-----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, F297R2j2ZzLRv8mREetWBq0GW24ta69I7eHArLiAfnYbCfF5PTehL5TSb8zHTQQy w1Oz55Ss+IzTfVT9PFu1uQ== 0000700565-97-000004.txt : 19970327 0000700565-97-000004.hdr.sgml : 19970327 ACCESSION NUMBER: 0000700565-97-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NONE 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: 97563173 BUSINESS ADDRESS: STREET 1: 1515 CHARLESTON AVE STREET 2: PO BOX 499 CITY: MATTOON STATE: IL ZIP: 61938 BUSINESS PHONE: 2172347454 MAIL ADDRESS: STREET 1: 1515 CHARLESTON AVENUE STREET 2: PO BOX 499 CITY: MATTOON STATE: IL ZIP: 61938 10-K 1 [PERIOD-TYPE] 12-MOS UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER: 0-13368 FIRST MID-ILLINOIS BANCSHARES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 37-1103704 (State or other jurisdiction of (I.R.S. employer identification No.) incorporation or organization) 1515 CHARLESTON AVENUE, MATTOON, ILLINOIS 61938 (Address and Zip Code of Principal Executive Offices) (217) 234-7454 (Registrant'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 (Title of class) Indicate by check mark whether the Registrant (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 Registrant 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 Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 18, 1997, 947,680 common shares, $4.00 par value, were outstanding, and the aggregate market value of common shares (based on the last sale price of the registrant's common shares on March 18, 1997) held by non-affiliates was approximately $38,854,880. DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT INTO FORM 10-K PART: Portions of the Proxy Statement for 1997 Annual Meeting of shareholders to be held on May 21, 1997 III
FIRST MID-ILLINOIS BANCSHARES, INC. FORM 10-K TABLE OF CONTENTS PART I Item 1 Business 3 Item 2 Properties 15 Item 3 Legal Proceedings 17 Item 4 Submission of Matters to a Vote of Security Holders 17 PART II Item 5 Market for Registrant's Common Shares and Related Shareholder Matters 18 Item 6 Selected Financial Data 19 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 8 Financial Statements and Supplementary Data 37 Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosures 58 PART III Item 10 Directors and Executive Officers of the Registrant 58 Item 11 Executive Compensation 59 Item 12 Security Ownership of Certain Beneficial Owners and Management 59 Item 13 Certain Relationships and Related Transactions 59 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 59 SIGNATURES 60 Exhibit Index 61
PART I ITEM 1. BUSINESS REGISTRANT AND SUBSIDIARIES First Mid-Illinois Bancshares, Inc. (the "Registrant") is a bank holding company engaged in the business of banking through its wholly owned subsidiaries, First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank") and Heartland Savings Bank ("Heartland"). First Mid Bank and Heartland are referred to as the "Bank Subsidiaries". In addition to engaging in banking activities, the Registrant also engages in certain other additional activities through Mid-Illinois Data Services, Inc., a wholly owned corporation organized on March 25, 1987, as a non-banking subsidiary ("MIDS"). The primary business of MIDS is to provide financial data processing services to the Registrant and the Bank Subsidiaries. The Registrant, 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 Registrant 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; and 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 Registrant acquired and recapitalized Heartland, a $125 million thrift headquartered in Mattoon with offices in Charleston, Sullivan and Urbana, Illinois. Under the terms of the acquisition, Heartland converted from the mutual form of organization into a federally chartered, stock savings association and became a 100% owned subsidiary of the Registrant. Following that reorganization and immediately before the Heartland acquisition, the reorganized banking subsidiary acquired certain assets and deposit liabilities of Heartland. The acquisition was accounted for as a purchase and, accordingly, the operating results of Heartland have been consolidated with those of the Registrant since July 1, 1992. In accordance with purchase accounting requirements, the assets and liabilities of Heartland were accounted for at their fair market values as of the acquisition date. 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 Registrant pursuant to a private placement. 620 shares of the preferred stock were sold at a stated value of $5,000 per share with such shares bearing a dividend rate of 9.25%. The preferred stock may be converted at any time, at the option of the preferred stockholder, into common shares at the conversion ratio of 202.1 shares of common stock for each share of preferred. The Registrant has the right at any time after July 1, 1998, and upon giving at least thirty days prior notice, to redeem all (but not less than all) of the preferred stock at a cash value of $5,000 per share plus any accrued but unpaid dividends. The Registrant also has the right at any time after July 1, 1998, and upon giving at least thirty days prior notice to require the conversion of all (but not less than all) of the preferred stock into common stock at the conversion ratio. On October 4, 1994, First Mid Bank acquired all of the outstanding stock of Downstate Bancshares, Inc. ("DBI") which owned 100% of the stock of Downstate National Bank ("DNB"). DNB operated branch locations in Altamont and Effingham, Illinois. Immediately following the acquisition, DBI was dissolved and DNB was merged with and into First Mid Bank with First Mid Bank being the surviving entity. DBI was purchased for cash in the amount of $8.6 million with $5.6 million of that amount being internally generated funds and $3 million from additional long-term borrowings of the Registrant. The acquisition of DBI by First Mid Bank was accounted for using the purchase method of accounting. Accordingly, the assets and liabilities of DBI were recorded at their fair values as of the acquisition date. 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. In November 1996, First Mid Bank signed an agreement to purchase the assets and assume the liabilities of First of America's Charleston, Illinois office. As of March 4, 1997, total assets to be acquired were approximately $1,800,000 while liabilities totaled approximately $28,200,000. This transaction which was completed on March 7, 1997 was accounted for as a purchase. DESCRIPTION OF BUSINESS The Bank Subsidiaries conduct a general banking business embracing most of the services, both consumer and commercial, which banks may lawfully provide, including the following principal services: the acceptance of deposits to demand, savings and time accounts and the servicing of such accounts; commercial, industrial, agricultural, consumer and real estate lending, including installment, credit card, personal lines of credit and overdraft protection; safe deposit box operations; and an extensive variety of additional services tailored to the needs of customers, such as traveler's checks and cashiers' checks, foreign currency, and other special services. First Mid Bank also provides services to its customers through its trust department and investment center. Loans, both commercial and consumer, are serviced on either a secured or unsecured basis to corporations, partnerships and individuals. Commercial lending covers such categories as business, industry, capital, construction, agriculture, inventory and real estate, with the latter including residential properties. The Bank Subsidiaries' installment loan departments make direct loans to consumers and some commercial customers, and purchase retail obligations from retailers, primarily without recourse. The Bank Subsidiaries conduct their businesses in the middle of some of the richest farmland in the world. Accordingly, the Bank Subsidiaries provide a wide range of financial services to farmers and agribusiness within their respective markets. The farm management department, headquartered in Mattoon, Illinois, has approximately 32,000 acres under management and is the largest management operation in the area, ranking in the top 100 firms nationwide. As a group, the Bank Subsidiaries are the largest supplier of farm credit in the Registrant's market area with $46.4 million in agriculture related loans at December 31, 1996. The farm credit products offered by the Bank Subsidiaries include not only real estate loans, but machinery and equipment loans, production loans, inventory financing and lines of credit. The following chart sets forth (in thousands) the assets, deposits and stockholder's equity of the Bank Subsidiaries (before intercompany eliminations) as of December 31, 1996, and the average deposits for the year ended December 31, 1996:
STOCKHOLDER'S AVERAGE ASSETS DEPOSITS EQUITY DEPOSITS First Mid Bank $422,404 $341,147 $36,111 $328,673 Heartland 90,794 74,224 7,337 78,382 Total $513,198 $415,371 $43,448 $407,055
EMPLOYEES The Registrant, MIDS and the Bank Subsidiaries employed 257 people on a full-time equivalent basis as of December 31, 1996. The Registrant 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 Registrant. The Registrant offers a variety of employee benefits and management considers its employee relations to be excellent. COMPETITION The Registrant, through its Bank Subsidiaries, actively competes in all areas in which the Bank Subsidiaries presently do business. Each 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 charges on loans, and fees charged for fiduciary and other banking services. The Bank Subsidiaries operate facilities in the Illinois counties of Champaign, Coles, Cumberland, Douglas, Effingham and Moultrie. Each facility primarily serves the community in which it is located. First Mid Bank serves eight different communities with 13 separate locations in the towns of Mattoon, Charleston, Neoga, Tuscola, Sullivan, Arcola, Effingham and Altamont, Illinois and Heartland serves the two communities of Mattoon and Urbana, Illinois. Within the area of service there are numerous competing financial institutions and financial services companies. SUPERVISION AND REGULATION GENERAL Financial institutions and their holding companies are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Registrant 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 Board of Governors of the Federal Reserve System (the "FRB"), the Office of the Comptroller of the Currency (the "OCC"), the Illinois Commissioner of Banks and Real Estate (the "Commissioner"), the Federal Deposit Insurance Corporation (the "FDIC"), the Internal Revenue Service and state taxing authorities and the Securities and Exchange Commission (the "SEC"). The effect of such statutes, regulations and policies can be significant, and cannot be predicted with a high degree of certainty. Federal and state laws and regulations generally applicable to financial institutions, such as the Registrant 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 Registrant and its subsidiaries establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC's deposit insurance funds and the depositors, rather than the shareholders, of financial institutions. The following references to material statutes and regulations affecting the Registrant 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 Registrant and its subsidiaries. RECENT REGULATORY DEVELOPMENTS On September 30, 1996, President Clinton signed into law the "Economic Growth and Regulatory Paperwork Reduction Act of 1996" (the "Regulatory Reduction Act"). Subtitle G of the Regulatory Reduction Act consists of the "Deposit Insurance Funds Act of 1996" (the "DIFA"). The DIFA provides for a one-time special assessment on each depository institution holding deposits subject to assessment by the FDIC for the Savings Association Insurance Fund (the "SAIF") in an amount which, in the aggregate, will increase the designated reserve ratio of the SAIF (I.E., the ratio of the insurance reserves of the SAIF to total SAIF-insured deposits) to 1.25% on October 1, 1996. Subject to certain exceptions, the special assessment was payable in full on November 27, 1996. As a SAIF-member, Heartland was subject to the special assessment. Additionally, First Mid Bank holds SAIF-assessable deposits acquired from Heartland in 1992. Thus, First Mid Bank was subject to the special assessment with respect to those deposits. Under the DIFA, the amount of the special assessment payable by an institution was determined on the basis of the amount of SAIF-assessable deposits held by the institution on March 31, 1995, or acquired by the institution after March 31, 1995 from another institution which held the deposits on March 31, 1995, but was no longer in existence on November 27, 1996. The DIFA provides for a 20% discount in calculating the SAIF-assessable deposits of certain "Oakar" banks (I.E., Bank Insurance Fund ("BIF") member banks that hold deposits acquired from a SAIF member that remain SAIF insured) and certain "Sasser" banks (I.E., institutions that converted from thrift to bank charters but remain SAIF members). First Mid Bank qualified for the 20% discount provided by the DIFA for "Oakar" banks. The DIFA also exempts certain institutions from payment of the special assessment (including institutions that are undercapitalized or that would become undercapitalized as a result of payment of the special assessment), and allows an institution to pay the special assessment in two installments if there is a significant risk that by paying the special assessment in a lump sum, the institution or its holding company would be in default under or in violation of terms or conditions of debt obligations or preferred stock issued by the institution or its holding company and outstanding on September 13, 1995. On October 8, 1996, the FDIC adopted a final regulation implementing the SAIF special assessment. In that regulation, the FDIC set the special assessment rate at 0.657% of SAIF-assessable deposits held on March 31, 1995. The amount of the special assessment paid by Heartland was $552,000, and after giving effect to the 20% Oakar bank discount for which First Mid Bank qualified, the amount of the special assessment paid by First Mid Bank with respect to its SAIF-assessable deposits was $199,000. The full amount of the special assessment paid by Heartland and First Mid Bank was recorded as a charge against earnings for the quarter ended September 30, 1996. As discussed below, however, the recapitalization of the SAIF resulting from the special assessment should significantly reduce the deposit insurance expense incurred by Heartland and by First Mid Bank with respect to the SAIF-assessable portion of its deposit base. In light of the recapitalization of the SAIF pursuant to the special assessment authorized by the DIFA, the FDIC, on December 11, 1996, took action to reduce regular semi-annual SAIF assessments from the range of 0.23% - 0.31% of deposits to a range of 0% - 0.27% of deposits. The new rates were effective October 1, 1996 for Oakar and Sasser banks, but did not take effect for other SAIF-assessable institutions until January 1, 1997. From October 1, 1996 through December 31, 1996, assessments payable by SAIF-assessable institutions other than Oakar and Sasser banks ranged from 0.18% to 0.27% of deposits, which represents the amount the FDIC calculates as necessary to cover the interest due for that period on outstanding obligations of the Financing Corporation (the "FICO"), discussed below. Because SAIF-assessable institutions were previously assessed at higher rates (I.E., 0.23% - 0.31% of deposits) for the semi-annual period ending December 31, 1996, the FDIC will refund or credit back the amount collected from such institutions for the period from October 1, 1996 through December 31, 1996 which exceeds the amount due for that period under the reduced assessment schedule. As a result of the FDIC's action, the deposit insurance assessments payable by Heartland, and by First Mid Bank with respect to its SAIF-assessable deposits, have been reduced significantly. Prior to the enactment of the DIFA, a substantial amount of the SAIF assessment revenue was used to pay the interest due on bonds issued by the FICO, the entity created in 1987 to finance the recapitalization of the Federal Savings and Loan Insurance Corporation (the "FSLIC"), the SAIF's predecessor insurance fund. Pursuant to the DIFA, the interest due on outstanding FICO bonds will be covered by assessments against both SAIF and BIF member institutions beginning January 1, 1997. Between January 1, 1997 and December 31, 1999, FICO assessments against BIF-member institutions cannot exceed 20% of the FICO assessments charged SAIF-member institutions. From January 1, 2000 until the FICO bonds mature in 2019, FICO assessments will be shared by all FDIC-insured institutions on a PRO RATA basis. It has been estimated that the FICO assessments for the period January 1, 1997 through December 31, 1999 will be approximately 0.013% of deposits for BIF members versus approximately 0.064% of deposits for SAIF members, and will be less than 0.025% of deposits thereafter. The DIFA also provides for a merger of the BIF and the SAIF on January 1, 1999, provided there are no state or federally chartered, FDIC-insured savings associations existing on that date. To facilitate the merger of the BIF and the SAIF, the DIFA directs the Treasury Department to conduct a study on the development of a common charter and to submit a report, along with appropriate legislative recommendations, to the Congress by March 31, 1997. In addition to the DIFA, the Regulatory Reduction Act includes a number of statutory changes designed to eliminate duplicative, redundant or unnecessary regulatory requirements. Among other things, the Regulatory Reduction Act establishes streamlined notice procedures for the commencement of new nonbanking activities by bank holding companies, eliminates the need for national banks to obtain OCC approval to establish off-site ATMs, excludes ATM closures and certain branch office relocations from the prior notice requirements applicable to branch closings, significantly expands the authority of well-capitalized and well-managed national banks to invest in office premises without prior regulatory approval, and establishes time frames within which the FDIC must act on applications by state banks to engage in activities which, although permitted for state banks under applicable state law, are not permissible activities for national banks. The Regulatory Reduction Act also clarifies the liability of a financial institution, when acting as a lender or in a fiduciary capacity, under the federal environmental laws. Although the full impact of the Regulatory Reduction Act on the operations of the Registrant, Heartland and First Mid Bank cannot be determined at this time, management believes that the legislation may reduce compliance costs to some extent and allow the Registrant, Heartland and First Mid Bank somewhat greater operating flexibility. On August 10, 1996, President Clinton signed into law the Small Business Job Protection Act of 1996 (the "Job Protection Act"). Among other things, the Job Protection Act eliminates the percent-of-taxable-income ("PTI") method for computing additions to a savings association's or savings bank's tax bad debt reserves for tax years beginning after December 31, 1995, and requires all savings associations or savings banks that have used the PTI method to recapture, over a six year period, all or a portion of their tax bad debt reserves added since the last taxable year beginning before January 1, 1988. The Job Protection Act allows a savings association or savings bank to postpone the recapture of bad debt reserves for up to two years if the institution meets a minimum level of mortgage lending activity during those years. Heartland believes that it will engage in sufficient mortgage lending activity during 1996 and 1997 to be able to postpone any recapture of its bad debt reserves until 1998. As a result of these provisions of the Job Protection Act, Heartland will determine additions to its tax bad debt reserves using the same method as a commercial bank of comparable size, and, if Heartland were to decide to convert to a commercial bank charter, the changes in the tax bad debt recapture rules enacted in the Job Protection Act should make such conversion less costly. THE REGISTRANT GENERAL. The Registrant, as the sole stockholder of Heartland and First Mid Bank, is a bank holding company. As a bank holding company, the Registrant is registered with, and is subject to regulation by, the FRB under the Bank Holding Act, as amended (the "BHCA"). In accordance with FRB policy, the Registrant is expected to act as a source of financial strength to Heartland and First Mid Bank and to commit resources to support Heartland and First Mid Bank in circumstances where the Registrant might not do so absent such policy. Under the BHCA, the Registrant is subject to periodic examination by the FRB and is required to file with the FRB periodic reports of its operations and such additional information as the FRB may require. As the sole stockholder of Heartland, the Registrant is also subject to regulation by the Commissioner under the Illinois Savings Bank Act, as amended (the "ISBA"). INVESTMENTS AND ACTIVITIES. Under the BHCA, a bank holding company must obtain FRB approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank; or (iii) merging or consolidating with another bank or bank holding company. Subject to certain conditions (including certain deposit concentration limits established by the BHCA), the FRB may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the FRB is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located or which require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. The BHCA also prohibits, with certain exceptions, the Registrant from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. The principal exception to this prohibition allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the FRB to be "so closely related to banking ... as to be a proper incident thereto." Under current regulations of the FRB, the Registrant and its non-bank subsidiaries are permitted to engage in, among other activities, such banking-related businesses as the operation of a thrift, sales and consumer finance, equipment leasing, the operation of a computer service bureau, including software development, and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the activities of non-bank subsidiaries of bank holding companies. Federal legislation also prohibits acquisition of "control" of a bank or bank holding company, such as the Registrant, without prior notice to certain federal bank regulators. "Control" is defined in certain cases as acquisition of 10% of the outstanding shares of a bank or bank holding company. CAPITAL REQUIREMENTS. Bank holding companies are required to maintain minimum levels of capital in accordance with FRB capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses. The FRB'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%, of which at least one-half 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 4% to 5% 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 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. 