasons for the more significant year-to-year changes in other income components are as follows: * Trust revenues increased $262,000 or 13.2% to $2,254,000 in 2004 from $1,992,000 in 2003 and $1,855,000 in 2002. Approximately 50 percent of trust revenue is market value dependent. The increase in trust revenues was the result of new business and an increase in equity prices. * Revenue from brokerage and annuity sales increased $145,000 or 51.2% to $428,000 in 2004 from $283,000 in 2003 and $265,000 in 2002 as a result of an increase in the number of stock transactions. * Insurance commissions decreased $29,000 or 2.0% to $1,447,000 in 2004 from $1,476,000 in 2003 and $1,257,000 in 2002. Decreased commissions received on sales of business property and casualty insurance resulted in less revenue in 2004. * Fees from service charges increased $262,000 or 5.8% to $4,746,000 in 2004 from $4,484,000 in 2003 and $3,799,000 in 2002. This increase was primarily the result of increased overdraft fees through the Company's Payment Privilege program. Under Payment Privilege, overdrafts up to a limit of $500 are generally paid for qualifying customers in exchange for a fee. A greater number of overdrafts paid has resulted in an increase in fee income. * Net securities gains in 2004 were $92,000 compared to net securities gains of $370,000 in 2003, and $223,000 in 2002. Several securities in the available-for-sale portfolio were sold to improve the overall portfolio mix and the margin in 2004, 2003 and 2002. * Mortgage banking income decreased $1,151,000 or 68.8% to $522,000 in 2004 from $1,673,000 in 2003 and $1,272,000 in 2002. This decrease was due to the declining volume of fixed rate loans originated and sold by First Mid Bank. The decrease in volume is largely attributed to the slowdown in mortgage refinancing activity. Loans sold balances are as follows: * $42 million (representing 441 loans) in 2004 * $135 million (representing 1,451 loans) in 2003 * $105 million (representing 1,116 loans) in 2002 * Other income increased $173,000 or 8.8% to $2,150,000 in 2004 from $1,977,000 in 2003 and $1,723,000 in 2002. The increase was primarily due to increased ATM service fees and increased loan closing fees in our Maryville branch. 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 --------- --------- --------- --------------- 2004 2003 2002 2004 2003 --------- --------- --------- ------- ------- Salaries and benefits $13,626 $13,232 $12,505 $ 394 $ 727 Occupancy and equipment 4,259 4,290 4,055 (31) 235 Amortization of other intangibles 623 774 742 (151) 32 Stationery and supplies 518 566 679 (48) (113) Legal and professional fees 1,173 991 1,027 182 (36) Marketing and promotion 771 662 738 109 (76) Other 4,169 4,015 4,260 154 (245) --------- --------- --------- ------- ------- Total other expense $25,139 $24,530 $24,006 $ 609 $ 524 ========= ========= ========= ======= ======= Total non-interest expense increased to $25,139,000 in 2004 from $24,530,000 in 2003 and $24,006,000 in 2002. The primary reasons for the more significant year-to-year changes in other expense components are as follows: * Salaries and employee benefits, the largest component of other expense, increased $394,000 or 3.0% to $13,626,000 in 2004 from $13,232,000 in 2003 and $12,505,000 in 2002. This increase is primarily due to merit and incentive increases for continuing employees and from adjustments to the Company's estimates for deferred compensation during the fourth quarter of 2004 which netted to $139,000. There were 317 full-time equivalent employees at December 31, 2004 compared to 314 at December 31, 2003 and 319 at December 31, 2002. * Occupancy and equipment expense decreased $31,000 or .7% to $4,259,000 in 2004 from $4,290,000 in 2003 and $4,055,000 in 2002. This decrease is due to a decrease in depreciation expense resulting from equipment that became fully depreciated by mid-2004. * There was no amortization of goodwill expense during 2004 in accordance with SFAS 142 and SFAS 147. Amortization of other intangibles expense decreased $151,000. This was a result of a reduction of core deposit intangible expense of $92,000 and a reduction of mortgage servicing rights amortization of $59,000. * Other operating expenses increased $154,000 or 3.8% to 4,169,000 in 2004 from $4,015,000 in 2003 and $4,260,000 in 2002. This increase resulted from increased franchise taxes paid by the Company. * On a net basis, all other categories of operating expenses increased $243,000 or 11.0% to $2,462,000 from $2,219,000 in 2003 and $2,444,000 in 2002. The increase was primarily due to increased legal and professional fees resulting from the requirements of the Sarbanes-Oxley Act of 2002, increased marketing and promotion expense due to new deposit products rolled out in the second quarter of 2004 and from fees associated with the issuance of trust preferred securities, the proceeds of which were invested in junior subordinated debentures of the Company, during the first quarter of 2004. Income Taxes Income tax expense amounted to $4,541,000 in 2004 compared to $4,674,000 in 2003 and $4,005,000 in 2002. Effective tax rates were 31.8%, 33.9% and 33.3%, respectively, for 2004, 2003 and 2002. The decrease in the effective tax rate in 2004 compared to 2003 is due to a reduction in the current year tax expense accrual to more accurately reflect the estimated tax liability position for 2004. The increase in the effective tax rate in 2003 compared to 2002 is due to an increase in non-deductible loan interest income and a decrease in deductible interest income from U.S. Treasury securities resulting in a larger amount of non-deductible interest income and greater state income tax expense. 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): 2004 2003 2002 2001 2000 ---------- ---------- ----------- ---------- ---------- Real estate - mortgage $427,154 $390,841 $340,033 $331,873 $299,252 Commercial & agricultural 137,733 131,609 127,065 107,620 100,201 Installment 30,587 28,932 31,119 32,522 28,674 Other 2,375 1,442 1,647 1,228 1,161 ---------- ---------- ----------- ---------- ---------- Total loans $597,849 $552,824 $499,864 $473,243 $429,288 ========== ========== =========== ========== ========== Loan balances have increased over the past few years primarily as a result of increased commercial real estate loans and commercial operating loans. The increase in commercial real estate loans outstanding has been the result of demand for credit for commercial real estate projects in central Illinois and business development efforts. Also, corporate borrowers have required additional capital for inventory and company expansion. The growth has been primarily in the communities of Champaign, Decatur, Effingham, Highland, and Maryville. Loan balances increased by $45 million or 8.1% from December 31, 2003 to December 31, 2004, primarily as a result of an increase in commercial real estate loan balances of $30.9 million. Loans secured by apartment buildings and hotels comprised the largest percentage of the growth in commercial real estate loans. Balances of loans sold into the secondary market were $42 million in 2004, compared to $135 million in 2003. The balance of real estate loans held for sale amounted to $2,689,000 and $751,000 as of December 31, 2004 and 2003, respectively. At December 31, 2004, the Company had loan concentrations in agricultural industries of $91.5 million, or 15.3%, of outstanding loans and $93.3 million, or 18.1%, at December 31, 2003. In addition, the Company had loan concentrations in the following industries as of December 31, 2004 and 2003 (dollars in thousands): 2004 2003 Principal % Outstanding Principal % Outstanding balance loans balance loans --------- ------------- ---------- ------------- Operators of non-residential $18,864 3.16% $11,633 2.10% buildings Apartment building owners 23,111 3.87% 21,207 3.84% Motels, hotels & tourist courts 25,756 4.31% 26,962 4.88% The Company had no further industry loan concentrations in excess of 25% of Tier 1 risk-based capital. The following table presents the balance of loans outstanding as of December 31, 2004, by maturities (in thousands): Maturity (1) --------------------------------------------------- Over 1 One year through Over or less(2) 5 years 5 years Total --------------------------------------------------- Real estate - mortgage $131,414 $253,146 $ 42,594 $427,154 Commercial & agricultural 97,091 37,551 3,091 137,733 Installment 15,827 14,725 35 30,587 Other 815 1,004 556 2,375 --------------------------------------------------- Total loans $245,147 $306,426 $46,276 $597,849 =================================================== (1) Based upon remaining maturity. (2) Includes demand loans, past due loans and overdrafts. As of December 31, 2004, loans with maturities over one year consisted of $249 million in fixed rate loans and $103 million in variable rate loans. The loan maturities noted above are based on the contractual provisions of the individual loans. The Company has no general policy regarding rollovers and borrower requests, which are handled on a case-by-case basis. Nonperforming Loans Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due ninety days or more as to interest or principal payments; and (c) loans not included in (a) and (b) above which are defined as "renegotiated loans". The following table presents information concerning the aggregate amount of nonperforming loans (in thousands): December 31, ------------------------------------------------- 2004 2003 2002 2001 2000 ------------------------------------------------- Nonaccrual loans $3,106 $3,296 $2,961 $3,419 $2,982 Loans past due ninety days or more and still accruing - - - - 245 Renegotiated loans which are performing in accordance with revised terms - 35 188 188 232 ------------------------------------------------- Total nonperforming loans $3,106 $3,331 $3,149 $3,607 $3,459 ================================================= At December 31, 2004, $2,069,000 of the nonperforming loans resulted from collateral-dependent loans to three borrowers. The $190,000 decrease in nonaccrual loans during the year resulted from the net of $1,695,000 of loans put on nonaccrual status, offset by $18,000 of loans transferred to other real estate owned, $49,000 of loans charged off and $1,818,000 of loans becoming current or paid-off. Interest income that would have been reported if nonaccrual and renegotiated loans had been performing totaled $169,000, $213,000 and $164,000 for the years ended December 31, 2004, 2003 and 2002, respectively. The Company's policy is to discontinue the accrual of interest income on any loan for which principal or interest is ninety days past due or earlier when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. Loan Quality and Allowance for Loan Losses The allowance for loan losses represents management's estimate of the reserve necessary to adequately account for probable losses that could ultimately be realized from current loan exposures. The provision for loan losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate allowance for loan losses. In determining the adequacy of the allowance for loan losses, and therefore the provision to be charged to current earnings, management relies predominantly on a disciplined credit review and approval process that extends to the full range of the Company's credit exposure. The review process is directed by overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Once identified, the magnitude of exposure to individual borrowers is quantified in the form of specific allocations of the allowance for loan losses. Management considers collateral values and guarantees in the determination of such specific allocations. Additional factors considered by management in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and renegotiated loans and the current economic conditions in the region where the Company operates. Management considers the allowance for loan losses a critical accounting policy. Management recognizes there are risk factors that are inherent in the Company's loan portfolio. All financial institutions face risk factors in their loan portfolios because risk exposure is a function of the business. The Company's operations (and therefore its loans) are concentrated in east central Illinois, an area where agriculture is the dominant industry. Accordingly, lending and other business relationships with agriculture-based businesses are critical to the Company's success. At December 31, 2004, the Company's loan portfolio included $91.5 million of loans to borrowers whose businesses are directly related to agriculture. The balance decreased $1.8 million from $93.3 million at December 31, 2003. While the Company adheres to sound underwriting practices, including collateralization of loans, any extended period of low commodity prices, significantly reduced yields on crops and/or reduced levels of government assistance to the agricultural industry could result in an increase in the level of problem agriculture loans and potentially result in loan losses within the agricultural portfolio. In addition, the Company has $25.8 million of loans to motels, hotels and tourist courts. The performance of these loans is dependent on borrower specific issues as well as the general level of business and personal travel within the region. While the Company adheres to sound underwriting standards, a prolonged period of reduced business or personal travel could result in an increase in non-performing loans to this business segment and potentially in loan losses. The Company also has $18.9 million of loans to operators of non-residential buildings and $23.1 million of loans to apartment building owners. Loan loss experience for the years ending December 31, 2004, 2003, 2002, 2001, and 2000, respectively are summarized as follows (dollars in thousands):
2004 2003 2002 2001 2000 -------------------------------------------------------------- Average loans outstanding, net of unearned income $572,836 $525,095 $483,764 $454,108 $409,648 Allowance-beginning of year $4,426 $3,723 $3,702 $3,262 $2,939 Balance added through acquisitions - - - 275 - Charge-offs: Commercial, financial and agricultural 436 589 673 244 57 Real estate-mortgage 23 50 200 86 47 Installment 129 139 255 171 183 -------------------------------------------------------------- Total charge-offs 588 778 1,128 501 287 Recoveries: Commercial, financial and agricultural 146 427 12 22 26 Real estate-mortgage - 15 17 - 1 Installment 49 39 45 44 33 -------------------------------------------------------------- Total recoveries 195 481 74 66 60 -------------------------------------------------------------- Net charge-offs 393 297 1,054 435 227 -------------------------------------------------------------- Provision for loan losses 588 1,000 1,075 600 550 -------------------------------------------------------------- Allowance-end of year $ 4,621 $ 4,426 $ 3,723 $ 3,702 $ 3,262 ============================================================== Ratio of net charge-offs to average loans .07% .06% .22% .10% .06% ============================================================== Ratio of allowance for loan losses to loans outstanding (at end of year) .77% .80% .74% .79% .76% ============================================================== Ratio of allowance for loan losses to nonperforming loans 148.8% 132.9% 118.2% 102.6% 94.3% ==============================================================
The Company minimizes credit risk by adhering to sound underwriting and credit review policies. These policies are reviewed at least annually, and the Board of Directors approves all changes. Senior management is actively involved in business development efforts and the maintenance and monitoring of credit underwriting and approval. The loan review system and controls are designed to identify, monitor and address asset quality problems in an accurate and timely manner. On a monthly basis, the Board of Directors reviews the status of problem loans. In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for loan losses. During 2004, the Company had net charge-offs of $393,000 compared to $297,000 in 2003 and $1,054,000 in 2002. During 2004, significant charge-offs included $118,000 on two commercial loans of a single borrower and $124,000 on two commercial real estate loans of a single borrower. The Company also recovered $85,000 in interest on an agricultural real estate loan that had been charged-off in a prior period and $68,500 on two commercial real estate loans that were previously charged-off. The Company's significant charge-offs during 2003 included $170,000 on a commercial loan and $80,000 on an agricultural loan secured by crops. During 2003, the Company also received a recovery of $382,000 on two commercial loans of a single borrower that were charged-off in 2002. This was the primary factor in the $757,000 decline in net charge-offs from 2002 to 2003. At December 31, 2004, the allowance for loan losses amounted to $4,621,000, or ..77% of total loans, and 148.8% of nonperforming loans. At December 31, 2003, the allowance was $4,426,000, or .80% of total loans, and 132.9% of nonperforming loans. The allowance for loan losses, in management's judgment, is allocated as follows to cover probable loan losses (dollars in thousands):
December 31, 2004 December 31, 2003 December 31, 2002 ------------------------ ------------------------ ------------------------ 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 $ 240 71.4% $ 179 70.7% $ 241 68.1% Commercial, financial and agricultural 3,124 23.1% 2,952 23.8% 2,856 25.4% Installment 150 5.1% 154 5.2% 190 6.2% Other - .4% - .3% - .3% ------------------------ ------------------------ ------------------------ Total allocated 3,514 3,285 3,287 Unallocated 1,107 N/A 1,141 N/A 436 N/A ------------------------ ------------------------ ------------------------ Allowance at end of year $4,621 100.0% $4,426 100.0% $3,723 100.0% ======================== ======================== ========================
December 31, 2001 December 31, 2000 ------------------------ ------------------------ Allowance % of Allowance % of for loans for loans loan to total loan to total losses loans losses loans ------------------------ ------------------------ Real estate-mortgage $ 282 70.1% $ 257 69.7% Commercial, financial and agricultural 2,524 22.7% 2,107 23.3% Installment 207 6.9% 182 6.7% Other - .3% - .3% ------------------------ ------------------------ Total allocated 3,013 2,546 Unallocated 689 N/A 716 N/A ------------------------ ------------------------ Allowance at end of year $3,702 100.0% $3,262 100.0% ======================== ======================== The allowance is allocated to the individual loan categories by a specific allocation for all classified loans plus a percentage of loans not classified based on historical losses and other factors. The unallocated allowance represents an estimate of the probable, inherent, but yet undetected, losses in the loan portfolio. It is based on factors that cannot necessarily be associated with a specific credit or loan category and represents management's attempt to ensure that the overall allowance of loan losses appropriately reflects a margin for the imprecision necessarily inherent in the estimates of expected credit losses. A number of subjective factors are considered when determining the unallocated portion, including local and general economic business factors and trends, portfolio concentrations, and changes in size, mix and general terms of the portfolio. Securities The Company's overall investment goal is to maximize earnings while maintaining liquidity in securities having minimal credit risk. The types and maturities of securities purchased are primarily based on the Company's current and projected liquidity and interest rate sensitivity positions. The following table sets forth the year-end amortized cost of the Company's securities for the last three years (dollars in thousands):
December 31, -------------------------------------------------------------- 2004 2003 2002 -------------------- -------------------- -------------------- Weighted Weighted Weighted Average Average Average Amount Yield Amount Yield Amount Yield --------- ---------- ---------- --------- ---------- --------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $92,369 2.81% $ 109,544 3.25% $ 76,342 3.80% Obligations of states and political subdivisions 25,133 4.54% 26,895 4.86% 27,597 4.63% Mortgage-backed securitiess 34,032 3.82% 21,607 3.64% 44,697 3.72% Other securities 17,817 6.02% 17,521 5.87% 15,807 5.86% --------- ---------- ---------- --------- ---------- --------- Total securities $169,351 3.61% $175,567 3.81% $164,443 4.12% ========= ========== ========== ========= ========== =========
At December 31, 2004, the investment portfolio showed an increase in mortgage-backed securities and a decrease in obligations of U.S. government corporations and agencies. This change in the portfolio mix improved the characteristics of the portfolio relating to interest rate risk exposure and portfolio yield. The following table indicates the expected maturities of investment securities classified as available-for-sale and held-to-maturity, presented at amortized cost, at December 31, 2004 (dollars in thousands) and the weighted average yield for each range of maturities. Mortgage-backed securities are aged according to their weighted average life. All other securities are shown at their contractual maturity.
