-----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, UjMfU76wcdd8IHfu0bcfkLy77fxmicQYyPuAnxLDZXq5wHWOrZ173Yr03kqdVHzF WYMGHlqqA/52TOCeu35xjA== 0000700565-98-000006.txt : 19980330 0000700565-98-000006.hdr.sgml : 19980330 ACCESSION NUMBER: 0000700565-98-000006 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 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-K405 SEC ACT: SEC FILE NUMBER: 000-13368 FILM NUMBER: 98576594 BUSINESS ADDRESS: STREET 1: 1515 CHARLESTON AVE STREET 2: PO BOX 499 CITY: MATTOON STATE: IL ZIP: 61938 BUSINESS PHONE: 2172347454 MAIL ADDRESS: STREET 1: 1515 CHARLESTON AVENUE STREET 2: PO BOX 499 CITY: MATTOON STATE: IL ZIP: 61938 10-K405 1 1997 10-K FILE 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, 1997 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 19, 1998, 1,978,400 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 19, 1998) held by non- affiliates was approximately $78,641,400. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENT INTO FORM 10-K PART: Portions of the Proxy Statement for 1998 Annual Meeting of Shareholders to be held on May 20, 1998 III FIRST MID-ILLINOIS BANCSHARES, INC. FORM 10-K TABLE OF CONTENTS PAGE PART I Item 1 Business 3 Item 2 Properties 11 Item 3 Legal Proceedings 13 Item 4 Submission of Matters to a Vote of Security Holders 14 PART II Item 5 Market for Registrant's Common Shares and Related Shareholder Matters 15 Item 6 Selected Financial Data 16 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 7A Quantitative and Qualitative Disclosures About Market Risk 33 Item 8 Financial Statements and Supplementary Data 36 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 60 SIGNATURES 61 Exhibit Index 62 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 subsidiary, First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank"). 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 First Mid Bank. 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 Registrant 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 re-capitalized Heartland Federal Savings and Loan Association ("Heartland"), a $125 million thrift headquartered in Mattoon with offices in Charleston, Sullivan and Urbana, Illinois. Under the terms of the acquisition, Heartland converted from the mutual form of organization into a federally-chartered, stock savings association and became a 100%-owned subsidiary of the Registrant. 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 404.2 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. 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 March 1997, First Mid Bank acquired the Charleston, Illinois branch location and the deposit base of First of America Bank. This cash acquisition added approximately $28 million to total deposits, $.5 million to loans, $1.3 million to premises and equipment and $3.8 million to intangible assets. In November 1997, Heartland merged with and into First Mid Bank with First Mid Bank being the surviving entity. DESCRIPTION OF BUSINESS First Mid Bank conducts a general banking business embracing most of the services, both consumer and commercial, which banks may lawfully provide, including the following principal services: the acceptance of deposits to demand, savings and time accounts and the servicing of such accounts; commercial, industrial, agricultural, consumer and real estate lending, including installment, credit card, personal lines of credit and overdraft protection; safe deposit box operations; and an extensive variety of additional services tailored to the needs of customers, such as traveler's checks and cashiers' checks, foreign currency, and other special services. First Mid Bank also provides services to its customers through its trust department and investment center. Loans, both commercial and consumer, are 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. First Mid Bank's installment loan department makes direct loans to consumers and some commercial customers, and purchases retail obligations from retailers, primarily without recourse. First Mid Bank conducts its business in the middle of some of the richest farmland in the world. Accordingly, First Mid Bank provides a wide range of financial services to farmers and agribusiness within their respective markets. The farm management department, headquartered in Mattoon, Illinois, has approximately 33,000 acres under management and is the largest management operation in the area, ranking in the top 100 firms nationwide. First Mid Bank is the largest supplier of farm credit in the Registrant's market area with $49.3 million in agriculture-related loans at December 31, 1997. The farm credit products offered by First Mid Bank include not only real estate loans, but machinery and equipment loans, production loans, inventory financing and lines of credit. The following chart sets forth (in thousands) the assets, deposits and stockholders' equity of First Mid Bank (before intercompany eliminations) as of December 31, 1997, and the average deposits for the year ended December 31, 1997: STOCKHOLDERS' AVERAGE ASSETS DEPOSITS EQUITY DEPOSITS First Mid Bank $529,679 $458,962 $48,336 $444,774 EMPLOYEES The Registrant, MIDS and First Mid Bank, collectively, employed 250 people on a full-time equivalent basis as of December 31, 1997. 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 actively competes in all areas in which First Mid Bank presently does business. First Mid Bank competes for commercial and individual deposits, loans, and trust business with many east central Illinois banks, savings and loan associations, and credit unions. The principal methods of competition in the banking and financial services industry are quality of services to customers, ease of access to facilities, and pricing of services, including interest rates paid on deposits, interest rates charged on loans, and fees charged for fiduciary and other banking services. First Mid Bank operates facilities in the Illinois counties of Champaign, Coles, Cumberland, Douglas, Effingham and Moultrie. Each facility primarily serves the community in which it is located. First Mid Bank serves nine different communities with 15 separate locations in the towns of Mattoon, Charleston, Neoga, Tuscola, Sullivan, Arcola, Effingham, Altamont, 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 OCC, the Board of Governors of the Federal Reserve System (the "FRB"), 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 PENDING LEGISLATION. Legislation is pending in the Congress that would allow bank holding companies to engage in a wider range of nonbanking activities, including greater authority to engage in securities and insurance activities. The expanded powers generally would be available to a bank holding company only if the bank holding company and its bank subsidiaries remain well-capitalized and well-managed. Additionally, the pending legislation would eliminate the federal thrift charter and merge the FDIC's Bank Insurance Fund ("BIF") and Savings Association Insurance Fund ("SAIF"). At this time, the Registrant is unable to predict whether the proposed legislation will be enacted and, therefore, is unable to predict the impact such legislation may have on the operations of the Registrant and First Mid Bank. THE REGISTRANT GENERAL. The Registrant, as the sole shareholder of 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 Company Act, ("BHCA"). In accordance with FRB policy, the Registrant is expected to act as a source of financial strength to First Mid Bank and to commit resources to support First Mid Bank in circumstances where the 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. 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 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 (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) or which require that the target bank has been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. The BHCA also prohibits, with certain exceptions, the 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 domestic activities of non-bank subsidiaries of bank holding companies. Federal law also prohibits acquisition of "control" of a bank, such as First Mid Bank, or bank holding company, such as the 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%, at least one-half of which must be Tier 1 capital. The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated companies, with minimum requirements of 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 Registrant's allowance for loan and lease losses. The risk-based and leverage standards described above are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the FRB's capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (I.E., Tier 1 capital less all intangible assets), well above the minimum levels. As of December 31, 1997, the Registrant had regulatory capital, calculated on a consolidated basis, in excess of the FRB's minimum requirements, with a risk- based capital ratio of 12.20% and a leverage ratio of 7.05%. 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 which exceed 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 (the "DGCL") allows the Registrant to pay dividends only out of its surplus (as defined and computed in accordance with the provisions of the DGCL), 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. FIRST MID BANK 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 First Mid Bank 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. DEPOSIT INSURANCE. As an FDIC-insured institution, First Mid Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their respective levels of capital and results of supervisory evaluations. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately-capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period. During the year ended December 31, 1997, FDIC assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment period beginning January 1, 1998, FDIC assessment rates will continue to range from 0% of deposits to 0.27% of deposits. The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Management of the Registrant is not aware of any activity or condition that could result in termination of the deposit insurance of 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 Federal Savings and Loan Insurance Corporation, the SAIF's predecessor insurance fund. Pursuant to federal legislation enacted September 30, 1996, commencing January 1, 1997, both SAIF members and BIF members became subject to assessments to cover the interest payments on outstanding FICO obligations. Such FICO assessments are 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. 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. During the year ended December 31, 1997, the FICO assessment rate for SAIF members was approximately 0.063% of deposits while the FICO assessment rate for BIF members was approximately 0.013% of deposits. During the year ended December 31, 1997, First Mid Bank paid FICO assessments totaling $82,100. OCC ASSESSMENTS. All national banks are required to pay supervisory fees to the OCC to fund the operations of the OCC. The amount of such supervisory fees is based upon each institution's total assets, including consolidated subsidiaries, as reported to the OCC. During the year ended December 31, 1997, First Mid Bank paid supervisory fees to the OCC totaling $99,900. CAPITAL REQUIREMENTS. The OCC has established the following minimum capital standards for national banks, such as First Mid Bank: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with minimum requirements of 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"). The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, the regulations of the OCC provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. During the year ended December 31, 1997, First Mid Bank was not required by the OCC to increase its capital to an amount in excess of the minimum regulatory requirements. As of December 31, 1997, First Mid Bank exceeded its minimum regulatory capital requirements with a leverage ratio of 7.59% and a risk-based capital ratio of 13.17%. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators' powers depends on whether the institution in question is "well-capitalized," "adequately-capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. DIVIDENDS. The National Bank Act imposes limitations on the amount of dividends that may be paid by a national bank, such as First Mid Bank. Generally, a national bank may pay dividends out of its undivided profits, in such amounts and at such times as the bank's board of directors deems prudent. Without prior OCC approval, however, a national bank may not pay dividends in any calendar year which, in the aggregate, exceed the bank's year-to-date net income plus the bank's adjusted retained net income for the two preceding years. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, First Mid Bank exceeded its minimum capital requirements under applicable guidelines as of December 31, 1997. As of December 31, 1997, approximately $5.6 million was available to be paid as dividends to the Registrant by First Mid Bank. Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment of any dividends by First Mid Bank if the FRB determines such payment would constitute an unsafe or unsound practice. INSIDER TRANSACTIONS. First Mid Bank is 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 First Mid Bank to its 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, federal law 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 maintains a correspondent relationship. SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies have adopted guidelines which establish operational and managerial standards to promote the safety and soundness of federally-insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. In general, the guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution's primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. The preamble to the guidelines states that the agencies expect to require a compliance plan from an institution whose failure to meet one or more of the guidelines is of such severity that it could threaten the safety and soundness of the institution. Failure to submit an acceptable plan, or failure to comply with a plan that has been accepted by the appropriate federal regulator, would constitute grounds for further enforcement action. BRANCHING AUTHORITY. National banks headquartered in Illinois, such as First Mid Bank, have the same branching rights in Illinois as banks chartered under Illinois law. Illinois law grants Illinois-chartered banks the authority to establish branches anywhere in the State of Illinois, subject to receipt of all required regulatory approvals. 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, subject to certain conditions, including a prohibition against interstate mergers unless any Illinois bank involved has been in existence and continuous operation for more than five years. 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 $47.8 million or less, the reserve requirement is 3% of total transaction accounts; and for transaction accounts aggregating in excess of $47.8 million, the reserve requirement is $1.434 million plus 10% of the aggregate amount of total transaction accounts in excess of $47.8 million. The first $4.7 million of otherwise reservable balances are exempted from the reserve requirements. These reserve requirements are subject to annual adjustment by the FRB. First Mid Bank is in compliance with the foregoing requirements. ITEM 2. PROPERTIES All of the following properties are owned by the Registrant or First Mid Bank except those specifically identified as being leased. FIRST MID BANK MATTOON First Mid Bank's main office is located at 1515 Charleston Avenue, Mattoon, Illinois. The office building consists of a one-story structure which was opened in 1965 with approximately 36,000 square feet of office space, 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. During 1997, First Mid Bank began a remodeling project of its main office which will be completed in mid- 1998. Total costs associated with this project are expected to be approximately $1.3 million. First Mid Bank has a facility at 333 Broadway Avenue East, Mattoon, Illinois. The one-story office building contains approximately 7,600 square feet of office space. The main floor provides space for five teller windows, two private offices, a safe deposit vault and four drive-up lanes. There is adequate parking located adjacent to the building. A drive-up ATM is located adjacent to the building. First Mid Bank leases a facility at 1504-A Lakeland Boulevard, Mattoon, Illinois which provides space for three tellers, two drive-up lanes and a walk- up ATM. First Mid Bank owns an office building located at 1701 Charleston Avenue, Mattoon, Illinois and an adjacent parking lot. The building is used by MIDS for its data processing center and back room operations for the Registrant and First Mid Bank. First Mid Bank owns a facility 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. A drive-up facility with eight drive-up lanes and a drive-up ATM is located adjacent to the main office. Adequate customer parking is available on two sides of the building and in an adjacent parking lot. In conjunction with the merger of Heartland and First Mid Bank, teller services are no longer offered at these locations. 