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, 1996, the Registrant had regulatory capital in excess of the FRB's minimum requirements, with a risk-based capital ratio of 11.80% and a leverage ratio of 6.81%. DIVIDENDS. The FRB has issued a policy statement with regard to the payment of cash dividends by bank holding companies. In the policy statement, the FRB expressed its view that a bank holding company should not pay cash dividends exceeding its net income or which can only be funded in ways that weaken the bank holding company's financial health, such as by borrowing. Additionally, the FRB possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. In addition to the restrictions on dividends that may be imposed by the FRB, the Delaware General Corporation Law would allow the Registrant to pay dividends only out of its surplus, or if the Registrant has no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. FEDERAL SECURITIES REGULATION. The Registrant's common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the Registrant is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. THE BANK SUBSIDIARIES GENERAL. First Mid Bank is a national bank, chartered by the OCC under the National Bank Act. The deposit accounts of First Mid Bank are insured by the BIF of the FDIC, and it is a member of the Federal Reserve System. As a BIF- insured national bank, First Mid Bank is subject to the examination, supervision, reporting and enforcement requirements of the OCC, as the chartering authority for national banks, and the FDIC, as administrator of the BIF. Heartland is an Illinois-chartered savings bank, the deposits of which are insured by the SAIF of the FDIC. As a SAIF-insured, Illinois-chartered savings bank, Heartland is subject to the examination, supervision, reporting and enforcement requirements of the Commissioner, as the chartering authority for Illinois savings banks, and the FDIC, as administrator of the SAIF. Heartland is also a member of the Federal Home Loan Bank System, which provides a central credit facility primarily for member institutions. DEPOSIT INSURANCE. As FDIC-insured institutions, First Mid Bank and Heartland are 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 supervisory evaluations. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period. During the year ended December 31, 1996 assessments paid by First Mid Bank with respect to the approximately 90% of its deposits that are BIF insured ranged from 0% of deposits to 0.27% of deposits. The FDIC has announced that for the semi-annual assessment period beginning January 1, 1997, BIF assessment rates will continue to range from 0% of deposits to 0.27% of deposits. During the period January 1, 1996 through September 30, 1996, assessments paid by SAIF members, such as Heartland, and by First Mid Bank with respect to the approximately 10% of its deposits that are SAIF insured ranged from 0.23% of deposits to 0.31% of deposits. As a result of the recapitalization of the SAIF on October 1, 1996, SAIF assessment rates payable by Heartland were reduced, effective October 1, 1996, to a range of 0.18% of deposits to 0.27% of deposits and were further reduced, effective January 1, 1997, to a range of 0% of deposits to 0.27% of deposits. The recapitalization of the SAIF resulted in a reduction in the SAIF assessments paid by an Oakar bank, such as First Mid Bank, to a range of 0% of deposits to 0.27% of deposits effective October 1, 1996. SEE "--Recent Regulatory Developments." 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 Registrant is not aware of any activity or condition that could result in termination of the deposit insurance of Heartland or First Mid Bank. FICO ASSESSMENTS. Since 1987, a portion of the deposit insurance assessments paid by SAIF members has been used to cover interest payments due on the outstanding obligations of the FICO, the entity created to finance the recapitalization of the FSLIC, the SAIF's predecessor insurance fund. Pursuant to federal legislation enacted September 30, 1996, commencing January 1, 1997, both SAIF members and BIF members will be subject to assessments to cover the interest payment on outstanding FICO obligations. Such FICO assessments will be in addition to amounts assessed by the FDIC for deposit insurance. Until January 1, 2000, the FICO assessments made against BIF members may not exceed 20% of the amount of the FICO assessments made against SAIF members. It is estimated that SAIF members will pay FICO assessments equal to 0.064% of deposits while BIF members will pay FICO assessments equal to 0.013% of deposits. Between January 1, 2000 and the maturity of the outstanding FICO obligations in 2019, BIF members and SAIF members will share the cost of the interest on the FICO bonds on a PRO RATA basis. It is estimated that FICO assessments during this period will be less than 0.025% of deposits. SUPERVISORY ASSESSMENTS. Illinois savings banks such as Heartland, and national banks, such as First Mid Bank, are required to pay supervisory fees to the Commissioner and the OCC, respectively, to fund the operations of each agency. The amount of such supervisory fees is based upon each institution's total assets, including consolidated subsidiaries, as reported to the agency. During the year ended December 31, 1996, First Mid Bank paid supervisory fees to the OCC totaling $91,800 and Heartland paid supervisory fees to the Commissioner totaling $14,700. CAPITAL REQUIREMENTS. Under federal regulations, Heartland and First Mid Bank are subject to the following minimum capital standards: 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 4% to 5% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. For purposes of these capital standards, Tier 1 capital and total capital consist of substantially the same components as Tier 1 capital and total capital under the FRB's capital guidelines for bank holding companies (SEE "--The Registrant--Capital Requirements"). Additionally, under the ISBA and the regulations of the Commissioner, an Illinois savings bank such as Heartland must maintain a minimum level of total capital equal to the higher of 3% of total assets or the amount required to maintain insurance of deposits by the FDIC. The Commissioner has the authority to require an Illinois savings bank to maintain a higher level of capital if the Commissioner deems necessary based on the savings bank's financial condition, history, management or earnings prospects. 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, federal regulations provide that additional capital may be required to take adequate account of interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. During the year ended December 31, 1996, neither First Mid Bank nor Heartland was required by its primary federal regulator to increase its capital to an amount in excess of the minimum regulatory requirements. As of December 31, 1996, First Mid Bank and Heartland each exceeded its minimum regulatory capital requirements with leverage ratios of 7.65% and 7.01%, respectively, risk-based capital ratios of 12.57% and 16.00%, respectively. 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. Additionally, under Federal law, institutions insured by the FDIC may be liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of commonly controlled FDIC insured depository institutions or any assistance provided by the FDIC to commonly controlled FDIC insured depository institutions in danger of default. For purposes of this provision of Federal law, First Mid Bank and Heartland are deemed to be commonly controlled. 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 board of directors of the bank deems prudent. Without prior OCC approval, however, a national bank may not pay dividends in any calendar year which exceed the bank's year-to-date net income plus the bank's adjusted retained net income for the two preceding years. Under the ISBA and the regulations of the Commissioner, dividends may be paid by Heartland out of its net profits. In general, without the prior written approval of the Commissioner, Heartland may not declare dividends in any twelve-month period which, in the aggregate, exceed its net profits for that twelve-month period. If, however, Heartland's capital falls below 6% of its total assets, Heartland may not declare dividends in any twelve-month period which, in the aggregate, exceed 50% of its net profits for that period, without the prior written approval of the Commissioner. 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 and Heartland each exceeded its minimum capital requirements under applicable guidelines as of December 31, 1996. As of December 31, 1996, approximately $3.9 million was available to be paid as dividends to the Registrant by First Mid Bank and Heartland. Notwithstanding the availability of funds for dividends, however, the OCC or the FDIC may prohibit the payment of any dividends by First Mid Bank or Heartland, respectively, if the agency determines such payment would constitute an unsafe or unsound practice. INSIDER TRANSACTIONS. First Mid Bank and Heartland are subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to the Registrant and its subsidiaries, on investments in the stock or other securities of the Registrant and its subsidiaries and the acceptance of the stock or other securities of the Registrant or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by each of First Mid Bank and Heartland to its respective directors and officers, to directors and officers of the Registrant and its subsidiaries, to principal stockholders of the Registrant, and to "related interests" of such directors, officers and principal stockholders. In addition, such legislation and regulations may affect the terms upon which any person becoming a director or officer of the Registrant or one of its subsidiaries or a principal stockholder of the Registrant may obtain credit from banks with which First Mid Bank or Heartland maintains a correspondent relationship. SAFETY AND SOUNDNESS STANDARDS. The OCC and the FDIC have adopted guidelines which establish operational and managerial standards to promote the safety and soundness of national banks and state nonmember banks, respectively. 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 agency may require the institution to submit a plan for achieving and maintaining compliance. The preamble to the guidelines states that the agencies expect to require a compliance plan from an institution whose failure to meet one or more of the guidelines is of such severity that it could threaten the safety and soundness of the institution. Failure to submit an acceptable plan, or failure to comply with a plan that has been accepted by the agency, would constitute grounds for further enforcement action. BRANCHING AUTHORITY. Illinois savings banks, such as Heartland, have the authority under Illinois law to establish branches anywhere in the State of Illinois, subject to receipt of all required regulatory approvals. Under federal law, First Mid Bank, has the same branching rights in Illinois. Effective June 1, 1997 (or earlier if expressly authorized by applicable state law), the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") allows banks to establish interstate branch networks through acquisitions of other banks, subject to certain conditions, including certain limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. The establishment of DE NOVO interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed by the Riegle- Neal Act only if specifically authorized by state law. The legislation allows individual states to "opt-out" of certain provisions of the Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997. Illinois has enacted legislation permitting interstate mergers beginning on June 1, 1997. STATE BANK ACTIVITIES. Under federal law and FDIC regulations, FDIC insured state banks, such as Heartland, are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. Impermissible investments and activities must be divested or discontinued within certain time frames set by the FDIC. These restrictions have not had, and are not currently expected to have, a material impact on the operations of Heartland. FEDERAL RESERVE SYSTEM. FRB regulations, as presently in effect, require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts), as follows: for transaction accounts aggregating $49.3 million or less, the reserve requirement is 3% of total transaction accounts; and for transaction accounts aggregating in excess of $49.3 million, the reserve requirement is $1.479 million plus 10% of the aggregate amount of total transaction accounts in excess of $49.3 million. The first $4.4 million of otherwise reservable balances are exempted from the reserve requirements. These reserve requirements are subject to annual adjustment by the FRB. Each of First Mid Bank and Heartland is in compliance with the foregoing requirements. ITEM 2. PROPERTIES All of the following properties are owned by the Registrant or its Bank Subsidiaries except those specifically identified as being leased. FIRST MID BANK MATTOON First Mid Bank's main office is located at 1515 Charleston Avenue, Mattoon, Illinois. The office building consists of a one-story structure which was opened in 1965 with approximately 36,000 square feet of office space, eight walk-in teller stations and a walk-up automated teller machine ("ATM"). Adjacent to this building is a parking lot with parking for approximately seventy cars. A drive-up facility with ten drive-up lanes 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 which provides space for three tellers, two drive-up lanes and a walk-up ATM. First Mid Bank owns an office building located at 1701 Charleston Avenue, Mattoon, Illinois and an adjacent parking lot. The building is used by MIDS for its data processing center and back room operations for the Registrant and its Bank Subsidiaries. SULLIVAN First Mid Bank operates two locations in Sullivan, Illinois. The main office is located at 200 South Hamilton Street, Sullivan, Illinois. Its office building is a one-story structure containing approximately 11,400 square feet of office space with five tellers, six private offices and four drive-up lanes. Adjacent to its main office is a parking lot used primarily by the employees. Adequate customer parking is available on two sides of the main office building. The second office is a leased facility at 435 South Hamilton, Sullivan, Illinois in the IGA. The facility has two teller stations, a vault, an ATM and a night depository. NEOGA First Mid Bank's office in Neoga, Illinois, is located at 102 East 6th Street, Neoga, Illinois. The building consists of a one-story structure containing approximately 4,000 square feet of office space. The main office building provides space for four tellers in the lobby of the building, two drive-up tellers, four private offices, two night depositories, and an ATM. Adequate customer parking is available on three sides of the main office building. During 1996, an adjacent building with approximately 400 square feet was purchased and is being held for future expansion. TUSCOLA First Mid Bank operates two offices in Tuscola, Illinois. The main office is located at 100 North Main Street, Tuscola, Illinois. The building consists of a two-story structure with approximately 18,000 square feet of office space with space for six tellers, five private offices and a night depository. Adequate customer parking is available at the main office building. The second facility is located at 410 South Main Street, Tuscola, Illinois. The facility has a walk-in teller stations and two drive-up bay windows and contains approximately 320 square feet of office space. A drive-up ATM is located adjacent to this facility. CHARLESTON First Mid Bank has two offices in Charleston, Illinois. The main office 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, seven private offices and a night depository. The second office is located at 580 West Lincoln Avenue, Charleston, Illinois. This office has three lobby tellers, three drive-up lanes, a commercial night drop and one private office. A drive-thru ATM is located in the parking lot of this facility. During 1996, land adjacent to this facility was purchased and is being held for future expansion. First Mid-Bank will acquire a facility at 500 West Lincoln Avenue, Charleston, Illinois, in connection with the purchase of First of America's branch in Charleston. This facility contains approximately 8,400 square feet with four teller stations, four private offices and four drive-up lanes. Two ATM's are associated with this facility. A drive-up ATM is located in the parking lot and an off-site ATM is located in the student union at Eastern Illinois University. ALTAMONT First Mid Bank has a banking facility located at 101 West Washington Street, Altamont, Illinois. This building is a one-story structure which has approximately 4,300 square feet of office space. The office space consists of nine teller windows, three drive-up teller lanes (one of which facilitates an ATM), seven private offices, one conference room and a night depository. Adequate parking is available on three sides of the building. EFFINGHAM First Mid Bank operates a facility at 902 N 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 N Keller Drive, Effingham, Illinois which is currently being renovated to provide additional customer parking along with a drive-up ATM. 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. HEARTLAND MATTOON The main office is located at 1520 Charleston Avenue, Mattoon, Illinois. The office building consists of a two-story structure which has approximately 20,000 square feet of office space including six teller stations on the main floor. A drive-up facility with eight drive-up lanes is located adjacent to the main office. Adequate customer parking is available on two sides of the building and in an adjacent parking lot. URBANA Heartland's Urbana facility is 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, one private office and two drive-up lanes. An adequate customer parking lot is located on the south side of the building. REGISTRANT The Registrant owns a single family residence at 1515 Wabash Avenue, Mattoon, Illinois which is being held for future expansion. ITEM 3. LEGAL PROCEEDINGS Since the Bank Subsidiaries act as depositories of funds, each is named from time to time as a defendant in law suits (such as garnishment proceedings) involving claims to the ownership of funds in particular accounts. Management believes that all such litigation as well as other pending legal proceedings constitute ordinary routine litigation incidental to the business of the Bank Subsidiaries and that such litigation will not materially adversely affect the Registrant's consolidated financial condition. In addition to the normal legal proceedings referred to above, the Registrant, on behalf of Heartland, filed a complaint on December 5, 1995, against the U.S. Government which is now pending in the U.S. Court of Federal Claims in Washington D.C. This complaint relates to Heartland's interest as successor to Mattoon Federal Savings and Loan Association which incurred a significant amount of supervisory goodwill when it acquired Urbana Federal Savings and Loan in 1982. The complaint alleges that the Government breached its contractual obligations when, in 1989, it issued new rules which eliminated supervisory goodwill from inclusion in regulatory capital. In January 1997, the U.S. Court of Federal Claims denied the Government's motion to dismiss this supervisory goodwill complaint. The Government had taken the position that the complaint, as well as the complaints of a number of other parties, should be prohibited from moving forward on statute of limitation grounds. At this time it is too early to tell whether Heartland will ultimately prevail in the suit and if so, what damages may be recovered. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS The Registrant's common stock was held by approximately 742 shareholders of record, as of December 31, 1996, and is traded in the over-the-counter market. The following table shows, for the indicated periods, the range of reported prices per share of the Registrant's common stock in the over-the-counter market. These quotations represent interdealer prices without retail mark-ups, mark-downs or commissions and do not necessarily represent actual transactions.
QUARTER HIGH BID LOW ASK 1996 1st $ 35 $ 35 2nd 37 37 3rd 38 40 4th 39 41
QUARTER HIGH BID LOW ASK 1995 1st $ 27 $ 28 2nd 29 30 3rd 33 32 4th 33 34
The following table sets forth the cash dividends per share paid on the Registrant's common stock for the past two years.