One After 1 After 5 After year through through 10 or less 5 years 10 years years Total ----------------------------------------------------------------------- Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 22,512 $51,396 $13,479 $4,982 $92,369 Obligations of state and political subdivisions 3,151 7,463 10,684 2,283 23,581 Mortgage-backed securities 6,205 27,827 - - 34,032 Other securities - - - 17,817 17,817 ----------------------------------------------------------------------- Total investments $31,868 $86,686 $24,163 $25,082 $167,799 ======================================================================= Weighted average yield 2.12% 3.59% 4.27% 5.38% 3.59% Full tax-equivalent yield 2.31% 3.76% 5.22% 5.59% 3.89% ======================================================================== Held-to-maturity: Obligations of state and political subdivisions $140 $ 600 $ 280 $ 532 $ 1,552 ======================================================================== Weighted average yield 5.19% 5.41% 5.67% 5.38% 5.43% Full tax-equivalent yield 7.66% 7.99% 8.39% 7.94% 8.02% ========================================================================
The weighted average yields are calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. Full tax-equivalent yields have been calculated using a 34% tax rate. With the exception of obligations of the U.S. Treasury and other U.S. government agencies and corporations, there were no investment securities of any single issuer the book value of which exceeded 10% of stockholders' equity at December 31, 2004. At December 31, 2004, there were no securities in a continuous unrealized loss position for twelve or more months. Investment securities carried at approximately $143,560,000 and $147,603,000 at December 31, 2004 and 2003, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law. Deposits Funding of the Company's earning assets is substantially provided by a combination of consumer, commercial and public fund deposits. The Company continues to focus its strategies and emphasis on retail core deposits, the major component of funding sources. The following table sets forth the average deposits and weighted average rates at December 31, 2004, 2003 and 2002 (dollars in thousands):
2004 2003 2002 -------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate -------------------------------------------------------------------------- Demand deposits: Non-interest bearing $ 85,437 - $ 85,368 - $ 79,082 - Interest bearing 230,300 .68% 219,809 .81% 200,653 1.33% Savings 61,144 .39% 56,402 .54% 51,634 1.55% Time deposits 261,564 2.80% 250,403 3.06% 242,301 3.63% -------------------------------------------------------------------------- Total average deposits $638,445 1.43% $611,982 1.59% $573,670 2.14% ==========================================================================
In 2004, the average balance of deposits increased by $26.5 million from 2003. The increase was primarily attributable to growth in interest-bearing deposits, including money market accounts, Club 50 accounts, and brokered certificate of deposit balances ("CDs"). Average money market account balances increased by $6.5 million, average balances in the Club 50 accounts increased by $9.6 million, and brokered CD balances increased by $19.3 million, partially offset by a decline in other time deposit balances. In 2003, the average balance of deposits increased by $38.3 million from 2002. The increase was primarily attributable to growth in interest-bearing deposits including money market accounts and Club 50 accounts. In 2004, the Company's significant deposits included brokered CDs, time deposits with the State of Illinois, and a deposit relationship with a public entity. The Company had thirteen brokered CDs at various maturities with a total balance of $42.1 million as of December 31, 2004. State of Illinois time deposits maintained with the Company totaled $4.4 million as of December 31, 2004. These balances are subject to bid annually. In addition, the Company maintains account relationships with various public entities throughout its market areas. One public entity had total balances of $22.8 million in various checking accounts and time deposits as of December 31, 2004. These balances are subject to change depending upon the cash flow needs of the public entity. The following table sets forth the maturity of time deposits of $100,000 or more (in thousands): December 31, ---------------------------------------------- 2004 2003 2002 ---------------------------------------------- 3 months or less $26,916 $ 20,510 $ 29,085 Over 3 through 6 months 17,560 10,906 18,926 Over 6 through 12 months 22,826 24,654 13,715 Over 12 months 48,031 28,446 32,225 ---------------------------------------------- Total $115,333 $ 84,516 $ 93,951 ============================================== The balance of time deposits of $100,000 or more increased by $30.8 million from December 31, 2003 to December 31, 2004. The increase in balances was primarily attributable to the movement of deposit balances into CDs due to rising rates and to an increase in brokered deposits. The balance of time deposits of $100,000 or more decreased by $9.4 million from December 31, 2002 to December 31, 2003. The decrease in balances was primarily attributable to movement of deposit balances from CDs to money market and checking accounts due to the reduced attractiveness of CDs in the low rate environment. Balances of time deposits of $100,000 or more includes brokered CDs, time deposits maintained for public entities, and consumer time deposits. The balance of brokered CDs was $42.1 million, $22.9 million and $16.2 as of December 31, 2004, 2003 and 2002, respectively. The Company also maintains time deposits for the State of Illinois with balances of $4.4 million, $6.3 million and $6.8 million as of December 31, 2004, 2003 and 2002, respectively. The State of Illinois deposits are subject to bid annually and could increase or decrease in any given year. Repurchase Agreements and Other Borrowings Securities sold under agreements to repurchase are short-term obligations of First Mid Bank. First Mid Bank collateralizes these obligations with certain government securities that are direct obligations of the United States or one of its agencies. First Mid Bank offers these retail repurchase agreements as a cash management service to its corporate customers. Other borrowings consist of Federal Home Loan Bank ("FHLB") advances, federal funds purchased, junior subordinated debentures and loans (short-term or long-term debt) that the Company has outstanding. Information relating to securities sold under agreements to repurchase and other borrowings for the last three years is presented below (dollars in thousands):
2004 2003 2002 ------------ ------------- ------------- At December 31: Securities sold under agreements to repurchase $59,835 $59,875 $44,184 Federal Home Loan Bank advances: Fixed term - due in one year or less 17,300 5,000 5,000 Fixed term - due after one year 8,000 25,300 30,300 Junior subordinated debentures 10,310 - - Debt: Loans due in one year or less 4,200 9,025 8,525 Loans due after one year 400 600 800 ------------ ------------- ------------- Total $100,045 $99,800 $88,809 ============ ============= ============= Average interest rate at year end 2.59% 2.13% 2.53% Maximum Outstanding at Any Month-end Securities sold under agreements to repurchase $63,517 $59,875 $44,588 Federal Home Loan Bank advances: Overnight 7,000 - 400 Fixed term - due in one year or less 17,300 5,000 8,000 Fixed term - due after one year 25,300 30,300 30,300 Federal funds purchased - - 3,250 Junior subordinated debentures 10,310 - - Debt: Loans due in one year or less 9,025 9,025 9,525 Loans due after one year 400 600 800 ------------ ------------- ------------- Total $132,852 $104,800 $96,863 ============ ============= ============= Averages for the Year Securities sold under agreements to repurchase $55,645 $47,795 $34,389 Federal Home Loan Bank advances: Overnight 997 - 521 Fixed term - due in one year or less 8,200 5,000 6,153 Fixed term - due after one year 17,920 26,094 30,300 Federal funds purchased 218 14 299 Junior subordinated debentures 8,704 - - Debt: Loans due in one year or less 6,746 8,796 5,350 Loans due after one year 415 615 738 ------------ ------------- ------------- Total $98,845 $88,314 $77,750 ============ ============= ============= Average interest rate during the year 2.63% 2.41% 3.10%
FHLB advances represent borrowings by First Mid Bank to economically fund loan demand. The fixed term advances consist of $25.3 million as follows: * $5 million advance at 6.16% with a 5-year maturity, due March 21, 2005, callable quarterly * $2.3 million advance at 6.10% with a 5-year maturity, due April 7, 2005, callable quarterly * $5 million advance at 6.12% with a 5-year maturity, due September 6, 2005, callable quarterly * $5 million advance at 5.34% with a 5-year maturity, due December 14, 2005, callable quarterly * $3 million advance at 5.98% with a 10-year maturity, due March 1, 2011 * $5 million advance at 4.33% with a 10-year maturity, due November 23, 2011, five year lockout, one-time call 11/23/06 At December 31, 2004, outstanding loan balances include $4,000,000 on a revolving credit agreement with The Northern Trust Company with a floating interest rate of 1.25% over the Federal funds rate (3.48% as of December 31, 2004) and set to mature October 22, 2005. This loan was renegotiated on October 23, 2004 and has a maximum available balance of $15 million. The loan is secured by all of the common stock of First Mid Bank. The borrowing agreement contains requirements for the Company and First Mid Bank to maintain various operating and capital ratios and also contains requirements for prior lender approval for certain sales of assets, merger activity, the acquisition or issuance of debt and the acquisition of treasury stock. The Company and First Mid Bank were in compliance with the existing covenants at December 31, 2004 and 2003. The balance also includes a promissory note, of which $600,000 is outstanding as of December 31, 2004, resulting from the acquisition of Checkley with an annual interest rate equal to the prime rate listed in the money rate section of the Wall Street Journal (5.25% as of December 31, 2004) and principal payable in the amount of $200,000 annually over five years, with a final maturity of January 2007. On February 27, 2004, the Company completed the issuance and sale of $10 million of floating rate trust preferred securities through First Mid-Illinois Statutory Trust I (the "Trust"), a statutory business trust and wholly-owned subsidiary of the Company, as part of a pooled offering. The Company established the Trust for the purpose of issuing the trust preferred securities. Upon adoption of FIN 46R, the Company was required to de-consolidate its investment in the Trust. The $10 million in proceeds from the trust preferred issuance and an additional $310,000 for the Company's investment in common equity of the Trust, a total of $10,310 000, was invested in junior subordinated debentures of the Company. The underlying junior subordinated debentures issued by the Company to the Trust mature in 2034, bear interest at three-month London Interbank Offered Rate ("LIBOR") plus 280 basis points, reset quarterly, and are callable, at the option of the Company, at par on or after April 7, 2009. The Company intends to use the proceeds of the offering for general corporate purposes. The trust preferred securities issued by the Trust are included as Tier 1 capital of the Company for regulatory capital purposes. On July 2, 2003, the Federal Reserve Board issued a supervisory letter instructing bank holding companies to continue to include trust preferred securities in the calculation of Tier 1 capital for regulatory purposes until further notice. As a result of the issuance of FIN 46R, the Federal Reserve Board is currently evaluating whether de-consolidation of the Trust will affect the qualification of the trust preferred securities as Tier 1 capital. If it is determined that the trust preferred securities no longer qualify as Tier 1 capital, the Company would still be classified as well-capitalized. Interest Rate Sensitivity The Company seeks to maximize its net interest margin while maintaining an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to changes in the interest rate environment, a variable over which management has no control. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of assets differ significantly from the maturity or repricing characteristics of liabilities. The Company monitors its interest rate sensitivity position to maintain a balance between rate-sensitive assets and rate-sensitive liabilities. This balance serves to limit the adverse effects of changes in interest rates. The Company's asset/liability management committee (ALCO) oversees the interest rate sensitivity position and directs the overall allocation of funds. In the banking industry, a traditional way to measure potential net interest income exposure to changes in interest rates is through a technique known as "static GAP" analysis which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. By comparing the volumes of interest-bearing assets and liabilities that have contractual maturities and repricing points at various times in the future, management can gain insight into the amount of interest rate risk embedded in the balance sheet. The following table sets forth the Company's interest rate repricing gaps for selected maturity periods at December 31, 2004 (dollars in thousands):
Number of Months Until Next Repricing Opportunity Interest-earning assets: 0-1 1-3 3-6 6-12 12+ ------------- --------------- -------------- --------------- ------------- Federal funds sold $ 4,435 $ - $ - $ - $ - Taxable investment securities 5,966 20,216 1,995 2,489 113,821 Nontaxable investment securities 1,799 2,165 1,332 1,516 19,075 Loans 187,785 39,869 44,992 53,970 271,233 ------------- --------------- -------------- --------------- ------------- Total $199,985 $ 62,250 $48,319 $57,975 $404,129 ------------- --------------- -------------- --------------- ------------- Interest-bearing liabilities: Savings and N.O.W. accounts 39,655 1,941 1,683 3,727 159,970 Money market accounts 50,564 612 918 1,741 30,096 Other time deposits 20,946 31,431 34,548 61,439 125,583 Short-term borrowings/debt 60,035 5,000 2,300 14,000 - Long-term borrowings/debt - - - - 18,710 ------------- --------------- -------------- --------------- ------------- Total $171,200 $ 38,984 $39,449 $80,907 $ 334,359 ------------- --------------- -------------- --------------- ------------- Periodic GAP $ 28,785 $ 23,266 $ 8,870 $(22,932) $ 69,770 ------------- --------------- -------------- --------------- ------------- Cumulative GAP $ 28,785 $ 52,051 $60,921 $37,989 $ 107,759 ============= =============== ============== =============== ============= GAP as a % of interest-earning assets: Periodic 3.7% 3.0% 1.1% (3.0%) 9.0% Cumulative 3.7% 6.7% 7.9% 4.9% 13.9% ============= =============== ============== =============== =============
The static GAP analysis shows that at December 31, 2004, the Company was asset sensitive, on a cumulative basis, through the twelve-month time horizon. There are several ways the Company measures and manages the exposure to interest rate sensitivity, static GAP analysis being one. The Company's ALCO also uses other financial models to project interest income under various rate scenarios and prepayment/extension assumptions consistent with First Mid Bank's historical experience and with known industry trends. ALCO meets at least monthly to review the Company's exposure to interest rate changes as indicated by the various techniques and to make necessary changes in the composition terms and/or rates of the assets and liabilities. Based on all information available, management does not believe that changes in interest rates which might reasonably be expected to occur in the next twelve months will have a material, adverse effect on the Company's net interest income. Capital Resources At December 31, 2004, stockholders' equity decreased $1,441,000 or 2.0% to $69,154,000 from $70,595,000 as of December 31, 2003. During 2004, net income contributed $9,751,000 to equity before the payment of dividends to common stockholders of $2,023,000. The change in the market value of available-for-sale investment securities decreased stockholders' equity by $958,000, net of tax. Additional purchases of treasury stock (319,618 shares at an average cost of $32.43 per share) decreased stockholders' equity by $10,365,000. Stock Plans On July 16, 2004, the Company effected a three-for-two stock split in the form of a 50% stock dividend. All share and per share information has been restated to reflect the split. Deferred Compensation Plan The Company follows the provisions of the Emerging Issues Task Force Issue No. 97-14, "Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested" ("EITF 97-14") for purposes of the First Mid-Illinois Bancshares, Inc. Deferred Compensation Plan ("DCP"). At December 31, 2004, the Company classified the cost basis of its common stock issued and held in trust in connection with the DCP of approximately $2,168,000 as treasury stock. The Company also classified the cost basis of its related deferred compensation obligation of approximately $2,168,000 as an equity instrument (deferred compensation). The DCP was effective as of June 1984, the purpose of which 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: * 6,421 common shares during 2004 * 10,866 common shares during 2003 * 8,678 common shares during 2002. 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: * 8,225 common shares during 2004 * 20,790 common shares during 2003 * 10,155 common shares during 2002. Dividend Reinvestment Plan The Dividend Reinvestment Plan ("DRIP") was effective as of October 1994. The purpose of the DRIP is to provide participating stockholders with a simple and convenient method of investing cash dividends paid by the Company on its common and preferred shares into newly issued common shares of the Company. All holders of record of the Company's common or preferred stock are eligible to voluntarily participate in the DRIP. The DRIP is administered by Computershare Investor Services, LLC and offers a way to increase one's investment in the Company. Of the $2,023,000 in common stock dividends paid during 2004, $1,252,000 or 61.9%, was reinvested into shares of common stock of the Company through the DRIP. Events that resulted in common shares being reinvested in the DRIP: * During 2004, 39,481 common shares were issued from common stock dividends * During 2003, 46,756 common shares were issued from common stock dividends * During 2002, 55,964 common shares were issued from common stock dividends. Stock Incentive Plan In December 1997, the Company established a Stock Incentive Plan ("SI Plan"), intended to provide a means whereby directors and certain officers can acquire shares of the Company's common stock, and a maximum of 225,000 shares were originally authorized under the SI Plan. In September 2001, the Board of Directors authorized an additional 225,000 shares to be issued and sold under the SI Plan. Options to acquire shares will be awarded at an exercise price equal to the fair market value of the shares on the date of grant. Options to acquire shares have a 10-year term. Options granted to employees vest over a four-year period and those options granted to directors vest at the time they are issued. The Company has awarded the following stock options: * In December 2004, the Company granted 74,250 options at an option price of $41.00 * In December 2003, the Company granted 72,000 options at an option price of $31.00 * In December 2002, the Company granted 65,250 options at an option price of $18.17 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, 2004, 2003, and 2002. Stock Repurchase Program On August 5, 1998, the Company announced a stock repurchase program of up to 3% of its common stock. In March 2000, the Board of Directors approved the repurchase of an additional 5% of the Company's common stock. In September 2001, the Board of Directors authorized the repurchase of $3 million additional shares of the authorized common stock and in August 2002, the Board of Directors authorized the repurchase of $5 million additional shares of the Company's common stock. In September 2003, the Board of Directors approved the repurchase of $10 million of additional shares of the Company's stock and on April 27, 2004, the Board approved the repurchase of an additional $5 million of shares of the Company's common stock, bringing the aggregate total to 8% of the Company's common stock plus $23 million of additional shares. During 2004, the Company repurchased 319,618 shares (7.2% of common shares) at a total price of $10,365,000. On February 9, 2004, the Company acquired, as treasury stock, a total of 100,000 shares of outstanding common stock from three shareholders pursuant to privately negotiated transactions. Total consideration for these share repurchases amounted to $4,750,000. During 2003, the Company repurchased 120,057 shares (3.8% of common shares) at a total price of $4,233,000. As of December 31, 2004, the Company was authorized pursuant to all repurchase programs to purchase an additional 88,338 shares. Treasury stock is further affected by activity in the DCP. Capital Ratios Minimum regulatory requirements for highly-rated banks that do not expect significant growth is 8% for the Total Capital to Risk-Weighted Assets ratio and 3% for the Tier 1 Capital to Average Assets ratio. Other institutions, not considered highly-rated, are required to maintain a ratio of Tier 1 Capital to Risk-Weighted Assets of 4% to 5% depending on their particular circumstances and risk profiles. The Company and First Mid Bank have capital ratios above the regulatory capital requirements. A tabulation of the Company and First Mid Bank's capital ratios as of December 31, 2004 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) 10.94% 11.71% 7.99% First Mid-Illinois Bank & Trust, N.A. 11.10% 11.88% 8.08%
Banks and bank holding companies are generally expected to operate at or above the minimum capital requirements. These ratios are in excess of regulatory minimums and will allow the Company to operate without capital adequacy concerns. Liquidity Liquidity represents the ability of the Company and its subsidiaries to meet all present and future financial obligations arising in the daily operations of the business. Financial obligations consist of the need for funds to meet extensions of credit, deposit withdrawals and debt servicing. The Company's liquidity management focuses on the ability to obtain funds economically through assets that may be converted into cash at minimal costs or through other sources. The Company's other sources for cash include overnight federal fund lines, FHLB advances, deposits of the State of Illinois, the ability to borrow at the Federal Reserve Bank, and the Company's operating line of credit with The Northern Trust Company. Details for the sources include: * First Mid Bank has $17 million available in overnight federal fund lines, including $10 million from Harris Trust and Savings Bank of Chicago and $7 million from The Northern Trust Company. Availability of the funds is subject to the First Mid Bank's meeting minimum regulatory capital requirements for total capital to risk-weighted assets and Tier 1 capital to total assets. As of December 31, 2004, the First Mid Bank's ratios of total capital to risk-weighted assets of 11.88% and Tier 1 capital to total average assets of 8.08% met regulatory requirements. * First Mid Bank can also borrow from the FHLB as a source of liquidity. Availability of the funds is subject to the pledging of collateral to the FHLB. Collateral that can be pledged includes one-to-four family residential real estate loans and securities. At December 31, 2004, the excess collateral at the FHLB could support approximately $45 million of additional advances. * First Mid Bank also receives deposits from the State of Illinois. The receipt of these funds is subject to competitive bid and requires collateral to be pledged at the time of placement. * First Mid Bank is also a member of the Federal Reserve System and can borrow funds provided that sufficient collateral is pledged. * In addition, the Company has a revolving credit agreement in the amount of $15 million with The Northern Trust Company. The Company has an outstanding balance of $4,000,000 as of December 31, 2004 and $11,000,000 in available funds. The credit agreement matures on October 22, 2005. The agreement contains requirements for the Company and First Mid Bank to maintain various operating and capital ratios and also contains requirements for prior lender approval for certain sales of assets, merger activity, the acquisition or issuance of debt, and the acquisition of treasury stock. The Company and First Mid Bank were in compliance with the existing covenants at December 31, 2004. Management monitors its expected liquidity requirements carefully, focusing primarily on cash flows from: * lending activities, including loan commitments, letters of credit and mortgage prepayment assumptions; * deposit activities, including seasonal demand of private and public funds; * investing activities, including prepayments of mortgage-backed securities and call assumptions on U.S. Treasuries and agencies; and * operating activities, including scheduled debt repayments and dividends to stockholders. The following table summarizes significant contractual obligations and other commitments at December 31, 2004 (in thousands):