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 station 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. A second facility, acquired in March, 1997, is located at 500 West Lincoln Avenue, Charleston, Illinois. This one-story facility contains approximately 8,400 square feet with four teller stations, four private offices and four drive-up lanes. During 1996, land adjacent to this facility was purchased and is being held for future expansion. Three ATMs are located in Charleston. A drive-up ATM is located in the parking lot of the facility at 500 West Lincoln Avenue and in the parking lot of Save-A-Lot at 1400 East Lincoln Avenue. The third is an off-site ATM located in the student union at Eastern Illinois University. In January, 1998, First Mid Bank sold a facility located at 580 West Lincoln Avenue, Charleston, Illinois. 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 North Keller Drive, Effingham, Illinois. The building is a two-story structure with approximately 4,000 square feet of office space. This office space consists of four teller stations, three drive-up teller lanes, five private offices and a night depository. Adequate parking is available to customers in front of the facility. First Mid Bank also owns property at 900 North Keller Drive, Effingham, Illinois which provides additional customer parking along with a drive-up ATM. 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. URBANA First Mid Bank owns a facility located at 601 South Vine Street, Urbana, Illinois. Its office building consists of a one-story structure and contains approximately 3,600 square feet. The office building provides space for three tellers, two private offices and two drive-up lanes. An adequate customer parking lot is located on the south side of the building. 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 First Mid Bank acts as depositories of funds, it is named from time to time as a defendant in law suits (such as garnishment proceedings) involving claims to the ownership of funds in particular accounts. Management believes that all such litigation as well as other pending legal proceedings constitute ordinary routine litigation incidental to the business of First Mid Bank and that such litigation will not materially adversely affect the Registrant's consolidated financial condition. In addition to the normal legal proceedings referred to above, Heartland, a subsidiary of the Registrant that merged with First Mid Bank during 1997, filed a complaint on December 5, 1995, against the U.S. Government which is now pending in the U.S. Court of Federal Claims in Washington D.C. This complaint relates to Heartland's interest as successor to Mattoon Federal Savings and Loan Association which incurred a significant amount of supervisory goodwill when it acquired Urbana Federal Savings and Loan in 1982. The complaint alleges that the Government breached its contractual obligations when, in 1989, it issued new rules which eliminated supervisory goodwill from inclusion in regulatory capital. At this time, it is too early to tell whether First Mid Bank 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 734 shareholders of record as of December 31, 1997, 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 inter-dealer prices without retail mark-ups, mark-downs or commissions and do not necessarily represent actual transactions. QUARTER HIGH LOW 1997 4th $ 37 $ 25 1/2 3rd 26 1/2 22 1/2 2nd 22 1/2 20 1/2 1st 21 1/4 20 1996 4th $ 19 1/2 $ 20 1/2 3rd 19 20 2nd 18 1/2 18 1/2 1st 17 1/2 17 1/2 The following table sets forth the cash dividends per share on the Registrant's common stock for the last two years. DIVIDEND DATE DECLARED DATE PAID PER SHARE 5-15-1996 6-20-1996 $.19 12-16-1996 1- 3-1997 $.23 1/2 5-21-1997 6-20-1997 $.20 12-16-1997 1- 2-1998 $.26 Effective May 22, 1997, the Registrant had a two-for-one stock split in the form of a 100% stock dividend. All share and per share information has been restated to reflect the split. 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 First Mid Bank. Regulatory authorities limit the amount of dividends which can be paid by First Mid Bank without prior approval from such authorities. For further discussion of First Mid Bank's dividend restrictions and capital requirements, see "Note 17" 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, 1997. ITEM 6. SELECTED FINANCIAL DATA The following sets forth a five-year comparison of selected financial data. (Dollars in thousands)
1997 1996 1995 1994 1993 SUMMARY OF OPERATIONS Interest income $37,805 $35,559 $33,465 $26,428 $25,510 Interest expense 19,131 17,805 16,725 11,918 11,935 Net interest income 18,674 17,754 16,740 14,510 13,575 Provision for loan losses 700 147 280 168 492 Other income 5,421 4,799 4,009 3,805 3,928 Other expense 16,039 15,977 14,715 13,263 12,713 Income before income taxes and cumulative effect of change in accounting principle 7,356 6,429 5,754 4,884 4,298 Income tax expense 2,630 2,263 1,830 1,450 1,150 Net income before cumulative effect of change in accounting principle 4,726 4,166 3,924 3,434 3,148 Cumulative effect of change in accounting principle - - - - 155 Net income $ 4,726 $ 4,166 $ 3,924 $ 3,434 $ 3,303 PER COMMON SHARE DATA Basic earnings per share before cumulative effect of change in accounting principle $ 2.30 $ 2.11 $ 2.05 $ 1.79 $ 1.63 Basic earnings per share 2.30 2.11 2.05 1.79 1.72 Diluted earnings per share before cumulative effect of change in accounting principle 2.17 1.99 1.94 1.71 1.57 Diluted earnings per share 2.17 1.99 1.94 1.71 1.65 Dividends per common share .46 .43 .41 .38 .38 Book value per common share 21.55 19.56 18.04 15.69 15.45 FINANCIAL RATIOS Net interest margin (TE) 3.96% 3.98% 3.98% 3.93% 3.85% Return on average assets .90 .85 .84 .84 .85 Return on average equity 11.08 11.03 11.76 11.35 11.80 Return on average common equity 11.23 11.18 12.02 11.59 12.12 Dividend payout ratio 19.99 20.16 19.76 20.89 21.40 Average total equity to average assets 8.11 7.69 7.17 7.38 7.17 Total capital to risk-weighted assets 12.20 11.80 11.51 10.69 13.10 YEAR END BALANCES Total assets $532,978 $515,397 $472,494 $451,158 $397,609 Net loans 355,587 345,533 304,190 279,545 221,109 Total deposits 457,598 413,676 396,879 389,568 349,058 Total equity 45,576 39,904 35,309 30,600 30,184 AVERAGE BALANCES Total assets $525,751 $491,058 $465,287 $409,684 $390,252 Net loans 352,495 323,540 294,220 243,166 214,408 Total deposits 443,399 405,223 395,580 356,833 344,226 Total equity 42,638 37,783 33,371 30,268 27,987
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, 1997, 1996 and 1995. This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes and selected financial data appearing elsewhere in this report. FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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. OVERVIEW In 1997, the Registrant achieved record net income and earnings per share. For the year, net income was $4,726,000 up 13.4% from $4,166,000 in 1996. In 1996, net income increased 6.2% from $3,924,000 in 1995. Diluted earnings per share was $2.17 in 1997 compared with $1.99 in 1996 and $1.94 in 1995. A summary of the factors which contributed to the changes in net income follows (in thousands): TABLE 1 EFFECT ON EARNINGS 1997 1996 VS VS 1996 1995 Net interest income $ 920 $ 1,014 Provision for loan losses (553) 133 Other income, including securities transactions 622 790 Other expenses, excluding SAIF assessment (813) (511) One-time SAIF assessment 751 (751) Income taxes (367) (433) Increase in net income $ 560 $ 242 On March 7, 1997, the Registrant acquired the Charleston, Illinois branch location and the deposit base of First of America Bank. This cash acquisition added approximately $28 million to total deposits, $500,000 to loans, $1.3 million to premises and equipment and $3.8 million to intangible assets. The acquisition of the branch was accounted for using the purchase method of accounting whereby the acquired assets and deposits of the branch were recorded at their fair values as of the acquisition date. The operating results have been combined with those of the Registrant since March 7, 1997. 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, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ASSETS Interest-bearing deposits $ 1,497 $ 75 5.01% $ 1,165 $ 55 4.72% $ 1,511 $ 84 5.56% Federal funds sold 4,254 230 5.41% 3,403 180 5.29 6,199 356 5.74 Investment securities Taxable 107,124 6,759 6.31% 111,739 6,868 6.15 115,824 7,078 6.11 Tax-exempt 13,046 1,062 8.14% 11,442 953 8.33 12,831 1,111 8.66 Loans 355,167 30,040 8.46% 326,302 27,827 8.53 294,220 25,214 8.57 Total earning assets 481,088 38,166 7.93% 454,051 35,883 7.90 430,585 33,843 7.86 Cash and due from banks 18,363 17,051 15,382 Premises and equipment 11,916 9,864 9,333 Other assets 17,056 12,854 12,699 Allowance for loan losses (2,672) (2,762) (2,711) Total assets $525,751 $491,058 $465,288 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-Bearing Deposits Demand deposits $125,666 3,684 2.93% $110,708 $ 3,085 2.79% $106,118 $ 2,823 2.66% Savings deposits 38,642 999 2.59% 39,364 1,069 2.72 40,920 1,107 2.71 Time deposits 226,431 12,464 5.50% 204,362 11,156 5.46 202,305 10,958 5.42 Securities sold under agreements to repurchase 10,806 488 4.52% 12,411 574 4.62 16,481 777 4.71 FHLB advances 17,221 1,018 5.91% 23,920 1,405 5.87 7,633 487 6.39 Federal funds purchased 502 26 5.18% 800 44 5.50 26 2 7.69 Long-term debt 6,584 452 6.87% 6,819 472 6.92 7,636 571 7.48 Total interest-bearing liabilities 425,852 19,131 4.49% 398,384 17,805 4.47 381,119 16,725 4.39 Demand deposits 52,660 50,789 46,237 Other liabilities 4,601 4,102 4,561 Stockholders' equity 42,638 37,783 33,371 Total liabilities/equity $525,751 $491,058 $465,288 Net interest income (TE) $ 19,035 $ 18,078 $ 17,118 Net interest spread 3.44% 3.43% 3.47% Impact of non-interest bearing funds .52% .55% .51% Net yield on interest- earnings assets (TE) 3.96% 3.98% 3.98% Interest income and rates are presented on a tax-equivalent basis ("TE") assuming a federal income tax rate of 34%. Loan fees are included in interest income and are not material. Nonaccrual loans have been included in the average balances.
Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income (TE) for the past two years (in thousands): TABLE 3 ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
1997 COMPARED TO 1996 1996 COMPARED TO 1995 INCREASE - (DECREASE) INCREASE - (DECREASE) TOTAL RATE/ TOTAL RATE/ CHANGE VOLUME RATE VOLUME CHANGE VOLUME RATE VOLUME EARNING ASSETS: Interest-bearing deposits $ 20 $ 16 $ 3 $ 1 $ (29) $ (20) $ (11) $ 2 Federal funds sold 50 45 4 1 (176) (161) (28) 13 Investment securities: Taxable (109) (281) 181 (9) (210) (248) 38 - Tax-exempt 109 133 (21) (3) (158) (120) (42) 4 Loans 2,213 2,460 (228) (19) 2,613 2,749 (123) (13) Total interest income 2,283 2,373 (61) (29) 2,040 2,200 (166) 6 Interest-Bearing Liabilities Interest-bearing deposits Demand deposits 599 417 160 22 262 122 134 6 Savings deposits (70) (20) (51) 1 (38) (42) 4 - Time deposits 1,308 1,205 93 10 198 111 86 1 Securities sold under agreements to repurchase (86) (74) (14) 2 (203) (192) (14) 3 FHLB advances (387) (393) 9 (3) 918 1,042 (39) (85) Federal funds purchased (18) (17) (2) 1 42 60 (1) (17) Long-term debt (20) (16) (4) - (99) (61) (43) 5 Total interest expense 1,326 1,102 191 33 1,080 1,040 127 (87) Net interest income $ 957 $1,271 $(252) $ (62) $ 960 $1,160 $ (293) $ 93 Interest income and rates are presented on a tax-equivalent basis, assuming a federal income tax rate of 34%. Loan fees are included in interest income and are not material. Nonaccrual loans are not material and have been included in the average balances. The changes in rate/volume are computed on a consistent basis by multiplying the change in rates with the change in volume.
On a tax equivalent basis, net interest income increased $957,000, or 5.3% in 1997, compared to an increase of $960,000, or 5.6% in 1996. As set forth in Table 3, the improvement in net interest income in 1997 was due primarily to the increases in the volume of earning assets and interest-bearing liabilities. In 1996, the increase in net interest income 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. To a lesser extent, changes in interest rates in 1995 also contributed to the growth in net interest income. In 1997, average earning assets increased by $27,037,000, or 6.0%, and average interest-bearing liabilities increased $27,468,000, or 6.9%, compared with 1996 (Table 2). The higher volumes of earning assets and interest-bearings liabilities were primarily the result of strong loan growth in 1997 and the acquisition of a branch facility in Charleston, Illinois. As a percentage of average earning assets, average loans increased from 68.3% in 1995 to 71.9% in 1996 to 73.8% in 1997 while average securities decreased from 29.9% in 1995 to 27.1% in 1996 to 25.0% in 1997. Net interest margin remained constant at 3.98% in 1996 and 1995 and decreased slightly to 3.96% in 1997. PROVISION FOR LOAN LOSSES The provision for loan losses in 1997 was $700,000 compared to $147,000 in 1996 and $280,000 in 1995. 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 1997 1996 1995 1997 1996 Trust $ 1,663 $ 1,293 $ 1,118 $ 370 $ 175 Brokerage 464 386 183 78 203 Securities losses (6) (9) - 3 (9) Service charges 1,804 1,728 1,574 76 154 Mortgage banking 491 428 273 63 155 Other 1,005 973 861 32 112 Total other income $ 5,421 $ 4,799 $ 4,009 $ 622 $ 790 The Registrant's other income increased to $5,421,000 in 1997 as compared to $4,799,000 in 1996 and $4,009,000 in 1995. Trust revenues increased 28.6% to $1,663,000 in 1997 from $1,293,000 in 1996 and $1,118,000 in 1995. Trust assets increased 46.5% to $326,935,000 at December 31, 1997 from $223,117,000 at December 31, 1996 and $215,903,000 at December 31, 1995. During 1997, increased revenues were primarily due to an increase in fees generated on retirement plans under management and the increase in trust assets. The increase in trust assets was approximately $40 million in growth of the trust accounts under management and approximately a $70 million market value adjustment upward for the agricultural-related properties. Revenues from brokerage and annuity sales continued to increase in 1997 as the Registrant expanded its product line by offering full-service brokerage services and increasing its marketing efforts in this area. Net securities losses in 1997 were $6,000 compared to $9,000 in 1996 and $0 in 1995. Service charges amounted to $1,804,000 in 1997 as compared to $1,728,000 in 1996 and $1,574,000 in 1995. The increase of $76,000 (4.4%) in service charges in 1997 as compared to 1996 was primarily due to an increase in the number of savings and transaction accounts and the volume associated with these accounts. First Mid Bank originates residential real estate 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 $491,000 in 1997 as compared to $428,000 in 1996 and $273,000 in 1995. This increase in 1997 was attributed to the volume of loans sold by First Mid Bank increasing to $29 million (representing 476 loans) from $21 million in 1996 (representing 339 loans). Included in mortgage banking income was the amount of the mortgage servicing fees recorded on loans originated and sold into the secondary market with servicing retained. This amount was $103,000 in 1997 and $196,000 in 1996. This decline in mortgage banking income was partially due to an increase in loans sold on a servicing-released basis. During 1997, 160 loans (with a balance of $13.6 million) were sold with servicing released, thus no mortgage servicing income was recorded. 