DATE PAID AMOUNT PER SHARE June 20, 1995 $.34 January 3, 1996 $.47 June 20, 1996 $.38 January 3, 1997 $.47
The Registrant's shareholders are entitled to receive such dividends as are declared by the board of directors, which considers payment of dividends semiannually. The ability of the Registrant to pay dividends, as well as fund its operations, is dependent upon receipt of dividends from the Bank Subsidiaries. Regulatory authorities limit the amount of dividends which can be paid by the Bank Subsidiaries without prior approval from such authorities. For further discussion of the Bank Subsidiaries' dividend restrictions and capital requirements, see "Note 16" of the Notes to the Consolidated Financial Statements included under Item 8 of this document. Cash dividends have been declared by the Board of Directors of the Registrant semi-annually during the two years ended December 31, 1996. ITEM 6. SELECTED FINANCIAL DATA The following sets forth a five year comparison of selected financial data. (Dollars in thousands)
1996 1995 1994 1993 1992 SUMMARY OF OPERATIONS Interest income $35,559 $33,465 $26,428 $25,510 $24,589 Interest expense 17,805 16,725 11,918 11,935 12,839 Net interest income 17,754 16,740 14,510 13,575 11,750 Provision for loan losses 147 280 168 492 543 Other income 4,799 4,009 3,805 3,928 3,580 Other expense 15,977 14,715 13,263 12,713 10,823 Income before income taxes and cumulative effect of in accounting principle 6,429 5,754 4,884 4,298 3,964 Income tax expense 2,263 1,830 1,450 1,150 1,100 Net income before cumulative effect of change in accounting principle 4,166 3,924 3,434 3,148 2,864 Cumulative effect of change in accounting principle - - - 155 - Net income $ 4,166 $ 3,924 $ 3,434 $ 3,303 $ 2,864 PER COMMON SHARE DATA Primary earnings per share before cumulative effect of change in accounting principle $ 4.22 $ 4.10 $ 3.59 $ 3.26 $ 3.10 Primary earnings per share 4.22 4.10 3.59 3.44 3.10 Fully diluted earnings per share before cumulative effect of change in accounting principle 3.98 3.88 3.43 3.14 3.05 Fully diluted earnings per share 3.98 3.88 3.43 3.30 3.05 Dividend per common share .85 .81 .75 .75 .75 Book value per common share 39.12 36.07 31.37 30.89 27.09 FINANCIAL RATIOS Net interest margin (TE) 3.98% 3.98% 3.93% 3.85% 3.94% Return on average assets .85 .84 .84 .85 .86 Return on average equity 11.03 11.76 11.35 11.80 11.80 Return on average common equty 11.18 12.02 11.59 12.12 11.98 Dividend payout ratio 20.16 19.76 20.89 21.40 24.18 Average total equity to average assets 7.69 7.17 7.38 7.17 7.31 Total capital to risk-weighted assets 11.80 11.51 10.69 13.10 12.54 YEAR END BALANCES Total assets $515,397 $472,494 $451,158 $397,609 $395,127 Net loans 345,533 304,190 279,545 221,109 212,287 Total deposits 413,676 396,879 389,568 349,058 349,605 Total equity 39,904 35,309 30,600 30,184 26,850 AVERAGE BALANCES Total assets 491,058 465,287 409,684 390,252 331,919 Net loans 323,540 294,220 243,166 214,408 178,919 Total deposits 405,223 395,580 356,833 344,226 283,882 Total equity 37,783 33,371 30,268 27,987 24,268
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 Registrant and its subsidiaries for the years ended December 31, 1996, 1995 and 1994. 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. 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. The Registrant intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities 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 Registrant, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Registrant's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Registrant and the subsidiaries include, but are not limited to, 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 Registrant'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 Registrant and its business, including additional factors that could materially affect the Registrant's financial results, is included in the Registrant's filings with the securities and Exchange Commission. On October 4, 1994, the First Mid Bank acquired all of the outstanding stock of Downstate Bancshares, Inc. ("DBI") which owned 100% of the stock of Downstate National Bank ("DNB") for $8.6 million in cash. At the date of the acquisition, DBI had total assets of $52 million. Immediately following the acquisition, DBI was dissolved and DNB was merged with and into the First Mid Bank with the First Mid Bank being the surviving entity. The acquisition was accounted for as a purchase and, accordingly, DBI's results of operations have been included in the consolidated statements of income since that date. OVERVIEW In 1996, the Registrant achieved record net income and earnings per share. For the year, net income was $4,166,000 up 6.2% from $3,924,000 in 1995. In 1995, net income increased 14.3% from $3,434,000 in 1994. Fully diluted net income per share was $3.98 in 1996 compared with $3.88 in 1995 and $3.43 in 1994. A summary of the factors which contributed to the changes in net income follows (in thousands): TABLE 1 EFFECT ON EARNINGS
1996 VS 1995 1995 VS 1994 Net interest income $ 1,014 $ 2,230 Provision for loan losses 133 (112) Other income, including securities transactions 790 204 Other expenses, excluding SAIF assessment (511) (1,452) One-time SAIF assessment (751) - Income taxes (433) (380) Increase in net income $ 242 $ 490
The growth in earnings in 1996 was primarily due to an increase in net interest income. The improvement in net interest income was attributable to the increases in the volumes of earning assets and interest-bearing liabilities, reflecting strong internal growth during the year. Negatively impacting 1996 earnings was a one-time assessment ($751,000) to recapitalize the Savings Association Insurance Fund ("SAIF"). Legislation to recapitalize SAIF was signed into law by the President on September 30, 1996, and the assessment was paid by the Registrant in December 1996. After taking into account the decrease in income taxes resulting from this assessment, the actual reduction in year-to-date income amounted to $496,000 ($.47 per fully diluted share) In 1995, the growth in net interest income and a reduction in FDIC deposit insurance premiums were major factors contributing to the increase in net income. The increase in net interest income was due to the growth in the volumes of earning assets and interest-bearing liabilities. RESULTS OF OPERATIONS NET INTEREST INCOME The largest source of operating revenue for the Registrant is net interest income. Net interest income represents the difference between total interest income earned on earning assets and total interest expense paid on interest- bearing liabilities. The amount of interest income is dependent upon many factors including the volume and mix of earning assets, the general level of interest rates and the dynamics of changes in interest rates. The cost of funds necessary to support earning assets varies with the volume and mix of interest-bearing liabilities and the rates paid to attract and retain such funds. For purposes of the following discussion and analysis, the interest earned on tax-exempt securities is adjusted to an amount comparable to interest subject to normal income taxes. The adjustment is referred to as the tax equivalent ("TE") adjustment. The Registrant'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): TABLE 2 DISTRIBUTION OF CONSOLIDATED ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY - INTEREST, RATES AND NET YIELDS
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ASSETS Interest bearing $ 1,264 $ 65 5.14% $ 1,610 $ 94 5.84% $ 2,135 $ 73 3.42% deposits Federal funds sold 3,403 180 5.29 6,199 356 5.74 3,643 156 4.28 Investment securities Taxable 111,640 6,858 6.14 115,725 7,068 6.11 117,285 5,772 4.92 Tax-exempt(1) 11,442 953 8.33 12,831 1,111 8.66 14,546 1,289 8.86 Loans (2)(3) 326,302 27,827 8.53 294,220 25,214 8.57 243,166 19,576 8.05 Total earning assets 454,051 35,883 7.90 430,585 33,843 7.86 380,775 26,866 7.06 Cash and due from banks 17,051 15,382 13,720 Premises and equipment 9,864 9,333 8,393 Other assets 12,854 12,699 9,150 Allowance for loan (2,762) (2,711) (2,354) losses Total assets $491,058 $465,288 $409,684 LIABILITIES AND STOCKHOLDERS' EQUITY Interest Bearing Deposits Demand deposits $110,708 $ 3,085 2.79% $106,118 $ 2,823 2.66% $110,069 $ 2,764 2.51% Savings deposits 39,364 1,069 2.72 40,920 1,107 2.71 38,985 1,009 2.59 Time deposits 204,362 11,156 5.46 202,305 10,958 5.42 170,252 7,298 4.29 Securities sold under agreements to 12,411 574 4.62 16,481 777 4.71 9,697 310 3.20 repurchase FHLB advances 23,920 1,405 5.87 7,633 487 6.39 2,696 135 5.01 Federal funds purchased 800 44 5.50 26 2 7.69 710 26 3.66 Long-term debt 6,819 472 6.92 7,636 571 7.48 5,579 376 6.74 Total interest-bearing liabilities 398,384 17,805 4.47 381,119 16,725 4.39 337,988 11,918 3.53 Demand deposits 50,789 46,237 37,527 Other liabilities 4,102 4,561 3,901 Stockholders' equity 37,783 33,371 30,268 Total liabilities & $491,058 $465,288 $409,684 equity Net interest income (TE) $ 18,078 $ 17,118 $ 14,948 Net interest spread 3.43% 3.47% 3.53% Impact of non-interest bearing funds .55% .51% .40% Net yield on interest earning assets (TE) 3.98% 3.98% 3.93% (1) Interest income and rates are presented on a tax equivalent basis ("TE") assuming a federal income tax rate of 34%. (2) Loan fees are included in interest income and are not material. (3) Nonaccrual loans have been included in the average balances.
Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income (TE) for the past two years (in thousands): TABLE 3 ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
1996 COMPARED TO 1995 1995 COMPARED TO 1994 INCREASE - (DECREASE) INCREASE - (DECREASE) TOTAL RATE/ TOTAL RATE/ CHANGE VOLUME RATE VOLUME(4) CHANGE VOLUME RATE VOLUME(4) EARNING ASSETS: Interest bearing deposits $ (29) $ (20) $ (11) $ 2 $ 21 $ (18) $ 52 $ (13) Federal funds sold (176) (161) (28) 13 200 110 53 37 Investment securities: Taxable (210) (248) 38 - 1,296 (78) 1,391 (17) Tax-exempt (1) (158) (120) (42) 4 (178) (152) (30) 4 Loans (2)(3) 2,613 2,749 (123) (13) 5,638 4,110 1,263 265 Total interest income 2,040 2,200 (166) 6 6,977 3,972 2,729 276 Interest-Bearing Liabilities Interest-bearing deposits Demand deposits 262 122 134 6 59 (99) 164 (6) Savings deposits (38) (42) 4 - 98 50 46 2 Time deposits 198 111 86 1 3,660 1,374 1,924 362 Securities sold under agreements to repurchase (203) (192) (14) 3 467 217 147 103 FHLB advances 918 1,042 (39) (85) 352 247 37 68 Federal funds purchased 42 60 (1) (17) (24) (25) 29 (28) Long-term debt (99) (61) (43) 5 195 139 41 15 Total interest expense 1,080 1,040 127 (87) 4,807 1,903 2,388 516 Net interest income $ 960 $1,160 $ (293) $ 93 $2,170 $2,069 $ 341 $ (240) (1) Interest income and rates are presented on a tax equivalent basis, assuming a federal income tax rate of 34%. (2) Loan fees are included in interest income and are not material. (3) Nonaccrual loans are not material and have been included in the average balances. (4) The changes in rate / volume are computed on a consistent basis by multiplying the change in rates with the change in volume.
On a tax equivalent basis, net interest income increased $960,000, or 5.6% in 1996, compared to an increase of 2,170,000, or 14.5% in 1995. As set forth in Table 3, the improvement in net interest income in 1996 was due to the increase in the volume of earning assets and interest-bearing liabilities, partially offset by the effect of changes in interest rates. In 1995, the increase in net interest income was due to the increases in the volume of earning assets and interest-bearing liabilities. To a lesser extent, changes in interest rates in 1995 also contributed to the growth in net interest income. In 1996, average earning assets increased by $23,466,000, or 5.4%, and average interest- bearing liabilities increased $17,265,000, or 4.5%, compared with 1995 (Table 2). The higher volumes of earning assets and interest-bearings liabilities were primarily the result of strong loan growth in 1996. As a percentage of average earning assets, average loans increased from 63.9% in 1994 to 71.9% in 1996 while average securities decreased from 34.6% in 1994 to 27.1% in 1996. Net interest margin remained constant at 3.98% in 1996 and 1995 and increased slightly from 3.93% in 1994. PROVISION FOR LOAN LOSSES The provision for loan losses in 1996 was $147,000 compared to $280,000 in 1995 and $168,000 in 1994. For information on loan loss experience and nonperforming loans, see the "Nonperforming Loans" and "Loan Quality and Allowance for Loan Losses" sections later in this document. OTHER INCOME An important source of the Registrant'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): TABLE 4 OTHER INCOME
$ CHANGE FROM PRIOR YEAR 1996 1995 1994 1996 1995 Trust $ 1,293 $ 1,118 $ 1,118 $ 175 $ - Brokerage 386 183 349 203 (166) Securities losses (9) - (4) (9) 4 Service charges 1,728 1,574 1,456 154 118 Mortgage banking 428 273 158 155 115 Other 973 861 728 112 133 Total other income $ 4,799 $ 4,009 $ 3,805 $ 790 $ 204
The Registrant's other income increased to $4,799,000 as compared to $4,009,000 in 1995 and $3,805,000 in 1994. The increase between 1994 and 1995 was primarily due to the acquisition of DBI in October, 1994. Trust revenues increased to $1,293,000 in 1996 and $1,118,000 in 1995 and 1994. Trust assets increased to $223,117,000 at December 31, 1996 from $215,903,000 at December 31, 1995 and $182,729,000 at December 31, 1994. During 1996, increased revenues were primarily due to an increase in fees generated on retirement plans under management and the increase in trust assets. During 1995 the number of estates under management and therefore executor fees on those accounts declined from the 1994 level. Revenues from brokerage and annuity sales increased in 1996 as the Registrant expanded its product line by offering full-service brokerage services and increasing its marketing efforts in this area. During 1995, brokerage and annuity sales decreased as consumer preference shifted away from annuity products when interest rates on traditional deposit products rose. Net securities losses in 1996 were $9,000 compared to $0 in 1995 and $4,000 in 1994. Service charges amounted to $1,728,000 in 1996 as compared to $1,574,000 in 1995 and $1,456,000 in 1994. The increase of $154,000 (9.8%) in service charges in 1996 as compared to 1995 was primarily due to an increase in the number of savings and transaction accounts and the volume associated with these accounts. The $118,000 (8.1%) increase in service charges in 1995 as compared to 1994 was primarily due to the addition of the Effingham and Altamont business units associated with the acquisition of DBI. These two business units added $104,000 to service charge income in 1995 as compared to $21,000 in 1994 because of the timing of the acquisition. Heartland originates loans for its own portfolio and for sale to others. Mortgage banking income from loans originated and subsequently sold into the secondary market amounted to $428,000 in 1996 as compared to $273,000 in 1995 and $158,000 in 1994. Included in 1996 mortgage banking income is the amount of the mortgage servicing rights recorded on loans originated and sold into the secondary market with servicing retained amounting to $196,000. In 1996, the volume of loans sold by Heartland was $21 million representing 339 loans as compared to $11 million in 1995 representing 189 loans. 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): TABLE 5 OTHER EXPENSE
$ CHANGE FROM PRIOR YEAR 1996 1995 1994 1996 1995 Salaries and benefits $ 7,938 $ 7,484 $ 6,964 $ 454 $ 520 Occupancy 1,098 1,021 937 77 84 Equipment 1,247 1,277 1,032 (30) 245 FDIC premiums 275 590 802 (315) (212) One-time SAIF assessment 751 - - 751 - Amortization of intangibles 547 608 358 (61) 250 Stationary and supplies 559 449 324 110 125 Legal and professional fees 795 699 737 96 (38) Marketing and promotion 579 500 383 79 117 Other operating expenses 2,188 2,087 1,726 101 361 Total other expense $15,977 $14,715 $13,263 $ 1,262 $ 1,452
The Registrant's non-interest expense amounted to $15,977,000 in 1996 as compared to $14,715,000 in 1995 and $13,263,000 in 1994. Salaries and employee benefits, the largest component of other expense, increased 6.1% in 1996 compared to 7.5% in 1995. At December 31, 1996, the number of full-time equivalent ("FTE") employees totaled 257 compared to 254 and 247 at December 31, 1995 and 1994 respectively. Occupancy expense increased 2.0% to $2,345,000 in 1996 as compared to $2,298,000 in 1995. The 16.7% increase from $1,969,000 in 1994 to $2,298,000 in 1995 was primarily due to the DBI acquisition. The cost of insurance premiums assessed by the Federal Deposit Insurance Corporation ("FDIC") was $275,000 in 1996, compared to $590,000 in 1995 and $802,000 in 1994. The 1996 decrease of $315,000 was the result of reduced FDIC insurance premiums paid by First Mid Bank during the year. The 1995 decrease was the result of a refund of FDIC premiums that First Mid Bank received in the third quarter of 1995 in the amount of $170,000 and a reduced assessment rate for the second half of 1995. In 1997, the Registrant paid a one-time assessment of $751,000 to recapitalize the Savings Association Insurance Fund ("SAIF"). Legislation to recapitalize SAIF was signed into law by the President on September 30, 1996, as the assessment was paid by the Registrant in December 1996. Amortization of intangible assets decreased 10% when comparing 1996 to 1995. This decrease was the result of the Registrant's purchase mortgage servicing rights from the Heartland acquisition being fully amortized in 1995. The 70% increase between 1995 and 1994 was the result of the additional intangible amortization associated with the acquisition of DBI. During 1996, various categories of other operating expenses were impacted by the implementation of several large technology projects including imaging of customer checks and statements and the establishment of a wide-area network, along with new products being introduced such as telephone banking. INCOME TAXES Total income tax expense amounted to $2,263,000 in 1996 as compared to $1,830,000 in 1995 and $1,450,000 in 1994. The 1996 tax expense includes state income tax expense totaling $195,000. In past years, low loan to deposit ratios and heavy reliance on interest income from state tax exempt securities had combined to produced operating losses for state tax purposes. These net operating loss carry forwards generated in past years have now been exhausted. Effective tax rates were 35.2%, 31.8% and 29.7% respectively, for 1996, 1995 and 1994, respectively. The effective tax rate has continued to increase each year as the relative percentage of tax-exempt income decreases. ANALYSIS OF BALANCE SHEETS SECURITIES The Registrant'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 Registrant's current and projected liquidity and interest rate sensitivity positions. The following table sets forth the year-end amortized cost of the securities for the last three years (in thousands): TABLE 6 INVESTMENT PORTFOLIO
DECEMBER 31, 1996 1995 1994 % OF % OF % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL U.S. Treasury securities and obligations of U.S. Government Agencies and corporations $ 86,518 74% $ 72,599 59% $ 76,670 58% Obligations of states and political subdivisions 11,398 10 12,009 10 13,664 10 Mortgage-backed securities 15,283 13 35,766 29 40,720 31 Other securities 4,285 3 2,105 2 1,888 1 Total securities $117,484 100% $122,479 100% $132,942 100%
At December 31, 1996 the Registrant's investment portfolio showed a decrease in mortgage-backed securities and an increase in U. S. Government agency securities. This change in the portfolio mix improves the repricing characteristics of the portfolio, helps mollify the Registrant's total exposure relating to real estate assets and improves the 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, 1996 (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. TABLE 7 INVESTMENT MATURITY SCHEDULE
ONE AFTER 1 AFTER 5 AFTER YEAR THROUGH THROUGH TEN OR LESS 5 YEARS 10 YEARS YEARS TOTAL Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $11,628 $56,214 $18,179 $ 497 $ 86,518 Obligations of state and political subdivisions 805 5,503 991 618 7,917 Mortgage-backed securities 2,545 9,682 564 2,492 15,283 Other securities - - - 4,285 4,285 Total Investments $14,978 $71,399 $19,734 $ 7,892 $114,003 Weighted average yield 5.45% 6.22% 6.39% 6.74% 6.18% Full tax equivalent yield 5.60% 6.45% 6.54% 7.18% 6.39% Held-to-maturity: Obligations of state and political subdivisions $ 620 $ 2,088 $ 308 $ 465 $ 3,481 Weighted average yield 5.51% 4.98% 5.96% 5.74% 5.26% Full tax equivalent yield 8.35% 7.55% 9.03% 8.70% 7.98%
The weighted average yields are calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. Full tax equivalent yields have been calculated using a 34% tax rate. The maturities of, and yields on, mortgage backed securities have been calculated using actual repayment history. However, where securities have call features, and have a market value in excess of par value, the call date has been used to determine the expected maturity. With the exception of obligations of the U.S. Treasury and other U.S. Government agencies and corporations, there were no investment securities of any single issuer the book value of which exceeded 10% of stockholders' equity at December 31, 1996. In December 1995, the Registrant reclassified certain investment securities between held-to- maturity and available-for-sale in accordance with guidelines issued by the Financial Accounting Standards Board ("FASB") permitting a one-time change in classification. Based on discussion and analysis, the Registrant decided that only local, non-rated municipal securities would be classified as held-to-maturity and the remaining portfolio would be designated as available-for-sale. The book value and gross unrealized loss of securities transferred from held-to-maturity to available-for-sale amounted to $52,536,000 and $445,000, respectively. LOANS The loan portfolio (net of unearned discount) is the largest category of the Registrant's earning assets. The following table summarizes the composition of the loan portfolio for the last five years (in thousands): TABLE 8 COMPOSITION OF LOANS
1996 1995 1994 1993 1992 Commercial, financial and agricultural $ 75,028 $ 65,916 $ 61,520 $ 50,353 $ 46,464 Real estate - mortgage 241,240 211,147 195,524 151,916 146,333 Installment 30,423 27,996 22,294 16,360 16,316 Other 1,526 1,945 2,815 4,590 5,080 Total loans $348,217 $307,004 $282,153 $223,219 $214,193
At December 31, 1996, the Registrant had loan concentrations in agricultural industries of 13.3% of outstanding loans at December 31, 1996 and 12.9% at December 31, 1995. The Registrant had no further industry loan concentrations in excess of 10% of outstanding loans. TABLE 9 LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY The following table presents the balance of loans outstanding as of December 31, 1996, by maturities (dollars in thousands):
MATURITY (1) OVER 1 ONE YEAR THROUGH OVER OR LESS(2) 5 YEARS 5 YEARS TOTAL Commercial, financial and agricultural $ 50,439 $ 22,482 $ 2,107 $ 75,028 Real estate - mortgage 46,255 124,797 70,188 241,240 Installment 7,154 22,024 1,245 30,423 Other 231 735 560 1,526 Total loans $ 104,079 $170,038 $ 74,100 $348,217 (1) Based on scheduled principal repayments. (2) Includes demand loans, past due loans and overdrafts.