Less than More than Total 1 year 1-3 years 3-5 years 5 years --------------- ---------------- ----------------- --------------- --------------- Time deposits $276,358 $150,520 $114,097 $11,332 $ 409 Debt 15,110 4,400 400 - 10,310 Other borrowings 85,135 77,135 - 5,000 3,000 Operating leases 2,876 296 516 488 1,576 Supplemental retirement liability 743 50 150 150 393 --------------- ---------------- ----------------- --------------- --------------- $380,222 $232,401 $115,163 $16,970 $15,688 =============== ================ ================= =============== ===============
For the year ended December 31, 2004, net cash was provided from both operating activities and financing activities ($11.2 million and $24.7 million, respectively), while investing activities used net cash of $37.3 million. Thus, cash and cash equivalents decreased by $1.4 million since year-end 2003. Generally, during 2004, cash balances were reduced by funds used to fund new loans offset by an increase in deposit balances primarily brokered deposits. For the year ended December 2003, net cash was provided from both operating activities and financing activities ($17.8 million and $8.4 million, respectively), while investing activities used net cash of $70.9 million. Thus, cash and cash equivalents decreased by $44.7 million since year-end 2002. Generally, during 2003, decreases in deposits and increase in funds used to fund new loans reduced cash balances. On February 27, 2004, the Company completed the issuance and sale of $10 million of floating rate trust preferred securities through First Mid-Illinois Statutory Trust I (the "Trust") as part of a pooled offering. The Company established the Trust for the purpose of issuing the trust preferred securities. The underlying junior subordinated debt securities issued by the Company to the Trust mature in 2034, bear interest at three-month London Interbank Offered Rate ("LIBOR") plus 280 basis points, reset quarterly, and are callable, at the option of the Company, at par on or after April 7, 2009. Effects of Inflation Unlike industrial companies, virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or experience the same magnitude of changes as goods and services, since such prices are effected by inflation. In the current economic environment, liquidity and interest rate adjustments are features of the Company's assets and liabilities that are important to the maintenance of acceptable performance levels. The Company attempts to maintain a balance between monetary assets and monetary liabilities, over time, to offset these potential effects. Accounting Pronouncements In December 2003, the FASB issued Interpretation No. 46 (Revised), "Consolidation of Variable Interest Entities" ("FIN 46R"), which provides further guidance on the accounting for variable interest entities. The provisions of FIN 46R must be applied to an interest held in a variable interest entity or potential variable interest entity at the end of the first interim period after December 31, 2003. Upon adoption of FIN 46R, the Company was required to de-consolidate its investment in First Mid-Illinois Statutory Trust I ("Trust"), a statutory business trust and wholly-owned subsidiary of the Company. On February 27, 2004, the Company completed the issuance and sale of $10 million of floating rate capital securities ("Trust Preferred") through the Trust as part of a pooled offering. The $10 million in proceeds from the Trust Preferred issuance and an additional $310,000 for the Company's investment in common equity of the Trust, a total of $10,310 000, was invested in junior subordinated debentures of the Company. The Trust Preferred held by the Trust presently qualify as Tier I Capital for regulatory capital purposes. The adoption of FIN 46R and the de-consolidation of the Trust did not have a material impact on the Company's financial position or results of operations. Currently, the Company does not have any other investments affected by FIN 46R. On December 16, 2003, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer" ("SOP 03-3"). SOP 03-3 provides guidance on the accounting for differences between contractual and expected cash flows from the purchaser's initial investment in loans or debt securities acquired in a transfer, if those differences are attributable, at least in part, to credit quality. Among other things, SOP 03-3: (1) prohibits the recognition of the excess of contractual cash flows over expected cash flows as an adjustment of yield, loss accrual, or valuation allowance at the time of purchase; (2) requires that subsequent increases in expected cash flows be recognized prospectively through an adjustment of yield; and (3) requires the subsequent decreases in expected cash flows be recognized as an impairment. In addition, SOP 03-3 prohibits the creation or carrying over of a valuation allowance in the initial accounting of all loans within its scope that are acquired in a transfer. SOP 03-3 becomes effective for loans or debt securities acquired in fiscal years beginning after December 15, 2004. The adoption of the requirements of SOP 03-3 is not expected to have a material impact on the Company's financial position or results of operations. In March 2004, the FASB reached a consensus on Emerging Issues Task Force Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("EITF 03-1"). EITF 03-1 provides guidance for determining when an investment is impaired and whether the impairment is other than temporary. EITF 03-01 also incorporates into its consensus the required disclosures about unrealized losses on investments announced by the EITF in late 2003 and adds new disclosure requirements relating to cost-method investments. The new disclosure requirements are effective for annual reporting periods ending June 15, 2004 and the new impairment accounting guidance was to become effective for reporting periods beginning June 15, 2004. In September 2004, the FASB delayed the effective date of EITF 03-1 for measurement and recognition of impairment losses until implementation guidance is issued. The Company does not expect the adoption of impairment guidance contained in EITF 03-1 to have a material impact on its financial position or results of operations. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29 Accounting for Nonmonetary Assets" ("SFAS 153"). SFAS 153 amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. The provisions of this Statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect the requirements of SFAS 153 to have a material impact on its financial position or results of operations. In December 2004, the FASB issued SFAS No. 123 (revised), "Accounting for Stock-Based Compensation" ("SFAS 123R"). SFAS 123R establishes accounting requirements for share-based compensation to employees and carries forward prior guidance on accounting for awards to non-employees. The Statement requires an entity to recognize compensation expense based on an estimate of the number of awards expected to actually vest, exclusive of awards expected to be forfeited. The provisions of this Statement will become effective July 1, 2005 for all equity awards granted after the effective date. The Company is evaluating the impact of SFAS 123R on its financial position and results of operations. In May 2004, the FASB issued FASB Staff Position on Financial Accounting Standard 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" ("FSP FAS 106-2"). FSP FAS 106-2 provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Act"); the Act was signed in law on December 8, 2003. Under the Act, a subsidy is available to sponsors of postretirement health care plans whose benefits are actuarially equivalent to Medicare Part D. The Company does not expect the requirements of FSP FAS 106-2 to have a material impact on its financial position or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk arises primarily from interest rate risk inherent in its lending, investing and deposit taking activities, which are restricted to First Mid Bank. The Company does not currently use derivatives to manage market or interest rate risks. For a discussion of how management of the Company addresses and evaluates interest rate risk see also "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Sensitivity." Based on the financial analysis performed as of December 31, 2004, 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 (dollars in thousands): Increase (Decrease) In Net Interest Net Interest Return On December 31, 2004 Income Income Average Equity Prime rate is 5.25% 2004=13.62% ------------------------------------------------- Prime rate increase of: 200 basis points to 7.25% $ 1,279 4.1 % .94 % 100 basis points to 6.25% 642 2.1 % .47 % Prime rate decrease of: 200 basis points to 3.25% (3,654) (11.8)% (2.79)% 100 basis points to 4.25% (1,778) (5.8)% (1.34)% The following table shows the same analysis performed as of December 31, 2003. Increase (Decrease) In Net Interest Net Interest Return On December 31, 2003 Income Income Average Equity Prime rate is 4.00% 2003=13.01% -------------- --------------- ---------------- Prime rate increase of: 200 basis points to 6.00% $ 2,315 8.2 % 1.78 % 100 basis points to 5.00% 1,452 5.1 % 1.13 % Prime rate decrease of: 200 basis points to 2.00% (3,637) (12.9)% (2.96)% 100 basis points to 3.00% (1,501) (5.3)% (1.20)% First Mid Bank's Board of Directors has adopted an interest rate risk policy that establishes maximum decreases in the percentage change in net interest margin of 5% in a 100 basis point rate shift and 10% in a 200 basis point rate shift. No assurance can be given that the actual net interest income would increase or decrease by such amounts in response to a 100 or 200 basis point increase or decrease in the prime rate. Interest rate sensitivity analysis is also used to measure the Company's interest risk by computing estimated changes in the Economic Value of Equity (EVE) of First Mid Bank under various interest rate shocks. EVE is determined by calculating the net present value of each asset and liability category by rate shock. The net differential between assets and liabilities is the Economic Value of Equity. EVE is an expression of the long-term interest rate risk in the balance sheet as a whole. The following tables present, in thousands, First Mid Bank's projected change in EVE for the various rate shock levels at December 31, 2004 and December 31, 2003. 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, 2004 Change in Changes In Economic Value of Equity Interest Rates Amount Percent (basis points) of Change of Change ---------------------------------------------------------- +200 bp $(10,846) (10.5)% +100 bp (2,273) (2.2)% -200 bp 1,137 1.1 % -100 bp 6,825 6.6 % December 31, 2003 Change in Changes In Economic Value of Equity Interest Rates Amount Percent (basis points) of Change of Change ----------------------- ----------------- ----------------- +200 bp $(10,194) (10.1)% +100 bp (2,296) (2.3)% -200 bp 1,735 1.7 % -100 bp 7,248 7.2 % As indicated above, at December 31, 2004, in the event of a sudden and sustained increase in prevailing market interest rates, First Mid Bank's EVE would be expected to decrease, and in the event of a sudden and sustained decrease in prevailing market interest rates, First Mid Bank's EVE would be expected to increase. At December 31, 2004, First Mid Bank's estimated changes in EVE were within the industry guidelines that normally allow for a change in capital of +/-10% from the base case scenario under a 100 basis point shock and +/- 20% from the base case scenario under a 200 basis point shock. Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and declines in deposit balances, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions First Mid Bank may undertake in response to changes in interest rates. Certain shortcomings are inherent in the method of analysis presented in the computation of EVE. Actual values may differ from those projections set forth in the table, should market conditions vary from assumptions used in the preparation of the table. Certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In addition, the proportion of adjustable-rate loans in First Mid Bank's portfolio change in future periods as market rates change. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the table. Finally, the ability of many borrowers to repay their adjustable-rate debt may decrease in the event of an interest rate increase. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Balance Sheets December 31, 2004 and 2003 (In thousands, except share data) 2004 2003 ---------- ---------- Assets Cash and due from banks: Non-interest bearing $ 19,119 $ 20,659 Interest bearing 1,985 2,915 Federal funds sold 2,450 1,375 ---------- ---------- Cash and cash equivalents 23,554 24,949 Investment securities (note 4): Available-for-sale, at fair value 168,821 176,481 Held-to-maturity, at amortized cost (estimated fair value of $1,598 and $1,687 at December 31, 2004 and 2003, respectively) 1,552 1,677 Loans (note 5) 597,849 552,824 Less allowance for loan losses (note 6) (4,621) (4,426) ---------- ---------- Net loans 593,228 548,398 Premises and equipment, net (note 7) 15,227 16,059 Accrued interest receivable 5,405 5,570 Goodwill, net (note 8) 9,034 9,034 Intangible assets, net (note 8) 3,346 3,969 Other assets 6,561 7,844 ---------- ---------- Total assets $826,728 $793,981 ========== ========== Liabilities and Stockholders' Equity Deposits (note 9): Non-interest bearing $ 85,524 $ 94,723 Interest bearing 564,716 520,269 ---------- ---------- Total deposits 650,240 614,992 Accrued interest payable 1,506 1,228 Securities sold under agreements to repurchase (note 10) 59,835 59,875 Junior subordinated debentures (note 10) 10,310 - ---------- ---------- Other borrowings (note 10) 29,900 39,925 ---------- ---------- Other liabilities 5,783 7,366 ---------- ---------- Total liabilities 757,574 723,386 ---------- ---------- Stockholders' Equity Common stock, $4 par value; authorized 18,000,000 shares; shares issued 5,578,897 shares in 2004 and 5,501,831 shares in 2003 22,316 14,672 Additional paid-in capital 17,845 15,960 Retained earnings 53,259 52,942 Deferred compensation 2,204 1,881 Accumulated other comprehensive income 623 1,581 Less treasury stock at cost, 1,121,546 shares in 2004 and 801,928 shares in 2003 (27,093) (16,441) ---------- ---------- Total stockholders' equity 69,154 70,595 ---------- ---------- Total liabilities and stockholders' equity $826,728 $793,981 ========== ========== See accompanying notes to consolidated financial statements.
Consolidated Statements of Income For the years ended December 31, 2004, 2003 and 2002 (In thousands, except per share data) 2004 2003 2002 ---------- ---------- --------- Interest income: Interest and fees on loans $33,793 $32,435 $33,726 Interest on investment securities: Taxable 4,860 4,961 6,014 Exempt from federal income tax 1,193 1,266 1,311 Interest on federal funds sold 103 164 199 Interest on deposits with other financial institutions 75 112 137 ---------- ---------- --------- Total interest income 40,024 38,938 41,387 Interest expense: Interest on deposits (note 9) 9,122 9,751 12,253 Interest on securities sold under agreements to repurchase 455 272 345 Interest on FHLB advances 1,484 1,632 1,863 Interest on federal funds purchased 3 - 6 Interest on subordinated debt 382 - - Interest on other debt 198 241 194 ---------- ---------- --------- Total interest expense 11,644 11,896 14,661 ---------- ---------- --------- Net interest income 28,380 27,042 26,726 Provision for loan losses (note 6) 588 1,000 1,075 ---------- ---------- --------- Net interest income after provision for loan losses 27,792 26,042 25,651 Other income: Trust revenues 2,254 1,992 1,855 Brokerage commissions 428 283 265 Insurance commissions 1,447 1,476 1,257 Service charges 4,746 4,484 3,799 Gains on sale of securities, net (note 4) 92 370 223 Mortgage banking revenue 522 1,673 1,272 Other 2,150 1,977 1,723 ---------- ---------- --------- Total other income 11,639 12,255 10,394 Other expense: Salaries and employee benefits 13,626 13,232 12,505 Net occupancy and equipment expense 4,259 4,290 4,055 Amortization of other intangible assets (note 8) 623 774 742 Stationery and supplies 518 566 679 Legal and professional 1,173 991 1,027 Marketing and promotion 771 662 738 Other 4,169 4,015 4,260 ---------- ---------- --------- Total other expense 25,139 24,530 24,006 ---------- ---------- --------- Income before income taxes 14,292 13,767 12,039 Income taxes (note 15) 4,541 4,674 4,005 ---------- ---------- --------- Net income $ 9,751 $ 9,093 $ 8,034 ========== ========== ========= Per common share data: Basic earnings per share $2.17 $1.92 $1.60 Diluted earnings per share 2.13 1.88 1.58 ========== ========== =========
See accompanying notes to consolidated financial statements. Consolidated Statements of Changes in Stockholders' Equity For the years ended December 31, 2004, 2003 and 2002 (In thousands, except share and per share data)
Additional Other Common Paid-In- Retained Deferred Comprehensive Treasury Stock Capital Earnings Compensation Income (Loss) Stock Total - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2001 $ 14,184 $13,288 $39,500 $1,392 $740 $(5,179) $63,925 Comprehensive income: Net income - - 8,034 - - - 8,034 Net unrealized change in available-for-sale investment securities - - - - 1,633 - 1,633 Total Comprehensive Income 9,667 Cash dividends on common stock ($.33 per share) - - (1,638) - - - (1,638) Issuance of 55,964 common shares pursuant to the Dividend Reinvestment Plan 150 762 - - - - 912 Issuance of 8,678 common shares pursuant to the Deferred Compensation Plan 23 122 - - - - 145 Issuance of 10,155 common shares pursuant to the First Retirement & Savings Plan 27 142 - - - - 169 Purchase of 360,519 treasury shares - - - - - (6,540) (6,540) Deferred compensation - - - 197 - (197) - Issuance of 11,720 common shares pursuant to the exercise of stock options 31 136 - - - - 167 - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2002 $ 14,415 $14,450 $45,896 $1,589 $2,373 $(11,916) $66,807 Comprehensive income: Net income - - 9,093 - - - 9,093 Net unrealized change in available-for-sale investment securities - - - - (792) - (792) Total Comprehensive Income 8,301 Cash dividends on common stock ($.43 per share) - - (2,047) - - - (2,047) Issuance of 46,756 common shares pursuant to the Dividend Reinvestment Plan 125 748 - - - - 873 Issuance of 10,866 common shares pursuant to the Deferred Compensation Plan 29 194 - - - - 223 Issuance of 20,790 common shares pursuant to the First Retirement & Savings Plan 55 382 - - - - 437 Purchase of 180,085 treasury shares - - - - - (4,233) (4,233) Deferred compensation - - - 292 - (292) - Issuance of 17,813 common shares pursuant to the exercise of stock options 48 186 - - - - 234 - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2003 $ 14,672 $15,960 $52,942 $1,881 $1,581 $(16,441) $70,595 ===================================================================================
Consolidated Statements of Changes in Stockholders' Equity For the years ended December 31, 2004, 2003 and 2002 (In thousands, except share and per share data)
Additional Other Common Paid-In- Retained Deferred Comprehensive Treasury Stock Capital Earnings Compensation Income (Loss) Stock Total - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2003 $ 14,672 $15,960 $52,942 $1,881 $1,581 $(16,441) $70,595 Comprehensive income: Net income - - 9,751 - - - 9,751 Net unrealized change in available-for- sale investment securities - - - - (958) - (958) Total Comprehensive Income 8,793 Cash dividends on common stock ($.45 per share) - - (2,023) - - - (2,023) Issuance of 39,481 common shares pursuant to the Dividend Reinvestment Plan 105 1,143 - - - - 1,248 Issuance of 6,421 common shares pursuant to the Deferred Compensation Plan 20 188 - - - - 208 Issuance of 8,225 common shares pursuant to the First Retirement & Savings Plan 29 240 - - - - 269 Purchase of 319,618 treasury shares - - - - - (10,365) (10,365) Deferred compensation - - - 287 - (287) - Tax benefit related to deferred compensation distributions - - - 36 - - 36 Issuance of 22,938 common shares pursuant to the exercise of stock options 79 246 - - - - 325 Tax benefit related to exercise of incentive stock options - 58 - - - - 58 Tax benefit related to exercise of non-qualified stock options - 10 - - - - 10 3-for-2 stock split in the form of 50% stock dividend 7,411 - (7,411) - - - - - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2004 $ 22,316 $17,845 $53,259 $2,204 $623 $(27,093) $69,154 ==================================================================================
See accompanying notes to financial statements. Consolidated Statements of Cash Flows For the years ended December 31, 2004, 2003 and 2002 (In thousands)
2004 2003 2002 ---------- ---------- ---------- Cash flows from operating activities: Net income $ 9,751 $ 9,093 $ 8,034 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 588 1,000 1,075 Depreciation, amortization and accretion, net 2,450 3,104 3,169 Gain on sale of securities, net (92) (370) (223) Loss on sale of other real property owned, net 76 53 107 Gain on sale of mortgage loans held for sale, net (595) (1,813) (1,350) Deferred income taxes 178 (226) (146) Decrease in accrued interest receivable 165 792 428 Increase (decrease) in accrued interest payable 278 (565) (577) Origination of mortgage loans held for sale (44,019) (128,708) (106,461) Proceeds from sale of mortgage loans held for sale 42,675 136,840 106,312 Impairment of other investment - - 250 Decrease (increase) in other assets 794 (2,698) (2,710) (Decrease) increase in other liabilities (1,068) 1,257 1,232 ---------- ---------- ---------- Net cash provided by operating activities 11,181 17,759 9,140 ---------- ---------- ---------- Cash flows from investing activities: Capitalization of mortgage servicing rights - (1) (6) Purchases of premises and equipment (889) (1,052) (2,130) Net increase in loans (43,479) (59,576) (26,176) Proceeds from sales of other real property owned 924 925 653 Proceeds from sales of securities available-for-sale 5,137 13,815 12,091 Proceeds from maturities of securities available-for-sale 96,442 139,783 45,253 Proceeds from maturities of securities held-to-maturity 125 225 20,331 Purchases of securities available-for-sale (95,502) (163,266) (81,250) Purchases of securities held-to-maturity - (1,734) (164) Purchase of financial organizations, net of cash received - - 15 ---------- ---------- ---------- Net cash used in investing activities (37,242) (70,881) (31,383) ---------- ---------- ---------- Cash flows from financing activities: Net increase in deposits 35,248 1,540 54,032 (Decrease) increase in repurchase agreements (40) 15,691 5,305 Decrease in short-term FHLB advances (5,000) (5,000) (3,000) Increase in long-term FHLB advances - - 5,000 Repayment of short-term debt (11,700) (200) (1,000) Proceeds from short-term debt 6,675 500 5,000 Issuance of junior subordinated debentures 10,000 - - Increase in other borrowings - - 200 Proceeds from issuance of common stock 802 894 481 Purchase of treasury stock (10,365) (4,233) (6,540) Dividends paid on common stock (954) (778) (674) ---------- ---------- ---------- Net cash provided by financing activities 24,666 8,414 58,804 ---------- ---------- ---------- (Decrease) increase in cash and cash equivalents (1,395) (44,708) 36,561 Cash and cash equivalents at beginning of year 24,949 69,657 33,096 ---------- ---------- ---------- Cash and cash equivalents at end of year $23,554 $24,949 $69,657 ========== ========== ========== Supplemental disclosures of cash flow information Cash paid during the year for: Interest $11,366 $12,461 $15,238 Income taxes 4,658 4,632 4,228 Supplemental disclosure of noncash investing and financing activities: Loans transferred to real estate owned $1,250 890 841 Dividends reinvested in common shares 1,248 873 913 Net tax benefit related to option and deferred compensation plans 104 - -