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 1997 1996 1995 1997 1996 Salaries and benefits $ 7,922 $ 7,938 $ 7,484 $ (16) $ 454 Occupancy and equipment 2,782 2,345 2,298 437 47 FDIC premiums 40 275 590 (235) (315) One-time SAIF assessment - 751 - (751) 751 Amortization of intangibles 709 547 608 162 (61) Stationery and supplies 692 559 449 133 110 Legal and professional fees 890 795 699 95 96 Marketing and promotion 529 579 500 (50) 79 Other operating expenses 2,475 2,188 2,087 287 101 Total other expense $16,039 $15,977 $14,715 $ 62 $ 1,262 The Registrant's non-interest expense amounted to $16,039,000 in 1997 as compared to $15,977,000 in 1996 and $14,715,000 in 1995. Salaries and employee benefits, the largest component of other expense, decreased slightly in 1997. At December 31, 1997, the number of full-time equivalent ("FTE") employees totaled 250 compared to 257 and 254 at December 31, 1996 and 1995, respectively. Occupancy and equipment expense increased 18.6% to $2,782,000 in 1997 as compared to $2,345,000 in 1996. This increase was primarily due to the increase in depreciation expense recorded on technology equipment put into service at the beginning of 1997. This included items relating to document imaging, report imaging, home banking and wide-area network projects. The net amount of insurance premiums assessed by the Federal Deposit Insurance Corporation ("FDIC") in 1997 includes a refund of $69,000 on the 1996 assessments of the Savings Association Insurance Fund ("SAIF"). During 1996, the Registrant recorded a premium expense of $275,000 and $590,000 in 1995. A lower premium rate went into effect beginning in 1997 that helped to reduce overall deposit insurance. In 1996, the Registrant paid a one-time assessment of $751,000 to re- capitalize the SAIF. Legislation to re-capitalize the SAIF was signed into law by the President on September 30, 1996, and the assessment was paid by the Registrant in December 1996. Amortization of intangible assets increased 29.6% when comparing 1997 to 1996. This increase was due to the goodwill and core deposit intangible associated with the purchase of the Charleston branch in 1997. The decrease between 1995 and 1996 was the result of the Registrant's purchase mortgage servicing rights from the Heartland acquisition being fully amortized in 1995. Other operating expenses increased $287,000 or 13.1% to $2,475,000 in 1997 from $2,188,000 in 1996. This increase was due to the accrual in 1997 of a loss of $106,000 on the January, 1998, sale of property located in Charleston, Illinois, as well as losses on the sale of other real estate owned and repossessed assets. INCOME TAXES Total income tax expense amounted to $2,630,000 in 1997 as compared to $2,263,000 in 1996 and $1,830,000 in 1995. Effective tax rates were 35.8%, 35.2% and 31.8% respectively, for 1997, 1996 and 1995. The effective tax rate increase was primarily due to an increase in state income taxes. THE YEAR 2000 ISSUE Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. The Year 2000 issue affects virtually all companies and organizations. The Registrant has considered the impact of the Year 2000 issue for its computer systems and applications as well as its general operations, customers and suppliers. The Registrant has developed a stratigic plan for Year 2000 compliance which is being administered by a committee with representation from all functional areas of the company as well as extensive involvement and oversite by the board of directors and senior management. The plan follows the guidelines set forth by the Federal Financial Institutions Examinations Council ("FFIEC"). The Registrant plans to complete its assessment phase, identifying hardware, software, networks, other processing platforms and customer and vendor interdependency affected by the Year 2000 date change, by March 31, 1998. The plan calls for all mission critical items to be Year 2000 compliant by year-end 1998. Additionally, alarms, elevators, heating and cooling systems, and other computer-controlled mechanical devices on which the Registrant relies are being evaluated. Those found not to be in compliance will be modified or replaced with a compliant product. While there will be some expenses incurred during the next two years, the Registrant has not identified any situations at this time that will require material cost expenditures to become fully compliant. An unknown element at this time is the impact of the Year 2000 on the Registrant's borrowing customers and their ability to repay. The Registrant has initiated a program to communicate with key bank customers to ensure they are properly prepared for the Year 2000 and will not suffer serious adverse consequences. 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, 1997 1996 1995 % OF % OF % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 80,509 67% $ 86,518 74% $ 72,599 59% Obligations of states and political subdivisions 12,820 11 11,398 10 12,009 10 Mortgage-backed securities 23,272 20 15,283 13 35,766 29 Other securities 2,747 2 4,384 3 2,204 2 Total securities $119,348 100% $117,583 100% $122,578 100% At December 31, 1997, the Registrant's investment portfolio showed an increase in mortgage-backed securities and a decrease in U.S. Government agency securities. This change in the portfolio mix improved the repricing characteristics of the portfolio, helped mollify the Registrant's exposure relating to interest rate risk and improved 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, 1997 (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 $10,754 $46,701 $22,557 $ 497 $ 80,509 Obligations of state and political subdivisions 2,132 3,112 1,039 3,517 9,800 Mortgage-backed securities 1,372 9,676 4,172 8,052 23,272 Other securities - - - 2,747 2,747 Total Investments $14,258 $59,489 $27,768 $14,813 $116,328 Weighted average yield 5.72% 6.34% 6.45% 6.27% 6.28% Full tax-equivalent yield 6.10% 6.51% 6.56% 7.06% 6.54% Held-to-maturity: Obligations of state and political subdivisions $ 457 $ 1,838 $ 280 $ 445 $ 3,020 Weighted average yield 4.85% 5.10% 5.70% 5.74% 5.21% Full tax-equivalent yield 7.35% 7.73% 8.64% 8.71% 7.90% 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, 1997. 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 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 1997 1996 1995 1994 1993 Commercial, financial and agricultural $ 73,854 $ 75,028 $ 65,916 $ 61,520 $ 50,353 Real estate - mortgage 252,312 241,240 211,147 195,524 151,916 Installment 29,266 30,423 27,996 22,294 16,360 Other 2,791 1,526 1,945 2,815 4,590 Total loans $358,223 $348,217 $307,004 $282,153 $223,219 At December 31, 1997, the Registrant had loan concentrations in agricultural industries of 13.8% of outstanding loans and 13.3% at December 31, 1996. 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, 1997, by maturities (dollars in thousands):
MATURITY OVER 1 ONE YEAR THROUGH OVER OR LESS 5 YEARS 5 YEARS TOTAL Commercial, financial and agricultural $ 53,631 $ 18,526 $ 1,697 $ 73,854 Real estate - mortgage 46,356 136,463 69,493 252,312 Installment 6,344 22,075 847 29,266 Other 417 1,984 390 2,791 Total loans $106,748 $179,048 $ 72,427 $358,223 Based on scheduled principal repayments. Includes demand loans, past due loans and overdrafts.
As of December 31, 1997, loans with maturities over one year consisted of $208,662,000 in fixed rate loans and $42,813,000 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 ninety 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, 1997 1996 1995 1994 1993 Nonaccrual loans $1,194 $ 790 $ 636 $ 393 $ 497 Loans past due ninety days or more and still accruing 145 575 554 509 248 Restructured loans which are performing in accordance with revised terms 346 580 604 772 307 Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $162,000, $143,000 and $143,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Interest income that was included in income totaled $32,000, $39,000 and $56,000 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 ninety days past due and when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. LOAN QUALITY AND ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents management's best estimate of the reserve necessary to adequately cover losses that could ultimately be realized from current loan exposures. The provision for loan losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate allowance for loan losses. In determining the adequacy of the allowance for loan losses, and therefore the provision to be charged to current earnings, management relies predominantly on a disciplined credit review and approval process which extends to the full range of the 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. 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, 1997, the Registrant's loan portfolio included $49.3 million of loans to borrowers whose businesses are directly related to agriculture. The balance increased $2.9 million from $46.4 million at December 31, 1996. In addition to agricultural lending, the Registrant has historically had substantial residential mortgage lending activity in and around east central Illinois. At December 31, 1997, these loans amounted to $181.3 million or 50.6% of total loans. Such residential mortgage loans amounted to $172.3 million or 49.5% of total loans at December 31, 1996. TABLE 11 ALLOWANCE FOR LOAN LOSSES Loan loss experience for the years ending December 31, are summarized as follows (dollars in thousands):
1997 1996 1995 1994 1993 Average loans outstanding, net of unearned income $355,167 $326,302 $294,220 $243,166 $214,408 Allowance-beginning of year 2,684 2,814 2,608 2,110 1,906 Balance of acquired subsidiary - - - 343 - Charge-offs: Commercial, financial and agricultural 588 238 18 29 140 Real estate-mortgage 69 6 111 28 241 Installment 145 131 57 120 86 Total charge-offs 802 375 186 177 467 Recoveries: Commercial, financial and agricultural 28 53 73 98 150 Real estate-mortgage 1 - - 21 3 Installment 25 45 39 45 26 Total recoveries 54 98 112 164 179 Net charge-offs 748 277 74 13 288 Provision for loan losses 700 147 280 168 492 Allowance-end of period $ 2,636 $ 2,684 $ 2,814 $ 2,608 $ 2,110 Ratio of net charge-offs to average loans .21% .08% .03% .01% .13% Ratio of allowance for loan losses to loans outstanding (less unearned interest at end of period) .74% .77% .90% .93% .95% Ratio of allowance for loan losses to nonperforming loans 156.4% 138.0% 156.8% 155.8% 200.6%
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 and external auditors periodically review asset quality and the overall adequacy of the allowance for loan losses. During 1997, the Registrant had net charge-offs of $748,000, a significant increase from 1996 and 1995 net charge-offs of $277,000 and $74,000, respectively. Of the 1997 charge-offs, $527,000 or 70% were related to three specific loans for which management does not anticipate any significant future recoveries. Management believes that these losses represented isolated events and do not reflect on the overall quality of the loan portfolio. On December 31, 1997, the allowance for loan losses amounted to $2,636,000, or .74% of total loans, and 156.4% of nonperforming loans. At December 31, 1996, the allowance was $2,684,000, or .77% of total loans, and 138.0% 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, December 31, December 31, 1997 1996 1995 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 $ 1,699 20.6% $ 1,854 21.5% $ 1,554 21.5% Real estate-mortgage 245 70.4% 434 69.3% 314 68.8% Installment 19 8.2% 152 8.7% 131 9.1% Other - .8% - .5% - .6% Total allocated 2,136 2,440 1,999 Unallocated 500 N/A 244 N/A 815 N/A Allowance at end of reported period $ 2,636 100.0% $ 2,684 100.0% $ 2,814 100.0%
December 31, December 31, 1994 1993 ALLOWANCE % OF ALLOWANCE % OF FOR LOANS FOR LOANS LOAN TO TOTAL LOAN TO TOTAL LOSSES LOANS LOSSES LOANS Commercial, financial and agricultural $ 1,481 21.8% $ 1,351 22.5% Real estate-mortgage 427 69.3% 330 68.1% Installment 100 7.9% 78 7.3% Other - 1.0% - 2.1% Total allocated 2,008 1,759 Unallocated 600 N/A 351 N/A Allowance at end of reported period $ 2,608 100.0% $ 2,110 100.0% The allowance is allocated to the individual loan categories by a specific allocation for all classified loans plus a percentage of loans not classified based on historical losses. 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, 1997, 1996 and 1995 (dollars in thousands): TABLE 13 COMPOSITION OF DEPOSITS
1997 1996 1995 WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE AMOUNT RATE Demand deposits: Non-interest bearing $ 52,660 - $ 50,789 - $ 46,237 - Interest bearing 125,666 2.93% 110,708 2.79% 106,118 2.66% Savings 38,642 2.59% 39,364 2.72% 40,920 2.71% Time deposits 226,431 5.50% 204,362 5.46% 202,305 5.42% Total average deposits $443,399 3.87% $405,223 3.78% $395,580 3.76%
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, 1997 1996 1995 3 months or less $ 21,715 $ 20,658 $ 17,167 Over 3 through 6 months 12,287 7,322 6,451 Over 6 through 12 months 6,438 6,897 7,495 Over 12 months 10,293 5,893 6,217 Total $ 50,733 $ 40,770 $ 37,330 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
1997 1996 1995 At December 31: Securities sold under agreements to repurchase $10,780 $18,360 $16,815 Federal Home Loan Bank advances: Overnight - 19,733 2,200 Fixed term - due in one year or less - 11,693 6,000 Fixed term - due after one year 7,000 1,000 3,500 Federal funds purchased - - - Total $17,780 $50,786 $28,515 Average interest rate at year end 5.01% 5.91% 5.11% Maximum Outstanding at Any Month-end Securities sold under agreements to repurchase $17,710 $18,860 $21,200 Federal Home Loan Bank advances: Overnight 23,733 23,083 5,000 Fixed term - due in one year or less 16,000 20,693 5,000 Fixed term - due after one year 9,000 7,500 6,500 Federal funds purchased - 6,500 - Total $66,443 $76,636 $37,700 Averages for the Year Securities sold under agreements to repurchase $10,806 $12,411 $16,481 Federal Home Loan Bank advances: Overnight 6,933 8,136 1,104 Fixed term - due in one year or less 3,455 9,352 2,905 Fixed term - due after one year 6,833 6,432 3,598 Federal funds purchased 502 800 26 Total $28,529 $37,131 $24,114 Average interest rate during the year 5.02% 5.45% 5.24%
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. FHLB advances represent borrowings by First Mid Bank 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, 1997 (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 $ 250 $ - $ - $ - $ - Federal funds sold 5,925 - - - - Taxable investment securities 24,033 18,439 6,311 22,752 35,072 Nontaxable investment securities 420 309 305 1,791 10,370 Loans 49,964 23,569 24,057 31,406 229,226 Total $ 80,592 $ 42,317 $ 30,673 $ 55,949 $ 274,668 INTEREST BEARING LIABILITIES: Savings and N.O.W. accounts 118,617 - - - - Money market accounts 49,341 - - - - Other time deposits 35,430 41,828 42,838 40,266 75,679 Other borrowings 10,780 - - 1,000 6,000 Long-term debt 6,200 - - - - Total $ 220,368 $ 41,828 $ 42,838 $ 41,266 $ 81,679 Periodic GAP $(139,776) $ 489 $ (12,165) $ 14,683 $ 192,989 Cumulative GAP $(139,776) $(139,287) $(151,452) $(136,769) $ 56,220 GAP as a % of interest earning assets: Periodic (28.9%) 0.1% (2.5%) 3.0% 39.9% Cumulative (28.9%) (28.8%) (31.3%) (28.2%) 11.6%