As of December 31, 1996, loans with maturities over one year consisted of $198,993,000 in fixed rate loans and $45,145,000 in variable rate loans. The loan maturities noted above are based on the contractual provisions of the individual loans. The Registrant 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 90 days or more as to interest or principal payments; and loans not included in (a) and (b) above which are defined as "troubled debt restructurings". The following table presents information concerning the aggregate amount of nonperforming loans (in thousands): TABLE 10 NONPERFORMING LOANS
DECEMBER 31, 1996 1995 1994 1993 1992 Nonaccrual loans $ 790 $ 636 $ 393 $ 497 $ 685 Loans past due ninety days or more and still accruing 575 554 509 248 585 Restructured loans which are performing in accordance with revised terms 580 604 772 307 383
Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $143,000, $143,000 and $100,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Interest income that was included in income totaled $39,000, $56,000 and $37,000 for the same periods. The Registrant's policy generally is to discontinue the accrual of interest income on any loan for which principal or interest is 90 days past due and when, in the opinion of management, there is reasonable doubt as to the timely collectibility of interest or principal. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collectibility of interest or principal. LOAN QUALITY AND ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents management's best estimate of the reserve necessary to adequately cover losses that could ultimately be realized from current loan exposures. The provision for loan losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate allowance for loan losses. In determining the adequacy of the allowance for loan losses, and therefore the provision to be charged to current earnings, management relies predominantly on a disciplined credit review and approval process which extends to the full range of the Registrant's credit exposure. The review process is directed by overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Once identified, the magnitude of exposure to individual borrowers is quantified in the form of specific allocations of the allowance for loan losses. Collateral values are considered by management in the determination of such specific allocations. Additional factors considered by management in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and renegotiated loans and the current and anticipated economic conditions in the region where the Registrant operates. In addition to the aforementioned considerations, management also considers the loan loss experience of other banks, thrifts and financial services holding companies. Management recognizes that there are risk factors which are inherent in the Registrant's loan portfolio. All financial institutions face risk factors in their loan portfolios because risk exposure is a function of the business. The Registrant'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 Registrant's success. At December 31, 1996, the Registrant's loan portfolio included $46.4 million of loans to borrowers whose businesses are directly related to agriculture. The balance increased $6.6 million from $39.7 million at December 31, 1995. In addition to agricultural lending, the Registrant has historically had substantial residential mortgage lending activity in and around east central Illinois. At December 31, 1996, these loans amounted to $172.3 million or 49.5% of total loans. Residential mortgage loans amounted to $153.6 million or 50.0% of total loans at December 31, 1995. TABLE 11 ALLOWANCE FOR LOAN LOSSES Loan loss experience for the years ending December 31, are summarized as follows (dollars in thousands):
1996 1995 1994 1993 1992 Average loans outstanding, net of unearned income $326,302 $294,220 $243,166 $214,408 $178,919 Allowance-beginning of year 2,814 2,608 2,110 1,906 1,566 Balance of acquired subsidiary - - 343 - 350 Charge-offs: Commercial, financial and agricultural 238 18 29 140 298 Real estate-mortgage 6 111 28 241 350 Installment 131 57 120 86 139 Total charge-offs 375 186 177 467 787 Recoveries: Commercial, financial and agricultural 53 73 98 150 167 Real estate-mortgage - - 21 3 18 Installment 45 39 45 26 49 Total recoveries 98 112 164 179 234 Net charge-offs 277 74 13 288 553 Provision for loan losses 147 280 168 492 543 Allowance-end of period $ 2,684 $ 2,814 $ 2,608 $ 2,110 $ 1,906 Ratio of net charge-offs to average loans .08% .03% .01% .13% .31% Ratio of allowance for loan losses to loans outstanding (less unearned interest at end of period) .77% .90% .93% .95% .89% Ratio of allowance for loan losses to nonperforming loans 138.0% 156.8% 155.8% 200.6% 115.3%
The Registrant minimizes credit risk by adhering to sound underwriting and credit review policies. These policies are reviewed at least annually, and changes are approved by the board of directors. Senior management is actively involved in business development efforts and the maintenance and monitoring of credit underwriting and approval. The loan review system and controls are designed to identify, monitor and address asset quality problems in an accurate and timely manner. On a monthly basis, the board of directors reviews the status of problem loans. In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for loan losses. During 1996, the Registrant had net charge-offs of $277,000, a significant increase from 1995 and 1994 net charge-offs of $74,000 and $13,000 respectively. $151,000 (55%) of the 1996 charge-offs related to three specific loans for which management does not anticipate any significant future recoveries. While management believes that these losses represented isolated events and do not reflect on the overall quality of the loan portfolio, management is also aware of the increasing rate of personal bankruptcies both nationally and in the Registrant's service area. Accordingly, management believes that its provision for loan losses will need to increase in 1997. On December 31, 1996, the allowance for loan losses amounted to $2,684,000, or .77% of total loans, and 138.0% of nonperforming loans. At December 31, 1995, the allowance was $2,814,000, or .92% of total loans, and 156.8% of nonperforming loans. The allowance for loan losses, in management's judgment, would be allocated as follows to cover potential loan losses (in thousands): TABLE 12 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 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 Commercial, financial and agricultural $ 1,854 21.5% $ 1,554 21.5% $ 1,481 21.8% Real estate-mortgage 434 69.3 314 68.8% 427 69.3% Installment 152 8.7 131 9.1% 100 7.9% Other - .5 - .6% - 1.0% Total allocated 2,440 1,999 2,008 Unallocated 244 N/A 815 N/A 600 N/A Allowance at end of reported period $ 2,684 100.0% $ 2,814 100.0% $ 2,608 100.0%
DECEMBER 31, 1993 DECEMBER 31, 1992 ALLOWANCE % OF ALLOWANCE % OF FOR LOANS FOR LOANS LOAN TO TOTAL LOAN TO TOTAL LOSSES LOANS LOSSES LOANS Commercial, financial and agricultural $ 1,351 22.5% $ 1,045 21.7% Real estate-mortgage 330 68.1% 325 68.3% Installment 78 7.3% 183 7.6% Other - 2.1% - 2.4% Total allocated 1,759 1,553 Unallocated 351 N/A 353 N/A Allowance at end of reported period $ 2,110 100.0% $ 1,906 100.0%
The allowance is allocated to the individual loan categories by a specific reserve for all classified loans plus a percentage of loans not classified based on historical losses. DEPOSITS Funding the Registrant's earning assets is substantially provided by a combination of consumer, commercial and public fund deposits. The Registrant 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, 1996, 1995 and 1994 (dollars in thousands): TABLE 13 COMPOSITION OF DEPOSITS
1996 1995 1994 WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE AMOUNT RATE Demand deposits: Non-interest bearing $ 50,789 - $ 46,237 - $ 37,527 - Interest bearing 110,708 2.79% 106,118 2.66% 110,069 2.51% Savings 39,364 2.72% 40,920 2.71% 38,985 2.59% Time deposits 204,362 5.46% 202,305 5.42% 170,252 4.29% Total average deposits $405,223 3.78% $395,580 3.76% $356,833 3.10%
The following table sets forth the maturity of time deposits of $100,000 or more (in thousands): TABLE 14 MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31, 1996 1995 1994 3 months or less $ 20,658 $ 17,167 $ 12,124 Over 3 through 6 months 7,322 6,451 4,525 Over 6 through 12 months 6,897 7,495 5,998 Over 12 months 5,893 6,217 6,807 Total $ 40,770 $ 37,330 $ 29,454
OTHER BORROWINGS Other borrowings consist of securities sold under agreements to repurchase, Federal Home Loan Bank (FHLB) advances, and federal funds purchased. Information relating to other borrowings for the last three years is presented below (in thousands): TABLE 15 SCHEDULE OF OTHER BORROWINGS
1996 1995 1994 At December 31: Securities sold under agreements to repurchase $18,360 $16,815 $15,590 Federal Home Loan Bank advances: Overnight 19,733 2,200 3,500 Fixed term - due in one year or less 11,693 6,000 - Fixed term - due after one year 1,000 3,500 - Federal funds purchased - - 500 Total $50,786 $28,515 $19,590 Average interest rate at year end 5.91% 5.11% 3.55% Maximum Outstanding at Any Month-end Securities sold under agreements to repurchase $18,860 $21,200 $15,980 Federal Home Loan Bank advances: Overnight 23,083 5,000 8,250 Fixed term - due in one year or less 20,693 5,000 - Fixed term - due after one year 7,500 6,500 - Federal funds purchased 6,500 - 5,000 Total $76,636 $37,700 $29,230 Averages for the Year Securities sold under agreements to repurchase $12,411 $16,481 $9,697 Federal Home Loan Bank advances: Overnight 8,136 1,104 2,803 Fixed term - due in one year or less 9,352 2,905 - Fixed term - due after one year 6,432 3,598 - Federal funds purchased 800 26 603 Total $37,131 $24,114 $13,103 Average interest rate during the year 5.45% 5.24% 3.59%
Securities sold under agreements to repurchase primarily represent borrowings originated as part of cash management services offered to corporate customers. The remaining balance of securities sold under agreements to repurchase represents term repurchase agreements with the State of Illinois. Federal Home Loan Bank advances represent borrowings by the Bank Subsidiaries to fund loan demand. INTEREST RATE SENSITIVITY The Registrant seeks to maximize its net interest margin within an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to favorable or unfavorable movements in interest rates. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of assets differ significantly from the maturity or repricing characteristics of liabilities. The Registrant 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 Registrant's asset/liability management committee oversees the interest rate sensitivity position and directs the overall allocation of funds in an effort to maintain a cumulative one-year gap to earning assets ratio of less than 30% of total earning assets. In the banking industry, a traditional measurement of interest rate sensitivity is known as "gap" analysis, which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. The following table sets forth the Registrant's interest rate repricing gaps for selected maturity periods at December 31, 1996 (in thousands): TABLE 16 GAP TABLE
NUMBER OF MONTHS UNTIL NEXT REPRICING OPPORTUNITY INTEREST EARNING ASSETS: 0-1 1-3 3-6 6-12 12+ Deposits with other financial institutions $ 453 $ - $ - $ - $ 99 Federal funds sold 6,500 - - - - Taxable investment securities 23,861 11,450 6,947 3,912 59,693 Nontaxable investment securities 460 249 327 1,876 8,733 Loans 47,121 25,712 21,060 30,897 223,427 Total $ 78,395 $ 37,411 $ 28,334 $ 36,685 $ 291,952 INTEREST BEARING LIABILITIES: Savings and N.O.W. accounts (1) 5,361 10,722 16,084 32,167 58,191 Money market accounts 35,837 - - - - Other time deposits 14,903 41,207 37,556 43,975 62,629 Other borrowings 44,686 1,600 3,500 - 1,000 Long-term debt 6,200 - - - - Total $ 106,987 $ 53,529 $ 57,140 $ 76,142 $ 121,820 Periodic GAP $ (28,592) $ (16,118) $ (28,806) $ (39,457) $ 170,132 Cumulative GAP $ (28,592) $ (44,710) $ (73,516) $(112,973) $ 57,159 GAP as a % of interest earning assets: Periodic (6.0%) (3.4%) (6.1%) (8.3%) 36.0% Cumulative (6.0%) (9.5%) (15.6%) (23.9%) 12.1% (1) Historically the Registrant's NOW accounts and savings deposits have been relatively insensitive to interest rate changes. However, the Registrant considers a portion of these deposits to be rate sensitive based on historical trends and management's expectations.