See accompanying notes to consolidated financial statements. Notes To Consolidated Financial Statements December 31, 2004, 2003 and 2002 Note 1 - Summary of Significant Accounting Policies Basis of Accounting and Consolidation The accompanying consolidated financial statements include the accounts of First Mid-Illinois Bancshares, Inc. ("Company") and its wholly-owned subsidiaries: Mid-Illinois Data Services, Inc. ("MIDS"), First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank") and the Checkley Agency, Inc. ("Checkley"). All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the 2004 presentation and there was no impact on net income or stockholders' equity from these reclassfications. The Company operates as a one-segment entity for financial reporting purposes. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America. Following is a description of the more significant of these policies. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. Cash Equivalents For purposes of reporting cash flows, cash equivalents include amounts due from banks and federal funds sold. Generally, federal funds are sold for one-day periods. Investment Securities The Company classifies its debt securities into one or more of three categories: held-to-maturity, available-for-sale, or trading. Held-to-maturity securities are those which management has the positive intent and ability to hold to maturity. Available-for-sale securities are those securities which management may sell prior to maturity as a result of changes in interest rates, prepayment factors, or as part of the Company's overall asset and liability strategy. Trading securities are those securities bought and held principally for the purpose of selling them in the near term. The Company had no securities designated as trading during 2004, 2003 or 2002. Held-to-maturity securities are recorded at cost adjusted for amortization of premiums and accretion of discounts to the earlier of the call date or maturity date using the interest method. Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related income tax effect, are excluded from income and reported as a separate component of stockholders' equity. If a decrease in the fair value of a security is expected to be other than temporary, then the security is written down to its fair value through a charge to income and a new cost basis is established for the security. Realized gains and losses on the sale of investment securities are recorded using the specific identification method. Loans Loans are stated at the principal amount outstanding net of unearned discounts, unearned income and the allowance for loan losses. Unearned income includes deferred loan origination fees reduced by loan origination costs and is amortized to interest income over the life of the related loan using methods which approximate the effective interest rate method. Interest on substantially all loans is credited to income based on the principal amount outstanding. The Company's policy is to discontinue the accrual of interest income on any loan that becomes ninety days past due as to principal or interest or earlier when, in the opinion of management there is reasonable doubt as to the timely collection of principal or interest. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collectibility of interest or principal. Loans expected to be sold are classified as held for sale in the consolidated financial statements and are recorded at the lower of aggregate cost or market value, taking into consideration future commitments to sell the loans. Allowance for Loan Losses The allowance for loan losses is maintained at a level deemed appropriate by management to provide for probable losses inherent in the loan portfolio. The allowance is based on a continuing review of the loan portfolio, the underlying value of the collateral securing the loans, current economic conditions and past loan loss experience. Loans that are deemed to be uncollectible are charged off to the allowance. The provision for loan losses and recoveries are credited to the allowance. Management, considering current information and events regarding the borrowers' ability to repay their obligations, considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the note agreement, including principal and interest. The amount of the impairment is measured based on the fair value of the collateral, if the loan is collateral dependent, or alternatively, at the present value of expected future cash flows discounted at the loan's effective interest rate. Certain homogeneous loans such as residential real estate mortgage and installment loans are excluded from the impaired loan provisions. Interest income on impaired loans is recorded when cash is received and only if principal is considered to be fully collectible. Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization is determined principally by the straight-line method over the estimated useful lives of the assets. Goodwill and Intangible Assets The Company has goodwill from business combinations, identifiable intangible assets assigned to core deposit relationships and customer lists of acquisitions, and intangible assets arising from the rights to service mortgage loans for others. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but rather will be tested at least annually for impairment. If goodwill is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the goodwill exceeds the implied fair value of the goodwill. Effective October 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 147, "Acquisitions of Certain Financial Institutions" ("SFAS 147"). SFAS 147 requires that all acquisitions of financial institutions that meet the definition of a business, including acquisitions of a part of a financial institution that meet the definition of a business, be accounted for in accordance with SFAS 142. Accordingly, unidentifiable intangible assets were reclassified to goodwill and were no longer amortized. Identifiable intangible assets generally arise from branches acquired that the Company accounted for as purchases. Such assets consist of the excess of the purchase price over the fair value of net assets acquired, with specific amounts assigned to core deposit relationships and customer lists primarily related to insurance agencies. Intangible assets are amortized by the straight-line method over various periods up to fifteen years. Management reviews intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company recognizes as a separate asset the rights to service mortgage loans for others. Mortgage servicing rights are not subject to SFAS 142, but are amortized in proportion to and over the period of estimated net servicing income and are subject to periodic impairment testing. Income Taxes The Company and its subsidiaries file consolidated federal and state income tax returns with each organization computing its taxes on a separate company basis. Amounts provided for income tax expense are based on income reported for financial statement purposes rather than amounts currently payable under tax laws. Deferred tax assets and liabilities are recognized for future tax consequences attributable to the temporary differences existing between the financial statement carrying amounts of assets and liabilities and their respective tax bases, as well as operating loss and tax credit carry forwards. To the extent that current available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as an increase or decrease in income tax expense in the period in which such change is enacted. Trust Department Assets Property held for customers in fiduciary or agency capacities is not included in the accompanying consolidated balance sheets since such items are not assets of the Company or its subsidiaries. Stock Split On July 16, 2004, the Company effected a three-for-two stock split in the form of a 50 % stock dividend. Par value remained at $4 per share. The stock split increased the Company's outstanding common shares from 2,981,539 to 4,472,309 shares. All share and per share amounts have been restated for years prior to 2004 to give retroactive recognition to the stock split. Stock Options The Company applies APB Opinion No. 25 in accounting for the Stock Incentive Plan and, accordingly, compensation cost based on fair value at grant date has not been recognized for its stock options in the consolidated financial statements. As required by SFAS 123, "Accounting for Stock-Based Compensation" as amended by SFAS 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," the Company provides pro forma net income and pro forma earnings per share disclosures for employee stock option grants in Note 14 - "Stock Option Plan." Recent Accounting Pronouncements In December 2003, the FASB issued Interpretation No. 46 (Revised), "Consolidation of Variable Interest Entities" ("FIN 46R"), which provides further guidance on the accounting for variable interest entities. The provisions of FIN 46R must be applied to an interest held in a variable interest entity or potential variable interest entity at the end of the first interim period after December 31, 2003. Upon adoption of FIN 46R, the Company was required to de-consolidate its investment in First Mid-Illinois Statutory Trust I ("Trust"), a statutory business trust and wholly-owned subsidiary of the Company. On February 27, 2004, the Company completed the issuance and sale of $10 million of floating rate capital securities ("Trust Preferred") through the Trust as part of a pooled offering. The $10 million in proceeds from the Trust Preferred issuance and an additional $310,000 for the Company's investment in common equity of the Trust, a total of $10,310 000, was invested in junior subordinated debentures of the Company. The Trust Preferred held by the Trust presently qualify as Tier I Capital for regulatory capital purposes. The adoption of FIN 46R and the de-consolidation of the Trust did not have a material impact on the Company's financial position or results of operations. Currently, the Company does not have any other investments affected by FIN 46R. On December 16, 2003, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer" ("SOP 03-3"). SOP 03-3 provides guidance on the accounting for differences between contractual and expected cash flows from the purchaser's initial investment in loans or debt securities acquired in a transfer, if those differences are attributable, at least in part, to credit quality. Among other things, SOP 03-3: (1) prohibits the recognition of the excess of contractual cash flows over expected cash flows as an adjustment of yield, loss accrual, or valuation allowance at the time of purchase; (2) requires that subsequent increases in expected cash flows be recognized prospectively through an adjustment of yield; and (3) requires the subsequent decreases in expected cash flows be recognized as an impairment. In addition, SOP 03-3 prohibits the creation or carrying over of a valuation allowance in the initial accounting of all loans within its scope that are acquired in a transfer. SOP 03-3 becomes effective for loans or debt securities acquired in fiscal years beginning after December 15, 2004. The adoption of the requirements of SOP 03-3 is not expected to have a material impact on the Company's financial position or results of operations. In March 2004, the FASB reached a consensus on Emerging Issues Task Force Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("EITF 03-1"). EITF 03-1 provides guidance for determining when an investment is impaired and whether the impairment is other than temporary. EITF 03-01 also incorporates into its consensus the required disclosures about unrealized losses on investments announced by the EITF in late 2003 and adds new disclosure requirements relating to cost-method investments. The new disclosure requirements are effective for annual reporting periods ending June 15, 2004 and the new impairment accounting guidance was to become effective for reporting periods beginning June 15, 2004. In September 2004, the FASB delayed the effective date of EITF 03-1 for measurement and recognition of impairment losses until implementation guidance is issued. The Company does not expect the adoption of impairment guidance contained in EITF 03-1 to have a material impact on its financial position or results of operations. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29 Accounting for Nonmonetary Assets" ("SFAS 153"). SFAS 153 amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. The provisions of this Statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect the requirements of SFAS 153 to have a material impact on its financial position or results of operations. In December 2004, the FASB issued SFAS No. 123 (revised), "Accounting for Stock-Based Compensation" ("SFAS 123R"). SFAS 123R establishes accounting requirements for share-based compensation to employees and carries forwards prior guidance on accounting for awards to non-employees. The Statement requires an entity to recognize compensation expense based on an estimate of the number of awards expected to actually vest, exclusive of awards expected to be forfeited. The provisions of this Statement will become effective July 1, 2005 for all equity awards granted after the effective date. The Company is evaluating the impact of SFAS 123R on its financial position and results of operations. In May 2004, the FASB issued FASB Staff Position on Financial Accounting Standard 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" ("FSP FAS 106-2"). FSP FAS 106-2 provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Act"); the Act was signed in law on December 8, 2003. Under the Act, a subsidy is available to sponsors of postretirement health care plans whose benefits are actuarially equivalent to Medicare Part D. The Company does not expect the requirements of FSP FAS 106-2 to have a material impact on its financial position or results of operations. Comprehensive Income The Company's comprehensive income for the years ended December 31, 2004, 2003 and 2002 is as follows (in thousands): 2004 2003 2002 ---------- ---------- ---------- Net income $9,751 $9,093 $8,034 Other comprehensive income: Unrealized gains (losses) during the year (1,478) (929) 2,889 Reclassification adjustment for net gains realized in net income (92) (370) (223) Tax effect 612 507 (1,033) ---------- ---------- ---------- Comprehensive income $8,793 $8,301 $9,667 ========== ========== ========== Note 2 - Earnings Per Share Basic Earnings per Share ("EPS") is based on the weighted average number of common shares outstanding. Diluted EPS is computed by using the weighted average number of common shares outstanding, increased by the assumed conversion of stock options, if not anti-dilutive. The components of basic and diluted earnings per common share for the years ended December 31, 2004, 2003, and 2002 are as follows:
2004 2003 2002 ------------- ------------ ------------ Basic Earnings per Share: Net income available to common stockholders $9,751,000 $9,093,000 $8,034,000 ============= ============ ============ Weighted average common shares outstanding 4,499,092 4,743,210 5,036,357 ============= ============ ============ Basic earnings per common share $2.17 $1.92 $1.60 ============= ============ ============ Diluted Earnings per Share: Net income available to common stockholders $9,751,000 $9,093,000 $8,034,000 ============= ============ ============ Weighted average common shares outstanding 4,499,092 4,743,210 5,036,357 Assumed conversion of stock options 88,967 85,935 36,249 ------------- ------------ ------------ Diluted weighted average common shares outstanding 4,588,059 4,829,145 5,072,606 ============= ============ ============ Diluted earnings per common share $2.13 $1.88 $1.58 ============= ============ ============
Note 3 - Cash and Due from Banks Aggregate cash and due from bank balances of $722,000 and $437,000 at December 31, 2004 and 2003, were maintained in satisfaction of statutory reserve requirements of the Federal Reserve Bank. Note 4 - Investment Securities The amortized cost, gross unrealized gains and losses and estimated fair values of available-for-sale and held-to-maturity securities by major security type at December 31, 2004 and 2003 were as follows (in thousands):
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ------------ ------------ ----------- 2004 Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and Agencies $92,369 $ 35 $(507) $91,897 Obligations of states and political Subdivisions 23,581 755 (2) 24,334 Mortgage-backed securities 34,032 220 (54) 34,198 Federal Home Loan Bank stock 5,293 - - 5,293 Other securities 12,524 575 - 13,099 ----------- ------------ ------------ ----------- Total available-for-sale $167,799 $ 1,585 $ (563) $168,821 =========== ============ ============ =========== Held-to-maturity: Obligations of states and political Subdivisions $ 1,552 $ 48 $ (2) $ 1,598 =========== ============ ============ =========== 2003 Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and Agencies $109,544 $ 786 $ (98) $110,232 Obligations of states and political Subdivisions 25,218 1,229 - 26,447 Mortgage-backed securities 21,607 259 (94) 21,772 Federal Home Loan Bank stock 5,000 - - 5,000 Other securities 12,521 509 - 13,030 ----------- ------------ ------------ ----------- Total available-for-sale $173,890 $ 2,783 $ (192) $176,481 =========== ============ ============ =========== Held-to-maturity: Obligations of states and political Subdivisions $ 1,677 $ 12 $ (2) $ 1,687 =========== ============ ============ ===========
Proceeds from sales of investment securities and realized gains and losses were as follows during the years ended December 31, 2004, 2003 and 2002 (in thousands): 2004 2003 2002 ---------- ---------- ---------- Proceeds from sales $5,137 $13,815 $12,091 Gross gains 92 370 223 Gross losses - - - The following table presents the age of gross unrealized losses and fair value by investment category (in thousands) as of December 31, 2004:
Less than 12 months 12 months or more Total -------------------- -------------------- --------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses --------- ---------- --------- ---------- --------- ----------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $76,886 $(507) $ - $ - $76,886 $(507) Obligations of states and political subdivisions 2,659 (4) - - 2,659 (4) Mortgage-backed securities 11,505 (54) - - 11,505 (54) --------- ---------- --------- ---------- --------- ----------- Total $91,050 $ (565) $ - $ - $91,050 $ (565) ========= ========== ========= ========== ========= ===========
Management does not believe any individual unrealized loss as of December 31, 2004 represents an other than temporary impairment. The unrealized losses reported for U.S. agency securities relate primarily to eleven securities issued by Federal Home Loan Bank and five U.S. Treasury securities. These unrealized losses are primarily attributable to changes in interest rates and individually were 2% or less of their respective amortized cost basis. The unrealized losses reported for mortgage-backed securities relate primarily to three securities issued by FHLMC. These unrealized losses are also primarily attributable to changes in interest rates and individually were 2% or less of their respective amortized cost basis. The Company has both the intent and ability to hold the securities included in the above table for a time necessary to recover the amortized cost. Maturities of investment securities were as follows at December 31, 2004 (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 $25,663 $25,618 Due after one-five years 58,859 58,750 Due after five-ten years 24,163 24,566 Due after ten years 25,082 25,689 -------------- -------------- 133,767 134,623 Mortgage-backed securities 34,032 34,198 -------------- -------------- Total available-for-sale $167,799 $168,821 -------------- -------------- Held-to-maturity: Due in one year or less $ 140 $ 140 Due after one-five years 600 629 Due after five-ten years 280 295 Due after ten-years 532 534 -------------- -------------- Total held-to-maturity $ 1,552 $ 1,598 -------------- -------------- Total investment securities $169,351 $170,419 ============== ============== Investment securities of approximately $143,560,000 and $147,603,000 at December 31, 2004 and 2003, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law. Note 5 - Loans A summary of loans at December 31, 2004 and 2003 follows (in thousands): 2004 2003 --------------- ---------------- Commercial, financial and agricultural $137,738 $131,620 Real estate mortgage 427,154 390,841 Installment 30,592 28,952 Other 2,375 1,442 --------------- ---------------- Total gross loans 597,859 552,855 Less unearned discount 10 31 --------------- ---------------- Net loans $597,849 $552,824 =============== ================ The real estate mortgage loan balance in the above table includes loans held for sale of $2,689,000 and $751,000 at December 31, 2004 and 2003, 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 $25,079,000 and $22,101,000 at December 31, 2004 and 2003, respectively. Activity during 2004 was as follows (in thousands): Balance at December 31, 2003 $22,101 New loans 8,100 Loan repayments (5,122) ----------------- Balance at December 31, 2004 $25,079 ================= The aggregate principal balances of nonaccrual, past due and renegotiated loans were as follows at December 31, 2004 and 2003 (in thousands): 2004 2003 ---------------- --------------- Nonaccrual loans $3,106 $3,296 Renegotiated loans which are performing in accordance with revised terms - 35 Interest income which would have been recorded under the original terms of such nonaccrual or renegotiated loans totaled $169,000, $213,000 and $164,000 in 2004, 2003 and 2002, respectively. Impaired loans are defined as those loans where it is probable that amounts due according to contractual terms, including principal and interest, will not be collected. Both nonaccrual and renegotiated loans meet this definition. The Company evaluates all individual loans on nonaccrual or renegotiated with a balance over $100,000 for impairment. Impaired loans are measured by the Company at the present value of expected future cash flows or, alternatively, if the loan is collateral dependant, at the fair value of the collateral. Known losses of principal on these loans have been charged off. Interest income on nonaccrual loans is recognized only at the time cash is received. Interest income on renegotiated loans is recorded according to the most recently agreed upon contractual terms. The following table presents information on impaired loans at December 31, 2004 and 2003 (in thousands): 2004 2003 ----------- ----------- Impaired loans for which a specific allowance has been provided $ 790 $ 858 Impaired loans for which no specific allowance has been provided 2,316 2,438 ----------- ----------- Total loans determined to be impaired $3,106 $3,296 =========== =========== Allowance on impaired loans $ 39 $ 90 =========== =========== For the year ended December 31, 2004 2003 ----------- ----------- Average recorded investment in impaired loans $3,324 $4,434 Cash basis interest income recognized from impaired loans 97 114 Most of the Company's business activities are with customers located within east central Illinois. At December 31, 2004 and 2003, the Company's loan portfolio included approximately $91,477,000 and $93,340,000, 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, 2004 and 2003 was approximately $10,830,000 and $14,360,000, respectively. Note 6 - Allowance for Loan Losses Changes in the allowance for loan losses were as follows during the three-year period ended December 31, 2004, 2003 and 2002 (in thousands): 2004 2003 2002 ------------ ------------- ------------ Balance, beginning of year $4,426 $3,723 $3,702 Provision for loan losses 588 1,000 1,075 Recoveries 195 481 74 Charge-offs (588) (778) (1,128) ------------ ------------- ------------ Balance, end of year $4,621 $4,426 $3,723 ============ ============= ============ Note 7 - Premises and Equipment, Net Premises and equipment at December 31, 2004 and 2003 consisted of (in thousands): 2004 2003 ------------ ------------ Land $ 3,364 $ 3,364 Buildings and improvements 14,806 14,544 Furniture and equipment 10,262 10,264 Leasehold improvements 1,049 1,049 Construction in progress 29 105 ------------ ------------ Subtotal 29,510 29,326 Accumulated depreciation and amortization 14,283 13,267 ------------ ------------ Total $15,227 $16,059 ============ ============ Depreciation and amortization expense was $1,721,000, $1,909,000 and $1,946,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Note 8 - Goodwill and Intangible Assets The Company has goodwill from business combinations, intangible assets from branch acquisitions, identifiable intangible assets assigned to core deposit relationships and customer lists of insurance agencies acquired, and intangible assets arising from the rights to service mortgage loans for others. As of January 1, 2002, the date of adoption of SFAS 142 and the effective date of SFAS 147, the Company had unamortized goodwill of $9 million, which was subject to the transition provisions of SFAS 142 and SFAS 147, and is no longer being amortized. The Company also had $2.1 million of intangible assets for an acquisition of a branch whereby the liabilities assumed were greater than the assets obtained and was not considered an acquisition of a business, $1.3 million of core deposit intangibles, and $217,000 of intangible assets arising from the rights to service mortgage loans for others, all which continue to be amortized. In January 2002, the Company added an additional $1.9 million of amortizable intangibles as a result of the acquisition of Checkley. The following table presents gross carrying amount and accumulated amortization by major intangible asset class as of December 31, 2004 and 2003 (in thousands):
2004 2003 ---------------------------------- --------------------------------- Gross Accumulated Gross Accumulated Carrying Carrying Value Amortization Value Amortization --------------- ------------------ -------------- ------------------ Goodwill not subject to amortization $12,794 $3,760 $12,794 $3,760 Intangibles from branch acquisition 3,015 1,559 3,015 1,358 Core deposit intangibles 2,805 2,279 2,805 2,089 Mortgage servicing rights 608 593 608 551 Customer list intangibles 1,904 555 1,904 365 --------------- ------------------ -------------- ------------------ $21,126 $8,746 $21,126 $8,123 =============== ================== ============== ==================
