Stock Incentive Plan

At the Annual Meeting of Stockholders held May 23, 2007, the stockholders approved the First Mid-Illinois Bancshares, Inc. 2007 Stock Incentive Plan (“SI Plan”). The SI Plan was implemented to succeed the Company’s 1997 Stock Incentive Plan, which had a ten-year term that expired October 21, 2007, under which there are still options outstanding. The SI Plan is intended to provide a means whereby directors, employees, consultants and advisors of the Company and its subsidiaries may sustain a sense of proprietorship and personal involvement in the continued development and financial success of the Company and its subsidiaries, thereby advancing the interests of the Company and its stockholders. Accordingly, directors and selected employees, consultants and advisors may be provided the opportunity to acquire shares of Common Stock of the Company on the terms and conditions established in the SI Plan.

On September 27, 2011, the Board of Directors passed a resolution authorizing and approving the Executive Long-Term Incentive Plan (“LTIP”). The LTIP was implemented to provide methodology for granting Stock Awards and Stock Unit Awards under the SI Plan to select senior executives of the Company or any subsidiary.

A maximum of 300,000 shares are authorized under the SI Plan. This amount reflects the Company’s stock split which occurred on June 29, 2007. Options to acquire shares are awarded at an exercise price equal to the fair market value of the shares on the date of grant and have a 10-year term. Options granted to employees vest over a four-year period and options granted to directors vest at the time they are issued. As of December 31, 2012, the Company had awarded 59,500 shares as stock options under the SI Plan. During 2012 and 2011, the Company awarded 15,162 shares and 17,409 shares, respectively as 50% Stock Awards and 50% Stock Unit Awards under the LTIP of the SI Plan.

The fair value of options granted is estimated on the grant date using the Black-Scholes option-pricing model. Expected volatility is based on historical volatility of the Company’s stock and other factors. The Company uses historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees who have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. There were no options granted during 2012, 2011 or 2010.

The following table summarizes the compensation cost, net of forfeitures, related to stock-based compensation for the years ended December 31, 2012, 2011 and 2010:



	2012			2011			2010
Stock and stock unit awards:
Pre-tax compensation expense	$	210		$	92		$	—
Income tax benefit	(73		)	(32		)	—
Stock and stock unit awards expense, net of income taxes	$	137		$	60		$	—
Stock options:
Pre-tax compensation expense	$	17		$	52		$	52
Income tax benefit	(6		)	(1		)	(1		)
Stock options expense, net of income taxes	$	11		$	51		$	51
Total share-based compensation:
Pre-tax compensation expense	$	227		$	144		$	52
Income tax benefit	(79		)	(33		)	(1		)
Total share-based compensation expense, net of income taxes	$	148		$	111		$	51

A summary of option activity under the SI Plan and the 1997 Stock Incentive Plan as of December 31, 2012, 2011 and 2010, and changes during the years then ended is presented below:



	2012
	Shares	Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding, beginning of year	228,140	$23.09
Granted	0	$0.00
Exercised	(44,763)	$15.90
Forfeited or expired	(6,752)	$24.00
Outstanding, end of year	176,625	$24.88	2.81	$	89,061
Exercisable, end of year	170,000	$24.95	2.69	$	89,061

The total intrinsic value of options exercised during 2012 was $332,000. Stock options for 108,125 shares of common stock were not considered in computing the aggregate intrinsic value of outstanding shares and exercisable shares for 2012 because they were anti-dilutive.



	2011
	Shares	Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding, beginning of year	239,532	$22.50
Granted	0	$0.00
Exercised	(11,392)	$10.67
Forfeited or expired	0	$0.00
Outstanding, end of year	228,140	$23.09	3.32	$	159,552
Exercisable, end of year	207,265	$22.98	2.99	$	159,552

The total intrinsic value of options exercised during 2011 was $90,000. Stock options for 202,970 and 182,095 shares of common stock were not considered in computing the aggregate intrinsic value of outstanding shares and exercisable shares, respectively, for 2011 because they were anti-dilutive.