At December 31, 1996, the Registrant was liability sensitive on a cumulative basis through the twelve-month time horizon. Accordingly, future increases in interest rates, if any, could have an unfavorable effect on the net interest margin. However, the Registrant's historical repricing of N.O.W. and savings accounts has not, and is not expected to change on a frequent basis and this would mitigate to some extent the negative effect of an upturn in rates. Management has, over the past year, placed an emphasis on growing core deposits, which are considered to be less sensitive to changes in interest rates. This strategy, among other actions contributed to the reduction of the one-year gap from (29.7%) at December 31, 1995 to (23.9%) at December 31, 1996. Interest rate sensitivity using a static GAP analysis basis is only one of several measurements of the impact of interest rate changes on net interest income used by the Registrant. Its actual usefulness in assessing the effect of changes in interest rates varies with the constant changes which occur in the composition of the Registrant's earning assets and interest bearing liabilities. For this reason, the Registrant uses financial models to project interest income under various rate scenarios and various assumptions relative to the prepayments, reinvestment and roll overs of assets and liabilities. CAPITAL RESOURCES At December 31, 1996, the Registrant's stockholders' equity amounted to $39,904,000, a $4,595,000 or 13.0% increase from the $35,309,000 balance as of December 31, 1995. During the year, net income contributed $4,166,000 to equity before the payment of dividends to common and preferred stockholders amounting to $1,081,000. The change in net unrealized gain on available-for-sale investment securities decreased stockholders' equity by $175,000, net of tax. During 1996, the Registrant began issuing Company common stock as part of a deferred compensation plan for its directors and certain senior officers and as an investment option under the Registrant's 401-K (First Retirement and Savings Plan) for its employees. During 1996, 15,248 shares were issued pursuant to the Deferred Compensation Plan and 15,734 shares were issued pursuant to the First Retirement and Savings Plan. In late 1994, the Registrant implemented a Dividend Reinvestment Plan whereby common and preferred shareholders could elect to have their cash dividends automatically reinvested into newly-issued common shares of the Registrant. This plan became effective with the January, 1995 common stock dividend. Of the $1,081,000 in common and preferred stock dividends paid during 1996, $592,000 or 54.8% was reinvested into shares of common stock of the Registrant through the Dividend Reinvestment Plan. This resulted in an additional 16,843 shares of common stock being issued during 1996. The Registrant and its subsidiaries have capital ratios which are above the regulatory capital requirements. These requirements call for a minimum total risk-based capital ratio of 8% and a minimum leverage ratio of 3% for the most highly rated banks that do not expect significant growth. All other institutions are required to maintain a ratio of Tier 1 capital to total risk-weighted assets of 4% to 5% depending on their particular circumstances and risk profiles. At December 31, 1996, the Registrant's leverage ratio was 6.81%. A tabulation of the Registrant's and its subsidiaries' risk-based capital ratios as of December 31, 1996 follows: TABLE 17 RISK-BASED CAPITAL RATIOS
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) 10.95% 11.80% 6.81% First Mid-Illinois Bank & Trust, N.A. 11.70 12.57 7.65 Heartland Savings Bank 15.20 16.00 7.01
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 Registrant to operate without capital adequacy concerns. LIQUIDITY Liquidity represents the ability of the Registrant and its subsidiaries to meet the requirements of customers for loans and deposit withdrawals. Liquidity management focuses on the ability to obtain funds economically for these purposes and to maintain assets which may be converted into cash at minimal costs. Management monitors its expected liquidity requirements carefully, focusing primarily on cash flows from operating, investing and financing activities. EFFECTS OF INFLATION Unlike industrial companies, virtually all of the assets and liabilities of the Registrant are monetary in nature. As a result, interest rates have a more significant impact on the Registrant'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 Registrant's assets and liabilities which are important to the maintenance of acceptable performance levels. The Registrant attempts to maintain a balance between monetary assets and monetary liabilities, over time, to offset these potential effects. FUTURE ACCOUNTING CHANGES In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). SFAS 125, among other things, applies a "financial-components approach" that focuses on control, whereby an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes assets when control has been surrendered, and derecognizes liabilities when extinguished. SFAS 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS 125 is effective for transactions occurring after December 31, 1996; however SFAS 127, issued in December 1996, defers the effective date of certain elements of SFAS 125 for one year. The Registrant does not expect these pronouncements to have a significant impact on its consolidated financial condition or results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995 (In thousands, except share data) 1996 1995 ASSETS Cash and due from banks (note 3): Non-interest bearing $ 20,158 $ 17,536 Interest bearing 453 784 Federal funds sold 6,500 4,975 Cash and cash equivalents 27,111 23,295 Interest bearing deposits with other financial institutions 99 99 Investment securities: Available-for-sale, at fair value (note 4) 114,027 119,388 Held-to-maturity, at amortized cost (estimated fair value of $3,491 and $3,409 at December 31, 1996 and 1995, respectively) (note 4) 3,481 3,381 Loans (note 5) 348,217 307,004 Less allowance for loan losses (note 6) 2,684 2,814 Net loans 345,533 304,190 Premises and equipment, net (note 7) 10,735 9,487 Accrued interest receivable 5,229 4,397 Intangible assets (notes 2 and 8) 5,472 6,019 Other assets (note 15) 3,710 2,238 TOTAL ASSETS $515,397 $472,494 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing $ 55,044 $ 51,017 Interest bearing (note 9) 358,632 345,862 Total deposits 413,676 396,879 Accrued interest payable 1,656 1,580 Securities sold under agreements to repurchase (notes 4 and 10) 18,360 16,815 Federal Home Loan Bank advances (note 10) 32,426 11,700 Long-term debt (note 11) 6,200 7,200 Other liabilities (note 15) 3,175 3,011 TOTAL LIABILITIES 475,493 437,185 Stockholders' Equity Series A convertible preferred stock; no par value; authorized 1,000,000 shares; issued 620 shares with stated value of $5,000 per share 3,100 3,100 Common stock, $4 par value; authorized 2,000,000 shares; issued 942,816 shares in 1996 and 894,991 shares in 1995 3,771 3,580 Additional paid-in-capital 5,463 3,969 Retained earnings 27,578 24,493 Net unrealized gain on available-for-sale investment securities, net of tax (note 4) 16 191 Less treasury stock at cost, 2,000 shares 24 24 TOTAL STOCKHOLDERS' EQUITY 39,904 35,309 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $515,397 $472,494 See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1996, 1995 and 1994 (In thousands, except per share data) 1996 1995 1994 INTEREST INCOME: Interest and fees on loans (note 5) $27,827 $ 25,214 $ 19,576 Interest on investment securities: Taxable 6,858 7,068 5,772 Exempt from federal income tax 629 733 851 Interest on federal funds sold 180 356 156 Interest on deposits with other financial institutions 65 94 73 Total interest income 35,559 33,465 26,428 INTEREST EXPENSE: Interest on deposits (note 9) 15,310 14,888 11,071 Interest on securities sold under agreements to repurchase (note 10) 574 777 310 Interest on Federal Home Loan Bank advances (note 10) 1,405 487 135 Interest on Federal funds purchased (note 10) 44 2 26 Interest on long-term debt (note 11) 472 571 376 Total interest expense 17,805 16,725 11,918 Net interest income 17,754 16,740 14,510 Provision for loan losses (note 6) 147 280 168 Net interest income after provision for loan losses 17,607 16,460 14,342 OTHER INCOME: Trust revenues 1,293 1,118 1,118 Brokerage revenues 386 183 349 Service charges 1,728 1,574 1,456 Securities (losses), net (note 4) (9) - (4) Mortgage banking income 428 273 158 Other 973 861 728 Total other income 4,799 4,009 3,805 OTHER EXPENSE: Salaries and employee benefits (note 14) 7,938 7,484 6,964 Net occupancy expense 1,098 1,021 937 Equipment rentals, depreciation and maintenance 1,247 1,277 1,032 Federal deposit insurance premiums 275 590 802 Savings Association Insurance Fund recapitalization assessment 751 - - Amortization of intangible assets (note 8) 547 608 358 Stationary and supplies 559 449 324 Legal and professional 795 699 737 Marketing and promotion 579 500 383 Other 2,188 2,087 1,726 Total other expense 15,977 14,715 13,263 Income before income taxes 6,429 5,754 4,884 Income taxes (note 15) 2,263 1,830 1,450 Net income $ 4,166 $ 3,924 $ 3,434 Per common share data: Primary earnings per share $ 4.22 $ 4.10 $ 3.59 Fully diluted earnings per share 3.98 3.88 3.43 See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the years ended December 31, 1996, 1995 and 1994 (In thousands, except per share data) NET UNREALIZED GAIN(LOSS) ON AVAILABLE- ADDITIONAL FOR-SALE PREFERRED COMMON PAID-IN- RETAINED INVESTMENT TREASURY STOCK STOCK CAPITAL EARNINGS SECURITIES STOCK TOTAL DECEMBER 31, 1993 $ 3,100 $ 3,515 $ 3,531 $ 19,087 $ 975 $ (24) $ 30,184 Net income - - - 3,434 - - 3,434 Cash dividends on preferred stock ($462.50 per share) - - - (286) - - (286) Cash dividends on common stock ($.75 per share) - - - (658) - - (658) Change in net unrealized gain/(loss) on available- for-sale investment securities, net of tax - - - - (2,074) - (2,074) DECEMBER 31, 1994 3,100 3,515 3,531 21,577 (1,099) (24) 30,600 Net income - - - 3,924 - - 3,924 Cash dividends on preferred stock ($462.50 per share) - - - (286) - - (286) Cash dividends on common stock ($.81 per share) - - - (722) - - (722) Issuance of 16,222 common shares pursuant to the Dividend Reinvestment Plan - 65 438 - - - 503 Change in net unrealized gain/(loss) on available- for-sale investment securities, net of tax - - - - 1,290 - 1,290 DECEMBER 31, 1995 3,100 3,580 3,969 24,493 191 (24) 35,309 Net income - - - 4,166 - - 4,166 Cash dividends on preferred stock ($462.50 per share) - - - (286) - - (286) Cash dividends on common stock ($.85 per share) - - - (795) - - (795) Issuance of 16,843 common shares pursuant to the Dividend Reinvestment Plan - 67 525 - - - 592 Issuance of 15,248 common shares pursuant to the Deferred Compensation Plan - 61 476 - - - 537 Issuance of 15,734 common shares pursuant to the First Retirement & Savings Plan - 63 493 - - - 556 Change in net unrealized gain on available-for- sale investment securities, net of tax - - - - (175) - (175) DECEMBER 31, 1996 $ 3,100 $ 3,771 $ 5,463 $ 27,578 $ 16 $ (24) $ 39,904 See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1996, 1995 and 1994 (In thousands) 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,166 $ 3,924 $ 3,434 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 147 280 168 Depreciation, amortization and accretion, net 1,251 1,231 1,503 Loss on sales of securities, net 9 - 4 Gain on sale of loans held for sale, net (322) (126) (22) Deferred income taxes (77) (110) 158 (Increase) decrease in accrued interest receivable (832) (468) 158 Increase in accrued interest payable 76 566 170 Origination of mortgage loans held for sale (21,139) (10,592) (4,307) Proceeds from sale of mortgage loans held for sale 21,113 11,055 5,021 (Increase) decrease in other assets (1,300) 394 365 Increase (decrease) in other liabilities 310 (290) (946) Net cash provided by operating activities 3,402 5,864 5,706 CASH FLOWS FROM INVESTING ACTIVITIES: Capitalization of mortgage servicing rights (196) - - Purchases of premises and equipment (2,036) (891) (455) Net increase in loans (41,142) (25,262) (29,438) Proceeds from sales of: Securities available-for-sale 31,667 487 21,232 Proceeds from maturities of: Securities available-for-sale 32,894 19,905 4,274 Securities held-to-maturity 580 12,549 31,631 Purchases of: Securities available-for-sale (59,366) (16,200) (22,636) Securities held-to-maturity (680) (6,161) (14,975) Net decrease in interest bearing deposits - - 2,776 Purchase of financial organization, net of cash received - - (6,706) Net cash used in investing activities (38,279) (15,573) (14,297) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 16,797 7,311 (6,829) Increase in securities sold under agreements to repurchase 1,545 1,225 9,960 Increase in Federal Home Loan Bank advances 20,726 8,200 - (Decrease) in federal funds purchased - (500) - Repayment of long-term debt (1,000) (500) (300) Proceeds from long-term debt - - 3,000 Proceeds from issuance of common stock 1,093 - - Dividends paid on preferred stock (32) (58) (286) Dividends paid on common stock (436) (387) (658) Net cash provided by financing activities 38,693 15,291 4,887 Increase (decrease) in cash and cash equivalents 3,816 5,582 (3,704) Cash and cash equivalents at beginning of year 23,295 17,713 21,417 Cash and cash equivalents at end of year $27,111 $23,295 $17,713 ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest paid $17,969 $17,291 $12,306 Income taxes 2,080 1,900 1,400 Loans transferred to real estate owned 290 182 264 Dividends reinvested in common shares 592 503 - See accompanying notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 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. ("Registrant") and its wholly owned subsidiaries: First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank"); Heartland Savings Bank ("Heartland"); and Mid-Illinois Data Services, Inc. ("MIDS"). All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the 1995 and 1994 consolidated financial statements have been reclassified to conform with the 1996 presentation. The accounting and reporting policies of the Registrant conform to generally accepted accounting principles and to general practices within the banking industry. The following is a description of the more significant of these policies. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. CASH EQUIVALENTS For purposes of reporting cash flows, cash equivalents include amounts due from banks and Federal funds sold. Generally, Federal funds are sold for one-day periods. INVESTMENT SECURITIES The Registrant 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 Registrant'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 Registrant has no securities designated as trading. Held-to-maturity securities are recorded at cost adjusted for amortization of premium and accretion of discount to the earlier of the call date or maturity date using the interest method. Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related income tax effect, are excluded from income and reported as a separate component of stockholders' equity. If a decrease in the market value of a security is expected to be other than temporary, then the security is written down to its fair value through a charge to income. Realized gains and losses on the sale of investment securities are recorded using the specific identification method. LOANS Loans are stated at the principal amount outstanding less unearned discount, net of the allowance for loan losses. Interest on substantially all loans is credited to income based on the principal amount outstanding. The Registrant's policy is to generally discontinue the accrual of interest income on any loan for which principal or interest is 90 days past due and when, in the opinion of management, there is reasonable doubt as to the timely collectibility of interest or principal. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collectibility of interest or principal. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in the loan portfolio. The allowance is based on a continuing review of the loan portfolio, the underlying value of the collateral securing the loans, current economic conditions and past loan loss experience. Loans which are deemed to be uncollectible are charged to the allowance. The provision for loan losses and recoveries are credited to the allowance. The Registrant adopted Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure", on January 1, 1995. Management, considering current information and events regarding the borrower's ability to repay their obligations, considers a loan to be impaired when it is probable that the Registrant will be unable to collect all amounts due according to the contractual terms of the note agreement, including principal and interest. The amount of the impairment is measured based on the fair value of the collateral, if the loan is collateral dependent, or alternatively, at the present value of expected future cash flows discounted at the loan's effective interest rate. Interest income on impaired loans is recorded when cash is received and only if principal is considered to be fully collectible. PREMISES AND EQUIPMENT Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization is determined principally by the straight-line method over the estimated useful lives of the assets. INTANGIBLE ASSETS Intangible assets generally arise from business combinations which the Registrant accounted for as purchases. Such assets consist of the excess of the purchase price over the fair market value of net assets acquired, specific amounts assigned to core deposit relationships of acquired businesses. Intangible assets are amortized by the straight-line and accelerated methods over various periods of up to 15 years. The Registrant assesses the recoverability of its intangible assets through reviews of various economic factors on a periodic basis in determining whether impairment, if any, exists. PREFERRED STOCK In connection with the Registrant's acquisition of Heartland in 1992, $3.1 million of Series A perpetual, cumulative, non-voting, convertible, preferred stock was issued to directors and certain senior officers of the Registrant pursuant to a private placement. 620 shares of the preferred stock were sold at a stated value of $5,000 per share with such shares bearing a dividend rate of 9.25%. The preferred stock may be converted at any time, at the option of the preferred stockholder, into common shares at the conversion ratio of 202.1 shares of common stock for each share of preferred. The Registrant also has the right, any time after July 1, 1998, and upon giving at least thirty days prior notice, to redeem all (but not less than all) of the preferred stock at a cash value of $5,000 per share plus any accrued but unpaid dividends. The Registrant also has the right at any time after July 1, 1998, and upon giving at least thirty days prior notice, to require the conversion of all (but not less than all) of the preferred stock into common stock at the conversion ratio. MORTGAGE BANKING ACTIVITIES Heartland originates residential mortgage loans both for its portfolio and for sale into the secondary market, generally with servicing rights retained. Included in mortgage banking income are gains or losses on the sale of loans and servicing fee income. Origination costs for loans sold are expensed as incurred. Loans that are originated and held for sale are carried at the lower of aggregate amortized cost or estimated market value. Gains or losses from loan sales are computed using the specific identification method and are included in mortgage banking income in the Consolidated Statements of Income. Effective January 1, 1996, the Registrant adopted Financial Accounting Standards Board's Statement No. 122, "ACCOUNTING FOR MORTGAGE SERVICING RIGHTS AN AMENDMENT OF FASB STATEMENT NO. 65," ("SFAS 122") which requires the recognition as separate assets the rights to service mortgage loans for others, however those rights are acquired. Originated Mortgage Servicing Rights ("OMSRs") are amortized in proportion to and over the period of estimated net servicing income. During 1996, $196,000 of mortgage servicing rights were capitalized with $50,000 of amortization expense being incurred. INCOME TAXES The Registrant and its subsidiaries file consolidated Federal and State income tax returns with each organization computing its taxes on a separate company basis. Amounts provided for income tax expense are based on income reported for financial statement purposes rather than amounts currently payable under tax laws. Deferred tax assets and liabilities are recognized for future tax consequences attributable to the temporary differences existing between the financial statement carrying amounts of assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards. To the extent that current available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as an increase or decrease in income tax expense in the period such change is enacted. TRUST DEPARTMENT ASSETS Property held for customers in fiduciary or agency capacities is not included in the accompanying consolidated balance sheets since such items are not assets of the Registrant or its subsidiaries. EARNINGS PER SHARE Income for primary earnings per common share is adjusted for dividends attributable to preferred stock. Primary earnings per common share is based on the weighted average number of common shares outstanding. Fully diluted earnings per share data is computed by using the weighted average number of common shares outstanding, increased by the assumed conversion of the convertible preferred stock. The weighted average number of common equivalent shares used in calculating earnings per share were as follows:
1996 1995 1994 Primary 920,460 887,370 876,769 Fully diluted 1,045,762 1,012,672 1,002,071
NOTE 2 - ACQUISITION On October 4, 1994, the First Mid Bank acquired all of the outstanding stock of Downstate Bancshares, Inc. ("DBI") which owned 100% of the stock of Downstate National Bank ("DNB"). DNB had locations in Altamont and Effingham, Illinois. Immediately following the acquisition, DBI was dissolved and DNB was merged with and into the First Mid Bank with the First Mid Bank being the surviving entity. DBI was purchased for cash of $8,570,0000, with $5,570,000 of that amount being internally generated funds and $3,000,000 resulting from additional long-term borrowings of the Registrant. The acquisition of DBI by the First Mid Bank was accounted for using the purchase method of accounting whereby the assets and liabilities of DBI were recorded at their fair values as of the acquisition date and the operating results of DBI operations have been combined with those of the Registrant since October 4, 1994. NOTE 3 - CASH AND DUE FROM BANKS Aggregate cash and due from bank balances of $8,263,000 and $5,881,000 at December 31, 1996 and 1995, respectively, 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 for available-for-sale and held-to-maturity securities by major security type at December 31, 1996 and 1995 were as follows (in thousands):