Total amortization expense for the years ended December 31, 2004, 2003 and 2002 was as follows (in thousands): 2004 2003 2002 ----------- ------------ ----------- Intangibles from branch acquisitions $201 $201 $201 Core deposit intangibles 190 282 300 Mortgage servicing rights 41 100 66 Customer list intangibles 191 191 175 ----------- ------------ ----------- $623 $774 $742 =========== ============ =========== Estimated amortization expense for each of the five succeeding years is shown in the table below (in thousands): Estimated amortization expense: For period ended 12/31/05 $578 For period ended 12/31/06 $579 For period ended 12/31/07 $515 For period ended 12/31/08 $454 For period ended 12/31/09 $417 In accordance with the provisions of SFAS 142, the Company performed testing of goodwill for impairment as of September 30, 2004 and 2003, and determined, as of each of these dates, that goodwill was not impaired. Management also concluded that the remaining amounts and amortization periods were appropriate for all intangible assets. Note 9 - Deposits As of December 31, 2004 and 2003, deposits consisted of the following (in thousands): 2004 2003 ------------------- ------------------ Demand deposits: Non-interest bearing $ 85,524 $ 94,723 Interest-bearing 146,668 143,324 Savings 57,897 58,862 Money market 83,793 70,795 Time deposits 276,358 247,288 ------------------- ------------------ Total deposits $650,240 $614,992 =================== ================== Total interest expense on deposits for the years ended December 31, 2004, 2003 and 2002 was as follows (in thousands): 2004 2003 2002 ----------- ------------ ------------ Interest-bearing demand $ 759 $ 907 $ 1,542 Savings 203 263 799 Money market 809 872 1,125 Time deposits 7,351 7,709 8,787 ----------- ------------ ------------ Total $9,122 $9,751 $12,253 =========== ============ ============ As of December 31, 2004, 2003 and 2002, 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): 2004 2003 2002 ------------- ------------- ------------- Outstanding $115,333 $84,516 $93,951 Interest expense for the year 2,956 2,462 2,766 The following table shows the amount of maturities for all time deposits as of December 31, 2004 (in thousands): Less than 1 year $150,520 1 year to 2 years 63,637 2 years to 3 years 50,460 3 years to 4 years 4,746 Over 4 years 6,995 ------------------ Total $276,358 ================== In 2004, the Company's significant deposits included brokered CDs, time deposits with the State of Illinois, and a deposit relationship with a public entity. The Company had thirteen brokered CDs at various maturities with a total balance of $42.1 million as of December 31, 2004. State of Illinois time deposits maintained with the Company totaled $4.4 million as of December 31, 2004. These balances are subject to bid annually. In addition, the Company maintains account relationships with various public entities throughout their market areas. One public entity had total balances of $22.8 million in various checking accounts and time deposits as of December 31, 2004. These balances are subject to change depending upon the cash flow needs of the public entity. Note 10 - Other Borrowings As of December 31, 2004 and 2003 other borrowings consisted of the following (in thousands): 2004 2003 ------------- -------------- Securities sold under agreements to repurchase $59,835 $59,875 Federal Home Loan Bank advances: Fixed-term advances 25,300 30,300 Subordinated debentures 10,310 - Other debt: Loans due in one year or less 4,200 9,025 Loans due after one year 400 600 ------------- -------------- Total $100,045 $99,800 ============= ============== The Federal Home Loan Bank fixed-term advances at December 31, 2004 consisted of the following: * $5 million advance at 6.16%, due March 21, 2005, callable quarterly * $2.3 million advance at 6.10%, due April 7, 2005, callable quarterly * $5 million advance at 6.12%, due September 6, 2005, callable quarterly * $5 million advance at 5.34%, due December 14, 2005, callable quarterly * $3 million advance at 5.98%, due March 1, 2011 * $5 million advance at 4.33%, due November 23, 2011, five year lockout, one-time call 11/23/06 2004 2003 2002 ---------- --------- --------- Securities sold under agreements to repurchase: Maximum outstanding at any month-end $63,517 $59,875 $44,588 Average amount outstanding for the year 55,645 47,795 34,389 First Mid Bank has collateral pledge agreements whereby it has agreed to keep on hand at all times, free of all other pledges, liens, and encumbrances, whole first mortgages on improved residential property with unpaid principal balances aggregating no less than 159% of the outstanding advances and letters of credit ($8 million on December 31, 2004) from the FHLB. The securities underlying the repurchase agreements are under the Company's control. The Company had debt outstanding of $4.6 million as of December 31, 2004, consisting of a loan agreement with The Northern Trust Company with a balance of $4 million and $.6 million remaining on a $1 million promissory note for the Checkley acquisition of which $.2 million is due in one year or less and $.4 million is due after one year. As of December 31, 2003, the Company's debt outstanding of $9.625 million consisted of a loan agreement with The Northern Trust Company with a balance of $8.825 million and $.8 million on a $1 million promissory note for the Checkley acquisition of which $200,000 was due in one year or less and $600,000 was due after one year. Terms of the Northern Trust loan agreement are a floating interest rate of 1.25% over the federal funds rate with interest due quarterly. The interest rate as of December 31, 2004 was 3.48% (2.22% at December 31, 2003). The loan is a revolving credit agreement with a maximum available balance of $15 million. The outstanding loan balance matures October 22, 2005. Management of the Company expects this loan to be renewed in the future. The loan is secured by all of the common stock of First Mid Bank. The borrowing agreement contains requirements for the Company and First Mid Bank to maintain various operating and capital ratios and also contains requirements for prior lender approval for certain sales of assets, merger activity, the acquisition or issuance of debt and the acquisition of treasury stock. The Company and First Mid Bank were in compliance with the existing covenants at December 31, 2004 and 2003. The $600,000 balance remaining on the promissory note resulting from the acquisition of Checkley has an annual interest rate equal to the prime rate listed in the money rate section of the Wall Street Journal (5.25% as of December 31, 2004) and principal payable in the amount of $200,000 annually over five years, with a final maturity of January 2007. On February 27, 2004, the Company completed the issuance and sale of $10 million of floating rate trust preferred securities through First Mid-Illinois Statutory Trust I (the "Trust"), a statutory business trust and wholly-owned subsidiary of the Company, as part of a pooled offering. The Company established the Trust for the purpose of issuing the trust preferred securities. Upon adoption of FIN 46R, the Company was required to de-consolidate its investment in the Trust. The $10 million in proceeds from the trust preferred issuance and an additional $310,000 for the Company's investment in common equity of the Trust, a total of $10,310,000, was invested in junior subordinated debentures of the Company. The underlying junior subordinated debentures issued by the Company to the Trust mature in 2034, bear interest at three-month London Interbank Offered Rate ("LIBOR") plus 280 basis points, reset quarterly, and are callable, at the option of the Company, at par on or after April 7, 2009. The Company intends to use the proceeds of the offering for general corporate purposes. The trust preferred securities issued by the Trust are included as Tier 1 capital of the Company for regulatory capital purposes. On July 2, 2003, the Federal Reserve Board issued a supervisory letter instructing bank holding companies to continue to include trust preferred securities in the calculation of Tier 1 capital for regulatory purposes until further notice. As a result of the issuance of FIN 46R, the Federal Reserve Board is currently evaluating whether de-consolidation of the Trust will affect the qualification of the trust preferred securities as Tier 1 capital. If it is determined that the trust preferred securities no longer qualify as Tier 1 capital, the Company would still be classified as well-capitalized. Note 11 - Regulatory Capital The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Bank holding companies follow minimum regulatory requirements established by the Federal Reserve Board. First Mid Bank follows similar minimum regulatory requirements established for national banks by the OCC. Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Quantitative measures established by each regulatory agency to ensure capital adequacy require the reporting institutions to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2004 and 2003, that all capital adequacy requirements have been met. As of December 31, 2004 and 2003, the most recent notification from the primary regulators categorized First Mid Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios must be maintained as set forth in the table. At December 31, 2004, there are no conditions or events since the most recent notification that management believes have changed this categorization.
To Be Well Capitalized Under For Capital Prompt Corrective (dollars in thousands) Actual Adequacy Purposes Action Provisions ------------------------ ------------------------- -------------------------- Amount Ratio Amount Ratio Amount Ratio ------------ ----------- ------------ ------------ ------------ ------------- December 31, 2004 Total Capital (to risk-weighted assets) Company $ 70,787 11.71% $ 48,371 > 8.00% N/A N/A - First Mid Bank 71,233 11.88 47,988 > 8.00 $59,986 > 10.00% - - Tier 1 Capital (to risk-weighted assets) Company 66,166 10.94 24,185 > 4.00 N/A N/A - First Mid Bank 66,612 11.10 23,994 > 4.00 35,991 > 6.00 - - Tier 1 Capital (to average assets) Company 66,166 7.99 33,132 > 4.00 N/A N/A - First Mid Bank 66,612 8.08 32,961 > 4.00 41,201 > 5.00 - - December 31, 2003 Total Capital (to risk-weighted assets) Company $ 60,494 10.61% $ 45,613 > 8.00% N/A N/A - First Mid Bank 65,356 11.57 45,190 > 8.00 $56,488 > 10.00% - - Tier 1 Capital (to risk-weighted assets) Company 56,068 9.83 22,807 > 4.00 N/A N/A - First Mid Bank 60,930 10.79 22,595 > 4.00 33,893 > 6.00 - - Tier 1 Capital (to average assets) Company 56,068 7.18 31,217 > 4.00 N/A N/A - First Mid Bank 60,930 7.85 31,059 > 4.00 38,824 > 5.00 - -
Note 12 - Disclosure of Fair Values of Financial Instruments Statement of Financial Accounting Standards No. 107 "Disclosures about Fair Value of Financial Instruments" ("SFAS 107") requires the disclosure of the estimated fair value of financial instrument assets and liabilities. For the Company, as for most financial institutions, most of the assets and liabilities are considered financial instruments as defined in SFAS 107. However, many of the Company's financial instruments lack an available trading market as characterized by a willing buyer and seller engaging in an exchange transaction. Additionally, the Company's general practice and intent is to hold its financial instruments until maturity and not to engage in trading or sales activity. Accordingly, the Company, for purposes of the SFAS 107 disclosure, used significant assumptions and estimations as well as present value calculations. Future changes in these assumptions or methodologies may have a material effect on estimated fair values. The Company has determined estimated fair values using the best available information and an estimation methodology suitable for each category of financial instrument. The estimation methodology used, the estimated fair values and the carrying amount at December 31, 2004 and 2003 were as follows (in thousands): Financial instruments for which an active secondary market exists have been valued using quoted available market prices.
2004 2003 ------------------------------ ----------------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------------- --------------- -------------- -------------- Cash and cash equivalents $ 23,554 $ 23,554 $ 24,949 $ 24,949 Investments available-for-sale 168,821 168,821 176,481 176,481 Investments held-to-maturity 1,552 1,598 1,677 1,687
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.
2004 2003 ------------------------------ ------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value --------------- -------------- -------------- --------------- Deposits with stated maturities $273,947 $275,578 $247,282 $249,857 Securities sold under agreements to repurchase 59,835 59,847 59,875 59,872 Federal Home Loan Bank advances 25,300 26,178 30,300 32,313
Financial instrument liabilities without stated maturities and floating rate debt have estimated fair values equal to both the amount payable on demand and the carrying amount.
2004 2003 ------------------------------ ------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value --------------- -------------- -------------- --------------- Deposits with no stated maturity $376,293 $376,293 $367,710 $367,710 Floating rate debt 4,600 4,600 9,625 9,625
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.
2004 2003 ------------------------------ ------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value --------------- -------------- -------------- --------------- Net loan portfolio $593,228 $596,175 $548,398 $555,154
Off-balance sheet items such as loan commitments and stand-by letters of credit generally approximate their estimated fair values. Note 13 - 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 $570,000, $544,000 and $516,000 in 2004, 2003 and 2002, respectively. The Company also has two agreements in place to pay $50,000 annually for 20 years from the retirement date to one retired senior officer of the Company and to one current senior officer. Total expense under these two agreements amounted to $610,000 in 2004 and $81,000 per year in 2003 and 2002. During the fourth quarter of 2004, the Company revised its estimate for supplemental retirement benefits and made a non-recurring entry of $528,000 to expense to reflect the change in the estimate. Note 14 - Stock Option Plan The Company established a Stock Incentive Plan ("SI Plan") intended to provide a means whereby directors and certain officers can acquire shares of the Company's common stock. A maximum of 450,000 shares have been authorized under the SI Plan. Options to acquire shares will be awarded at an exercise price equal to the fair market value of the shares on the date of grant. Options to acquire shares have a 10-year term. Options granted to employees vest over a four-year period and those options granted to directors vest at the time they are issued. A summary of the status of stock options under the SI Plan at December 31, 2004, 2003 and 2002 and changes during the years then ended are presented in the following table:
2004 2003 2002 -------------------------- ---------------------------- --------------------------- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------ ------------- ------------ --------------- ------------- ------------- Beginning of year 305,343 $18.97 251,156 $15.10 197,625 $14.04 Granted 74,250 41.00 72,000 31.00 65,250 18.17 Exercised (22,937) 14.15 (17,813) 12.85 (11,719) 14.29 ------------ ------------- ------------ --------------- ------------- ------------- End of year 356,656 $23.86 305,343 $18.97 251,156 $15.10 ============ ============= ============ =============== ============= ============= Options exercisable 176,380 $19.33 140,441 $16.31 99,848 $13.31 ============ ============= ============ =============== ============= ============= Fair value of options granted during year $ 7.81 $ 5.79 $ 4.40 ============= =============== =============
The Company applies APB Opinion No. 25 in accounting for the SI Plan and, accordingly, compensation cost based on fair value at grant date has not been recognized for its stock options in the consolidated financial statements. As required by SFAS 123, "Accounting for Stock-Based Compensation" as amended by SFAS 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," the Company provides pro forma net income and pro forma earnings per share disclosures for employee stock option grants. The following table illustrates the effect on net income if the fair-value-based method had been applied (dollars in thousands).
For the years ended December 31, 2004 2003 2002 --------------- -------------- -------------- Net income, as reported $ 9,751 $ 9,093 $ 8,034 Stock-based compensation expense determined under fair-value-based method, net of related tax effect (259) (206) (143) --------------- -------------- -------------- Pro forma net income $ 9,492 $ 8,887 $ 7,891 =============== ============== ============== Basic Earnings Per Share: As reported $ 2.17 $ 1.92 $ 1.60 Pro forma 2.11 1.87 1.57 Diluted Earnings Per Share: As reported $ 2.13 $ 1.88 $ 1.58 Pro forma 2.07 1.84 1.56
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 2004, 2003 and 2002: 2004 2003 2002 ------------ ----------- ----------- Dividend yield 1.3% 1.8% 1.8% Average risk free interest rate 3.51% 2.49% 4.56% Weighted average expected life 5.2 yrs 9.9 yrs 9.9 yrs Average expected volatility 17.2% 15.5% 15.0% Note 15 - Income Taxes The components of federal and state income tax expense (benefit) for the years ended December 31, 2004, 2003 and 2002 were as follows (in thousands): 2004 2003 2002 ---------------- --------------- ---------------- Current Federal $3,644 $4,183 $3,515 State 719 717 636 ---------------- --------------- ---------------- Total Current 4,363 4,900 4,151 Deferred Federal 156 (186) (119) State 22 (40) (27) ---------------- --------------- ---------------- Total Deferred 178 (226) (146) ---------------- --------------- ---------------- Total $4,541 $4,674 $4,005 ================ =============== ================ Recorded income tax expense differs from the expected tax expense (computed by applying the applicable statutory U.S. Federal tax rate of 35% in 2004 and 2003 and 34% in 2002 to income before income taxes). During 2004 and 2003, the Company was in a graduated tax rate position. The principal reasons for the difference are as follows (in thousands): 2004 2003 2002 -------------- ------------- ------------- Expected income taxes $5,002 $4,819 $4,093 Effects of: Tax-exempt income (530) (550) (577) Nondeductible interest expense 32 35 46 State taxes, net of federal taxes 487 440 402 Other items (350) 19 41 Effect of marginal tax rate (100) (89) - -------------- ------------- ------------- Total $4,541 $4,674 $4,005 ============== ============= ============= The Company reduced its accrual for taxes in 2004 by $355,000 based upon management's best estimate of future tax liability. Tax returns filed with the Internal Revenue Service and Illinois Department of Revenue are subject to review by law under a three-year statute of limitations. The tax effects of the temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2004 and 2003 are presented below (in thousands): 2004 2003 --------------- ---------------- Deferred tax assets: Allowance for loan losses $ 1,801 $ 1,725 Deferred compensation 696 619 Supplemental retirement 289 71 Other 68 48 --------------- ---------------- Total gross deferred tax assets $ 2,854 $ 2,463 --------------- ---------------- Deferred tax liabilities: Deferred loan costs $ 133 $ - Goodwill 378 253 FHLB stock dividend 407 293 Core deposit premium amortization 57 (5) Depreciation 41 (128) Purchase accounting 63 88 Other 42 51 Available-for-sale investment securities 398 1,009 --------------- ---------------- Total gross deferred tax liabilities $1,519 $ 1,561 --------------- ---------------- Net deferred tax assets $1,335 $ 902 =============== ================ Net deferred tax assets are recorded in other assets on the consolidated balance sheets. No valuation allowance related to deferred tax assets has been recorded at December 31, 2004 and 2003 as management believes it is more likely than not that the deferred tax assets will be fully realized. Note 16 - Dividend Restrictions Banking regulations impose restrictions on the ability of First Mid Bank to pay dividends to the Company. At December 31, 2004, regulatory approval would have been required for aggregate dividends from First Mid Bank to the Company in excess of approximately $14.8 million. The amount of such dividends that could be paid is further restricted by the limitations of sound and prudent banking principles. Note 17 - Commitments and Contingent Liabilities First Mid Bank enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, letters of credit and other commitments to extend credit. Each of these instruments involves, to varying degrees, elements of credit, and interest rate and liquidity risk in excess of the amounts recognized in the consolidated balance sheets. The Company uses the same credit policies and requires similar collateral in approving lines of credit and commitments and issuing letters of credit as it does in making loans. The exposure to credit losses on financial instruments is represented by the contractual amount of these instruments. However, the Company does not anticipate any losses from these instruments. The off-balance sheet financial instruments whose contract amounts represent credit risk at December 31, 2004 and 2003 are as follows (in thousands): 2004 2003 ------------- ------------ Unused commitments including lines of credit: Commercial real estate $25,837 $24,283 Commercial operating 35,986 32,928 Home Equity 16,002 13,207 Other 13,577 14,991 ------------- ------------ Total $91,402 $85,409 ============= ============ Standby letters of credit $2,840 $2,440 ============= ============ Commitments to originate credit represent approved commercial, residential real estate and home equity loans that generally are expected to be funded within ninety days. Lines of credit are agreements by which the Company agrees to provide a borrowing accommodation up to a stated amount as long as there is no violation of any condition established in the loan agreement. Both commitments to originate credit and lines of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the liens and some commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by the Company to guarantee the financial performance of customers to third parties. Standby letters of credit are primarily issued to facilitate trade or support borrowing arrangements and generally expire in one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit facilities to customers. The maximum amount of credit that would be extended under letters of credit is equal to the total off-balance sheet contract amount of such instrument. Note 18 - Parent Company Only Financial Statements Presented below are condensed balance sheets, statements of income and cash flows for the Company (in thousands): First Mid-Illinois Bancshares, Inc. (Parent Company) Balance Sheets December 31, 2004 2003 ------------ ----------- Assets Cash $ 36 $ 1,743 Premises and equipment, net 268 275 Investment in subsidiaries 82,179 77,209 Other assets 3,115 3,647 ------------ ----------- Total Assets $85,598 $82,874 ============ =========== Liabilities and Stockholders' equity Liabilities Dividends payable $ 1,073 $ 1,256 Debt 14,910 9,625 Other liabilities 461 1,398 ------------ ----------- Total Liabilities 16,444 12,279 Stockholders' equity 69,154 70,595 ------------ ----------- Total Liabilities and Stockholders' equity $85,598 $82,874 ============ =========== First Mid-Illinois Bancshares, Inc. (Parent Company) Statements of Income Years ended December 31, 2004 2003 2002 --------- --------- ---------- Income: Dividends from subsidiaries $5,156 $4,922 $3,515 Other income 104 80 42 --------- --------- ---------- 5,260 5,002 3,557 Operating expenses 2,212 1,068 1,205 --------- --------- ---------- Income before income taxes and equity in undistributed earnings of subsidiaries 3,048 3,934 2,352 Income tax benefit 1,202 381 425 --------- --------- ---------- Income before equity in undistributed earnings of subsidiaries 4,250 4,315 2,777 Equity in undistributed earnings of subsidiaries 5,501 4,778 5,257 --------- --------- ---------- Net income $9,751 $9,093 $8,034 ========= ========= ========== First Mid-Illinois Bancshares, Inc. (Parent Company) Statements of Cash Flows Years ended December 31, 2004 2003 2002 --------- --------- ---------- Cash flows from operating activities: Net income $9,751 $9,093 $8,034 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization, accretion, net 7 6 2 Equity in undistributed earnings of subsidiaries (5,501) (4,778) (5,257) (Increase) decrease in other assets 209 (1,292) (1,495) (Decrease) increase in other liabilities (631) 1,301 (12) --------- --------- ---------- Net cash provided by operating activities 3,835 4,330 1,272 --------- --------- ---------- Cash flows from financing activities: Repayment of debt (11,700) (200) (3,525) Proceeds from debt 6,675 500 8,525 Issuance of subordinated debt 10,000 - - Proceeds from issuance of common stock 802 895 481 Purchase of treasury stock (10,365) (4,233) (6,540) Dividends paid on common stock (954) (778) (674) --------- --------- ---------- Net cash used in financing activities (5,542) (3,816) (1,733) --------- --------- ---------- (Decrease) increase in cash (1,707) 514 (461) Cash at beginning of year 1,743 1,229 1,690 --------- --------- ---------- Cash at end of year $ 36 $ 1,743 $ 1,229 ========= ========= ========== Note 19 - Quarterly Financial Data - Unaudited The following table presents summarized quarterly data for each of the two years ended December 31:
Quarters ended in 2004 March 31 June 30 September 30 December 31 (1) ------------- ------------- -------------- ---------------- Selected operations data: Interest income $9,727 $9,761 $10,099 $10,437 Interest expense 2,687 2,727 2,986 3,244 ------------- ------------- -------------- ---------------- Net interest income 7,040 7,034 7,113 7,193 Provision for loan losses 187 188 62 151 ------------- ------------- -------------- ---------------- Net interest income after 6,853 6,846 7,051 7,042 provision for loan losses Other income 2,898 2,943 2,876 2,922 Other expense 6,168 6,236 6,252 6,483 ------------- ------------- -------------- ---------------- Income before income taxes 3,583 3,553 3,675 3,481 Income taxes 1,194 1,190 1,246 911 ------------- ------------- -------------- ---------------- Net income $ 2,389 $ 2,363 $ 2,429 $ 2,570 ============= ============= ============== ================ Basic earnings per share $0.52 $0.53 $0.54 $0.58 Diluted earnings per share $0.51 $0.52 $0.53 $0.57
(1) During the fourth quarter of 2004, the Company revised its estimates for deferred loan fees and costs, deferred compensation liabilities and accrued income taxes and adjusted its 2004 earnings accordingly. The net effect of these adjustments increased 2004 reported earnings by $147,000 and $.04 per diluted share.