At December 31, 1997, 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. To some extent, this would mitigate the negative effect of an upturn in rates. Over the past years, management has placed an emphasis on growing core deposits, which are considered to be less sensitive to changes in interest rates. 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 assumptions relative to the prepayments, reinvestment and roll overs of assets and liabilities, of which First Mid Bank represents substantially all of the Registrant's rate sensitive assets and liabilities. This analysis excluded the parent company and MIDS, whose assets and liabilities are not deemed significant to interest rate sensitivity. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Based on the financial analysis performed as of December 31, 1997, which takes into account how the specific interest rate scenario would be expected to impact each interest-earning asset and each interest-bearing liability, the Registrant estimates that changes in the prime interest rate would impact First Mid Bank's performance as follows: Increase (Decrease) In Net Interest Net Interest Return On Income Margin Equity Current prime rate is 8.50% (000) 1997=3.97% 1997=11.67% Prime rate increase of: 200 basis points to 10.50% $ (306) -1.46% -0.59% 100 basis points to 9.50% (71) -0.34% -0.14% Prime rate decrease of: 200 basis points to 6.50% (689) -3.27% -1.35% 100 basis points to 6.50% (341) -1.62% -0.66% The First Mid Bank's board of directors has adopted an interest rate risk policy which establishes maximum decreases in the percentage change in net interest margin of 5% in a 100 basis point rate shift and 10% in a 200 basis point rate shift. No assurance can be given that the actual net interest margin (percentage) or net interest income would increase or decrease by such amounts in response to a 100 or 200 basis point increase or decrease in the prime rate. Interest rate sensitivity analysis is also used to measure the Registrant's interest risk by computing estimated changes in net portfolio value ("NPV") of its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained two percent increase or decrease in market interest rates. The following table presents, in thousands, First Mid Bank's projected change in NPV for the various rate shock levels at December 31, 1997. All market risk sensitive instruments presented in the table are held-to-maturity or available-for-sale. First Mid Bank has no trading securities. Estimated Changes In NPV As A Interest Estimated % of PV Amount Percent (basis) NPV of Assets of Change of Change +200 bp $45,026 8.83% $(3,310) -6.85% 0 bp 48,336 9.13% -200 bp 50,118 9.13% 1,782 3.67% The above table indicates that at December 31, 1997, in the event of a sudden and sustained increase in prevailing market interest rates, First Mid Bank's NPV would be expected to decrease, and that in the event of a sudden and sustained decrease in prevailing market interest rates, First Mid Bank's NPV would be expected to increase. At December 31, 1997, First Mid Bank's estimated changes in NPV were within the industry guidelines which normally allow a change in capital of +/-10% from the base case scenario. The NPV calculation is based on the net present value of discounted cash flows utilizing market prepayment assumptions and market rates of interest provided by Bloomberg quotations. Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions First Mid Bank may undertake in response to changes in interest rates. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. Actual values may differ from those projections set forth in the table, should market conditions vary from assumptions used in the preparation of the table. Certain assets, such as adjustable-rate loans, which represent First Mid Bank's primary loan product, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In addition, the proportion of adjustable-rate loans in First Mid Bank's portfolio could decrease in future periods if market rates remain at or decrease below current levels due to refinance activity. Further, in the event of a change in interest rates, prepayment and early withdrawal, levels would likely deviate significantly from those assumed in the table. Finally, the ability of many borrowers to repay their adjustable-rate debt may decrease in the event of an interest rate increase. CAPITAL RESOURCES At December 31, 1997, the Registrant's stockholders' equity amounted to $45,576,000, a $5,672,000 or 14.2% increase from the $39,904,000 balance as of December 31, 1996. During the year, net income contributed $4,726,000 to equity before the payment of $1,181,000 dividends to common and preferred stockholders. The change in net unrealized gain on available-for-sale investment securities increased stockholders' equity by $284,000, net of tax. During 1996, the Registrant began issuing 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 1997, 11,403 shares were issued pursuant to the Deferred Compensation Plan and 44,893 shares were issued pursuant to the First Retirement and Savings Plan. During 1996, 30,496 shares were issued pursuant to the Deferred Compensation Plan and 31,468 shares were issued pursuant to the First Retirement and Savings Plan. The Registrant has a Dividend Reinvestment Plan whereby common and preferred shareholders can elect to have their cash dividends automatically reinvested into newly-issued common shares of the Registrant. Of the $1,181,000 in common and preferred stock dividends paid during 1997, $655,000 or 55.5% was reinvested into shares of common stock of the Registrant through the Dividend Reinvestment Plan. This resulted in an additional 32,781 shares of common stock being issued during 1997 and 33,686 during 1996. The Registrant and First Mid Bank have capital ratios above the regulatory capital requirements. These requirements call for a minimum total risk-based capital ratio of 8% and a minimum leverage ratio of 3% for the most highly-rated banks that do not expect significant growth. All other institutions are required to maintain a ratio of Tier 1 capital to total risk-weighted assets of 4% to 5% depending on their particular circumstances and risk profiles. At December 31, 1997, the Registrant's leverage ratio was 7.05%. A tabulation of the Registrant's and First Mid Bank's capital ratios as of December 31, 1997 follows: TABLE 17 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) 11.39% 12.20% 7.05% First Mid-Illinois Bank & Trust, N.A. 12.34% 13.17% 7.59%
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. At December 31, 1997, the excess collateral at the Federal Home Loan Bank will support approximately $90 million of additional advances. 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, 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 130, "REPORTING COMPREHENSIVE INCOME," ("SFAS 130"). SFAS 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of general purpose financial statements. SFAS 130 is effective for both interim and annual periods beginning after December 15, 1997, and is not expected to have a material impact on the consolidated financial condition or results of operations. In June, 1997, the FASB issued Statement No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION," ("SFAS 131"). SFAS 131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. SFAS 131 is effective for financial periods beginning after December 15, 1997, and is not expected to have a material impact on the Registrant. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 (In thousands, except share data) 1997 1996 ASSETS Cash and due from banks (note 3): Non-interest bearing $ 20,486 $ 20,158 Interest bearing 250 453 Federal funds sold 5,925 6,500 Cash and cash equivalents 26,661 27,111 Investment securities (note 4): Available-for-sale, at fair value 116,782 114,027 Held-to-maturity, at amortized cost (estimated fair value of $3,057 and $3,590 at December 31, 1997 and 1996, respectively) 3,020 3,580 Loans (note 5) 358,223 348,217 Less allowance for loan losses (note 6) 2,636 2,684 Net loans 355,587 345,533 Premises and equipment, net (note 7) 12,356 10,735 Accrued interest receivable 5,367 5,229 Intangible assets, net (notes 2 and 8) 8,550 5,472 Other assets (note 16) 4,655 3,710 TOTAL ASSETS $532,978 $515,397 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits (note 9): Non-interest bearing $ 53,599 $ 55,044 Interest bearing 403,999 358,632 Total deposits 457,598 413,676 Accrued interest payable 2,229 1,656 Securities sold under agreements to repurchase (notes 4 and 10) 10,780 18,360 Federal Home Loan Bank advances (note 10) 7,000 32,426 Long-term debt (note 11) 6,200 6,200 Other liabilities (note 16) 3,595 3,175 TOTAL LIABILITIES 487,402 475,493 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 6,000,000 shares in 1997 and 4,000,000 shares in 1996; issued 1,972,709 shares in 1997 and 1,883,632 shares in 1996 7,891 3,771 Additional paid-in-capital 7,038 5,463 Retained earnings 27,271 27,578 Net unrealized gain on available-for-sale investment securities, net of tax 300 16 Less treasury stock at cost, 2,000 shares (24) (24) TOTAL STOCKHOLDERS' EQUITY 45,576 39,904 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $532,978 $515,397 See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1997, 1996 and 1995 (In thousands, except per share data) 1997 1996 1995 INTEREST INCOME: Interest and fees on loans $30,040 $ 27,827 $ 25,214 Interest on investment securities: Taxable 6,759 6,868 7,078 Exempt from federal income tax 701 629 733 Interest on federal funds sold 230 180 356 Interest on deposits with other financial institutions 75 55 84 Total interest income 37,805 35,559 33,465 INTEREST EXPENSE: Interest on deposits (note 9) 17,147 15,310 14,888 Interest on securities sold under agreements to repurchase 488 574 777 Interest on Federal Home Loan Bank advances 1,018 1,405 487 Interest on Federal funds purchased 26 44 2 Interest on long-term debt (note 11) 452 472 571 Total interest expense 19,131 17,805 16,725 Net interest income 18,674 17,754 16,740 Provision for loan losses (note 6) 700 147 280 Net interest income after provision for loan losses 17,974 17,607 16,460 OTHER INCOME: Trust revenues 1,663 1,293 1,118 Brokerage revenues 464 386 183 Service charges 1,804 1,728 1,574 Securities (losses), net (note 4) (6) (9) - Mortgage banking income 491 428 273 Other 1,005 973 861 Total other income 5,421 4,799 4,009 OTHER EXPENSE: Salaries and employee benefits (note 14) 7,922 7,938 7,484 Net occupancy expense 1,116 1,098 1,021 Equipment rentals, depreciation and maintenance 1,666 1,247 1,277 Federal deposit insurance premiums 40 275 590 Savings Association Insurance Fund recapitalization assessment - 751 - Amortization of intangible assets (note 8) 709 547 608 Stationary and supplies 692 559 449 Legal and professional 890 795 699 Marketing and promotion 529 579 500 Other 2,475 2,188 2,087 Total other expense 16,039 15,977 14,715 Income before income taxes 7,356 6,429 5,754 Income taxes (note 16) 2,630 2,263 1,830 Net income $ 4,726 $ 4,166 $ 3,924 Per common share data: Basic earnings per share $ 2.30 $ 2.11 $ 2.05 Diluted earnings per share 2.17 1.99 1.94 See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the years ended December 31, 1997, 1996 and 1995 (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, 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 ($462.50 per share) - - - (286) - - (286) Cash dividends on common stock ($.405 per share) - - - (722) - - (722) Issuance of 32,444 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 ($462.50 per share) - - - (286) - - (286) Cash dividends on common stock ($.425 per share) - - - (795) - - (795) Issuance of 33,686 common shares pursuant to the Dividend Reinvestment Plan - 67 525 - - - 592 Issuance of 30,496 common shares pursuant to the Deferred Compensation Plan - 61 476 - - - 537 Issuance of 31,468 common shares pursuant to the First Retirement & Savings Plan - 63 493 - - - 556 Change in net unrealized gain (loss) 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 Net income - - - 4,726 - - 4,726 Cash dividends on preferred stock ($462.50 per share) - - - (286) - - (286) Cash dividends on common stock ($.46 per share) - - - (895) - - (895) Issuance of 32,781 common shares pursuant to the Dividend Reinvestment Plan - 96 559 - - - 655 Issuance of 11,403 common shares pursuant to the Deferred Compensation Plan - 34 206 - - - 240 Issuance of 44,893 common shares pursuant to the First Retirement & Savings Plan - 138 810 - - - 948 Stock split in the form of a 100% stock dividend (2-for-1) - 3,852 - (3,852) - - - Change in net unrealized gain (loss) on available-for-sale investment securities, net of tax - - - - 284 - 284 December 31, 1997 $ 3,100 $ 7,891 $ 7,038 $ 27,271 $ 300 $ (24) $ 45,576 See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1997, 1996 and 1995 (In thousands) 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,726 $ 4,166 $ 3,924 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 700 147 280 Depreciation, amortization and accretion, net 1,864 1,251 1,231 Loss on sale of securities, net 6 9 - Gain on sale of loans held for sale, net (390) (322) (126) Deferred income taxes (495) (77) (110) Increase in accrued interest receivable (138) (832) (468) Increase in accrued interest payable 573 76 566 Origination of mortgage loans held for sale (30,531) (21,139) (10,592) Proceeds from sale of mortgage loans held for sale 29,605 21,113 11,055 (Increase) decrease in other assets (878) (1,300) 394 Increase (decrease) in other liabilities 461 309 (290) Net cash provided by operating activities 5,503 3,401 5,864 CASH FLOWS FROM INVESTING ACTIVITIES: Capitalization of mortgage servicing rights (103) (196) - Purchases of premises and equipment (1,458) (2,036) (891) Net increase in loans (8,978) (41,142) (25,262) Proceeds from sales of: Securities available-for-sale 9,983 31,667 487 Proceeds from maturities of: Securities available-for-sale 31,463 32,894 19,905 Securities held-to-maturity 723 580 12,549 Purchases of: Securities available-for-sale (43,718) (59,366) (16,200) Securities held-to-maturity (170) (680) (6,161) Purchase of financial organization, net of cash received 22,416 - - Net cash provided by (used in) investing activities 10,158 (38,279) (15,573) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 16,166 16,797 7,311 Increase(decrease) in securities sold under agreements to repurchase (7,580) 1,545 1,225 Increase(decrease) in short-term Federal Home Loan Bank advances (31,426) 23,226 4,700 Decrease in federal funds purchased - - (500) Repayment of long-term debt (1,000) (3,500) (500) Proceeds from issuance of long-term debt 7,000 - 3,500 Proceeds from issuance of common stock 1,188 1,094 - Dividends paid on preferred stock (32) (32) (58) Dividends paid on common stock (427) (436) (387) Net cash provided by (used in) financing activities (16,111) 38,694 15,291 Increase (decrease) in cash and cash equivalents (450) 3,816 5,582 Cash and cash equivalents at beginning of year 27,111 23,295 17,713 Cash and cash equivalents at end of year $26,661 $27,111 $23,295 ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $19,704 $17,969 $17,291 Income taxes 3,000 2,080 1,900 Loans transferred to real estate owned 578 290 182 Dividends reinvested in common shares 655 592 503 See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 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"); and Mid-Illinois Data Services, Inc. ("MIDS"). All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the 1996 and 1995 consolidated financial statements have been reclassified to conform with the 1997 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 ninety days past due and when, in the opinion of management, there is reasonable doubt as to the timely collectibility of interest or principal. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collectibility of interest or principal. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in the loan portfolio. The allowance is based on a continuing review of the loan portfolio, the underlying value of the collateral securing the loans, current economic conditions and past loan loss experience. Loans which are deemed to be uncollectible are charged to the allowance. The provision for loan losses and recoveries are credited to the allowance. Management, considering current information and events regarding the borrowers' ability to repay their obligations, considers a loan to be impaired when it is probable that the 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, with specific amounts assigned to core deposit relationships of acquired businesses. Intangible assets are amortized by the straight-line and accelerated methods over various periods of up to fifteen 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 Savings Bank ("Heartland") in 1992, $3.1 million of Series A perpetual, cumulative, non- voting, convertible, preferred stock was issued to directors and certain senior officers of the 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 404.2 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 First Mid Bank 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, 1997, the Registrant adopted Financial Accounting Standards Board's Statement No. 125, "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES," ("SFAS 125"). SFAS 125 superseded Financial Accounting Standards Board's Statement No. 122, "ACCOUNTING FOR MORTGAGE SERVICING RIGHTS," ("SFAS 122") which the Registrant adopted effective January 1, 1996. SFAS 125 requires 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 1997, $103,000 of mortgage servicing rights were capitalized with $65,000 of amortization expense being incurred. 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 Effective December 31, 1997, the Registrant adopted Financial Accounting Standards Board's Statement No. 128, "EARNINGS PER SHARE" ("SFAS 128"). Income for Basic Earnings per Share ("EPS") is adjusted for dividends attributable to preferred stock and is based on the weighted average number of common shares outstanding. Diluted EPS is computed by using the weighted average number of common shares outstanding, increased by the assumed conversion of the convertible preferred stock and the assumed conversion of the stock options. The components of basic and diluted earnings per common share for the years ended December 31, 1997, 1996, and 1995 are as follows:
1997 1996 1995 BASIC EARNINGS PER SHARE: Net income $4,726,000 $4,166,000 $3,924,000 Less preferred stock dividends (286,000) (286,000) (286,000) Net income available to common stockholders' equity $4,440,000 $3,880,000 $3,638,000 Weighted average common shares outstanding 1,928,727 1,840,921 1,774,739 Basic Earnings per Common Share $2.30 $2.11 $2.05 DILUTED EARNINGS PER SHARE: Net income available to common stockholders' equity $4,440,000 $3,880,000 $3,638,000 Assumed conversion of preferred stock 286,000 286,000 286,000 Net income available to common stock- holders after assumed conversion $4,726,000 $4,166,000 $3,924,000 Weighted average common shares outstanding 1,928,727 1,840,921 1,774,739 Assumed conversion of stock options 447 - - Assumed conversion of preferred stock 250,604 250,604 250,604 Diluted weighted average common shares outstanding 2,179,778 2,091,525 2,025,343 Diluted Earnings per Common Share $2.17 $1.99 $1.94
STOCK SPLIT On May 22, 1997, the Registrant declared a two-for-one stock split in the form of a 100% stock dividend. Par value remained at $4 per share. The stock split increased the Registrant's outstanding common shares from 2,000,000 to 4,000,000 shares. All references in the consolidated financial statements and notes thereto as to the number of common shares, per common share amounts and market prices of the Registrant's common stock have been restated giving retroactive recognition to the stock split. NOTE 2 - MERGERS AND ACQUISITIONs In November, 1997, Heartland merged with and into First Mid Bank. Prior to the merger, Heartland was a wholly-owned subsidiary of the Registrant. Therefore, the merger had no effect on the Registrant's financial position and results of its operations. On March 7, 1997, the Registrant acquired the Charleston, Illinois branch location and the deposit base of First of America Bank. This cash acquisition added approximately $28 million to total deposits, $500,000 to loans, $1.3 million to premises and equipment and $3.8 million to intangible assets. The acquisition of the branch was accounted for using the purchase method of accounting whereby the acquired assets and deposits of the branch were recorded at their fair values as of the acquisition date. The operating results have been combined with those of the Registrant since March 7, 1997. NOTE 3 - CASH AND DUE FROM BANKS Aggregate cash and due from bank balances of $8,724,000 and $8,263,000 at December 31, 1997 and 1996, 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, 1997 and 1996 were as follows (in thousands):
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR 1997 COST GAINS LOSSES VALUE Available-for-sale: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 80,509 $ 198 $ (256) $ 80,451 Obligations of states and political subdivisions 9,800 373 - 10,173 Mortgage-backed securities 23,272 195 (56) 23,411 Federal Home Loan Bank stock 2,115 - - 2,115 Other securities 632 - - 632 Total available-for-sale $116,328 $ 766 $ (312) $116,782 Held-to-maturity: Obligations of states and political subdivisions $ 3,020 $ 41 $ (4) $ 3,057 1996 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 $ 3,580 $ 28 $ (18) $ 3,590
Proceeds from sales of investment securities and realized gains and losses were as follows during the years ended December 31, 1997, 1996 and 1995 (in thousands): 1997 1996 1995 Proceeds from sales $ 9,983 $ 31,667 $ 487 Gains 20 155 - Losses 26 164 - Maturities of investment securities were as follows at December 31, 1997 (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 $ 12,886 $ 12,903 Due after one-five years 49,813 50,002 Due after five-ten years 23,596 23,571 Due after ten years 6,761 6,895 93,056 93,371 Mortgage-backed securities 23,272 23,411 Total available-for-sale $116,328 $116,782 Held-to-maturity: Due in one year or less $ 457 $ 459 Due after one-five years 1,838 1,867 Due after five-ten years 280 285 Due after ten-years 445 446 Total held-to-maturity $ 3,020 $ 3,057 Total $119,348 $119,839 Investment securities carried at approximately $93,182,000 and $90,523,000 at December 31, 1997 and 1996 respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law. NOTE 5 - LOANS A summary of loans at December 31, 1997 and 1996 follows (in thousands): 1997 1996 Commercial, financial and agricultural $ 73,920 $ 75,097 Real estate-mortgage 252,312 241,240 Installment 30,109 31,546 Other 2,791 1,526 Total gross loans 359,132 349,409 Less unearned discount 909 1,192 Net loans $358,223 $348,217 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 totaled $7,758,000 at December 31, 1997 and $7,852,000 at December 31, 1996. Activity during 1997 was as follows (in thousands): Balance at December 31, 1996 $ 7,852 New loans 868 Loan repayments (962) Balance at December 31, 1997 $ 7,758 The aggregate principal balances of nonaccrual, past due and renegotiated loans were as follows at December 31, 1997 and 1996 (in thousands): 1997 1996 Nonaccrual loans $1,194 $790 Loans past due ninety days or more and still accruing 145 575 Renegotiated loans which are performing in accordance with revised terms 346 580 Interest income which would have been recorded under the original terms of such nonaccrual or renegotiated loans totaled $162,000, $143,000 and $143,000 in 1997, 1996 and 1995, respectively. The amount of interest income which was recorded amounted to $32,000 in 1997, $39,000 in 1996 and $56,000 in 1995. 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. The Registrant evaluates all loans not on nonaccrual or restructured with a balance over $100,000 for impairment. 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 recorded according to the most recently agreed upon contractual terms. The recorded investment of impaired loans totaled $1,540,000 at December 31, 1997 and $1,370,000 at December 31, 1996. Of this total, there was a related allowance of $50,000 for $438,000 of these impaired loans at December 31, 1997. There was no related allowance at December 31, 1996. The average recorded investment in impaired loans during the year was $1,131,000 in 1997, $1,105,000 in 1996 and $1,076,000 in 1995. Total interest income which would have been recorded under the original terms of the impaired loans was $162,000 in 1997, $143,000 in 1996 and $143,000 in 1995. Total interest income recorded on a cash basis was $32,000, $39,000 and $56,000 for 1997, 1996, and 1995, respectively. First Mid Bank enters into financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit in accordance with line of credit agreements and/or mortgage commitments and standby letters of credit. Standby letters of credit are conditional commitments issued by a bank to guarantee the performance of a customer to a third-party. First Mid Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by First Mid Bank upon an extension of credit, is based on management's evaluation of the credit worthiness of the borrower. Collateral varies but generally includes assets such as property, equipment and receivables. At December 31, 1997 and 1996, respectively, the Registrant had $43,533,000 and $34,620,000 of outstanding commitments to extend credit and $855,000 and $1,182,000 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, 1997 and 1996, the Registrant's loan portfolio included $49,309,000 and $46,366,000, respectively, of loans to borrowers directly related to the agricultural industry. Mortgage loans serviced for others by First Mid Bank are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans at December 31, 1997, 1996 and 1995 was approximately $62,784,000, $57,031,000 and $43,622,000, respectively. NOTE 6 - ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses were as follows during the three year period ended December 31,1997 (in thousands): 1997 1996 1995 Balance, beginning of year $2,684 $2,814 $2,608 Provision for loan losses 700 147 280 Recoveries 54 98 112 Charge offs (802) (375) (186) Balance, end of year $2,636 $2,684 $2,814 NOTE 7 - PREMISES AND EQUIPMENT, NET Premises and equipment at December 31, 1997 and 1996 consisted of (in thousands): 1997 1996 Land $ 2,950 $ 2,555 Buildings and improvements 8,549 7,738 Furniture and equipment 6,137 6,302 Leasehold improvements 353 353 Construction in progress 1,015 137 Subtotal 19,004 17,085 Accumulated depreciation and amortization 6,648 6,350 Total $12,356 $10,735 Depreciation expense was $1,168,000, $788,000 and $740,000 for the years ended December 31, 1997, 1996 and 1995, respectively. NOTE 8 - INTANGIBLE ASSETS Intangible assets, net of accumulated amortization, at December 31, 1997 and 1996 consisted of (in thousands): 1997 1996 Excess of cost over fair market value of acquired subsidiaries $ 6,901 $ 4,391 Core deposit premium of acquired subsidiaries 1,649 1,081 Total $ 8,550 $ 5,472 Amortization expense was $709,000, $547,000 and $608,000 for the years ended December 31, 1997, 1996 and 1995, respectively. NOTE 9 - DEPOSITS As of December 31, 1997 and 1996, deposits consisted of (in thousands): 1997 1996 Demand deposits: Non-interest bearing $ 53,599 $ 55,044 Interest bearing 82,479 85,350 Savings 36,861 37,176 Money market 49,341 35,836 Time deposits 235,318 200,270 Total deposits $457,598 $413,676 Total interest expense on deposits for the years ended December 31, 1997, 1996 and 1995 was as follows (in thousands): 1997 1996 1995 Interest-bearing demand $ 2,210 $ 1,931 $ 1,547 Savings 999 1,069 1,107 Money market 1,474 1,154 1,276 Time deposits 12,464 11,156 10,958 Total $17,147 $15,310 $14,888 As of December 31, 1997, 1996 and 1995, 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): 1997 1996 1995 Outstanding $50,733 $36,746 $35,002 Interest expense for the year 2,676 2,108 1,963 NOTE 10 - OTHER BORROWINGS As of December 31, 1997 and 1996 other borrowings consisted of (in thousands): 1997 1996 Securities sold under agreements to repurchase $10,780 $18,360 Federal Home Loan Bank advances: Overnight advances - 19,733 Fixed term advances due in one year or less - 11,693 Fixed term advances due after one year 7,000 1,000 $17,780 $50,786 1997 1996 1995 Securities sold under agreements to repurchase: Maximum outstanding at any month-end $17,710 $18,860 $21,200 Average amount outstanding for the year 10,806 12,411 16,481 First Mid Bank has collateral pledge agreements whereby it has agreed to keep on hand at all time, free of all other pledges, liens, and encumbrances, whole first mortgages on improved residential property with unpaid principal balances aggregating no less than 167% of the outstanding advances from the Federal Home Loan Bank. The securities underlying the repurchase agreements are under the Registrant's control. NOTE 11 - LONG-TERM DEBT A summary of long-term debt at December 31, 1997 and 1996 was as follows (in thousands): 1997 1996 Floating rate loan at 1.25% in 1997 and 1.5% in 1996 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 6.82% at December 31, 1997 and 7.27% at December 31, 1996. $6,200 $ 6,200 The loan is secured by all of the common stock of First Mid Bank. The borrowing agreement contains requirements for the Registrant and First Mid Bank to maintain various operating and capital ratios and also contains requirements for prior lender approval for certain sales of assets, merger activity, the acquisition or issuance of debt and the acquisition of treasury stock. The Registrant and First Mid Bank were in compliance with the existing covenants at December 31, 1997 and 1996. The scheduled principal payments on the outstanding long-term debt is $1.5 million during 1998 and the remaining balance in 1999. 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. 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, 1997 and 1996, that all capital adequacy requirements have been met. As of December 31, 1997 and 1996, the most recent notification from the primary regulators categorized the Registrant and First Mid Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios must be maintained as set forth in the table. 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, 1997 Total Capital (to risk-weighted assets) Registrant $ 39,416 12.20% $ 25,842 > 8.00% $ 32,303 > 10.00% First Mid Bank 42,105 13.17 25,584 > 8.00 31,980 > 10.00 Tier 1 Capital (to risk-weighted assets) Registrant 36,780 11.39 12,921 > 4.00 19,382 > 6.00 First Mid Bank 39,469 12.34 12,792 > 4.00 19,188 > 6.00 Tier 1 Capital (to average assets) Registrant 36,780 7.05 20,879 > 4.00 26,099 > 5.00 First Mid Bank 39,469 7.59 20,807 > 4.00 26,009 > 5.00
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 "DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS," ("SFAS 107"), requires the disclosure of the estimated fair value of financial instrument assets and liabilities. For the 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, 1997 and 1996 were as follows (in thousands): Financial instruments for which an active secondary market exists have been valued using quoted available market prices. 1997 1996 FAIR CARRYING FAIR CARRYING VALUE AMOUNT VALUE AMOUNT Cash and cash equivalents $ 26,661 $ 26,661 $ 27,111 $ 27,111 Investments available-for-sale 116,782 116,782 114,027 114,027 Investments held-to-maturity 3,057 3,020 3,590 3,580 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. 1997 1996 FAIR CARRYING FAIR CARRYING VALUE AMOUNT VALUE AMOUNT Deposits with stated maturities $235,283 $235,318 $200,401 $200,270 Securities sold under agreements to repurchase 10,761 10,780 18,319 18,360 Federal Home Loan Bank advances 6,974 7,000 32,364 32,426 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. 1997 1996 FAIR CARRYING FAIR CARRYING VALUE AMOUNT VALUE AMOUNT Deposits with no stated maturity $222,280 $222,280 $213,406 $213,406 Floating rate long-term debt 6,200 6,200 6,200 6,200 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. 