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR 1996 COST GAINS LOSSES VALUE Available-for-sale: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 86,518 $ 342 $ (585) $ 86,275 Obligations of states and political subdivisions 7,917 249 (3) 8,163 Mortgage-backed securities 15,283 103 (82) 15,304 Federal Home Loan Bank stock 3,878 - - 3,878 Other securities 407 - - 407 Total available-for-sale $114,003 $ 694 $ (670) $114,027 Held-to-maturity: Obligations of states and political subdivisions $ 3,481 $ 28 $ (18) $ 3,491
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR 1995 COST GAINS LOSSES VALUE Available-for-sale: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 72,599 $ 481 $ (683) $ 72,397 Obligations of states and political subdivisions 8,628 440 (7) 9,061 Mortgage-backed securities 35,766 222 (163) 35,825 Federal Home Loan Bank stock 1,699 - - 1,699 Other securities 406 - - 406 Total available-for-sale $ 119,098 $ 1,143 $ (853) $ 119,388 Held-to-maturity: Obligations of states and political Subdivisions $ 3,381 $ 43 $ (15) $ 3,409
Proceeds from sales of investment securities and realized gains and losses were as follows during the three years ended December 31, 1996, 1995 and 1994 (in thousands):
1996 1995 1994 Proceeds from sales $ 31,667 $ 487 $ 21,232 Gains 155 - 157 Losses 164 - 161
Maturities of investment securities were as follows at December 31, 1996 (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 $ 12,433 $ 12,390 Due after one-five years 61,717 61,965 Due after five-ten years 19,170 18,962 Due after ten years 5,400 5,405 98,720 98,722 Mortgage-backed securities 15,283 15,304 Total available-for-sale $114,003 $114,027 Held-to-maturity: Due in one year or less $ 620 $ 623 Due after one-five years 2,088 2,088 Due after five-ten years 308 315 Due after ten-years 465 465 Total held-to-maturity $ 3,481 $ 3,491 Total $117,484 $117,518
Investment securities carried at approximately $90,523,000 and $88,030,000 at December 31, 1996 and 1995 respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law. In December 1995, the Registrant reclassified certain investment securities between held-to-maturity and available-for-sale in accordance with guidelines issued by the Financial Accounting Standards Board ("FASB") permitting a one-time change in classification. Based on discussion and analysis, the Registrant decided that only local, non-rated municipal securities would be classified as held-to-maturity and the remaining portfolio would be designated as available-for-sale. The book value and gross unrealized loss of securities transferred from held-to-maturity to available-for-sale amounted to $52,536,000 and $445,000, respectively. NOTE 5 - LOANS A summary of loans at December 31, 1996 and 1995 follows (in thousands):
1996 1995 Commercial, financial and agricultural $ 75,097 $ 66,027 Real estate-mortgage 241,240 211,147 Installment 31,546 28,985 Other 1,526 1,945 Total gross loans 349,409 308,104 Less unearned discount 1,192 1,100 Net loans $348,217 $307,004
Certain officers, directors and principal stockholders of the Registrant 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 which exceeded $60,000 in the aggregate totaled $7,852,000 at December 31, 1996 and $10,060,000 at December 31, 1995. Activity during 1996 was as follows (in thousands):
Balance at December 31, 1995 $10,060 New loans 3,588 Loan repayments (5,796) Balance at December 31, 1996 $ 7,852
The aggregate principal balances of nonaccrual, past due and renegotiated loans were as follows at December 31, 1996 and 1995(in thousands):
1996 1995 Nonaccrual loans $790 $636 Loans past due ninety days or more and still accruing 575 554 Renegotiated loans which are performing in accordance with revised terms 580 604
The interest income which would have been recorded under the original terms of such nonaccrual or renegotiated loans totaled $143,000, $143,000 and $100,000 in 1996, 1995 and 1994, respectively. The amount of interest income which was recorded amounted to $39,000 in 1996, $56,000 in 1995 and $37,000 in 1994. 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 restructured loans meet this definition. Impaired loans are measured by the Registrant 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 restructured loans is accrued according to the most recently agreed upon contractual terms. The recorded investment of impaired loans totaled $1,370,000 at December 31, 1996 and $1,240,000 at December 31, 1995. There was no related allowance for these impaired loans at December 31, 1996 or 1995. The average recorded investment in impaired loans during the year was $1,105,000 in 1996 and $1,076,000 for 1995. Total interest income which would have been recorded under the original terms of the impaired loans was $143,000 in 1996 and $143,000 in 1995. Total interest income recorded on a cash basis was $39,000 and $56,000 for 1996 and 1995, respectively. The Bank Subsidiaries enter into financial instruments with off-balance sheet risk to meet the financing needs of their customers. These financial instruments include commitments to extend credit in accordance with line of credit agreements and/or mortgage commitments and standby letters of credit. Standby letters of credit are conditional commitments issued by a bank to guarantee the performance of a customer to a third-party. The subsidiaries evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the subsidiaries upon an extension of credit, is based on management's evaluation of the credit worthiness of the borrower. Collateral varies but generally includes assets such as property, equipment and receivables. At December 31, 1996 and 1995, respectively, the Registrant had $34,620,000 and $29,070,000 of outstanding commitments to extend credit and $1,182,000 and $1,242,000 of standby letters of credit. Management does not believe that any significant losses will be incurred in connection with such instruments. Most of the Registrant's business activities are with customers located within east central Illinois. At December 31, 1996 and 1995, the Registrant's loan portfolio included $46,366,000 and $39,720,000, respectively, of loans to borrowers directly related to the agricultural industry. Mortgage loans serviced for others by Heartland are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans at December 31, 1996, 1995 and 1994 was approximately $57,031,000, $43,622,000 and $39,193,000, 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, 1996 (in thousands):
1996 1995 1994 Balance, beginning of year $2,814 $2,608 $2,110 Allowance of purchased subsidiary at date of acquisition - - 343 Provision for loan losses 147 280 168 Recoveries 98 112 164 Charge offs (375) (186) (177) Balance, end of year $2,684 $2,814 $2,608
NOTE 7 - PREMISES AND EQUIPMENT, NET Premises and equipment at December 31, 1996 and 1995 consisted of (in thousands):
1996 1995 Land $ 2,555 $ 2,489 Buildings and improvements 7,738 7,679 Furniture and equipment 6,302 4,881 Leasehold improvements 353 340 Construction in progress 137 78 Subtotal 17,085 15,467 Accumulated depreciation and amortization 6,350 5,980 Total $10,735 $ 9,487
Depreciation expense was $788,000, $740,000 and $672,000 for the years ended December 31, 1996, 1995 and 1994, respectively. NOTE 8 - INTANGIBLE ASSETS Intangible assets, net of accumulated amortization, at December 31, 1996 and 1995 consisted of (in thousands):
1996 1995 Excess of cost over fair market value of acquired subsidiaries $ 4,391 $ 4,742 Core deposit premium of acquired subsidiaries 1,081 1,277 Total $ 5,472 $ 6,019
Amortization expense was $547,000, $608,000 and $358,000 for the years ended December 31, 1996, 1995 and 1994, respectively. NOTE 9 - DEPOSITS Total interest expense on deposits for the years ended December 31, 1996, 1995 and 1994 was as follows (in thousands):
1996 1995 1994 Interest-bearing demand $ 3,085 $ 2,823 $ 2,764 Savings 1,069 1,107 1,009 Time 11,156 10,958 7,298 Total $15,310 $14,888 $11,071
As of December 31, 1996, 1995 and 1994, 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):
1996 1995 1994 Outstanding $36,746 $35,002 $26,451 Interest expense for the year 2,108 1,963 963
NOTE 10 - OTHER BORROWINGS As of December 31, 1996 and 1995 other borrowings consisted of (in thousands):
1996 1995 Securities sold under agreements to repurchase $18,360 $16,815 Federal Home Loan Bank advances: Overnight advances 19,733 2,200 Fixed term advances due in one year or less 11,693 6,000 Fixed term advances due after one year 1,000 3,500 Federal funds purchased - - $50,786 $28,515
1996 1995 1994 Securities sold under agreements to repurchase: Maximum outstanding at any month-end $18,860 $21,200 $15,980 Average amount outstanding for the year 12,411 16,481 9,697
The First Mid Bank and Heartland have collateral pledge agreements whereby they have agreed to keep on hand at all time, free of all other pledges, liens, and encumbrances, whole first mortgages on improved residential property with unpaid principal balances aggregating no less than 167% of the outstanding advances from the Federal Home Loan Bank. The securities underlying the repurchase agreements are under the Registrant's control. NOTE 11 - LONG-TERM DEBT A summary of long-term debt at December 31, 1996 and 1995 was as follows (in thousands):
1996 1995 Floating rate loan at 1.5% over the Federal funds rate. Interest due quarterly. Principal payments due quarterly in various amounts beginning September 30, 1995. The debt matures September 30, 1999. Effective interest rate of 7.27% at December 31, 1996. $6,200 $ 7,200
The loan is secured by all of the common stock of the Bank Subsidiaries. The borrowing agreement contains requirements for the Registrant and the Bank Subsidiaries 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 Registrant and the subsidiaries were in compliance with the existing covenants a December 31, 1996. The scheduled principal payments on the outstanding long-term debt are as follows (in thousands):
1997 1,125 1998 1,500 1999 3,575
NOTE 12 - REGULATORY CAPITAL The Registrant is subject to various regulatory capital requirements administered by the federal banking agencies. Bank holding companies follow minimum regulatory requirements established by the Federal Reserve Board, First Mid Bank follows similar minimum regulatory requirements established for national banks by the Office of the Comptroller of the Currency and Heartland is regulated by the FDIC and the Office of the Commissioner of Banks & Real Estate. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Registrant'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, 1996, that all capital adequacy requirements have been met. As of December 31, 1996, the most recent notification from the primary regulators categorized the Registrant, First Mid Bank and Heartland 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. There are no conditions or events since that notification that management believes have changed these categories.
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO DECEMBER 31, 1996 Total Capital (to risk-weighted assets) Registrant $ 37,106 11.80% $ 25,156 > 8.00% $ 31,433 > 10.00% First Mid Bank 33,670 12.57 21,427 > 8.00 26,783 > 10.00 Heartland 6,957 16.00 3,479 > 8.00 4,348 > 10.00 Tier 1 Capital (to risk-weighted assets) Registrant 34,422 10.95 12,573 > 4.00 18,860 > 6.00 First Mid Bank 31,335 11.70 10,713 > 4.00 16,070 > 6.00 Heartland 6,608 15.20 1,739 > 4.00 2,609 > 6.00 Tier 1 Capital (to average assets) Registrant 34,422 6.81 20,213 > 4.00 25,267 > 5.00 First Mid Bank 31,335 7.65 16,380 > 4.00 20,475 > 5.00 Heartland 6,608 7.01 3,772 > 4.00 4,715 > 5.00
NOTE 13 - DISCLOSURE OF FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair Value of Financial Instruments", requires the disclosure of the estimated fair value of financial instrument assets and liabilities. For the Registrant, as for most financial institutions, most of the assets and liabilities are considered financial instruments as defined in SFAS 107. However, many of the Registrant's financial instruments lack an available trading market as characterized by a willing buyer and seller engaging in an exchange transaction. Additionally, the Registrant's general practice and intent is to hold its financial instruments until maturity and not to engage in trading or sales activity. Accordingly, significant assumptions and estimations as well as present value calculations were used by the Registrant for purposes of the SFAS 107 disclosure. Future changes in these assumptions or methodologies may have a material effect on estimated fair values. Estimated fair values have been determined by the Registrant 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, 1996 and 1995 were as follows (in thousands): Financial instruments for which an active secondary market exists have been valued using quoted available market prices.
1996 1996 1995 1995 FAIR CARRYING FAIR CARRYING VALUE AMOUNT VALUE AMOUNT Cash and cash equivalents $ 27,111 $ 27,111 $ 23,295 $ 23,295 Interest bearing deposits with financial institutions 99 99 99 99 Investments available-for-sale 114,027 114,027 119,388 119,388 Investments held-to-maturity 3,491 3,481 3,409 3,381
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.
1996 1996 1995 1995 FAIR CARRYING FAIR CARRYING VALUE AMOUNT VALUE AMOUNT Deposits with stated maturities $200,401 $200,270 $206,062 $204,844 Securities sold under agreements to repurchase 18,319 18,360 16,839 16,815 Federal Home Loan Bank advances 32,364 32,426 11,717 11,700
Financial instrument liabilities without stated maturities and floating rate long-term debt have estimated fair values equal to both the amount payable on demand and the carrying amount.
1996 1996 1995 1995 FAIR CARRYING FAIR CARRYING VALUE AMOUNT VALUE AMOUNT Deposits with no stated maturity $213,406 $213,406 $192,035 $192,035 Floating rate long-term debt 6,200 6,200 7,200 7,200
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.
1996 1996 1995 1995 FAIR CARRYING FAIR CARRYING VALUE AMOUNT VALUE AMOUNT Net loan portfolio $345,216 $345,533 $304,038 $304,190
The notional amount of off-balance sheet items such as unfunded loan commitments and stand-by letters of credit generally approximate their estimated fair values. NOTE 14 - RETIREMENT PLAN The Registrant 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 Registrant 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 $309,000, $285,000 and $270,000 in 1996, 1995 and 1994, respectively. NOTE 15 - INCOME TAXES The components of Federal and State income taxes (benefit) for the years ended December 31, 1996, 1995 and 1994 were as follows (in thousands):
1996 1995 1994 Current Federal $2,134 $1,940 $1,292 State 206 - - Total Current 2,340 1,940 1,292 Deferred Federal (66) (110) 158 State (11) - - Total Deferred (77) (110) 158 Total $2,263 $1,830 $1,450
Recorded income tax expense differs from the expected tax expense (computed by applying the applicable statutory U.S. Federal tax rate of 34% to income before income taxes). The principle reasons for this difference are as follows (in thousands):
1996 1995 1994 Expected income taxes $2,186 $1,956 $1,661 Effects of: Tax-exempt income (235) (276) (317) Nondeductible interest expense 28 29 28 Goodwill amortization 120 120 35 State deduction, net of federal taxes 129 - - Other items, net 35 1 43 Total $2,263 $1,830 $1,450
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, 1996 and 1995 are presented below (in thousands):
1996 1995 Deferred tax assets: Allowance for loan losses $ 423 $ 479 Employee benefits 114 166 Other, net 316 193 Total gross deferred tax assets 853 838 Less valuation allowance - (149) Net deferred tax assets $ 853 $ 689 Deferred tax liabilities: Depreciation $ 469 $ 415 Available-for-sale investment securities 8 99 Purchase accounting 144 160 Other, net 147 70 Total gross deferred tax liabilities $ 768 $ 744 Net deferred tax assets (liabilities) $ 85 $ (55)
Deferred tax assets and deferred tax liabilities are recorded in other assets and other liabilities, respectively, on the consolidated balance sheets. The valuation allowance was eliminated at December 31, 1996 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 the Banking Subsidiaries to pay dividends to the Registrant. At December 31, 1996, regulatory approval would have been required for aggregate dividends from the Bank Subsidiaries to the Registrant in excess of approximately $3.9 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 In the normal course of business, there are various outstanding commitments and contingent liabilities such as guarantees, commitments to extend credit, claims and legal actions which are not reflected in the accompanying consolidated financial statements. In the opinion of management, no significant losses are anticipated as a result of these matters. NOTE 18 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
FIRST MID-ILLINOIS BANCSHARES, INC. (PARENT COMPANY) Presented below are condensed balance sheets, statements of income and cash flows for the Parent Company (in thousands): BALANCE SHEETS: DECEMBER 31, 1996 1995 Assets Cash $ 786 $ 724 Premises and equipment, net 62 68 Investment in subsidiaries 43,956 42,045 Other assets 2,445 927 Total assets $47,249 $43,764 Liabilities and stockholders' equity Liabilities: Dividends payable $ 442 $ 420 Long-term debt 6,200 7,200 Other liabilities 703 835 Total liabilities 7,345 8,455 Stockholders' equity 39,904 35,309 Total liabilities and stockholders' equity $47,249 $43,764 STATEMENTS OF INCOME: YEARS ENDED DECEMBER 31, 1996 1995 1994 Income: Dividends from subsidiaries $ 2,737 $ 1,369 $ 1,825 Other income 48 25 62 2,785 1,394 1,887 Operating expenses 1,037 1,266 1,127 Income before income taxes and equity in undistributed earnings of subsidiaries 1,748 128 760 Income tax benefit 332 402 342 Income before equity in undistributed earnings of subsidiaries 2,080 530 1,102 Equity in undistributed earnings of subsidiaries 2,086 3,394 2,332 Net income $ 4,166 $ 3,924 $ 3,434 STATEMENTS OF CASH FLOWS: YEARS ENDED DECEMBER 31, 1996 1995 1994 Cash flows from operating activities: Net income $ 4,166 $ 3,924 $ 3,434 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion, net 8 5 33 Equity in undistributed earnings of subsidiaries (2,086) (3,394) (2,332) (Increase) decrease in other assets (1,515) (93) 305 Increase (decrease) in other liabilities (132) 331 2 Net cash provided by operating activities 441 773 1,442 Cash flows from investing activities: Investment in subsidiaries - - (3,000) (Purchases) sales of equipment (6) (18) 27 Net cash used in investment activities (6) (18) (2,973) Cash flows from financing activities: Repayment of long-term debt (1,000) (500) (300) Proceeds from long-term borrowings - - 3,000 Proceeds from issuance of common stock 1,095 - - Dividends paid on preferred stock (32) (58) (286) Dividends paid on common stock (436) (387) (658) Net cash provided by (used in) financing activities (373) (945) 1,756 Increase (decrease) in cash 62 (190) 225 Cash at beginning of year 724 914 689 Cash at end of year $ 786 $ 724 $ 914
STATEMENT OF RESPONSIBILITY FOR FINANCIAL DATA Management is responsible for the integrity of all the financial data included in this Annual Report. The financial statements and related notes are prepared in accordance with generally accepted accounting principles, which in the judgement of management are appropriate in the circumstances. Financial information elsewhere in this Report is consistent with that in the financial statements. Management maintains a system of internal accounting control, including an internal audit program, which provides reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, transactions are properly authorized and accounting records are reliable for the preparation of financial statements. The foundation of the system of internal accounting control rests upon careful selection and training of personnel, segregation of responsibilities and application of formal policies and procedures that are consistent with the highest standards of business conduct. The system of internal accounting control is being continuously modified and improved in response to changes in business conditions and operations. The Board of Directors has an Audit Committee comprised of six outside directors. The Committee meets periodically with the independent auditors, the internal auditors and management to ensure that the system of internal accounting control is being properly administered and that financial data is being properly reported. The Committee reviews the scope and timing of both the internal and external audits, including recommendations made with respect to the system of internal accounting control by the independent auditors. The consolidated financial statements, as identified in the accompanying Independent Auditors' Report, have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The audits were conducted in accordance with generally accepted auditing standards, which included tests of the accounting records and other auditing procedures considered necessary to formulate an opinion as to the fairness, in all material respects, of the consolidated financial statements. Daniel E. Marvin, Jr. William S. Rowland Chairman and Chief Chief Financial Officer Executive Officer INDEPENDENT AUDITORS' REPORT The Board of Directors First Mid-Illinois Bancshares, Inc. Mattoon, Illinois: We have audited the accompanying consolidated balance sheets of First Mid-Illinois Bancshares, Inc. and subsidiaries as of December 31, 1996 and 1995, 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, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Mid-Illinois Bancshares, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Chicago, Illinois January 24, 1997 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT "Election of Directors" on pages 2 through 3 of the 1997 Proxy Statement is incorporated by reference. Section 16(a) of the Securities Exchange Act of 1934 requires that the Registrant's executive officers and directors and persons who own more than 10% of the Registrant's Common Stock file reports of ownership and changes in ownership with the Securities and Exchange Commission and with the exchange on which the Registrant's shares of Common Stock are traded. Such persons are also required to furnish the Registrant with copies of all Section 16(a) forms they file. Based solely on the Registrant's review of the copies of such forms, the Registrant is not aware that any of its directors and executive officers or 10% stockholders failed to comply with the filing requirements of Section 16(a) during the period commencing January 1, 1996 and ending December 31, 1996. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Registrant are identified below. The executive officers of the Registrant are elected annually by the Registrant's Board of Directors.