Quarters ended in 2003 March 31 June 30 September 30 December 31 ------------- ------------- -------------- ---------------- Selected operations data: Interest income $9,720 $9,729 $9,667 $9,822 Interest expense 3,240 3,104 2,807 2,745 ------------- ------------- -------------- ---------------- Net interest income 6,480 6,625 6,860 7,077 Provision for loan losses 250 250 250 250 ------------- ------------- -------------- ---------------- Net interest income after 6,230 6,375 6,610 6,827 provision for loan losses Other income 3,300 2,970 3,217 2,768 Other expense 5,936 6,135 6,177 6,282 ------------- ------------- -------------- ---------------- Income before income taxes 3,594 3,210 3,650 3,313 Income taxes 1,232 1,088 1,257 1,097 ------------- ------------- -------------- ---------------- Net income $ 2,362 $ 2,122 $ 2,393 $ 2,216 ============= ============= ============== ================ Basic earnings per share $0.49 $0.45 $0.51 $0.47 Diluted earnings per share $0.49 $0.45 $0.49 $0.45
Report of Independent Registered Public Accounting Firm The Board of Directors First Mid-Illinois Bancshares, Inc.: We have audited the accompanying consolidated balance sheets of First Mid-Illinois Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2004 and 2003, 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, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the financial position of First Mid-Illinois Bancshares, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of First Mid-Illinois Bancshares, Inc.'s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 9, 2005 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. /s/ KPMG LLP Chicago, Illinois March 9, 2005 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures The Company's management carried out an evaluation, under the supervision and with the participation of the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2004. Based upon that evaluation, the chief executive officer along with the chief financial officer concluded that the Company's disclosure controls and procedures as of December 31, 2004, are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings under the Exchange Act. Management's Annual Report on Internal Control over Financial Reporting The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company's internal control over financial reporting is a process designed under the supervision of the Company's chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2004 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in "Internal Control-Integrated Framework." Based on the assessment, management determined that, as of December 31, 2004, the Company's internal control over financial reporting is effective, based on those criteria. Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2004 has been audited by KPMG, LLP, an independent registered public accounting firm, as stated in their report following. /s/ William S. Rowland William S. Rowland President and Chief Executive Officer /s/ Michael L. Taylor Michael L. Taylor Chief Financial Officer Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders First Mid-Illinois Bancshares, Inc.: We have audited management's assessment, included in the accompanying Managements' Report, that First Mid-Illinois Bancshares, Inc. (the Company) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, First Mid-Illinois Bancshares, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of First Mid-Illinois Bancshares, Inc. and subsidiaries as of December 31, 2004 and 2003, 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, 2004, and our report dated March 9, 2005 expressed an unqualified opinion on those consolidated financial statements. /s/ KPMG LLP Chicago, Illinois March 9, 2005 Changes in Internal Controls There were no changes in the Company's internal control over financial reporting that occurred during the Company's fourth fiscal quarter of 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information called for by Item 10 with respect to directors and director nominees is incorporated by reference to the Company's 2005 Proxy Statement under the captions "Proposal 1 - Election of Directors" and "Section 16 - Beneficial Ownership Reporting Compliance." The information called for by Item 10 with respect to executive officers is incorporated by reference to Part I hereof under the caption "Supplemental Item - - Executive Officers of the Company." The information called for by Item 10 with respect to audit committee financial expert is incorporated by reference to the Company's 2005 Proxy Statement under the caption "Report of the Audit Committee to the Board of Directors." The Company has adopted a code of ethics for senior financial management applicable to the Chief Executive Officer and Chief Financial Officer of the Company. A copy of this code of ethics is filed herewith as Exhibit 14.1. This code of ethics is also available on the Company's website. In the event that the Company amends or waives any provisions of this code of ethics, the Company intends to disclose the same on its website at www.firstmid.com. ITEM 11. EXECUTIVE COMPENSATION The information called for by Item 11 is incorporated by reference to the Company's 2005 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 AND RELATED STOCKHOLDER MATTERS The information called for by Item 12 with respect to equity compensation plans is provided in the table below.
Equity Compensation Plan Information ------------------------------------------------------------------------------------- Number of securities to be issued upon Weighted-average Number of securities remaining exercise of exercise price of available for future issuance outstanding options outstanding options under equity compensation plans Plan category (a) (b) (c) ------------------------ ------------------------ ----------------------------------- Equity compensation plans approved by security holders: (1) Deferred Compensation Plan 159,544 $13.50 290,456 (2) Stock Incentive Plan 356,656 23.86 36,375 Equity compensation plans not approved by security holders - - - ------------------------ ------------------------ ----------------------------------- Total 516,200 $20.66 326,831 ======================== ======================== ===================================
The Company's equity compensation plans approved by security holders consist of the Deferred Compensation Plan and the Stock Incentive Plan. Additional information regarding each plan is available in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Stock Plans" and Note 14 - "Stock Option Plans" herein. The information called for by Item 12 with respect to security ownership is incorporated by reference to the Company's 2005 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 2005 Proxy Statement under the caption "Certain Relationships and Related Transactions." ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information called for by Item 14 is incorporated by reference to the Company's 2005 Proxy Statement under the caption "Fees of Independent Auditors." PART IV ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES (a)(1) and (2) -- Financial Statements and Financial Statement Schedules The following consolidated financial statements and financial statement schedules of the Company are filed as part of this document under Item 8. Financial Statements and Supplementary Data: * Consolidated Balance Sheets -- December 31, 2004 and 2003 * Consolidated Statements of Income -- For the Years Ended December 31, 2004, 2003 and 2002 * Consolidated Statements of Changes in Stockholders' Equity -- For the Years Ended December 31, 2004, 2003 and 2002 * Consolidated Statements of Cash Flows -- For the Years Ended December 31, 2004, 2003 and 2002. (a)(3) -- Exhibits The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit Index that follows the Signature Page and immediately precedes the exhibits filed. SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST MID-ILLINOIS BANCSHARES, INC. (Company) Dated: March 9, 2005 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 9th day of March, 2005, by the following persons on behalf of the Company and in the capacities listed. Signature and Title /s/ William S. Rowland William S. Rowland, Chairman of the Board, President and Chief Executive Officer and Director /s/ Michael L. Taylor Michael L. Taylor, Vice President and Chief Financial Officer /s/ Charles A. Adams Charles A. Adams, Director /s/ Kenneth R. Diepholz Kenneth R. Diepholz, Director /s/ Joseph R. Dively Joseph R. Dively, Director /s/ Steven L. Grissom Steven L. Grissom, Director /s/ Daniel E. Marvin, Jr. Daniel E. Marvin, Jr., Director /s/ Gary W. Melvin Gary W. Melvin, Director /s/ Sara Jane Preston Sara Jane Preston, Director /s/ Ray A. Sparks Ray A. Sparks, Director Exhibit Index to Annual Report on Form 10-K - -------------------------------------------------------------------------------- Exhibit Number Description and Filing or Incorporation Reference - -------------------------------------------------------------------------------- 3.1 Restated Certificate of Incorporation and Amendment to Restated Certificate of Incorporation of First Mid-Illinois Bancshares, Inc. Incorporated by reference to Exhibit 3(a) to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987 (File No. 0-13368) 3.2 Restated Bylaws of First Mid-Illinois Bancshares, Inc. and Amendment thereto Incorporated by reference to Exhibit 3.2 to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 0-13368) 4.1 Rights Agreement, dated as of September 21, 1999, between First Mid-Illinois Bancshares, Inc. and Harris Trust and Savings Bank, as Rights Agent Incorporated by reference to Exhibit 4.1 to First Mid-Illinois Bancshares, Inc.'s Registration Statement on Form 8-A filed with the SEC on September 22, 1999 10.1 Employment Agreement between the Company and William S. Rowland Incorporated by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.'s Report on Form 8-K filed with the SEC on December 16, 2004. 10.2 Employment Agreement between the Company and John W. Hedges (Filed herewith) 10.3 Deferred Compensation Plan Incorporated by reference to Exhibit 10.4 to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998 (File No 0-13368) 10.4 1997 Stock Incentive Plan Incorporated by reference to Exhibit 10.5 to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998 (File No 0-13368) 10.5 Supplemental Executive Retirement Plan (Filed herewith) 10.6 Form of Employment Agreement between the Company and certain officers of the Company, including Michael L. Taylor, Robert J. Swift, Jr., Stanley E. Gilliland and Laurel Allenbaugh The agreements are substantially identical in all material respects except as to the parties, the execution dates and the monthly base payout. A sample form of the agreement is filed herewith. 11.1 Statement re: Computation of Earnings Per Share (Filed herewith) 14.1 Form of Code of Ethics The Chief Executive Officer and the Chief Financial Officer signed Code of Ethics with the Company. The forms are identical in all material respects except for the dates signed. A sample form of the Code of Ethics is filed herewith. 21.1 Subsidiaries of the Company (Filed herewith) 23.1 Consent of KPMG LLP (Filed herewith) 31.1 Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 10.2 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into this 1st day of October, 2002, by and between First Mid-Illinois Bancshares, Inc. ("the Company"), a corporation with its principal place of business located in Mattoon, Illinois, and John W. Hedges ("Executive"). In consideration of the promises and mutual covenants and agreements contained herein, the parties hereto acknowledge and agree as follows: ARTICLE ONE TERM AND NATURE OF AGREEMENT 1.01 Term of Agreement. The term of this Agreement shall commence as of October 1, 2002 and shall continue for three years, until September 30, 2005. Thereafter, unless Executive's employment with the Company has been previously terminated, Executive shall continue his employment with the Company on an at will basis and, except as provided in Articles Five, Six and Seven, this Agreement shall terminate unless extended by mutual written agreement. 1.02 Employment. The Company agrees to employ Executive as President of First Mid-Illinois Bank & Trust, N.A. commencing October 1, 1999 and Executive accepts such employment by the Company on the terms and conditions herein set forth. The duties of Executive shall be determined by the Company's Board of Directors and Executive shall adhere to the policies and procedures of the Company and shall follow the supervision and direction of the Board in the performance of such duties. During the term of his employment, Executive agrees to devote his full working time, attention and energies to the diligent and satisfactory performance of his duties hereunder. Executive shall not, while he is employed by the Company, engage in any activity which would (a) interfere with, or have an adverse effect on, the reputation, goodwill or any business relationship of the Company or any of its subsidiaries; (b) result in economic harm to the Company or any of its subsidiaries; or (c) result in a breach of Section Six of the Agreement. ARTICLE TWO COMPENSATION AND BENEFITS While Executive is employed with the Company during the term of this Agreement, the Company shall provide Executive with the following compensation and benefits: 2.01 Base Salary. The Company shall pay Executive an annual base salary of $130,000 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 Vacation. Executive shall be entitled to three (3) weeks of paid vacation each year during the term of this Agreement. 2.05 Fringe Benefits. The Company shall provide the following additional fringe benefits to Executive: (a) Use of a Company-owned or leased vehicle for professional and personal use. (b) An amount equal to the annual dues for a Class "H" membership at the Mattoon Golf and Country Club. (c) Use of a cellular phone for work-related calls and calls associated with Internet connection for Executive's home. 2.06 Other Benefits. Executive shall be eligible (to the extent he qualifies) to participate in any other retirement, health, accident and disability insurance, or similar employee benefit plans as may be maintained from time to time by the Company for its other executives or employees subject to and on a consistent basis with the terms, conditions and overall administration of such plans. 2.07 Business Expenses. Executive shall be entitled to reimbursement by the Company for all reasonable expenses actually and necessarily incurred by him on its behalf in the course of his employment hereunder and in accordance with expense reimbursement plans and policies of the Company from time to time in effect for executive employees. 2.08 Withholding. All salary, incentive compensation and other benefits provided to Executive pursuant to this Agreement shall be subject to withholding for federal, state or local taxes, amounts withheld under applicable employee benefit plans, policies or programs, and any other amounts that may be required to be withheld by law, judicial order or otherwise or by agreement with, or consent of, Executive. ARTICLE THREE DEATH OF EXECUTIVE This Agreement shall terminate prior to the end of the term described in Section 1.01 upon Executive's termination of employment with the Company due to his death. Upon Executive's termination due to death, the Company shall pay Executive's estate the amount of Executive's base salary and his accrued but unused vacation time earned through the date of such death and any incentive compensation earned for the preceding fiscal year that is not yet paid as of the date of such death. ARTICLE FOUR TERMINATION OF EMPLOYMENT Executive's employment with the Company may be terminated by Executive or by the Company at any time for any reason. Upon Executive's termination of employment prior to the end of the term of the Agreement, the Company shall pay Executive as follows: 4.01 Termination by the Company for Other Than Cause. If the Company terminates Executive's employment for any reason other than Cause, the Company shall pay Executive the following: (a) An amount equal to Executive's monthly base salary in effect at the time of such termination of employment for a period of twelve (12) months thereafter. Such amount shall be paid to Executive periodically in accordance with the Company's customary payroll practices for executive employees. (b) The base salary and accrued but unused paid vacation time earned through the date of termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. (c) Continued coverage for Executive and/or Executive's family under the Company's health plan pursuant to Title I, Part 6 of the Employee Retirement Income Security Act of 1974 ("COBRA") and for such purpose the date of Executive's termination of employment shall be considered the date of the "qualifying event" as such term is defined by COBRA. During the twelve month period beginning on the date of such termination, the Executive shall be charged for such coverage in the amount that he would have paid for such coverage had he remained employed by the Company, and for the duration of the COBRA period, the Executive shall be charged for such coverage in accordance with the provisions of COBRA. (d) For purposes of this Agreement, "Cause" shall mean Executive's (i) conviction in a court of law of (or entering a plea of guilty or no contest to) any crime or offense involving fraud, dishonesty or breach of trust or involving a felony; (ii) performance of any act which, if known to the customers, clients, stockholders or regulators of the Company, would materially and adversely impact the business of the Company; (iii) act or omission that causes a regulatory body with jurisdiction over the Company to demand, request, or recommend that Executive be suspended or removed from any position in which Executive serves with the Company; (iv) substantial nonperformance of any of his obligations under this Agreement; (v) misappropriation of or intentional material damage to the property or business of the Company or any affiliate; or (vi) breach of Article Five or Six of this Agreement. 4.02 Termination Following a Change in Control. Notwithstanding Section 4.01, if, following a Change in Control, Executive's employment is terminated by the Company (or any successor thereto) for any reason other than Cause, or if Executive terminates his employment because of a decrease in his then current base salary or a substantial diminution in his position and responsibilities, the Company (or any successor thereto) shall pay Executive the following: (a) Two times Executive's annual base salary in effect at the time of such termination. Such amount shall be paid, at Executive's election, in either a lump sum payment as soon as practicable following the date of such termination or periodically in accordance with the Company's or successor's customary payroll practices for executive employees. (b) An amount equal to the incentive compensation earned by or paid to Executive for the fiscal year immediately preceding the year in which Executive's termination of employment occurs. Such amount shall be paid to Executive in a lump sum as soon as practicable after the date of his termination. (c) The base salary and accrued but unused paid vacation time earned through the date of termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. (d) Continued coverage for Executive and/or Executive's family under the Company's health plan pursuant to Title I, Part 6 of the Employee Retirement Income Security Act of 1974 ("COBRA") and for such purpose the date of Executive's termination of employment shall be considered the date of the "qualifying event" as such term is defined by COBRA. During the twelve month period beginning on the date of such termination, the Executive shall be charged for such coverage in the amount that he would have paid for such coverage had he remained employed by the Company, and for the duration of the COBRA period, the Executive shall be charged for such coverage in accordance with the provisions of COBRA. For purposes of this Agreement, "Change in Control" shall have the meaning as set forth in the First Mid-Illinois Bancshares, Inc. 1997 Stock Incentive Plan. 4.03 Other Termination of Employment. If the Company terminates Executive's employment for Cause, or if Executive terminates his employment for any reason other than as described in Section 4.02 above, the Company shall pay Executive the base salary and accrued but unused paid vacation time earned through the date of such termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. ARTICLE FIVE CONFIDENTIAL INFORMATION 5.01 Non-Disclosure of Confidential Information. During his employment with Company, and after his termination of such employment with the Company, Executive shall not, in any form or manner, directly or indirectly, use, divulge, disclose or communicate to any person, entity, firm, corporation or any other third party, any Confidential Information, except as required in the performance of Executive's duties hereunder, as required by law or as necessary in conjunction with legal proceedings. 5.02 Definition of Confidential Information. For the purposes of this Agreement, the term "Confidential Information" shall mean any and all information either developed by Executive during his employment with the Company and used by the Company or its affiliates or developed by or for the Company or its affiliates of which Executive gained knowledge by reason of his employment with the Company that is not readily available in or known to the general public or the industry in which the Company or any affiliate is or becomes engaged. Such Confidential Information shall include, but shall not be limited to, any technical or non-technical data, formulae, compilations, programs, devices, methods, techniques, procedures, manuals, financial data, business plans, lists of actual or potential customers. Lists of employees and any information regarding the Company's or any affiliate's products, marketing or database. The Company and Executive acknowledge and agree that such Confidential Information is extremely valuable to the Company and may constitute trade secret information under applicable law. In the event that any part of the Confidential Information becomes generally known to the public through legitimate origins (other than by the breach of this Agreement by Executive or by other misappropriation of the Confidential Information), that part of the Confidential Information shall no longer be deemed Confidential Information for the purposes of this Agreement, but Executive shall continue to be bound by the terms of this Agreement as to all other Confidential Information. 5.03 Delivery Upon Termination. Upon termination of Executive's employment with the Company for any reason, Executive shall promptly deliver to the Company all correspondence, files, manuals, letters, notes, notebooks, reports, programs, plans, proposals, financial documents, and any other documents or data concerning the Company's or any affiliate's customers, database, business plan, marketing strategies, processes or other materials which contain Confidential Information, together with all other property of the Company or any affiliate in Executive's possession, custody or control. ARTICLE SIX NON-COMPETE AND NON-SOLICITATION COVENANTS 6.01 Covenant Not to Compete. During the term of this Agreement and for a period of two years following the later of (i) the termination of Executive's employment for any reason or (ii) the last day of the term of the Agreement, Executive shall not, on behalf of himself or on behalf of another person, corporation, partnership, trust or other entity, within the counties of Coles, Moultrie, Douglas, Cumberland, Effingham, Champaign, Christian or Piatt, Illinois: (a) Directly or indirectly own, manage, operate, control, participate in the ownership, management, operation or control of, be connected with or have any financial interest in, or serve as an officer, employee, advisor, consultant, agent or otherwise to any person, firm, partnership, corporation, trust or other entity which owns or operates a business similar to that of the Company or its affiliates. (b) Solicit for sale, represent, and/or sell Competing Products to any person or entity who or which was the Company's customer or client during the last two years of Executive's employment. "Competing Products," for purposes of this Agreement, means products or services which are similar to, compete with, or can be used for the same purposes as products or services sold or offered for sale by the Company or any affiliate or which were in development by the Company or any affiliate within the last two years of Executive's employment. 