1997 1996 FAIR CARRYING FAIR CARRYING VALUE AMOUNT VALUE AMOUNT Net loan portfolio $357,218 $355,587 $345,216 $345,533 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 $352,000, $309,000 and $285,000 in 1997, 1996 and 1995, respectively. NOTE 15 - STOCK OPTION PLAN In 1997, the Registrant established an Incentive Stock Option Plan ("ISO Plan") intended to provide a means whereby directors and certain officers can acquire shares of the Registrant's common stock. A maximum of 100,000 shares have been authorized under the ISO Plan. The shares will be awarded at an exercise price equal to the fair market value of the shares on the date of grant. The options are granted for a 10 year term and vest over a period of four years. In October, 1997, the Registrant granted 19,500 options at an option price of $23.51. In December, 1997, the Registrant granted 11,500 options at an option price of $33.73. The Registrant applied APB Opinion No. 25 in accounting for the ISO Plan and, accordingly, compensation cost based on fair value at grant date has not been recognized for its stock options in the consolidated financial statements for the year ended December 31, 1997. The Registrant has not presented compensation cost based on the fair value at grant date for its stock options under Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" as the pro forma impact would be insignificant as the ISO Plan initial grants were near year end. Pro forma information will be presented in future years. NOTE 16 - INCOME TAXES The components of Federal and State income tax expense (benefit) for the years ended December 31, 1997, 1996 and 1995 were as follows (in thousands): 1997 1996 1995 Current Federal $2,845 $2,134 $1,940 State 280 206 - Total Current 3,125 2,340 1,940 Deferred Federal (434) (66) (110) State (61) (11) - Total Deferred (495) (77) (110) Total $2,630 $2,263 $1,830 Recorded income tax expense differs from the expected tax expense (computed by applying the applicable statutory U.S. Federal tax rate of 34% to income before income taxes). The principal reasons for this difference are as follows (in thousands): 1997 1996 1995 Expected income taxes $2,501 $2,186 $1,956 Effects of: Tax-exempt income (263) (235) (276) Nondeductible interest expense 31 28 29 Goodwill amortization 120 120 120 State deduction, net of federal taxes 137 129 - Other items, net 104 35 1 Total $2,630 $2,263 $1,830 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, 1997 and 1996 are presented below (in thousands): 1997 1996 Deferred tax assets: Allowance for loan losses $ 623 $ 423 Employee benefits - 114 Deferred Compensation 616 262 Other, net 92 54 Total gross deferred tax assets $ 1,331 $ 853 Deferred tax liabilities: Depreciation $ 291 $ 469 Available-for-sale investment securities 154 8 Purchase accounting 319 144 Other, net 133 147 Total gross deferred tax liabilities $ 897 $ 768 Net deferred tax assets $ 434 $ 85 Deferred tax assets and deferred tax liabilities are recorded in other assets and other liabilities, respectively, on the consolidated balance sheets. No valuation allowance related to deferred tax assets has been recorded at December 31, 1997 and 1996 as management believes it is more likely than not that the deferred tax assets will be fully realized. NOTE 17 - DIVIDEND RESTRICTIONS Banking regulations impose restrictions on the ability of First Mid Bank to pay dividends to the Registrant. At December 31, 1997, regulatory approval would have been required for aggregate dividends from First Mid Bank to the Registrant in excess of approximately $5.6 million. The amount of such dividends that could be paid is further restricted by the limitations of sound and prudent banking principles. NOTE 18 - COMMITMENTS AND CONTINGENT LIABILITIES 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 19 - PARENT COMPANY ONLY FINANCIAL STATEMENTS Presented below are condensed balance sheets, statements of income and cash flows for the Parent Company (in thousands): FIRST MID-ILLINOIS BANCSHARES, INC. (PARENT COMPANY) BALANCE SHEETS: December 31, 1997 1996 Assets Cash $ 1,055 $ 786 Premises and equipment, net 49 62 Investment in subsidiaries 48,907 43,956 Other Assets 2,910 2,445 Total Assets $52,921 $47,249 Liabilities and stockholders' equity Liabilities Dividends payable $ 581 $ 442 Long-term debt 6,200 6,200 Other liabilities 564 703 Total Liabilities 7,345 7,345 Stockholders' equity 45,576 39,904 Total Liabilities and stockholders' equity $52,921 $47,249 FIRST MID-ILLINOIS BANCSHARES, INC. (PARENT COMPANY) STATEMENTS OF INCOME: YEARS ENDED DECEMBER 31, 1997 1996 1995 Income: Dividends from subsidiaries $ 756 $ 2,737 $ 1,369 Other income 120 48 25 876 2,785 1,394 Operating expenses 1,203 1,037 1,266 Income (loss) before income taxes and equity in undistributed earnings of subsidiaries (327) 1,748 128 Income tax benefit 385 332 402 Income before equity in undistributed earnings of subsidiaries 58 2,080 530 Equity in undistributed earnings of subsidiaries 4,668 2,086 3,394 Net income $4,726 $4,166 $3,924 FIRST MID-ILLINOIS BANCSHARES, INC. (PARENT COMPANY) STATEMENTS OF CASH FLOWS: YEARS ENDED DECEMBER 31, 1997 1996 1995 Cash flows from operating activities: Net income $ 4,726 $ 4,166 $ 3,924 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation, amortization, accretion, net 7 8 5 Equity in undistributed earnings of subsidiaries (4,668) (2,086) (3,394) Increase in other assets (445) (1,515) (93) Increase (decrease) in other liabilities (67) (131) 331 Net cash provided by (used in) operating activities (447) 442 773 Net cash used in investing activities: Purchases of equipment (13) (6) (18) Net cash used in investing activities (13) (6) (18) Cash flows from financing activities: Repayment of long-term debt (1,000) (1,000) (500) Proceeds from issuance of long-term debt 1,000 - - Proceeds from issuance of common stock 1,188 1,094 - Dividends paid on preferred stock (32) (32) (58) Dividends paid on common stock (427) (436) (387) Net cash provided by (used in) financing activities 729 (374) (945) Increase (decrease) in cash 269 62 (190) Cash at beginning of year 786 724 914 Cash at end of year $1,055 $ 786 $ 724 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. Chairman and Chief Executive Officer William S. Rowland Chief Financial 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Chicago, Illinois January 23, 1998 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 1998 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, 1997 and ending December 31, 1997. 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. (60) Chairman of the Board of Directors, President and Chief Executive Officer William S. Rowland (51) Director, Executive Vice President, Chief Financial Officer, Treasurer John M. Remsen, Jr. (52) Executive Vice President John R. Kuczynski (45) Vice President, Trust and Farm Stanley E. Gilliland (53) Vice President, Lending Alfred M. Wooleyhan, Jr. (50) Vice President, Development Daniel E. Marvin, Jr., age 60, has been Chairman of the Board of Directors, President and Chief Executive Officer of the Registrant and First Mid Bank since 1983. William S. Rowland, age 51, has served as a director of the Registrant since 1991, has been Chief Financial Officer since 1989 and has served as 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. Mr. Rowland was in the Davenport, Iowa, office of KPMG Peat Marwick LLP from 1975-1989. John M. Remsen, Jr., age 52, has been Executive Vice President of the Registrant and President and Chief Executive Officer of First Mid Bank since August, 1997. Mr. Remsen was an Executive Vice President, Marketing for Busey Bank in Urbana, Illinois from 1992 to 1997. John R. Kuczynski, age 45, 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 53, 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. Alfred M. Wooleyhan, Jr., age 50, 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 9 of the 1998 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 10 through 11 of the 1998 Proxy Statement are incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. "Transactions with Management" on page 4 of the 1998 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, 1997 and 1996 Consolidated Statements of Income -- For the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Stockholders' Equity -- For the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows -- For the Years Ended December 31, 1997, 1996 and 1995 (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, 1997. 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 18th day of March, 1998. 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, 1998 *---------------------* Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 18th day of March, 1998, by the following persons on behalf of the Registrant and in the capacities listed. 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 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) 10.1 EMPLOYMENT AGREEMENT BETWEEN THE REGISTRANT AND WILLIAM S. ROWLAND (Filed herewith) 10.2 EMPLOYMENT AGREEMENT BETWEEN THE REGISTRANT AND DANIEL E. MARVIN, JR. (Filed herewith) 10.3 EMPLOYMENT AGREEMENT BETWEEN THE REGISTRANT AND JOHN M. REMSEN, JR. (Filed herewith) 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 1998 ANNUAL MEETING OF STOCKHOLDERS (Filed herewith) EXHIBIT 10.1 EMPLOYMENT AND BONUS AGREEMENT Employment and bonus agreement ("Agreement") made and entered into this 17{th} day of December, 1997, by and between First Mid-Illinois Bancshares, Inc., ("Bancshares") a corporation with its principal place of business located in Mattoon, Illinois and WILLIAM S. ROWLAND ("Employee"). In consideration of the promises and of the mutual covenants and agreements hereinafter set forth, the parties hereto acknowledge and agree as follows: ARTICLE ONE NATURE AND TERM OF EMPLOYMENT 1.01 TERM OF EMPLOYMENT: The term of such employment shall continue for three (3) years from the current date. Thereafter, unless employment has been previously terminated, Employee shall continue his employment with Bancshares on an "at will" basis and this Agreement shall in its entirety terminate unless extended by mutual agreement. 1.02 DUTIES: The duties of Employee shall be determined by Bancshares' Board of Directors, and Employee will adhere to the policies and procedures of Bancshares and will follow the supervision and direction of the Board in the performance of such duties. Employee agrees to devote his full working time, attention and energies to the diligent and satisfactory performance of his duties hereunder. Employee will not while he is employed by Bancshares engage in any activity which would have an adverse affect on Bancshares' reputation, goodwill and business relationship or which would result in economic harm to Bancshares. ARTICLE TWO COMPENSATION AND BENEFITS 2.01 BASE SALARY: During the term of Employee's employment, Bancshares shall pay to Employee an annual base salary of $117,200, payable in equal biweekly installments as are customary under Bancshares' payroll practices. Bancshares may review and adjust Employee's base salary from year to year but during term of the Employee's employment, Bancshares may not decrease the Employee's aforementioned base salary. 2.02 INCENTIVE COMPENSATION PLAN: During the term of Employee's employment hereunder, the Employee shall be a participant in Bancshares' Incentive Compensation Plan for calendar year 1998, and thereafter, Employee's bonus shall be paid strictly in accordance with the Plan. Pursuant to the Plan, Employee will have an opportunity to receive incentive compensation of a maximum of 25% of Employee's base salary. 2.03 DEFERRED COMPENSATION PLAN: During the term of the Employee's employment hereunder, the Employee shall be eligible to participate in the Company's Deferred Compensation Plan under terms and conditions of the Plan. 2.04 COMPANY STOCK OPTION PLAN: During the term of Employee's employment hereunder, the Employee shall be eligible to participate in the Company's Stock Option Plan. Actual stock option awards shall be made in accordance with the approved Plan. 2.05 VACATION: Employee shall be entitled to four (4) weeks of paid vacation each year during the term of this Agreement. 2.06 HEALTH BENEFITS: Bancshares offers a health and major medical insurance plan and will pay the cost of Employee's coverage. Said insurance plan includes an option for coverage of Employee's dependents. The cost of coverage for any and all dependents shall be the sole responsibility of Employee. 2.07 OTHER BENEFITS: During the term of the contract, Bancshares shall provide the following additional benefits to Employee subject to any and all tax or 1099 consequences: (1) Use of Company-owned or leased vehicle for professional and personal use. (2) An amount equal to the annual dues for a Class "H" membership at the Mattoon Golf & Country Club. (3) Use of a cellular phone for work-related calls and calls associated with Internet connection for Employee's home. (4) WITHHOLDING: All salary, bonus and other payments described in this Agreement shall be subject to withholding for federal, state or local taxes, amounts withheld under applicable benefit policies or programs, and any other amounts that may be required to be withheld by law, judicial order or otherwise. ARTICLE THREE CONFIDENTIAL INFORMATION 3.01 DEFINITION OF CONFIDENTIAL INFORMATION: For the purposes of this Agreement, the term "Confidential Information" shall mean, but shall not be limited to, any technical or non-technical data, formulae, compilations, programs, devices, methods, techniques, procedures, manuals, financial data, business plans, lists of actual or potential customers, lists of employees, and any information regarding the Employer's products, marketing or database, or that of any affiliate of Employer, which is not generally known to the public. The Employer and Employee acknowledge and agree that such Confidential Information is extremely valuable to the Employer and may constitute trade secret information under applicable law. In the event that any part of the Confidential Information becomes generally known to the public through legitimate origins (other than by the breach of this Agreement by Employee or by other misappropriation of the Confidential Information), that part of the Confidential Information shall no longer be deemed Confidential Information for the purposes of this Agreement, but Employee shall continue to be bound by the terms of this Agreement as to all other Confidential Information. 3.02 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION: Except as required in the faithful performance of Employee's duties hereunder (or as required by law), Employee will not during, or after termination of, Employee's employment by the Employer, in any form or manner, directly or indirectly, divulge, disclose or communicate to any person, entity, firm, corporation or any other third party, or utilize for Employee's personal benefit or for the benefit of any competitor of the Employer, any Confidential Information. 3.03 DELIVERY UPON TERMINATION: Upon termination of Employee's employment with the Employer for any reason, Employee shall promptly deliver to the Employer all correspondence, files, manuals, letters, notes, notebooks, reports, programs, plans, proposals, financial documents, and any other documents or data concerning the Employer's customers, database, business plan, marketing strategies, or processes and/or which contains Confidential Information, together with all other property of the Employer or any affiliate in Employee's possession, custody or control. ARTICLE FOUR NONCOMPETE AND NONSOLICITATION COVENANTS 4.01 COVENANT NOT TO COMPETE: For a period of two years after termination of Employee's employment for any reason, Employee will not, on behalf of himself or on behalf of another person, corporation, partnership or entity, solicit for sale, represent, and/or sell Competing Products with the Counties of Coles, Moultrie, Douglas, Cumberland, Effingham and Champaign, Illinois, to any person or entity who or which was Employee's customer during the last twelve (12) months of Employee's employment and with whom Employee dealt on behalf of Employer. "Competing Products" as used in this Article means products or services which are similar to, compete with, or can be used for the same purposes as products or services sold or offered for sale by Employer or which were in development by Employer within the last twelve (12) months of Employee's employment. 4.02 COVENANT NOT TO SOLICIT EMPLOYEES: For a period of two (2) years following termination of his employment with the Employer, Employee will not, or any reason, employ, solicit or endeavor to entice away from the Employer (whether for his own benefit or on behalf of another person or entity) any employees of the Employer who have had access to confidential information to work for any competitor of the Employer, nor will Employee otherwise attempt to interfere (to the Employer's detriment) in the relationship between the Employer and any such employees. ARTICLE FIVE TERMINATION 5.01 TERMINATION OF EMPLOYEE: The Employer shall have the right to terminate Employee's employment at any time at will for any reason upon ten (10) days prior written notice to Employee. If Employee's employment is terminated for any reason other than cause, the Employer shall continue to pay to Employee his monthly base salary for a total of twelve (12) months. 5.02 TERMINATION OF EMPLOYEE DUE TO CAUSE: The Employer may terminate the Employee at any time for cause as set forth in Bancshares' Employee Handbook, a copy of which is attached hereto as "Exhibit C". In the event of termination for cause, no further salary or benefits will be paid to Employee. 5.03 TERMINATION DUE TO MERGER OR ACQUISITION: If Employee's employment is terminated as a result of merger or acquisition of Employer or Bancshares, and the Employee is not continued at same salary and responsibility level, then Employer shall pay to Employee the greater of: (I) two years' base salary; (ii) base salary for the balance of the initial three year employment term. 5.04 TERMINATION BY EMPLOYEE: Subject to the provisions of Article Four above, Employee may terminate his employment with the Employer prior to the end of the Employment Term. If Employee's employment is so terminated, the Employer shall be obligated to continue to pay to Employee only his then current salary and other benefits accrued up to and including the date on which Employee's employment is so terminated. Employer shall have no further liability or obligation to Employee. 