Name (Age) Position With Registrant Daniel E. Marvin, Jr. (57) Chairman of the Board of Directors, President and Chief Executive Officer William S. Rowland (50) Director, Chief Financial Officer, Secretary and Treasurer John R. Kuczynski (43) Vice President, Trust and Farm Stanley E. Gilliland (52) Vice President, Lending Alfred M. Wooleyhan, Jr. (49) Vice President, Development
Daniel E. Marvin, Jr., age 57, has been Chairman of the Board of Directors, President and Chief Executive Officer of the Registrant and the First Mid Bank since 1983, and has been Vice Chairman of the Board of Directors of Heartland since 1992. He was appointed president of Heartland in 1994. William S. Rowland, age 50, has served as a director of the Registrant since 1991, has been Chief Financial Officer since 1989 and has served as Secretary/Treasurer since 1991. Since 1989 Mr. Rowland has been Executive Vice President, Finance of First Mid Bank and has also served as a director of MIDS since 1989, and as a director of Heartland since 1992. Mr. Rowland was in the Davenport, Iowa, office of KPMG Peat Marwick from 1975-1989. John R. Kuczynski, age 43, has been Vice President of the Trust and Farm Department of the Registrant since June 1996. Mr. Kuczynski was a Sr. Vice President and Trust Officer for the Amcore Trust Company in Sterling, Illinois, from 1980 - 1996. Stanley E. Gilliland, age 52, has been Vice President of Lending of the Registrant since 1985, and has been Executive Vice President of Lending for First Mid Bank since 1990. Mr. Gilliland is also a director and member of the Loan Committee of Heartland. Alfred M. Wooleyhan, Jr., age 49, has been Vice President of Development of the Registrant since the beginning of 1995. Mr. Wooleyhan was the President of the Charleston Business Unit of First Mid Bank from 1989-1995. ITEM 11. EXECUTIVE COMPENSATION "Remuneration of Executive Officers," "Retirement Benefits" and "Transactions with Management" on pages 4 through 6 of the 1997 Proxy Statement are incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" on pages 8 through 9 of the 1997 Proxy Statement are incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. "Transactions with Management" on page 4 of the 1997 Proxy Statement is incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) and (2) -- Financial Statements and Financial Statement Schedules The following consolidated financial statements and financial statement schedules of the Registrant are filed as part of this document under Item 8. Financial Statements and Supplementary Data: Consolidated Balance Sheets -- December 31, 1996 and 1995 Consolidated Statements of Income -- For the Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Changes in Shareholders' Equity -- For the Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows -- For the Years Ended December 31, 1996, 1995 and 1994 (a)(3) -- Exhibits (a)(3) -- The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the exhibit Index which follows the Signature Page and immediately precedes the exhibits filed. (b) Reports on Form 8-K There were no reports on Form 8-K filed by the Registrant during the quarter ended December 31, 1996. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on this 18 day of March 1997. FIRST MID-ILLINOIS BANCSHARES, INC. (Registrant) /s/ Daniel E. Marvin, Jr. *-------------------------------------* Daniel E. Marvin, Jr. President and Chief Executive Officer /s/ William S. Rowland *-------------------------------------* William S. Rowland Chief Financial Officer Dated: March 18, 1997 *---------------------* Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 18th day of March by the following persons on behalf of the Registrant and in the capacities. SIGNATURE AND TITLE by /s/ Daniel E. Marvin, Jr. Daniel E. Marvin, Jr. (Principal Executive Officer) and Director by /s/ William S. Rowland William S. Rowland (Principal Financial Officer) and Director by /s/ Charles A. Adams Charles A. Adams Director by Kenneth R. Diepholz Director by Richard A. Lumpkin Director by /s/ Gary W. Melvin Gary W. Melvin Director by /s/ William G. Roley William G. Roley Director by /s/ Ray A. Sparks Ray A. Sparks Director
EXHIBIT INDEX TO FORM 10-K REGISTRATION STATEMENT EXHIBIT NUMBER DESCRIPTION AND FILING OR INCORPORATION REFERENCE 3.1 RESTATED CERTIFICATE OF INCORPORATION AND AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION OF FIRST MID-ILLINOIS BANCSHARES, INC. Exhibit 3(a) to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987 (File No. 0-13688) 3.2 RESTATED BYLAWS OF FIRST MID-ILLINOIS BANCSHARES, INC. Exhibit 3(b) to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987 (File No 0-13368) 11.1 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE (Filed herewith) 21.1 SUBSIDIARIES OF THE REGISTRANT (Filed herewith) 23.1 CONSENT OF KPMG PEAT MARWICK LLP (Filed herewith) 27.1 FINANCIAL DATA SCHEDULE (Filed herewith) 99.1 PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF STOCKHOLDERS (Filed herewith)
EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors First Mid-Illinois Bancshares, Inc. RE: Registration Statements Registration No. 33-84404 on Form S-3 Registration No. 33-64061 on Form S-8 Registration No. 33-64139 on Form S-8 We consent to incorporation by reference in the subject Registration Statements on Forms S-3 and S-8 of First Mid-Illinois Bancshares, Inc. of our report dated January 24, 1997, relating to the consolidated balance sheets of First Mid-Illinois Bancshares, Inc. and subsidiaries as of December 31, 1996 and 1995, 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, 1996, which report is incorporated by reference in the December 31, 1996 annual report on Form 10-K of First Mid-Illinois Bancshares, Inc. KPMG Peat Marwick LLP Chicago, Illinois March 20, 1997 SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities and Exchange Act of 1934 Filed by the Registrant {X} Filed by a Party other than the Registrant { } Check the appropriate box: {X} Preliminary Proxy Statement { } Confidential, for use of the Commission Only (as permitted by Rule 14a-6(e)(2)) { } Definitive Proxy Statement { } Definitive Additional Materials { } Soliticiting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 First Mid-Illinois Bancshares, Inc. (Name of Registrant as specified in its Charter) Not applicable (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box) {X} No fee required { } Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11 (1) Title of each class of securities to which transactions applies: (2) Aggregate number of securities to which transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): (4) Proposed maximum aggregate value of transaction: (5) Total fee paid: { } Fee paid previously with preliminary materials { } Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identifying the filing for which the offsetting fee was paid previously. Identiry the previous filing by registration statement number, or the form or Schedule and the date of its filing. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: First Mid-Illinois Bancshares, Inc. April 16, 1997 Dear Fellow Stockholder: On behalf of the Board of Directors and management of First Mid-Illinois Bancshares, Inc., I cordially invite you to attend the Annual Meeting of Stockholders of First Mid-Illinois Bancshares, Inc. to be held at 11:00 a.m. on May 21, 1997, at the Ramada Inn located at 300 Broadway Avenue, Mattoon, Illinois. The accompanying Notice of Annual Meeting of Stockholders and Proxy Statement discuss the business to be conducted at the meeting. We have also enclosed a copy of the Company's 1996 Annual Report to Stockholders. At the meeting we shall report on Company operations and the outlook for the year ahead. Your Board of Directors has also nominated three persons to serve as Class II directors. Each of the nominees are incumbent directors. In addition, the Company's management has selected and recommends that you ratify the selection of KPMG Peat Marwick LLP to continue as the Company's independent public accountants for the year ending December 31, 1997. We are also pleased to announce that the Company's Board of Directors has put forth a special matter for consideration at this year's annual meeting. As a result of the Company's continued growth, the Board has announced its intention to declare a two-for-one stock split in the form of a stock dividend. In order to have sufficient shares of common stock available for the special stock dividend, the Board has proposed increasing the number of authorized shares of common stock of the Company. The proposal to amend the Company's Restated Certificate of Incorporation in this regard is described in the accompanying Proxy Statement. The Board is very proud of the Company's performance and recommends that stockholders vote in favor of the proposed amendment. We recommend that you vote your shares for the director nominees and in favor of the proposals. I encourage you to attend the meeting in person. WHETHER OR NOT YOU PLAN TO ATTEND, HOWEVER, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE ACCOMPANYING POSTPAID RETURN ENVELOPE AS PROMPTLY AS POSSIBLE. This will ensure that your shares are represented at the meeting. If you have any questions concerning these matters, please do not hesitate to contact me at (217) 234-7454. We look forward with pleasure to seeing and visiting with you at the meeting. Very truly yours, FIRST MID-ILLINOIS BANCSHARES, INC. Daniel E. Marvin, Jr. CHAIRMAN NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 21, 1997 FIRST MID-ILLINOIS BANCSHARES, INC. 1515 CHARLESTON AVENUE P.O. BOX 499 MATTOON, ILLINOIS 61938 (217) 234-7454 To the stockholders of FIRST MID-ILLINOIS BANCSHARES, INC. The Annual Meeting of the Stockholders of First Mid-Illinois Bancshares, Inc., a Delaware corporation (the "Company"), will be held at the RAMADA INN, 300 BROADWAY AVENUE, EAST IN ROOMS A, B AND C, Mattoon, Illinois, on Wednesday, May 21, 1997, at 11:00 a.m., local time, for the following purposes: 1. to elect three Class II directors for a term of three years. 2. to amend Article IV of the Company's Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock, $4.00 par value per share, from 2,000,000 to 6,000,000 shares. 3. to approve the appointment of KPMG Peat Marwick LLP as independent public accountants for the Company for the fiscal year ending December 31, 1997. 4. to transact such other business as may properly be brought before the meeting and any adjournments or postponements thereof. The Board of Directors has fixed the close of business on April 1, 1997, as the record date for the determination of stockholders entitled to notice of, and to vote at, the meeting. By order of the Board of Directors Daniel E. Marvin, Jr. Chairman Mattoon, Illinois April 16, 1997 FIRST MID-ILLINOIS BANCSHARES, INC. PROXY STATEMENT This Proxy Statement is furnished in connection with the solicitation by the Board of Directors of First Mid-Illinois Bancshares, Inc. (the "Company") of proxies to be voted at the Annual Meeting of Stockholders to be held at the RAMADA INN, 300 BROADWAY AVENUE, EAST IN ROOMS A, B AND C, Mattoon, Illinois, on Wednesday, May 21, 1997, at 11:00 a.m., local time, and at any adjournments or postponements thereof. The Board of Directors would like to have all stockholders represented at the meeting. If you do not expect to be present, please sign and mail your proxy card in the enclosed self-addressed, stamped envelope to First Mid-Illinois Bancshares, Inc., 1515 Charleston Avenue, P.O. Box 499, Mattoon, Illinois 61938, Attention: Mr. William S. Rowland. You have the power to revoke your proxy at any time before it is voted, and the giving of a proxy will not affect your right to vote in person if you attend the meeting. The mailing address of the Company's principal executive offices is 1515 Charleston Avenue, P.O. Box 499, Mattoon, Illinois 61938. This Proxy Statement and the accompanying proxy card are being mailed to stockholders on or about April 16, 1997. The 1996 Annual Report of the Company, which includes consolidated financial statements of the Company, is enclosed. The Company is a diversified financial services company which serves the financial needs of east central Illinois. It is the parent company of First Mid-Illinois Bank & Trust, N.A. (the "Bank"), a regional banking entity which has locations in Mattoon, Altamont, Arcola, Effingham, Charleston, Sullivan, Tuscola and Neoga, Illinois. The Company is also the holding company for Heartland Savings Bank, an Illinois savings bank located in Mattoon and Urbana, Illinois ("Heartland"). Mid-Illinois Data Services, Inc., a data processing company ("MIDS"), is a wholly owned nonbanking subsidiary of the Company. The Bank, Heartland and MIDS are sometimes referred to as the "Subsidiaries." Only holders of record of the Company's Common Stock, par value $4.00 per share (the "Common Stock"), at the close of business on April 1, 1997 will be entitled to vote at the annual meeting or any adjournments or postponements of such meeting. On April 1, 1997, the Company had 947,680 shares of Common Stock, and 620 shares of Preferred Stock, no par value (the "Preferred Stock"), issued and outstanding. In the election of directors, and for all other matters to be voted upon at the annual meeting, each issued and outstanding share of Common Stock is entitled to one vote. Stockholders voting FOR the election of directors on the enclosed proxy will be deemed to have given their proxy to vote for the election of all directors except as otherwise noted on the proxy. Holders of the Preferred Stock are not entitled to vote their Preferred Stock at the annual meeting. All shares of Common Stock represented at the annual meeting by properly executed proxies received prior to or at the annual meeting, and not revoked, will be voted at the meeting in accordance with the instructions thereon. If no instructions are indicated, properly executed proxies will be voted for the nominees and for adoption of the proposals set forth in this Proxy Statement. A majority of the shares of the Common Stock, present in person or represented by proxy, shall constitute a quorum for purposes of the annual meeting. Abstentions and broker non-votes will be counted for purposes of determining a quorum. Directors shall be elected by a plurality of the votes present in person or represented by proxy. Approval of the amendment to the Company's Restated Certificate of Incorporation requires the approval of a majority of the outstanding shares of Common Stock. In all other matters, the affirmative vote of the majority of shares present in person or represented by proxy at the annual meeting and entitled to vote on the subject matter shall be required to constitute stockholder approval. Abstentions will be treated as votes against a proposal and broker non-votes will have no effect on the vote. ELECTION OF DIRECTORS At the Annual Meeting of the Stockholders to be held on May 21, 1997, the stockholders will be entitled to elect three (3) Class II directors for a term expiring in 2000. The directors of the Company are divided into three classes having staggered terms of three years. Each of the nominees for election as Class II directors are incumbent directors. The Company has no knowledge that any of the nominees will refuse or be unable to serve, but if any of the nominees becomes unavailable for election, the holders of the proxies reserve the right to substitute another person of their choice as a nominee when voting at the meeting. Set forth below is information, as of April 1, 1997, concerning the nominees for election and for the other persons whose terms of office will continue after the meeting, including age, year first elected a director of the Company and business experience during the previous five years of each. The three nominees, if elected at the annual meeting, will serve as Class II directors for three year terms expiring in 2000. NOMINEES
Position with the Company and Name Director the Subsidiaries and Occupation (AGE) SINCE FOR THE LAST FIVE YEARS CLASS II (TERM EXPIRES 2000) Richard Anthony Lumpkin 1982 Director of the Bank (since 1966) and (Age 62) of the Company; Chairman of the Board of Consolidated Communications Inc., Director CIPSCO Incorporated (since 1995). William G. Roley 1985 Director of the Bank (since 1992) and (Age 67) of the Company; retired, former owner of Roley Real Estate. William S. Rowland 1991 Chief Financial Officer, Secretary (Age 50) (since 1991), Treasurer (since 1989) and Director of the Company; Director of MIDS (since 1989) and of Heartland (since 1992); Executive Vice President of the Bank (since 1989). CONTINUING DIRECTORS CLASS III (TERM EXPIRES 1998) Charles A. Adams 1984 Director of the Bank (since 1989), of (Age 55) MIDS (since 1987) and of the Company; Vice President, Howell Asphalt Company and President, Howell Paving, Inc. Daniel E. Marvin, Jr. 1982 Chairman, President, Chief Executive (Age 58) Officer and Director of the Company; Director (since 1980), Chairman, President and Chief Executive Officer (since 1983) of the Bank; Director of MIDS (1987-1992); Director, Chairman (since 1992) of Heartland Ray Anthony Sparks 1994 Director of the Company; Director of (Age 40) Heartland (since 1992); Director of MIDS (since 1996); President of Elasco Agency Sales, Inc. and Electrical Laboratories and Sales Corporation. CLASS I (TERM EXPIRES 1999) Kenneth R. Diepholz 1990 Director of the Bank (since 1984) and (Age 58) of the Company; President, Diepholz Chevrolet, Oldsmobile, Cadillac and Geo and Owner, D-Co Coin Laundry and Diepholz Rentals. Gary W. Melvin 1990 Director of the Bank (since 1984) and (Age 47) of the Company; Director of MIDS (since 1987); Co-Owner, Rural King Stores.
ALL OF THE COMPANY'S DIRECTORS WILL HOLD OFFICE FOR THE TERMS INDICATED, OR UNTIL THEIR RESPECTIVE SUCCESSORS ARE DULY ELECTED AND QUALIFIED, AND ALL EXECUTIVE OFFICERS HOLD OFFICE FOR A TERM OF ONE YEAR. THERE ARE NO ARRANGEMENTS OR UNDERSTANDINGS BETWEEN ANY OF THE DIRECTORS, EXECUTIVE OFFICERS OR ANY OTHER PERSON PURSUANT TO WHICH ANY OF THE COMPANY'S DIRECTORS OR EXECUTIVE OFFICERS HAVE BEEN SELECTED FOR THEIR RESPECTIVE POSITIONS. DIRECTORS OF THE COMPANY RECEIVED A $1,800 QUARTERLY RETAINER FOR SERVING ON THE BOARD OF DIRECTORS IN 1996, EXCEPT MR. ROWLAND WHO IS NOT SEPARATELY COMPENSATED FOR HIS SERVICES ON THE BOARD. ADDITIONALLY, THE BANK PROVIDES A PENSION TO CERTAIN BANK DIRECTORS WHO HAVE SERVED FOR A MINIMUM OF TEN YEARS AND HAVE ATTAINED THE AGE OF 65 OR OLDER AND WHO WERE NOT SERVING AS AN OFFICER OF THE BANK UPON RETIREMENT. THE PENSION IS EQUAL TO 75% OF THE REGULAR DIRECTORS' MEETING FEES PAID TO CURRENT DIRECTORS, BASED UPON FOURTEEN REGULAR MEETINGS IN EACH FISCAL YEAR. BOARD COMMITTEES AND MEETINGS The Board of Directors of the Company has established an audit committee and a compensation committee. These committees are composed entirely of outside directors. The Board has also created other company-wide committees composed of officers of the Company and the Subsidiaries. Members of the audit committee are Messrs. Adams, Diepholz, Lumpkin, Melvin, Roley and Sparks. The audit committee reports to the Board of Directors and has the responsibility to review and approve internal control procedures, accounting practices and reporting activities of the Subsidiaries. The committee also has the responsibility for establishing and maintaining communications between the Board and the independent auditors and regulatory agencies. The audit committee reviews with the independent auditors the scope of their examinations, with particular emphasis on the areas to which either the audit committee or the auditors believe special attention should be directed. It also reviews the examination reports of regulatory agencies and reports to the full Board regarding matters discussed therein. Finally, it oversees the establishment and maintenance of effective controls over the business operations of the Subsidiaries. The Audit Committee met four times in 1996. The members of the compensation committee are Messrs. Adams, Diepholz, Lumpkin, Melvin, Roley and Sparks. The compensation committee reports to the Board of Directors and has responsibility for all matters related to compensation of executive officers of the Company, including review and approval of base salaries, conducting a review of salaries of executive officers compared to other financial services holding companies in the region, fringe benefits, including modification of the retirement plan, and incentive compensation. The compensation committee met two times in 1996. A total of 12 regularly scheduled and special meetings were held by the Board of Directors of the Company during 1996. During 1996, all directors attended at least 75 percent of the meetings of the Board and the committees on which they served. TRANSACTIONS WITH MANAGEMENT Directors and officers of the Company and the Subsidiaries and their associates, were customers of and had transactions with the Company and the Subsidiaries during 1996. Additional transactions may be expected to take place in the future. All outstanding loans, commitments to loan, transactions in repurchase agreements and certificates of deposit and depository relationships, in the opinion of management, were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time or comparable transactions with other persons and did not involve more than the normal risk of collectibility or present other unfavorable features. EXECUTIVE COMPENSATION The following table shows the compensation earned for the last three fiscal years by the Chief Executive Officer and those executive officers of the Company and the Subsidiaries whose 1996 salary and bonus exceeded $100,000:
SUMMARY COMPENSATION TABLE Annual Compensation (a) (b) (c) (D) (H) Fiscal Year ALL OTHER Name and Ended COMPENSATION Principal Position December 31st Salary($){(1)} BONUS ($) ($) Daniel E. Marvin, Jr., 1996 $ 170,338 $ 54,848 $ 26,792{(2)} President & 1995 164,000 48,163 26,001{(2)} Chief Executive Officer 1994 160,255 35,040 23,048{(2)} William S. Rowland, 1996 $ 105,338 $ 23,570 $ 12,018{(3)} Chief Financial Officer 1995 101,000 21,651 11,940{(3)} 1994 96,000 13,590 11,971{(3)} Stanley E. Gilliland, 1996 $ 91,338 $ 15,435 $ 6,407{(4)} Vice President 1995 86,000 15,738 6,103{(4)} 1994 82,620 12,636 5,477{(4)} (1) Includes deferred amounts. (2) Represents the Company's contributions to its retirement plan for 1996, 1995 and 1994 of $13,511, $12,720 and $10,874, respectively, and premium payments for an insurance policy purchased to fund a supplemental retirement and death benefit for Mr. Marvin in the amount of $13,281 for 1996, $13,281 for 1995 and $12,174 for 1994. (3) Represents the Company's contributions to its retirement plan for 1996, 1995 and 1994 of $6,120, $6,060 and $6,091, respectively, and an annual premium payment for an insurance policy purchased to fund a supplemental retirement and death benefit for Mr. Rowland in the amount of $5,898 in 1996 and $5,880 for 1995 and 1994. (4) Represents the Company's contributions to its retirement plan.