	2010
	Shares	Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding, beginning of year	289,033	$20.54
Granted	0	$0.00
Exercised	(49,500)	$11.05
Forfeited or expired	(1)	$8.37
Outstanding, end of year	239,532	$22.50	4.16	$	204,345
Exercisable, end of year	204,407	$22.18	3.58	$	204,345

The total intrinsic value of options exercised during 2010 was $365,000. Stock options for 202,970 and 167,845 shares of common stock were not considered in computing the aggregate intrinsic value of outstanding shares and exercisable shares, respectively, for 2010 because they were anti-dilutive.

A summary of the status of the Company’s shares subject to unvested options under the SI Plan and the 1997 Stock Incentive Plan as of December 31, 2012, 2011 and 2010, and changes during the years then ended, is presented below:



	2012		2011		2010
	Shares	Weighted-Average Grant-Date Fair Value	Shares	Weighted-Average Grant-Date Fair Value	Shares	Weighted-Average Grant-Date Fair Value
Unvested, beginning of year	20,875	$3.16	35,125	$3.29	49,375	$3.34
Granted	0	$0	0	$0	0	$0
Vested	(14,250)	$3.47	(14,250)	$3.47	(14,250)	$3.47
Forfeited	0	$0	0	$0	0	$0.00
Unvested, end of year	6,625	$2.51	20,875	$3.16	35,125	$3.29

As of December 31, 2012, 2011 and 2010, there was $0, $17,000 and $69,000, respectively, of total unrecognized compensation cost related to unvested options granted under the SI Plan and the 1997 Stock Incentive Plan. The total fair value of shares subject to options that vested during the years ended December 31, 2012, 2011 and 2010, was $49,000. The following table summarizes information about stock options under the SI Plan outstanding at December 31, 2012:



		Options Outstanding		Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price	Number Exercisable	Weighted-Average Exercise Price
Below $22.50	42,750	0.96	$20.67	42,750	$20.67
$22.50 to $24.50	25,750	5.96	$23.00	19,125	$23.00
$24.50 to $26.50	30,500	4.95	$26.10	30,500	$26.10
Above $26.50	77,625	1.95	$27.33	77,625	$27.33
	176,625	2.81	$24.88	170,000	$24.95

In September 2011, as part of the LTIP approval, the Board approved a form of Stock Award/Stock Unit Award Agreement and a form of Stock Unit Award Agreement. These forms set forth the terms and conditions of the Stock Awards and Stock Units granted to participants in the Plan as part of their Annual Performance Award and Cumulative Performance Award. Each of the Annual Performance Award and Cumulative Performance Award consists of Stock Awards (50%) and Stock Units (50%), except that Awards to retirement-eligible employees are made 100% in Stock Units. The target number of shares subject to the Stock Awards and/or Stock Units is adjusted by the Board at the end of each applicable performance period based on the actual level of attainment of performance goals previously set by the Board. The Annual Performance Award has a one-year performance period and vest over four years. The Cumulative Performance Award has a three-year performance period and vest at the end of the three-year period. Stock Awards are settled in shares while Stock Units are settled in cash (although Stock Units held by retirement-eligible employees are settled half in shares and half in cash). The following table summarizes non-vested stock and stock unit activity for the years ended December 31, 2012 and 2011:



	2012			2011
	Shares	Weighted-avg Grant-date Fair Value		Shares	Weighted-avg Grant-date Fair Value
Nonvested, beginning of year	15,096	$18.70		0	$0.00
Granted	15,162	$25.50		17,409	$18.70
Vested	(4,179)	$21.84		(2,313)	$18.70
Forfeited	(742)	$21.87		0	$0.00
Nonvested, end of year	25,337	$22.16		15,096	$18.70
Fair value of shares vested		$	91,259		$	42,675

The fair value of the awards is amortized to compensation expense over the vesting periods of the awards (four years for annual awards and three years for cumulative awards) and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. As of December 31, 2012 and 2011, there was $400,000 and $216,000, respectively, of total unrecognized compensation cost related to unvested stock and stock unit awards under the SI. That cost is expected to be recognized over a period of three years.