5.05 CHANGE IN EMPLOYMENT STATUS: Subject to the provisions of Article Four - Noncompete and Nonsolicitation Covenants above and only upon mutual agreement of Employer and Employee, Employee's employment status may be changed at any time to reflect partial or full retirement. Upon full retirement, the provisions of Article One - Nature and Term of Employment and Article Two - Compensation and Benefit will be null and void. Upon partial retirement, the terms of this contract will be reduced to one year and the terms of Article One and Article Two renegotiated. ARTICLE SIX MISCELLANEOUS 6.01 ASSIGNMENT: Employee and Employer acknowledge and agree that the covenants, terms and provisions contained in this Agreement constitute a personal employment contract and the rights and obligations of the parties thereunder cannot be transferred, sold, assigned, pledged or hypothecated, excepting that the rights and obligations of the Employer under this Agreement may be assigned or transferred pursuant to a sale of the business, merger, consolidation, share exchange, sale of substantially all of the Employer's assets, or other reorganization described in Section 368 of the Internal Revenue Code, or through liquidation, dissolution or otherwise, whether or not the Employer is the continuing entity, provided that the assignee, or transferee is the successor to all or substantially all of the assets of the Employer and such assignee or transferee assumes the rights and duties of the Employer, if any, as contained in this Agreement, either contractually or as a matter of law. 6.02 ENTIRE AGREEMENT: This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and may not be modified except in writing by the parties hereto. Furthermore, the parties hereto specifically agree that all prior agreements, whether written or oral, relating to Employee's employment by the Employer shall be of no further force or effect from and after the date hereof. 6.03 SEVERABILITY: If any phrase clause or provision of this Agreement is declared invalid or unenforceable by a court of competent jurisdiction, such phrase, clause or provision shall be deemed severed from this Agreement, but will not affect any other provisions of this Agreement, which shall otherwise remain in full force and effect. If any restriction or limitation in this Agreement is deemed to be unreasonable, onerous and unduly restrictive by a court of competent jurisdiction, it shall not be stricken, in its entirety and held totally void and unenforceable, but shall be deemed rewritten and shall remain effective to the maximum extent permissible within reasonable bounds. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EMPLOYEE /s/ William S. Rowland William S. Rowland EMPLOYER By: /s/Daniel E. Marvin, Jr. Daniel E. Marvin, Jr. Title: Chairman, President & CEO First Mid-Illinois Bancshares, Inc. EXHIBIT 10.2 EMPLOYMENT AND BONUS AGREEMENT Employment and bonus agreement ("Agreement") made and entered into this 17{th} day of December, 1997 by and between First Mid-Illinois Bancshares, Inc., ("Bancshares") a corporation with its principal place of business located in Mattoon, Illinois and DANIEL E. MARVIN, JR. ("Employee"). In consideration of the promises and of the mutual covenants and agreements hereinafter set forth, the parties hereto acknowledge and agree as follows: ARTICLE ONE NATURE AND TERM OF EMPLOYMENT 1.01 TERM OF EMPLOYMENT: The term of such employment shall continue for three (3) years from the current date. Thereafter, unless employment has been previously terminated, Employee shall continue his employment with Bancshares on an "at will" basis and this Agreement shall in its entirety terminate unless extended by mutual agreement. 1.02 DUTIES: The duties of Employee shall be determined by Bancshares' Board of Directors, and Employee will adhere to the policies and procedures of Bancshares and will follow the supervision and direction of the Board in the performance of such duties. Employee agrees to devote his full working time, attention and energies to the diligent and satisfactory performance of his duties hereunder. Employee will not while he is employed by Bancshares engage in any activity which would have an adverse affect on Bancshares' reputation, goodwill and business relationship or which would result in economic harm to Bancshares. ARTICLE TWO COMPENSATION AND BENEFITS 2.01 BASE SALARY: During the term of Employee's employment, Bancshares shall pay to Employee an annual base salary of $170,000, payable in equal biweekly installments as are customary under Bancshares' payroll practices. Bancshares may review and adjust Employee's base salary from year to year but during term of the Employee's employment, Bancshares may not decrease the Employee's aforementioned base salary. 2.02 INCENTIVE COMPENSATIONPLAN: During the term of Employee's employment hereunder, the Employee shall be a participant in Bancshares' Incentive Compensation Plan for calendar year 1998, and thereafter, Employee's bonus shall be paid strictly in accordance with the Plan. Pursuant to the Plan, Employee will have an opportunity to receive incentive compensation of a maximum of 35% of Employee's base salary. 2.03 DEFERRED COMPENSATION PLAN: During the term of the Employee's employment hereunder, the Employee shall be eligible to participate in the Company's Deferred Compensation Plan under terms and conditions of the Plan. 2.04 COMPANY STOCK OPTION PLAN: During the term of Employee's employment hereunder, the Employee shall be eligible to participate in the Company's Stock Option Plan. Actual stock option awards shall be made in accordance with the approved Plan. 2.05 VACATION: Employee shall be entitled to four (4) weeks of paid vacation each year during the term of this Agreement. 2.06 HEALTH BENEFITS: Bancshares offers a health and major medical insurance plan and will pay the cost of Employee's coverage. Said insurance plan includes an option for coverage of Employee's dependents. The cost of coverage for any and all dependents shall be the sole responsibility of Employee. 2.07 OTHER BENEFITS: During the term of the contract, Bancshares shall provide the following additional benefits to Employee subject to any and all tax or 1099 consequences: (1) Use of Company-owned or leased vehicle for professional and personal use. (2) An amount equal to the annual dues for a Class "A" membership at the Mattoon Golf & Country Club. (3) Use of a cellular phone for work-related calls and calls associated with Internet connection for Employee's home. (4) WITHHOLDING: All salary, bonus and other payments described in this Agreement shall be subject to withholding for federal, state or local taxes, amounts withheld under applicable benefit policies or programs, and any other amounts that may be required to be withheld by law, judicial order or otherwise. ARTICLE THREE CONFIDENTIAL INFORMATION 3.01 DEFINITION OF CONFIDENTIAL INFORMATION: For the purposes of this Agreement, the term "Confidential Information" shall mean, but shall not be limited to, any technical or non-technical data, formulae, compilations, programs, devices, methods, techniques, procedures, manuals, financial data, business plans, lists of actual or potential customers, lists of employees, and any information regarding the Employer's products, marketing or database, or that of any affiliate of Employer, which is not generally known to the public. The Employer and Employee acknowledge and agree that such Confidential Information is extremely valuable to the Employer and may constitute trade secret information under applicable law. In the event that any part of the Confidential Information becomes generally known to the public through legitimate origins (other than by the breach of this Agreement by Employee or by other misappropriation of the Confidential Information), that part of the Confidential Information shall no longer be deemed Confidential Information for the purposes of this Agreement, but Employee shall continue to be bound by the terms of this Agreement as to all other Confidential Information. 3.02 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION: Except as required in the faithful performance of Employee's duties hereunder (or as required by law), Employee will not during, or after termination of, Employee's employment by the Employer, in any form or manner, directly or indirectly, divulge, disclose or communicate to any person, entity, firm, corporation or any other third party, or utilize for Employee's personal benefit or for the benefit of any competitor of the Employer, any Confidential Information. 3.03 DELIVERY UPON TERMINATION: Upon termination of Employee's employment with the Employer for any reason, Employee shall promptly deliver to the Employer all correspondence, files, manuals, letters, notes, notebooks, reports, programs, plans, proposals, financial documents, and any other documents or data concerning the Employer's customers, database, business plan, marketing strategies, or processes and/or which contains Confidential Information, together with all other property of the Employer or any affiliate in Employee's possession, custody or control. ARTICLE FOUR NONCOMPETE AND NONSOLICITATION COVENANTS 4.01 COVENANT NOT TO COMPETE: For a period of two years after termination of Employee's employment for any reason, Employee will not, on behalf of himself or on behalf of another person, corporation, partnership or entity, solicit for sale, represent, and/or sell Competing Products with the Counties of Coles, Moultrie, Douglas, Cumberland, Effingham and Champaign, Illinois, to any person or entity who or which was Employee's customer during the last twelve (12) months of Employee's employment and with whom Employee dealt on behalf of Employer. "Competing Products" as used in this Article means products or services which are similar to, compete with, or can be used for the same purposes as products or services sold or offered for sale by Employer or which were in development by Employer by Employer within the last twelve (12) months of Employee's employment. 4.02 COVENANT NOT TO SOLICIT EMPLOYEES: For a period of two (2) years following termination of his employment with the Employer, Employee will not, for any reason, employ, solicit or endeavor to entice away from the Employer (whether for his own benefit or on behalf of another person or entity) any employees of the Employer who have had access to confidential information to work for any competitor of the Employer, nor will Employee otherwise attempt to interfere (to the Employer's detriment) in the relationship between the Employer and any such employees. ARTICLE FIVE TERMINATION 5.01 TERMINATION OF EMPLOYEE: The Employer shall have the right to terminate Employee's employment at any time at will for any reason upon ten (10) days prior written notice to Employee. If Employee's employment is terminated for any reason other than cause, the Employer shall continue to pay to Employee his monthly base salary for a total of twelve (12) months. 5.02 TERMINATION OF EMPLOYEE DUE TO CAUSE: The Employer may terminate the Employee at any time for cause as set forth in Bancshares' Employee Handbook, a copy of which is attached hereto as "Exhibit C". In the event of termination for cause, no further salary or benefits will be paid to Employee. 5.03 TERMINATION DUE TO MERGER OR ACQUISITION: If Employee's employment is terminated as a result of merger or acquisition of Employer or Bancshares, and the Employee is not continued at same salary and responsibility level, then Employer shall pay to Employee the greater of: (I) two years' base salary; (ii) base salary for the balance of the initial three year employment term. 5.04 TERMINATION BY EMPLOYEE: Subject to the provisions of Article Four above, Employee may terminate his employment with the Employer prior to the end of the Employment Term. If Employee's employment is so terminated, the Employer shall be obligated to continue to pay to Employee only his then current salary and other benefits accrued up to and including the date on which Employee's employment is so terminated. Employer shall have no further liability or obligation to Employee. 5.05 CHANGE IN EMPLOYMENT STATUS: Subject to the provisions of Article Four - Noncompete and Nonsolicitation Covenants above and only upon mutual agreement of Employer and Employee, Employee's employment status may be changed at any time to reflect partial or full retirement. Upon full retirement, the provisions of Article One - Nature and Term of Employment and Article Two - Compensation and Benefit will be null and void. Upon partial retirement, the terms of this contract will be reduced to one year and the terms of Article One and Article Two renegotiated. ARTICLE SIX MISCELLANEOUS 6.01 ASSIGNMENT: Employee and Employer acknowledge and agree that the covenants, terms and provisions contained in this Agreement constitute a personal employment contract and the rights and obligations of the parties thereunder cannot be transferred, sold, assigned, pledged or hypothecated, excepting that the rights and obligations of the Employer under this Agreement may be assigned or transferred pursuant to a sale of the business, merger, consolidation, share exchange, sale of substantially all of the Employer's assets, or other reorganization described in Section 368 of the Internal Revenue Code, or through liquidation, dissolution or otherwise, whether or not the Employer is the continuing entity, provided that the assignee, or transferee is the successor to all or substantially all of the assets of the Employer and such assignee or transferee assumes the rights and duties of the Employer, if any, as contained in this Agreement, either contractually or as a matter of law. 6.02 ENTIRE AGREEMENT: This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and may not be modified except in writing by the parties hereto. Furthermore, the parties hereto specifically agree that all prior agreements, whether written or oral, relating to Employee's employment by the Employer shall be of no further force or effect from and after the date hereof. 6.03 SEVERABILITY: If any phrase clause or provision of this Agreement is declared invalid or unenforceable by a court of competent jurisdiction, such phrase, clause or provision shall be deemed severed from this Agreement, but will not affect any other provisions of this Agreement, which shall otherwise remain in full force and effect. If any restriction or limitation in this Agreement is deemed to be unreasonable, onerous and unduly restrictive by a court of competent jurisdiction, it shall not be stricken, in its entirety and held totally void and unenforceable, but shall be deemed rewritten and shall remain effective to the maximum extent permissible within reasonable bounds. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EMPLOYEE /s/ Daniel E. Marvin, Jr. Daniel E. Marvin, Jr. EMPLOYER By: /s/ Christie Burich Christie Burich Title: Secretary of the Board EXHIBIT 10.3 EMPLOYMENT AND BONUS AGREEMENT Employment and bonus agreement ("Agreement") made and entered into this 17{th} day of December, 1997 by and between First Mid-Illinois Bancshares, Inc., ("Bancshares") a corporation with its principal place of business located in Mattoon, Illinois and JOHN M. REMSEN, JR. ("Employee"). In consideration of the promises and of the mutual covenants and agreements hereinafter set forth, the parties hereto acknowledge and agree as follows: ARTICLE ONE NATURE AND TERM OF EMPLOYMENT 1.01 TERM OF EMPLOYMENT: The term of such employment shall continue for three (3) years from the current date. Thereafter, unless employment has been previously terminated, Employee shall continue his employment with Bancshares on an "at will" basis and this Agreement shall in its entirety terminate unless extended by mutual agreement. 1.02 DUTIES: The duties of Employee shall be determined by Bancshares' Board of Directors, and Employee will adhere to the policies and procedures of Bancshares and will follow the supervision and direction of the Board in the performance of such duties. Employee agrees to devote his full working time, attention and energies to the diligent and satisfactory performance of his duties hereunder. Employee will not while he is employed by Bancshares engage in any activity which would have an adverse affect on Bancshares' reputation, goodwill and business relationship or which would result in economic harm to Bancshares. ARTICLE TWO COMPENSATION AND BENEFITS 2.01 BASE SALARY: During the term of Employee's employment, Bancshares shall pay to Employee an annual base salary of $132,000, payable in equal biweekly installments as are customary under Bancshares' payroll practices. Bancshares may review and adjust Employee's base salary from year to year but during term of the Employee's employment, Bancshares may not decrease the Employee's aforementioned base salary. 