6.02 Covenant Not to Solicit. For a period of two years following the later of (i) the termination of Executive's employment for any reason or (ii) the last day of the term of this Agreement, Executive shall not: (a) Attempt in any manner to solicit from any client or customer business of the type performed by the Company or any affiliate or persuade any client or customer of the Company or any affiliate to cease to do such business or to reduce the amount of such business which any such client or customer has customarily done or contemplates doing with the Company or any affiliate, whether or not the relationship between the Company or affiliate and such client or customer was originally established in whole or in part through Executive's efforts. (b) Render any services of the type rendered by the Company or any affiliate for any client or customer of the Company. (c) Solicit or encourage, or assist any other person to solicit or encourage, any employees, agents or representatives of the Company or an affiliate to terminate or alter their relationship with the Company or any affiliate. (d) Do not cause to be done, directly or indirectly, any acts which may impair the relationship between the Company or any affiliate with their respective clients, customers or employees. ARTICLE SEVEN REMEDIES Executive acknowledges that compliance with the provisions of Articles Five and Six herein is necessary to protect the business, goodwill and proprietary information of the Company and that a breach of these covenants will irreparably and continually damage the Company for which money damages may not be inadequate. Consequently, Executive agrees that, in the event that he breaches or threatens to breach any of these provisions, the Company shall be entitled to both (a) a temporary, preliminary or permanent injunction in order to prevent the continuation of such harm; and (b) money damages insofar as they can be determined. In addition, the Company will cease payment of all compensation and benefits under Articles Three and Four hereof. In the event that any of the provisions, covenants, warranties or agreements in this Agreement are held to be in any respect an unreasonable restriction upon the Executive or are otherwise invalid, for whatsoever cause, then the court so holding shall reduce, and is so authorized to reduce, the territory to which it pertains and/or the period of time in which it operates, or the scope of activity to which it pertains or effect any other change to the extent necessary to render any of the restrictions of this Agreement enforceable. ARTICLE EIGHT MISCELLANEOUS 8.01 Successors and Assignability. (a) No rights or obligations of the Company under this Agreement may be assigned or transferred except that the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) No rights or obligations of Executive under this Agreement may be assigned or transferred by Executive other than his rights to payments or benefits hereunder which may be transferred only by will or the laws of descent and distribution. 8.02 Entire Agreement. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and may not be modified except in writing by the parties hereto. Furthermore, the parties hereto specifically agree that all prior agreements, whether written or oral, relating to Executive's employment by the Company shall be of no further force or effect from and after the date hereof. 8.03 Severability. If any phrase, clause or provision of this Agreement is deemed invalid or unenforceable, such phrase, clause or provision shall be deemed severed from this Agreement, but will not affect any other provisions of this Agreement, which shall otherwise remain in full force and effect. If any restriction or limitation in this Agreement is deemed to be unreasonable, onerous or unduly restrictive, it shall not be stricken in its entirety and held totally void and unenforceable, but shall be deemed rewritten and shall remain effective to the maximum extent permissible within reasonable bounds. 8.04 Controlling Law and Jurisdiction. This Agreement shall be governed by and interpreted and construed according to the laws of the State of Illinois. The parties hereby consent to the jurisdiction of the state and federal courts in the State of Illinois in the event that any disputes arise under this Agreement. 8.05 Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (a) on the date of service if served personally on the party to whom notice is to be given; (b) on the day after delivery to an overnight courier service; (c) on the day of transmission if sent via facsimile to the facsimile number given below; or (d) on the third day after mailing, if mailed to the party to whom notice is to be given, by first class mail, registered or certified, postage prepaid and properly addressed, to the party as follows: If to Executive: __________________________ __________________________ __________________________ Facsimile: __________________ If to the Company: First Mid-Illinois Bancshares, Inc. 1515 Charleston Avenue Mattoon IL 61938 Facsimile: 217-258-0485 Attention: Chairman Any party may change its address for the purpose of this Section by giving the other party written notice of its new address in the manner set forth above. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. FIRST MID-ILLINOIS BANCSHARES, INC. By: /s/ William S. Rowland William S. Rowland Title: Chairman of the Board EXECUTIVE: /s/ John W. Hedges John W. Hedges Exhibit 10.5 FIRST MID-ILLINOIS BANCSHARES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN PREAMBLE First Mid-Illinois Bancshares, Inc. has adopted the Supplemental Executive Retirement Plan, effective as of May 21, 1986, for a select group of executive personnel to ensure that the overall effectiveness of the Company's executive compensation program will attract, retain and motivate qualified senior management personnel. SECTION I DEFINITIONS When used herein, the following words shall have the meanings below unless the context clearly indicates otherwise: 1.1 "Affiliated Company" means any trade or business entity (whether or not incorporated), or a predecessor company of such entity, if any, which is a member of a controlled group of corporations of which the Company is also a member or which is under common control with the Company. 1.2 "Committee" means the Compensation Committee of the Board of Directors of the Company. 1.3 "Company" means First Mid-Illinois Bancshares, Inc. and any successor thereto. 1.4 "Designated Beneficiary" means any person or persons designated by a Participant to receive any Supplemental Plan Benefit by reason of his death. Such designation shall be made by written notice delivered to the Committee prior to the date of the Participant's death. 1.5 "Participant" means any employee of the Company or an Affiliated Company who is recommended and designated with respect to participation in the Plan as set forth in Section II. 1.6 "Participation Agreement" means an agreement entered into between the Company and a Participant that sets forth the amount, terms and conditions of a Supplemental Plan Benefit payable to or with respect to a Participant. 1.7 "Plan" means the First Mid-Illinois Bancshares, Inc. Supplemental Executive Retirement Plan. 1.8 "President" means the President of the Company. 1.9 "Supplemental Plan Benefit" means the annual benefit payable to or with respect to a Participant in accordance with the Plan. SECTION II ELIGIBILITY TO PARTICIPATE A senior management employee of the Company or an affiliated Company will become a Participant in the Plan when such employee is recommended to the Committee as a Participant in writing by the President and is designated as a Participant by the Committee in writing. Once an employee becomes a Participant he shall remain a Participant until his termination of employment with the Company and all Affiliated Companies and thereafter until the Supplemental Plan Benefit to which he or any Designated Beneficiary is entitled under the Plan has been paid in full. SECTION III SUPPLEMENTAL PLAN BENEFIT The amount, terms and conditions of a Supplemental Plan Benefit payable to or with respect to a Participant shall be set forth in a separate Participation Agreement entered into between the Company and the Participant within sixty (60) days after the date on which the Participant is designated as such pursuant to Section II. SECTION IV AMENDMENT AND TERMINATION 4.1 Amendment or Termination. The Company intends the Plan to be permanent but reserves the right to amend or terminate the Plan or any Participation Agreement when, in the sole opinion of the Company, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board of Directors of the Company and shall be effective as of the date of such resolution. Notwithstanding the preceding sentence, no amendment or termination of the Plan or any Participation Agreement shall directly or indirectly deprive any Participant or Designated Beneficiary of all or any portion of any Supplemental Plan Benefit the payment of which has commenced prior to the effective date of the resolution amending or terminating the Plan or Participation Agreement. 4.2 Termination Benefit. In the case of a Plan termination, each actively employed Participant on the termination date shall become fully vested in his Supplemental Plan benefit as of the termination date without regard to the number of years of employment with the Company and all Affiliated Companies he has then completed. Payment of a Participant's Supplemental Plan Benefit shall not be dependent upon his continuation of employment with the Company or any Affiliated Company following the Plan termination date, and such Benefit shall be payable in the form and at the time set forth in his Participation Agreement. 4.3 Corporate Successors. The Plan shall not be automatically terminated by a transfer or sale of assets of the Company, or by the merger or consolidation of the Company into or with any other corporation or other entity, but the Plan shall be continued after such sale, merger or consolidation only if and to the extent that the transferee, purchaser or successor entity agrees to continue the Plan. In the event the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall terminate subject to the provisions of Paragraph 4.2. SECTION V MISCELLANEOUS 5.1 Forfeiture of Benefits. Notwithstanding any other provision of the Plan or any Participation Agreement, future payment of a Supplemental Plan Benefit hereunder to a Participant or Designated Beneficiary will, at the discretion of the Committee, be discontinued and forfeited, and the Company will have no further obligation hereunder to such Participant or Designated Beneficiary, if any of the following circumstances occur: (a) the Participant is discharged from employment with the Company or an Affiliated Company for cause. For purposes of this clause, "cause" shall be deemed to exist if, and only if, (i) the Participant willfully refuses to perform services for the Company or an Affiliated Company; (ii) the Participant engages in acts of dishonesty or fraud in connection with his employment by the Company or an Affiliated Company; or (iii) the Participant engages in other serious misconduct of such a nature that the continued employment of the Participant may reasonably be expected to adversely affect the business of the Company or an Affiliated Company. The Company shall have the sole discretion, which shall be exercised in a reasonable manner, to determine whether the events referred to in (i), (ii) and (iii) above have occurred; (b) the Participant engages in competition with the Company or any Affiliated Company or interferes with the business relationships of the Company or an Affiliated Company during his employment or during the period commencing on the date of termination of his employment with the Company and all Affiliated Companies and ending on the second anniversary thereof; (c) the Participant discloses any type of confidential information of the Company or an Affiliated Company to any third party by any means, other than as required in the performance of his duties for the Company or an Affiliated Company, or refused to report to the Company or an Affiliated Company any discoveries, inventions, or improvements conceived by him during the course of his employment and in any way applicable to the business of the Company or any Affiliated Company. The Committee's exercise of its discretion under this Paragraph shall be conclusive and binding upon the Participant, his Designated Beneficiary and all other persons. 5.2 No Effect on Employment Rights. Nothing contained herein will confer any Participant the right to be retained in the service of the Company or an Affiliated Company nor limit the right of the Company or an Affiliated Company to discharge or otherwise deal with any Participant without regard to the existence of the Plan. 5.3 Funding. The Plan and all Participation Agreements shall at all times be entirely unfunded and no provision shall at any time be made with respect to segregating assets of the Company or any Affiliated Company for payment of any Supplemental Plan Benefit hereunder. No Participant, Designated Beneficiary or other person shall have any interest in any particular assets of the Company or any Affiliated Company by reason of the right to receive a Supplemental Plan Benefit under the Plan or under any Participation Agreement, and any such Participant, Designated Beneficiary, or other person shall have only the rights of a general unsecured creditor of the Company with respect to any rights under the Plan or any Participation Agreement. 5.4 No Guaranty of Benefits. Nothing contained in the Plan or any Participation Agreement shall constitute a guaranty by the Company, any Affiliated Company, or any other entity or person that the assets of the Company will be sufficient to pay any Supplemental Plan Benefit hereunder. 5.5 Spendthrift Provision. No Supplemental Plan Benefit payable under the Plan or any Participation Agreement shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge prior to actual receipt thereof by the payee; and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge prior to such receipt shall be void; and the Company shall not be liable in any manner for, or subject to, the debts, contracts, liabilities, engagements or torts of any person entitled to any Supplemental Plan Benefit under the Plan or any Participation Agreement. 5.6 Administration. The Committee shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof. The Committee shall have all powers necessary to interpret and carry out the provisions of the Plan and all Participation Agreements and may, from time to time, establish rules for the administration of the Plan and the transaction of the Plan's business. In making any such rule, the Committee shall pursue uniform policies and shall not discriminate in favor of or against any Participant or group of Participants. The Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Company or the Committee with respect to the Plan. 5.7 Disclosure. Each Participant shall receive a copy of the Plan and the Committee will make available for inspection by any Participant or Designated Beneficiary a copy of any rules and regulations used by the Committee in administering the Plan. 5.8 State Law. The Plan and all Participation Agreements are established under and will be construed according to the laws of the State of Illinois, to the extent that such laws are not preempted by the Employee Retirement Income Security Act and valid regulations published thereunder. 5.9 Small Benefits. If the actuarial value of any Supplemental Plan Benefit is less than $3,500, the Committee, in its discretion, may pay the actuarial value of such Benefit to the Participant or Designated Beneficiary entitled thereto in a single lump sum or in quarterly, semi-annual or annual installments in lieu of any further benefit payments hereunder. 5.10 Incapacity of Recipient. In the event a Participant or Designated Beneficiary is declared incompetent and a conservator or other person legally charged with the care of his person or of his estate is appointed, any Supplemental Plan Benefit to which such Participant or Designated Beneficiary is entitled shall be paid to such conservator or other person legally charged with the care of his person or his estate. Except as provided above in this paragraph, when the Committee, in its sole discretion, determines that a Participant or Designated Beneficiary is unable to manage his financial affairs, the Committee may provide for any Supplemental Plan Benefit Payment, or any part thereof, to be made to any other person or institution then contributing toward or providing for the care and maintenance of such Participant or Designated Beneficiary. Any such payment shall be for the benefit of such Participant or Designated Beneficiary and a complete discharge of any obligation of the Company and the Plan with respect thereto. 5.11 Unclaimed Benefit. Each Participant shall keep the Committee informed of his current address and the current address of his Designated Beneficiary. The Committee shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Committee within three (3) years after the date on which any payment of the Participant's Supplemental Plan Benefit may be made, payment may be made as though the Participant had died at the end of the three-year period. If, within one additional year after such three-year period has elapsed, or, within three years after the actual death of a Participant, the Committee is unable to locate any Designated Beneficiary of the Participant, then the Committee shall have no further obligation to pay any Supplemental Plan Benefit hereunder to such Participant or Designated Beneficiary or any other person and such Benefit shall be irrevocably forfeited. 5.12 Limitations on Liability. Notwithstanding any of the preceding provisions of the Plan, no individual acting as an employee or agent of the Company or an Affiliated Company or any member of the Committee, shall be liable to any Participant, former Participant, Designated Beneficiary, or any other person for any claim, loss, liability or expense incurred in connection with the Plan or any Participation Agreement. 5.13 Gender and Number. In the Plan, where the context admits, words in the masculine gender include the feminine and neuter genders, words in the singular include the plural, and the plural includes the singular. Exhibit 10.6 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into this ____ day of _____________, _____, by and between First Mid-Illinois Bancshares, Inc. ("the Company"), a corporation with its principal place of business located in Mattoon, Illinois, and _____________ ("Manager"). In consideration of the promises and mutual covenants and agreements contained herein, the parties hereto acknowledge and agree as follows: ARTICLE ONE TERM AND NATURE OF AGREEMENT 1.01 Term of Agreement. The term of this Agreement shall commence as of _________, ____ and shall continue until ___________, ____. Thereafter, unless Manager's employment with the Company has been previously terminated, Manager shall continue his employment with the Company on an at will basis and, except as provided in Articles Five, Six and Seven, this Agreement shall terminate unless extended by mutual written agreement. 1.02 Employment. The Company agrees to employ Manager and Manager accepts such employment by the Company on the terms and conditions herein set forth. The duties of Manager shall be determined by the Company's Chief Executive Officer and shall adhere to the policies and procedures of the Company and shall follow the supervision and direction of the Chief Executive Officer or his designee in the performance of such duties. During the term of his employment, Manager agrees to devote his full working time, attention and energies to the diligent and satisfactory performance of his duties hereunder. Manager shall not, while he is employed by the Company, engage in any activity which would (a) interfere with, or have an adverse effect on, the reputation, goodwill or any business relationship of the Company or any of its subsidiaries; (b) result in economic harm to the Company or any of its subsidiaries; or (c) result in a breach of Section Six of the Agreement. ARTICLE TWO COMPENSATION AND BENEFITS While Manager is employed with the Company during the term of this Agreement, the Company shall provide Manager with the following compensation and benefits: 2.01 Base Salary. The Company shall pay Manager an annual base salary of $________ per fiscal year, payable in accordance with the Company's customary payroll practices for management employees. The Chief Executive Officer or his designee may review and adjust Manager's base salary from year to year; provided, however, that during the term of Manager's employment, the Company shall not decrease Manager's base salary. 2.02 Incentive Compensation Plan. Manager shall continue to participate in the First Mid-Illinois Bancshares, Inc. Incentive Compensation Plan in accordance with the terms and conditions of such Plan. Pursuant to the Plan, Manager shall have an opportunity to receive incentive compensation of up to a maximum of ____% of Manager's annual base salary. The incentive compensation payable for a particular fiscal year will be based upon the attainment of the performance goals in effect under the Plan for such year and will be paid in accordance with the terms of the Plan and at the sole discretion of the Board. 2.03 Vacation. Manager shall be entitled to _ weeks of paid vacation each year during the term of this Agreement. 2.04 Other Benefits. Manager shall be eligible (to the extent he qualifies) to participate in any other retirement, health, accident and disability insurance, or similar employee benefit plans as may be maintained from time to time by the Company for its other management employees subject to and on a consistent basis with the terms, conditions and overall administration of such plans. 2.05 Business Expenses. Manager shall be entitled to reimbursement by the Company for all reasonable expenses actually and necessarily incurred by him on its behalf in the course of his employment hereunder and in accordance with expense reimbursement plans and policies of the Company from time to time in effect for management employees. 2.6. Withholding. All salary, incentive compensation and other benefits provided to Manager pursuant to this Agreement shall be subject to withholding for federal, state or local taxes, amounts withheld under applicable employee benefit plans, policies or programs, and any other amounts that may be required to be withheld by law, judicial order or otherwise or by agreement with, or consent of, Manager. ARTICLE THREE DEATH OF MANAGER This Agreement shall terminate prior to the end of the term described in Section 1.01 upon Manager's termination of employment with the Company due to his death. Upon Manager's termination due to death, the Company shall pay Manager's estate the amount of Manager's base salary and his accrued but unused vacation time earned through the date of such death and any incentive compensation earned for the preceding fiscal year that is not yet paid as of the date of such death. ARTICLE FOUR TERMINATION OF EMPLOYMENT Manager's employment with the Company may be terminated by Manager or by the Company at any time for any reason. Upon Manager's termination of employment prior to the end of the term of the Agreement, the Company shall pay Manager as follows: 4.01 Termination by the Company for Other Than Cause. If the Company terminates Manager's employment for any reason other than Cause, the Company shall pay Manager the following: (a) An amount equal to Manager's monthly base salary in effect at the time of such termination of employment for a period of _____ months thereafter. Such amount shall be paid to Manager periodically in accordance with the Company's customary payroll practices for management employees. (b) The base salary and accrued but unused paid vacation time earned through the date of termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. (c) Continued coverage for Manager and/or Manager's family under the Company's health plan pursuant to Title I, Part 6 of the Employee Retirement Income Security Act of 1974 ("COBRA") and for such purpose the date of Manager's termination of employment shall be considered the date of the "qualifying event" as such term is defined by COBRA. During the period beginning on the date of such termination and ending at the end of the period described in Section 4.01(a), Manager shall be charged for such coverage in the amount that he would have paid for such coverage had he remained employed by the Company, and for the duration of the COBRA period, Manager shall be charged for such coverage in accordance with the provisions of COBRA. For purposes of this Agreement, "Cause" shall mean Manager's (i) conviction in a court of law of (or entering a plea of guilty or no contest to) any crime or offense involving fraud, dishonesty or breach of trust or involving a felony; (ii) performance of any act which, if known to the customers, clients, stockholders or regulators of the Company, would materially and adversely impact the business of the Company; (iii) act or omission that causes a regulatory body with jurisdiction over the Company to demand, request, or recommend that Manager be suspended or removed from any position in which Manager serves with the Company; (iv) substantial nonperformance of any of his obligations under this Agreement; (v) misappropriation of or intentional material damage to the property or business of the Company or any affiliate; or (vi) breach of Article Five or Six of this Agreement. 4.02 Termination Following a Change in Control. Notwithstanding Section 4.01, if, following a Change in Control, and prior to the end of the term of this Agreement, Manager's employment is terminated by the Company (or any successor thereto) for any reason other than Cause, or if Manager terminates his employment because of a decrease in his then current base salary or a substantial diminution in his position and responsibilities, the Company (or any successor thereto) shall pay Manager the following: (a) An amount equal to Manager's monthly base salary in effect at the time of such termination for a period of twelve (12) months thereafter. Such amount shall be paid in accordance with the Company's or successor's customary payroll practices for Manager employees. (b) The base salary and accrued but unused paid vacation time earned through the date of termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. (c) Continued coverage for Manager and/or Manager's family under the Company's health plan pursuant to Title I, Part 6 of the Employee Retirement Income Security Act of 1974 ("COBRA") and for such purpose the date of Manager's termination of employment shall be considered the date of the "qualifying event" as such term is defined by COBRA. During the period beginning on the date of such termination and ending at the end of the period described in Section 4.02(a), Manager shall be charged for such coverage in the amount that he would have paid for such coverage had he remained employed by the Company, and for the duration of the COBRA period, Manager shall be charged for such coverage in accordance with the provisions of COBRA. For purposes of this Agreement, "Change in Control" shall have the meaning as set forth in the First Mid-Illinois Bancshares, Inc. 1997 Stock Incentive Plan. 4.03 Other Termination of Employment. If, prior to the end of the term of this Agreement, the Company terminates Manager's employment for Cause, or if Manager terminates his employment for any reason other than as described in Section 4.02 above, the Company shall pay Manager the base salary and accrued but unused paid vacation time earned through the date of such termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. ARTICLE FIVE CONFIDENTIAL INFORMATION 5.01 Non-Disclosure of Confidential Information. During his employment with the Company, and after his termination of such employment with the Company, Manager shall not, in any form or manner, directly or indirectly, use, divulge, disclose or communicate to any person, entity, firm, corporation or any other third party, any Confidential Information, except as required in the performance of Manager's duties hereunder, as required by law or as necessary in conjunction with legal proceedings. 