THE COMPENSATION COMMITTEE HAS FURNISHED THE FOLLOWING REPORT ON EXECUTIVE COMPENSATION. THE INCORPORATION BY REFERENCE OF THIS PROXY STATEMENT INTO ANY DOCUMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE COMPANY SHALL NOT BE DEEMED TO INCLUDE SUCH REPORT UNLESS SUCH REPORT IS SPECIFICALLY STATED TO BE INCORPORATED BY REFERENCE INTO SUCH DOCUMENT. COMPENSATION COMMITTEE REPORT As members of the Compensation Committee, it is our duty to evaluate the performance of management, review total management compensation levels and consider management succession and other related matters. The Committee reviews and approves in detail all aspects of compensation for the nine highest paid officers within the Company and uses state, regional and national salary studies to ascertain existing market conditions for personnel. No member of the Committee is a former or current officer or employee of the Company or any of the Subsidiaries. The compensation philosophy of the Company is that a portion of the annual compensation of each officer relates to and must be contingent upon the performance of the Company, as well as the individual contribution of each officer. As a result, a portion of each executive officer's annual compensation is based upon the officer's performance, the performance of the operating unit for which the officer has primary responsibility and the performance of the Company as a whole. In 1993, the formulas for measuring performance and awarding bonuses were refined and improved so as to more objectively link financial and individual performance with bonus amounts. During 1996, the Company's net income amounted to $4,166,000, a $242,000 (6.2%) improvement from 1995's comparable earnings level. In addition, the Company's market share increased significantly and various other improvements were made in the Company's operating and administrative functions. Accordingly, Messrs. Marvin, Rowland and Gilliland were awarded incentive bonuses of $54,848, $23,570 and $15,435, respectively. The relationships between the base salaries and incentive compensation of Messrs. Marvin, Rowland and Gilliland for 1996, 1995 and 1994 were as follows: INCENTIVE COMPENSATION AS A % OF BASE SALARY
1996 1995 1994 Mr. Marvin 32% 29% 22% Mr. Rowland 22% 21% 15% Mr. Gilliland 17% 18% 15%
SUBMITTED BY THE COMPENSATION COMMITTEE MEMBERS Charles A. Adams Kenneth R. Diepholz Richard A. Lumpkin Gary W. Melvin William G. Roley Ray Anthony Sparks THE INCORPORATION BY REFERENCE OF THIS PROXY STATEMENT INTO ANY DOCUMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE COMPANY SHALL NOT BE DEEMED TO INCLUDE THE FOLLOWING PERFORMANCE GRAPH UNLESS SUCH GRAPH IS SPECIFICALLY STATED TO BE INCORPORATED BY REFERENCE INTO SUCH DOCUMENT. PERFORMANCE GRAPH The line graph below compares the cumulative total stockholder return on a $100 investment in the Company's Common Stock to the cumulative total return of the S & P 500 Index and the Nasdaq Bank Stock Index for the period December 31, 1991 through December 31, 1996. The S&P 500 Index and the Nasdaq Bank Stock Index were calculated at the Company's request by Research Data Group, San Francisco, California. CUMULATIVE TOTAL RETURN{*} * Total return assumes reinvestment of dividends
12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 First Mid-Illinois Bancshares, Inc $100 $138 $180 $186 $245 $299 Nasdaq Bank Stocks $100 $146 $166 $165 $246 $326 S&P 500 $100 $108 $118 $120 $165 $203
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth certain information regarding the Company's Common Stock beneficially owned on February 28, 1997 with respect to all persons known to the Company to be the beneficial owner of more than five percent of the Company Common Stock, each director and nominee, each executive officer named in the Summary Compensation Table and all directors and executive officers of the Company as a group.
NAME OF INDIVIDUAL AND AMOUNT AND NATURE OF PERCENT NUMBER OF PERSONS IN GROUP BENEFICIAL OWNERSHIP{(1)} OF CLASS 5% STOCKHOLDERS Margaret Lumpkin Keon 66,800{(2)} 7.0% 16 Miller Avenue Suite 203 Mill Valley, California 94941 Mary Lumpkin Sparks 94,245{(3)} 9.8% 2438 Campbell Road, N.W. Albuquerque, New Mexico 87104 DIRECTORS Charles A. Adams 62,412{(4)} 6.3% Kenneth R. Diepholz 15,481{(5)} 1.6% Richard Anthony Lumpkin 196,975{(6)} 20.1% Daniel E. Marvin, Jr. 13,719{(7)} 1.4% Gary W. Melvin 43,476{(8)} 4.5% William G. Roley 19,296{(9)} 2.0% William S. Rowland 4,628{(10)} * Ray Anthony Sparks 10,984{(11)} 1.2% OTHER EXECUTIVE OFFICERS Stanley E. Gilliland 3,244{(12)} * All directors and executive officers as a group (13 persons) 370,680{(13)} 35.1% _____________ * Less than one percent. (1) The information contained in this column is based upon information furnished to the Company by the persons named above and the members of the designated group. The nature of beneficial ownership for shares shown in this column is sole voting and investment power, except as set forth in the footnotes below. (2) The above amount includes 10,105 shares obtainable through the conversion of Preferred Stock held by Ms. Keon and 56,695 shares held under the Margaret L. Keon Trust, established under Article 5 of the Mary G. Lumpkin Trust dated January 31, 1984, of which trust Ms. Keon is trustee and beneficiary. (3) The above amount includes 10,105 shares obtainable through the conversion of Preferred Stock and 56,695 shares held under the Mary L. Sparks Trust, established under Article 5 of the Mary G. Lumpkin Trust dated January 31, 1984, with respect to which shares Mrs. Sparks has no voting or investment power. The shares held by this trust are also included in the number of shares reported as beneficially owned by Mr. Richard A. Lumpkin in this table. The above amount also includes 585 shares held directly by Mrs. Sparks and 26,860 shares held in trust for the benefit of Richard Anthony Lumpkin's adult children for which Mrs. Sparks serves as trustee and of which shares Mrs. Sparks disclaims beneficial ownership. (4) The above amount includes 5,706 shares of Common Stock and 40,420 shares obtainable through the conversion of Preferred Stock held by a corporation over which Mr. Adams is deemed to control. The above amount also includes 1,010 shares held by Mr. Adams' spouse, over which shares Mr. Adams has no voting and investment power. The above amount does not include 797 shares held by adult children of Mr. Adams. (5) The above amount includes 7,074 shares obtainable through the conversion of Preferred Stock held by Mr. Diepholz. (6) The above amount includes 20,210 shares obtainable through the conversion of Preferred Stock held by Mr. Lumpkin and by the Richard A. Lumpkin Trust, of which Mr. Lumpkin is trustee and beneficiary, 26,023 shares held directly by Mr. Lumpkin and 4,816 shares held by The Lumpkin Foundation, of which Mr. Lumpkin serves as a director. The above amount also includes 56,695 shares held under the Richard A. Lumpkin Trust, and further includes 10,105 shares obtainable through the conversion of Preferred Stock and 56,695 shares held under the Mary Lee Sparks Trust, of which Mr. Lumpkin is trustee. Each such trust has been established under Article 5 of the Mary G. Lumpkin Trust dated January 31, 1984. The above amount also includes 22,431 shares held by Consolidated Communications Inc., of which Mr. Lumpkin is Chairman of the Board, and of which shares beneficial ownership is disclaimed. The above amount does not include 32,173 shares held by adult children of Mr. Lumpkin and 26,860 shares held in trust for the benefit of Mr. Lumpkin's adult children of which trust Mr. Lumpkin is not a trustee and of which shares beneficial ownership is also disclaimed. (7) The above amount includes 2,425 shares obtainable through the conversion of Preferred Stock held by Mr. Marvin. The above amount also includes 1,530 shares held by Mr. Marvin's spouse, over which shares Mr. Marvin has no voting or investment power and of which Mr. Marvin disclaims beneficial ownership. (8) The above amount includes 20,210 shares obtainable through the conversion of Preferred Stock held by Mr. Melvin. (9) The above amount includes 2,021 shares obtainable through the conversion of Preferred Stock held by Mr. Roley. The above amount also includes 2,021 shares obtainable through the conversion of Preferred Stock and 12,750 shares held in trust for the benefit of Mr. Roley's spouse, over which shares Mr. Roley has shared voting and investment power and of which Mr. Roley disclaims beneficial ownership. (10) The above amount includes 2,425 shares obtainable through the conversion of Preferred Stock held by Mr. Rowland. (11) The above amount includes 3,531 shares held by Mr. Sparks' children, over which Mr. Sparks shares voting and investment power. (12) The above amount includes 1,011 shares obtainable through the conversion of Preferred Stock held by Mr. Gilliland. (13) Includes an aggregate of 107,921 shares obtainable through conversion of Preferred Stock.
As of February 28, 1997, the Bank acted as sole or co-fiduciary with respect to trusts and other fiduciary accounts which own or hold 51,014 shares or 5.38% of the outstanding Common Stock of the Company, over which the Bank has sole voting and investment power with respect to 42,964 shares or 4.53% of the outstanding Common Stock and shared voting and investment power with respect to 8,050 shares or .85% of the outstanding Common Stock. Section 16(a) of the Securities Exchange Act of 1934 requires that the Company's directors, executive officers and persons who own more than 10% of the Company's Common Stock file reports of ownership and changes in ownership with the Securities and Exchange Commission. Such persons are also required to furnish the Company with copies of all Section 16(a) forms they file. Based solely on the Company's review of the copies of such forms, the Company is not aware that any of its directors and executive officers or 10% stockholders failed to comply with the filing requirements of Section 16(a) during the period commencing January 1, 1996 through December 31, 1996. PROPOSED AMENDMENT TO THE CERTIFICATE OF INCORPORATION The Board of Directors of the Company has unanimously approved an amendment (the "Amendment") to Article IV of the Company's Certificate of Incorporation (the "Certificate") that would increase the number of authorized shares of the Company's Common Stock, $4.00 par value per share, from 2,000,000 shares to 6,000,000 shares. The Board of Directors has also approved a resolution providing for a two-for-one stock split of the Common Stock in the form of a stock dividend if the Amendment is approved. It is anticipated that the distribution date for the proposed stock split will be shortly after the annual meeting. As of April 1, 1997, the Company had 947,680 shares of Common Stock issued and outstanding. The Board of Directors has proposed adoption of the Amendment for several reasons, including those set forth below. First, the Amendment will provide for the additional shares of Common Stock necessary to effectuate the proposed stock split. As a result of the stock split, the number of shares of Common Stock owned by each of the Company's stockholders as of the record date for the stock split will double, and each such share will have approximately half of the per share value of Common Stock prior to the stock split. The decrease in the per share value of Common Stock should also lead to a commensurate decrease in the per share market price, thus making an investment in Common Stock by existing or potential stockholders of the Company more readily possible. Second, the additional shares authorized by the Amendment will provide management with enough shares of Common Stock to enter into certain transactions involving the use of Common Stock that may be advisable from time to time. Such transactions could include, but are not limited to, the acquisition by the Company of additional branch locations, subsidiaries or bank or thrift holding companies. Although no such transactions are planned for the immediate future, management and the Board of Directors believe that it is in the Company's best interests to have available a sufficient number of authorized shares of Common Stock if such transactions become advisable. Third, the additional shares of Common Stock authorized by the Amendment could be used to raise additional working capital for the Company or the Subsidiaries. The Board of Directors does not currently have any plans to raise capital through the issuance of additional shares or otherwise, but these shares would be available for that purpose. The increase in the number of shares of Common Stock authorized by the Amendment will allow for the possibility of substantial dilution of the voting power of current stockholders of the Company, although no dilution will occur as a direct result of the proposed stock split. The degree of any such dilution which would occur following the issuance of any additional shares of Common Stock, including any newly authorized Common Stock, would depend upon the number of shares of Common Stock that are actually issued in the future, which number cannot be determined at this time. Issuance of a large number of such shares could significantly dilute the voting power of existing stockholders. The existence of a substantial number of authorized and unissued shares of Common Stock could also impede an attempt to acquire control of the Company because the Company would have the ability to issue additional shares of Common Stock in response to any such attempt. The Company is not aware of any such attempt to acquire control at this time, and no decision has been made as to whether any or all newly authorized but unissued shares of Common Stock would be issued in response to any such attempt. To be approved by the Company's stockholders, the Amendment must receive the affirmative vote of a majority of the outstanding shares of Common Stock. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE YOUR SHARES FOR THE AMENDMENT. RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS Stockholders will be asked to approve the appointment of KPMG Peat Marwick LLP as the Company's independent public accountants for the year ending December 31, 1997. A proposal will be presented at the annual meeting to ratify the appointment of KPMG Peat Marwick LLP. If the appointment of KPMG Peat Marwick LLP is not ratified, the matter of the appointment of independent public accountants will be considered by the Board of Directors. Representatives of KPMG Peat Marwick LLP are expected to be present at the meeting and will be given the opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR RATIFICATION OF THIS APPOINTMENT. STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING For inclusion in the Company's Proxy Statement and form of proxy relating to the 1998 Annual Meeting of Stockholders, stockholder proposals must be received by the Company on or before December 17, 1997 and must otherwise comply with the Company's bylaws. GENERAL Your proxy is solicited by the Board of Directors and the cost of solicitation will be paid by the Company. In addition to the solicitation of proxies by use of the mails, officers, directors and regular employees of the Company or the Subsidiaries, acting on the Company's behalf, may solicit proxies by telephone, telegraph or personal interview. The Company will, at its expense, upon the receipt of a request from brokers and other custodians, nominees and fiduciaries, forward proxy soliciting material to the beneficial owners of shares held of record by such persons. OTHER BUSINESS It is not anticipated that any action will be asked of the stockholders other than that set forth above, but if other matters properly are brought before the meeting, the persons named in the proxy will vote in accordance with their best judgment. FAILURE TO INDICATE CHOICE If any stockholder fails to indicate a choice in items (1), (2) or (3) on the proxy card, the shares of such stockholder shall be voted (FOR) in each instance. REPORT ON FORM 10-K THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH PERSON REPRESENTING THAT HE OR SHE WAS A BENEFICIAL OWNER OF THE COMPANY'S COMMON STOCK AS OF THE RECORD DATE FOR THE MEETING, UPON WRITTEN REQUEST, A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K. SUCH WRITTEN REQUEST SHOULD BE SENT TO MR. WILLIAM S. ROWLAND, FIRST MID-ILLINOIS BANCSHARES, INC., 1515 CHARLESTON AVENUE, P.O. BOX 499, MATTOON, ILLINOIS 61938. By order of the Board of Directors Daniel E. Marvin, Jr. Chairman Mattoon, Illinois April 16, 1997 ALL STOCKHOLDERS ARE URGED TO SIGN AND MAIL THEIR PROXIES PROMPTLY PROXY FIRST MID-ILLINOIS BANCSHARES, INC. PROXY PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF STOCKHOLDERS -- MAY 21, 1997 The undersigned hereby appoints Dan R. Cunningham, Stanley E. Gilliland and Alfred M. Wooleyhan, Jr., or any of them acting in the absence of the others, with power of substitution, attorneys and proxies, for and in the name and place of the undersigned, to vote the number of shares of Common Stock that the undersigned would be entitled to vote if then personally present at the Annual Meeting of the Stockholders of First Mid-Illinois Bancshares, Inc., to be held at the Ramada Inn, 300 Broadway Avenue, East in Rooms A B and C, Mattoon, Illinois 61938, on Wednesday, May 21, 1997, at 11:00 a.m., local time, or any adjournments or postponements thereof, upon the matters set forth in the Notice of Annual Meeting and Proxy Statement (receipt of which is hereby acknowledged) as designated on the reverse side, and in their discretion, the proxies are authorized to vote upon such other business as may come before the meeting: { } Check here for address change. New address: { } Check here if you plan to attend the meeting. (Continued and to be signed on reverse side.) FIRST MID-ILLINOIS BANCSHARES, INC. PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY 1. Election of Directors Richard Anthony Lumpkin, William G. Roley, and William S. Rowland 2. To amend the Certificate of Incorporation to increase the number of authorized shares of Common Stock. 3. To ratify the selection of KPMG Peat Marwick LLP as auditors for the Company for 1997. The Board of Directors recommends a vote FOR all proposals. To ratify the selection of KPMG Peat Marwick LLP as auditors for the Company for 1997. THIS PROXY WILL BE VOTED IN ACCORDANCE WITH SPECIFICATION MADE. IF NO CHOICES ARE INDICATED, THIS PROXY WILL BE VOTED FOR ALL PROPOSALS. Dated: , 1997 NOTE: Please sign exactly as your name(s) appears. For joint accounts, each owner should sign. When signing as executor, administrator, attorney, trustee or guardian, etc., please give your full title. Signatures: EX-27 2 ARTICLE 9 FDS FOR 10-K
9 12-MOS DEC-31-1996 DEC-31-1996 20,158,000 453,000 6,500,000 0 114,027,000 3,480,000 3,491,000 348,217,000 2,684,000 515,397,000 413,676,000 50,786,000 3,175,000 6,200,000 3,771,000 0 3,100,000 33,033,000 515,397,000 27,827,000 7,487,000 245,000 35,559,000 15,310,000 17,805,000 17,754,000 147,000 (9,000) 15,977,000 6,429,000 6,429,000 0 0 4,166,000 4.22 3.98 3.98 790,000 575,000 580,000 0 2,814,000 375,000 98,000 2,684,000 2,684,000 0 244,000
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