5.02 Definition of Confidential Information. For the purposes of this Agreement, the term "Confidential Information" shall mean any and all information either developed by Manager during his employment with the Company and used by the Company or its affiliates or developed by or for the Company or its affiliates of which Manager gained knowledge by reason of his employment with the Company that is not readily available in or known to the general public or the industry in which the Company or any affiliate is or becomes engaged. Such Confidential Information shall include, but shall not be limited to, any technical or non-technical data, formulae, compilations, programs, devices, methods, techniques, procedures, manuals, financial data, business plans, lists of actual or potential customers, lists of employees and any information regarding the Company's or any affiliate's products, marketing or database. The Company and Manager acknowledge and agree that such Confidential Information is extremely valuable to the Company and may constitute trade secret information under applicable law. In the event that any part of the Confidential Information becomes generally known to the public through legitimate origins (other than by the breach of this Agreement by Manager or by other misappropriation of the Confidential Information), that part of the Confidential Information shall no longer be deemed Confidential Information for the purposes of this Agreement, but Manager shall continue to be bound by the terms of this Agreement as to all other Confidential Information. 5.03 Delivery Upon Termination. Upon termination of Manager's employment with the Company for any reason, Manager shall promptly deliver to the Company all correspondence, files, manuals, letters, notes, notebooks, reports, programs, plans, proposals, financial documents, and any other documents or data concerning the Company's or any affiliate's customers, database, business plan, marketing strategies, processes or other materials which contain Confidential Information, together with all other property of the Company or any affiliate in Manager's possession, custody or control. ARTICLE SIX NON-COMPETE AND NON-SOLICITATION COVENANTS 6.01 Covenant Not to Compete. During the term of this Agreement and for a period of one year following the later of (i) the termination of Manager's employment for any reason or (ii) the last day of the term of the Agreement, Manager shall not, on behalf of himself or on behalf of another person, corporation, partnership, trust or other entity, within the counties of Coles, Moultrie, Douglas, Cumberland, Effingham, Champaign, Christian, Madison, Macon, Bond or Piatt, Illinois, or any other county in which the Company or any affiliate conducts business: (a) Directly or indirectly own, manage, operate, control, participate in the ownership, management, operation or control of, be connected with or have any financial interest in, or serve as an officer, employee, advisor, consultant, agent or otherwise to any person, firm, partnership, corporation, trust or other entity which owns or operates a business similar to that of the Company or its affiliates. (b) Solicit for sale, represent, and/or sell Competing Products to any person or entity who or which was the Company's customer or client during the last year of Manager's employment. "Competing Products," for purposes of this Agreement, means products or services which are similar to, compete with, or can be used for the same purposes as products or services sold or offered for sale by the Company or any affiliate or which were in development by the Company or any affiliate within the last year of Manager's employment. 6.02 Covenant Not to Solicit. For a period of one year following the later of (i) the termination of Manager's employment for any reason or (ii) the last day of the term of this Agreement, Manager shall not: (a) Attempt in any manner to solicit from any client or customer business of the type performed by the Company or any affiliate or persuade any client or customer of the Company or any affiliate to cease to do such business or to reduce the amount of such business which any such client or customer has customarily done or contemplates doing with the Company or any affiliate, whether or not the relationship between the Company or affiliate and such client or customer was originally established in whole or in part through Manager's efforts. (b) Render any services of the type rendered by the Company or any affiliate for any client or customer of the Company. (c) Solicit or encourage, or assist any other person to solicit or encourage, any employees, agents or representatives of the Company or an affiliate to terminate or alter their relationship with the Company or any affiliate. (d) Do or cause to be done, directly or indirectly, any acts which may impair the relationship between the Company or any affiliate with their respective clients, customers or employees. ARTICLE SEVEN REMEDIES Manager acknowledges that compliance with the provisions of Articles Five and Six herein is necessary to protect the business, goodwill and proprietary information of the Company and that a breach of these covenants will irreparably and continually damage the Company for which money damages may be inadequate. Consequently, Manager agrees that, in the event that he breaches or threatens to breach any of these provisions, the Company shall be entitled to both (a) a temporary, preliminary or permanent injunction in order to prevent the continuation of such harm; and (b) money damages insofar as they can be determined. In addition, the Company will cease payment of all compensation and benefits under Articles Three and Four hereof. In the event that any of the provisions, covenants, warranties or agreements in this Agreement are held to be in any respect an unreasonable restriction upon Manager or are otherwise invalid, for whatsoever cause, then the court so holding shall reduce, and is so authorized to reduce, the territory to which it pertains and/or the period of time in which it operates, or the scope of activity to which it pertains or effect any other change to the extent necessary to render any of the restrictions of this Agreement enforceable. ARTICLE EIGHT MISCELLANEOUS 8.01 Successors and Assignability. (a) No rights or obligations of the Company under this Agreement may be assigned or transferred except that the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) No rights or obligations of Manager under this Agreement may be assigned or transferred by Manager other than his rights to payments or benefits hereunder which may be transferred only by will or the laws of descent and distribution. 8.02 Entire Agreement. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and may not be modified except in writing by the parties hereto. Furthermore, the parties hereto specifically agree that all prior agreements, whether written or oral, relating to Manager's employment by the Company shall be of no further force or effect from and after the date hereof. 8.03 Severability. If any phrase, clause or provision of this Agreement is deemed invalid or unenforceable, such phrase, clause or provision shall be deemed severed from this Agreement, but will not affect any other provisions of this Agreement, which shall otherwise remain in full force and effect. If any restriction or limitation in this Agreement is deemed to be unreasonable, onerous or unduly restrictive, it shall not be stricken in its entirety and held totally void and unenforceable, but shall be deemed rewritten and shall remain effective to the maximum extent permissible within reasonable bounds. 8.04 Controlling Law and Jurisdiction. This Agreement shall be governed by and interpreted and construed according to the laws of the State of Illinois. The parties hereby consent to the jurisdiction of the state and federal courts in the State of Illinois in the event that any disputes arise under this Agreement. 8.05 Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (a) on the date of service if served personally on the party to whom notice is to be given; (b) on the day after delivery to an overnight courier service; (c) on the day of transmission if sent via facsimile to the facsimile number given below; or (d) on the third day after mailing, if mailed to the party to whom notice is to be given, by first class mail, registered or certified, postage prepaid and properly addressed, to the party as follows: If to Manager: ________________ ________________ If to the Company: First Mid-Illinois Bancshares, Inc. 1515 Charleston Avenue Mattoon, Illinois 61938 Facsimile: 217-234-0485 Attention: Chairman and Chief Executive Officer Any party may change its address for the purpose of this Section by giving the other party written notice of its new address in the manner set forth above. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. FIRST MID-ILLINOIS BANCSHARES, INC. By: /s/ William S. Rowland William S. Rowland Title: Chairman of the Board MANAGER: /s/_____________________ Exhibit 11.1 Computation of Earnings Per Share The Company follows Financial Accounting Standards Board's Statement No. 128, "Earnings Per Share" ("SFAS 128") in which income for Basic Earnings per Share ("EPS") is adjusted for dividends attributable to preferred stock and is based on the weighted average number of common shares outstanding. Diluted EPS is computed by using the weighted average number of common shares outstanding, increased by the assumed conversion of the convertible preferred stock and the assumed conversion of the stock options. The components of basic and diluted earnings per common share for the years ended December 31, 2004, 2003, and 2002 are as follows:
2004 2003 2002 ------------ ------------ ------------ Basic Earnings per Share: Net income available to common stockholders $9,751,000 $9,093,000 $8,034,000 ============ ============ ============ Weighted average common shares outstanding 4,499,092 4,743,210 5,036,357 ============ ============ ============ Basic earnings per common share $2.17 $1.92 $1.60 ============ ============ ============ Diluted Earnings per Share: Net income available to common stockholders $9,751,000 $9,093,000 $8,034,000 ============ ============ ============ Weighted average common shares outstanding 4,499,092 4,743,210 5,036,357 Assumed conversion of stock options 88,967 85,935 36,249 ------------ ------------ ------------ Diluted weighted average common shares outstanding 4,588,059 4,829,145 5,072,606 ============ ============ ============ Diluted earnings per common share $2.13 $1.88 $1.58 ============ ============ ============
Exhibit 14.1 CODE OF ETHICS FOR SENIOR FINANCIAL MANAGEMENT FIRST MID-ILLINOIS BANCSHARES, INC. DATED DECEMBER 16, 2003 I. OVERVIEW The banking business is based on trust. Our shareholders and customers entrust us with their money and confidential information because of our reputation for honesty, integrity and high ethical standards. The Chief Executive Officer and the Chief Financial Officer (referred to in this Code as the "Senior Financial Management" collectively or "you") of First Mid-Illinois Bancshares, Inc. (referred to in this Code as "First Mid" or "we" or "our" or "us") are required to maintain high ethical standards. The Code of Ethics for Senior Financial Management of First Mid-Illinois Bancshares, Inc. ("Code") sets forth the guiding principles by which we operate our company and conduct our daily business with our shareholders and customers as well as with our directors, advisory board members, officers and employees. These principles apply to each member of the Senior Financial Management of First Mid. Each member of the Senior Financial Management of First Mid has a responsibility to read, understand and comply with this Code. Any person who has information concerning any violation of this Code by any member of the Senior Financial Management of First Mid must promptly bring such information to the attention of the Audit Committee Chairperson or his or her designee. If the Chairperson or his or her designee determines that there is a conflict of interest that would make it inappropriate for him or her to resolve the matter, he or she shall refer the matter to the Audit Committee of the Board of Directors for resolution. Violations of this Code may subject the member of Senior Financial Management to appropriate actions, such as censure, suspension or termination. Such actions shall be reasonably designed to deter wrongdoing and to promote accountability for adherence to this Code. II. PRINCIPLES Ethical Behavior Each member of the Senior Financial Management must (a) act honestly and ethically, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (b) act in good faith, responsibly, and with due care, competence and diligence, without misrepresenting material facts or allowing the member's independent judgment to be subordinated; (c) share knowledge and maintain skills relevant to carry out the member's duties within First Mid; and (d) proactively promote ethical behavior as a responsible partner among peers and colleagues in the work environment and community. Complying with Laws, Regulations, Policies and Procedures All members of the Senior Financial Management of First Mid must understand, respect and comply with all of the laws, rules, regulations, policies and procedures that apply to them in their position with First Mid as well as those that affect the conduct of First Mid's business and financial reporting. All members of the Senior Financial Management of First Mid are responsible for determining which laws, rules, regulations and First Mid policies apply to their position and affect the conduct of First Mid's business and financial reporting and what training is necessary to understand and comply with them. All members of the Senior Financial Management of First Mid are directed to specific policies and procedures available from the Corporate Secretary. Conflicts of Interest All members of the Senior Financial Management of First Mid should be scrupulous in avoiding any action or interest that conflicts or gives the appearance of a conflict with First Mid's interests. A "conflict of interest" exists whenever an individual's private interests interfere or conflict in any way (or even appear to interfere or conflict) with the interests of First Mid. A conflict situation can arise when a member of the Senior Financial Management of First Mid takes action or has interests that may make it difficult to perform his or her work for First Mid objectively and effectively. Conflicts of interest may also arise when a member of the Senior Financial Management of First Mid or a member of his or her family receives improper personal benefits as a result of his or her position with First Mid, whether from a third party or from First Mid. All members of the Senior Financial Management of First Mid should utilize First Mid's products and services, when appropriate, but this must be done on an arm's-length basis. Conflicts of interest are prohibited as a matter of First Mid policy. Conflicts of interest may not always be clear-cut, so if a question arises, you should consult with higher levels of management or the Corporate Secretary. Any member of the Senior Financial Management of First Mid who becomes aware of a conflict or potential conflict should bring it to the attention of a supervisor, manager or other appropriate personnel. Corporate Opportunity All members of the Senior Financial Management of First Mid are prohibited from (a) taking for themselves personally opportunities that properly belong to First Mid or are discovered through the use of corporate property, information or position; (b) using corporate property, information and position for personal gain; and (c) competing with First Mid. All members of the Senior Financial Management of First Mid owe a duty to First Mid to advance First Mid's legitimate interests when the opportunity to do so arises. Confidentiality All members of the Senior Financial Management of First Mid must respect the confidentiality of all information acquired in the course of work, except when disclosure is specifically authorized or required by laws, regulations or legal proceedings. Such information includes (a) information entrusted to members of the Senior Financial Management by First Mid or its customers and (b) all non-public information that might be of use to competitors of First Mid or harmful to First Mid or its customers or employees if disclosed. Fair Dealing We seek to outperform our competition fairly and honestly. We do not seek competitive advantages through unethical or illegal business practices. Stealing proprietary information, possessing or utilizing trade secret information that was obtained without the owner's consent or inducing such disclosures by past or present employees of other companies is prohibited. Each member of the Senior Financial Management of First Mid is expected to deal fairly with the customers, competitors, officers and employees of First Mid. No one should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair dealing. Bribery No member of the Senior Financial Management of First Mid may solicit or accept a bribe. Use good judgment in determining what constitutes a bribe. When a customer buys you lunch, that is not a bribe. When a customer pays you a fee to make a loan, you are being bribed. A discount from a local department store, available to everyone, is not a bribe. A free car from a customer is a bribe. No member of the Senior Financial Management of First Mid may pay a bribe. Use good judgment in determining what constitutes a bribe. A political contribution within the law is not a bribe. An under-the-table fee paid to a government officer is a bribe. A loan made to a public official, under normal terms and conditions and with proper approvals, is not a bribe. A no-interest loan to a government official is a bribe. Strict laws and regulations apply to favors granted to public officials and you must consult with executive management about any questionable situation. Protection and Proper Use of First Mid Assets All members of the Senior Financial Management of First Mid should protect First Mid's assets and ensure their efficient use. Each member of the Senior Financial Management of First Mid must achieve responsible use of and control over all assets and resources of First Mid entrusted to the member. Theft, carelessness and waste have a direct impact on First Mid's ability to do business effectively. All First Mid assets should be used for legitimate business purposes. This includes such things as the internet, software, office supplies and office equipment. Public Company Reporting As a public company, it is of critical importance that First Mid's filings with the Securities and Exchange Commission (the "SEC") be accurate and timely. You may be called upon to provide necessary information to assure that First Mid's public reports are complete, fair and understandable. First Mid expects all members of the Senior Financial Management to take this responsibility very seriously and to provide prompt and accurate answers to inquiries related to First Mid's public disclosure requirements. All members of the Senior Management of First Mid must provide full, fair, accurate, timely and understandable disclosures in reports and documents First Mid files with, or submits to, the SEC and in other public communications by First Mid. Financial Statements and Other Records All of First Mid's books, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect First Mid's transactions and must conform to applicable legal requirements and to First Mid's system of internal controls. Unrecorded or "off the books" funds or assets should not be maintained unless permitted by applicable law or regulation. III. REPORTING ILLEGAL OR UNETHICAL BEHAVIOR Reporting Illegal or Unethical Behavior All members of the Senior Financial Management of First Mid who suspect or know of violations of this Code or illegal or unethical business or workplace conduct by employees, officers, advisory board members or directors have an obligation to contact either the Corporate Secretary or the manager in First Mid's Audit Department. Such communications will be kept confidential to the extent feasible. If concerns or complaints require confidentiality, then this confidentiality will be protected to the extent feasible, subject to applicable law. Accounting Complaints First Mid's policy is to comply with all applicable financial reporting and accounting regulations. If any member of the Senior Financial Management of First Mid has unresolved concerns or complaints regarding questionable accounting or auditing matters of First Mid, then he or she is encouraged to submit those concerns or complaints (anonymously, confidentially or otherwise) to the manager in First Mid's Audit Department. Subject to his or her legal duties, the manager in First Mid's Audit Department will treat such submissions confidentially. All members of the Senior Financial Management of First Mid must promptly bring to the attention of the Audit Committee Chairperson any information concerning (a) significant deficiencies in the design or operation of internal controls which could adversely affect First Mid's ability to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in First Mid's financial reporting, disclosures or internal controls. Non-Retaliation First Mid prohibits retaliation of any kind against individuals who have made good faith reports or complaints of violations of this Code or other known or suspected illegal or unethical conduct. IV. AMENDMENT, MODIFICATION AND WAIVER The Audit Committee of the Board of Directors shall consider any request for a waiver of this Code and any amendment to this Code and all such waivers or amendments shall be disclosed promptly as required by law or SEC regulation. CODE OF ETHICS FOR SENIOR FINANCIAL MANAGEMENT FIRST MID-ILLINOIS BANCSHARES, INC. DATED DECEMBER 16, 2003 Agreement I acknowledge receipt of and have read, understand, and agree to comply in all respects with the Code of Ethics for Senior Financial Management of First Mid-Illinois Bancshares, Inc. dated December 16, 2003 ("Code"). I am not engaged on the date set forth below, and will not engage, in any enterprise or activity which is prohibited by, or might give rise to, any non-compliance with this Code, except as stated below: (If none, insert "None") Should, to my knowledge, any change in my situation occur, I will immediately notify the Corporate Secretary or the manager of First Mid-Illinois Bancshares, Inc.'s Audit Department, as applicable, in writing with such details as he or she may reasonably request. Signed this ____ day of ________________ Signed: _____________________________ Print Name: __________________________ Title: _______________________________ Location: ____________________________ Exhibit 21.1 Subsidiaries of the Company First Mid-Illinois Bank & Trust, N.A. (a national banking association) Mid-Illinois Data Services, Inc. (a Delaware corporation) First Mid-Illinois Insurance Services, Inc. (an Illinois corporation; 100% owned by First Mid Bank) The Checkley Agency, Inc. (an Illinois corporation) First Mid-Illinois Statutory Trust I (a business trust) Exhibit 23.1 Consent of Independent Registered Public Accounting Firm The Board of Directors First Mid-Illinois Bancshares, Inc.: RE: Registration Statements Registration No. 033-84404 on Form S-3 Registration No. 033-64061 on Form S-8 Registration No. 033-64139 on Form S-8 Registration No. 333-69673 on Form S-8 We consent to incorporation by reference in the Registration Statements on Forms S-3 and S-8 of First Mid-Illinois Bancshares, Inc. of our reports dated March 9, 2005, relating to the consolidated balance sheets of First Mid-Illinois Bancshares, Inc. and subsidiaries as of December 31, 2004 and 2003, 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, 2004, and management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 and the effectiveness of internal control over financial reporting as of December 31, 2004, which reports appears in the December 31, 2004 annual report on Form 10-K of First Mid-Illinois Bancshares, Inc. /s/ KPMG LLP Chicago, Illinois March 9, 2005 Exhibit 31.1 CERTIFICATION I, William S. Rowland, President and Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of First Mid-Illinois Bancshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 9, 2005 /s/ William S. Rowland William S. Rowland President and Chief Executive Officer Exhibit 31.2 CERTIFICATION I, Michael L. Taylor, Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of First Mid-Illinois Bancshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 9, 2005 /s/ Michael L. Taylor Michael L. Taylor Chief Financial Officer Exhibit 32.1 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of First Mid-Illinois Bancshares, Inc. (the "Company") on Form 10-K for the period ended December 31, 2004 (the "Report"), I, William S. Rowland, as President and Chief Executive Officer of the Company certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 9, 2005 /s/ William S. Rowland William S. Rowland President and Chief Executive Officer Exhibit 32.2 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of First Mid-Illinois Bancshares, Inc. (the "Company") on Form 10-K for the period ended December 31, 2004 (the "Report"), I Michael L. Taylor, as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 9, 2005 /s/ Michael L. Taylor Michael L. Taylor Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----