2.02 INCENTIVE COMPENSATION PLAN: During the term of Employee's employment hereunder, the Employee shall be a participant in Bancshares' Incentive Compensation Plan for calendar year 1998, and thereafter, Employee's bonus shall be paid strictly in accordance with the Plan. Pursuant to the Plan, Employee will have an opportunity to receive incentive compensation of a maximum of 35% of Employee's base salary. 2.03 DEFERRED COMPENSATION PLAN: During the term of the Employee's employment hereunder, the Employee shall be eligible to participate in the Company's Deferred Compensation Plan under terms and conditions of the Plan. 2.04 COMPANY STOCK OPTION PLAN: During the term of Employee's employment hereunder, the Employee shall be eligible to participate in the Company's Stock Option Plan. Actual stock option awards shall be made in accordance with the approved Plan. 2.05 VACATION: Employee shall be entitled to four (4) weeks of paid vacation each year during the term of this Agreement. 2.06 HEALTH BENEFITS: Bancshares offers a health and major medical insurance plan and will pay the cost of Employee's coverage. Said insurance plan includes an option for coverage of Employee's dependents. The cost of coverage for any and all dependents shall be the sole responsibility of Employee. 2.07 OTHER BENEFITS: During the term of the contract, Bancshares shall provide the following additional benefits to Employee subject to any and all tax or 1099 consequences: (1) Use of Company-owned or leased vehicle for professional and personal use. (2) An amount equal to the annual dues for a Class "A" membership at the Mattoon Golf & Country Club. (3) Use of a cellular phone for work-related calls and calls associated with Internet connection for Employee's home. (4) WITHHOLDING: All salary, bonus and other payments described in this Agreement shall be subject to withholding for federal, state or local taxes, amounts withheld under applicable benefit policies or programs, and any other amounts that may be required to be withheld by law, judicial order or otherwise. ARTICLE THREE CONFIDENTIAL INFORMATION 3.01 DEFINITION OF CONFIDENTIAL INFORMATION: For the purposes of this Agreement, the term "Confidential Information" shall mean, but shall not be limited to, any technical or non-technical data, formulae, compilations, programs, devices, methods, techniques, procedures, manuals, financial data, business plans, lists of actual or potential customers, lists of employees, and any information regarding the Employer's products, marketing or database, or that of any affiliate of Employer, which is not generally known to the public. The Employer and Employee acknowledge and agree that such Confidential Information is extremely valuable to the Employer and may constitute trade secret information under applicable law. In the event that any part of the Confidential Information becomes generally known to the public through legitimate origins (other than by the breach of this Agreement by Employee or by other misappropriation of the Confidential Information), that part of the Confidential Information shall no longer be deemed Confidential Information for the purposes of this Agreement, but Employee shall continue to be bound by the terms of this Agreement as to all other Confidential Information. 3.02 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION: Except as required in the faithful performance of Employee's duties hereunder (or as required by law), Employee will not during, or after termination of, Employee's employment by the Employer, in any form or manner, directly or indirectly, divulge, disclose or communicate to any person, entity, firm, corporation or any other third party, or utilize for Employee's personal benefit or for the benefit of any competitor of the Employer, any Confidential Information. 3.03 DELIVERY UPON TERMINATION: Upon termination of Employee's employment with the Employer for any reason, Employee shall promptly deliver to the Employer all correspondence, files, manuals, letters, notes, notebooks, reports, programs, plans, proposals, financial documents, and any other documents or data concerning the Employer's customers, database, business plan, marketing strategies, or processes and/or which contains Confidential Information, together with all other property of the Employer or any affiliate in Employee's possession, custody or control. ARTICLE FOUR NONCOMPETE AND NONSOLICITATION COVENANTS 4.01 COVENANT NOT TO COMPETE: For a period of two years after termination of Employee's employment for any reason, Employee will not, on behalf of himself or on behalf of another person, corporation, partnership or entity, solicit for sale, represent, and/or sell Competing Products with the Counties of Coles, Moultrie, Douglas, Cumberland, Effingham and Champaign, Illinois, to any person or entity who or which was Employee's customer during the last twelve (12) months of Employee's employment and with whom Employee dealt on behalf of Employer. "Competing Products" as used in this Article means products or services which are similar to, compete with, or can be used for the same purposes as products or services sold or offered for sale by Employer or which were in development by Employer by Employer within the last twelve (12) months of Employee's employment. 4.02 COVENANT NOT TO SOLICIT EMPLOYEES: For a period of two (2) years following termination of his employment with the Employer, Employee will not, for any reason, employ, solicit or endeavor to entice away from the Employer (whether for his own benefit or on behalf of another person or entity) any employees of the Employer who have had access to confidential information to work for any competitor of the Employer, nor will Employee otherwise attempt to interfere (to the Employer's detriment) in the relationship between the Employer and any such employees. ARTICLE FIVE TERMINATION 5.01 TERMINATION OF EMPLOYEE: The Employer shall have the right to terminate Employee's employment at any time at will for any reason upon ten (10) days prior written notice to Employee. If Employee's employment is terminated for any reason other than cause, the Employer shall continue to pay to Employee his monthly base salary for a total of twelve (12) months. 5.02 TERMINATION OF EMPLOYEE DUE TO CAUSE: The Employer may terminate the Employee at any time for cause as set forth in Bancshares' Employee Handbook, a copy of which is attached hereto as "Exhibit C". In the event of termination for cause, no further salary or benefits will be paid to Employee. 5.03 TERMINATION DUE TO MERGER OR ACQUISITION: If Employee's employment is terminated as a result of merger or acquisition of Employer or Bancshares, and the Employee is not continued at same salary and responsibility level, then Employer shall pay to Employee the greater of: (I) two years' base salary; (ii) base salary for the balance of the initial three year employment term. 5.04 TERMINATION BY EMPLOYEE: Subject to the provisions of Article Four above, Employee may terminate his employment with the Employer prior to the end of the Employment Term. If Employee's employment is so terminated, the Employer shall be obligated to continue to pay to Employee only his then current salary and other benefits accrued up to and including the date on which Employee's employment is so terminated. Employer shall have no further liability or obligation to Employee. 5.05 CHANGE IN EMPLOYMENT STATUS: Subject to the provisions of Article Four - Noncompete and Nonsolicitation Covenants above and only upon mutual agreement of Employer and Employee, Employee's employment status may be changed at any time to reflect partial or full retirement. Upon full retirement, the provisions of Article One - Nature and Term of Employment and Article Two - Compensation and Benefit will be null and void. Upon partial retirement, the terms of this contract will be reduced to one year and the terms of Article One and Article Two renegotiated. ARTICLE SIX MISCELLANEOUS 6.01 ASSIGNMENT: Employee and Employer acknowledge and agree that the covenants, terms and provisions contained in this Agreement constitute a personal employment contract and the rights and obligations of the parties thereunder cannot be transferred, sold, assigned, pledged or hypothecated, excepting that the rights and obligations of the Employer under this Agreement may be assigned or transferred pursuant to a sale of the business, merger, consolidation, share exchange, sale of substantially all of the Employer's assets, or other reorganization described in Section 368 of the Internal Revenue Code, or through liquidation, dissolution or otherwise, whether or not the Employer is the continuing entity, provided that the assignee, or transferee is the successor to all or substantially all of the assets of the Employer and such assignee or transferee assumes the rights and duties of the Employer, if any, as contained in this Agreement, either contractually or as a matter of law. 6.02 ENTIRE AGREEMENT: This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and may not be modified except in writing by the parties hereto. Furthermore, the parties hereto specifically agree that all prior agreements, whether written or oral, relating to Employee's employment by the Employer shall be of no further force or effect from and after the date hereof. 6.03 SEVERABILITY: If any phrase clause or provision of this Agreement is declared invalid or unenforceable by a court of competent jurisdiction, such phrase, clause or provision shall be deemed severed from this Agreement, but will not affect any other provisions of this Agreement, which shall otherwise remain in full force and effect. If any restriction or limitation in this Agreement is deemed to be unreasonable, onerous and unduly restrictive by a court of competent jurisdiction, it shall not be stricken, in its entirety and held totally void and unenforceable, but shall be deemed rewritten and shall remain effective to the maximum extent permissible within reasonable bounds. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EMPLOYEE /s/ John M. Remsen, Jr. John M. Remsen, Jr. EMPLOYER By: /s/ Daniel E. Marvin, Jr. Daniel E. Marvin, Jr. Title: Chairman, President & CEO First Mid-Illinois Bancshares, Inc. 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 23, 1998, relating to the consolidated balance sheets of First Mid- Illinois Bancshares, Inc. and subsidiaries as of December 31, 1997 and 1996, 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, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of First Mid-Illinois Bancshares, Inc. /s/ KPMG Peat Marwick LLP Chicago, Illinois March 25, 1998 FIRST MID-ILLINOIS BANCSHARES, INC. April 15, 1998 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 20, 1998, 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 1997 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 nominated three persons to serve as Class III directors. Each of the nominees are incumbent directors. The Board also recommends that you approve the adoption of a Stock Incentive Plan, as set forth in the accompanying Proxy Statement. 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, 1998. 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) 258-0493. 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 FIRST MID-ILLINOIS BANCSHARES, INC. NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 20, 1998 FIRST MID-ILLINOIS BANCSHARES, INC. 1515 CHARLESTON AVENUE P.O. BOX 499 MATTOON, ILLINOIS 61938 (217) 258-0493 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 20, 1998, at 11:00 a.m., local time, for the following purposes: 1. to elect three Class III directors for a term of three years. 2. to approve the adoption of the First Mid-Illinois Bancshares, Inc. 1997 Stock Incentive Plan. 3. to approve the appointment of KPMG Peat Marwick LLP as independent public accountants for the Company for the fiscal year ending December 31, 1998. 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, 1998, 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 15, 1998 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 20, 1998, 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. Please sign and return your proxy card in the enclosed self-addressed, stamped envelope. 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 15, 1998. The 1997 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, Urbana and Neoga, Illinois. Mid-Illinois Data Services, Inc., a data processing company ("MIDS"), is also a wholly owned nonbanking subsidiary of the Company. The Bank 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, 1998 will be entitled to vote at the annual meeting or any adjournments or postponements of such meeting. On April 1, 1998, the Company had approximately 1,978,400 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. 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 20, 1998, the stockholders will be entitled to elect three (3) Class III directors for a term expiring in 2001. The directors of the Company are divided into three classes having staggered terms of three years. Each of the nominees for election as Class III 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, 1998, 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 III directors for three year terms expiring in 2001. NOMINEES Position with the Company and Name Director the Subsidiaries and Occupation (AGE) SINCE FOR THE LAST FIVE YEARS CLASS III (TERM EXPIRES 2001) Charles A. Adams 1984 Director of the Bank (since 1989), of (Age 56) MIDS (since 1987) and of the Company; President, Howell Paving, Inc. Daniel E. Marvin, Jr. 1982 Chairman, President, Chief Executive (Age 59) Officer and Director of the Company; Director (since 1980), Chairman (since 1983), President and Chief Executive Officer (1983-1997) of the Bank; Director of MIDS (1987-1992). Ray Anthony Sparks 1994 Director of the Bank (since 1997) and (Age 41) of the Company; Director of MIDS (since 1996); former President of Elasco Agency Sales, Inc. and Electrical Laboratories and Sales Corporation; private investor. CONTINUING DIRECTORS CLASS I (TERM EXPIRES 1999) Kenneth R. Diepholz 1990 Director of the Bank (since 1984) and (Age 59) of the Company; President, Diepholz Chevrolet, Oldsmobile, Cadillac and Geo; Owner, D-Co Coin Laundry and Diepholz Rentals. Gary W. Melvin 1990 Director of the Bank (since 1984) and (Age 48) of the Company; Director of MIDS (since 1987); Co-Owner, Rural King Stores. CLASS II (TERM EXPIRES 2000) Richard Anthony Lumpkin 1982 Director of the Bank (since 1966) and (Age 63) of the Company; former Chairman of the Board of Consolidated Communications Inc. (until 1997), Director Ameren CIPS (since 1995); Vice Chairman, McCloud USA, Inc. (since 1997); Chairman, Illinois Consolidated Telephone Company (since 1997). William G. Roley 1985 Director of the Bank (since 1992) and (Age 68) of the Company; retired, former owner of Roley Real Estate. William S. Rowland 1991 Executive Vice President (since 1997), (Age 51) Treasurer and Chief Financial Officer (since 1989) and Director of the Company; Director of MIDS (since 1989); Executive Vice President of the Bank (since 1989). All of the Company's directors will hold office for the terms indicated, or until their respective successors are duly elected and qualified. 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 1997. Directors who are not employees of the Company also received options to purchase 500 shares of the Company's Common Stock at $23.51 per share for their service in 1997, and received options to purchase 500 shares of common stock at $33.73 per share for their service in 1998. Such options have terms of ten years and became exercisable on their respective date of grant. Additionally, the Company provides retirement pension benefits to non- employee directors who have attained the age of 70 and who have served as a director for a minimum of ten years upon retirement. The pension is equal to 75% of the compensation received by the director from the Company in the year prior to retirement. Directors who are not employees of the Company also receive health insurance. 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 1997. 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 1997. A total of eleven regularly scheduled and special meetings were held by the Board of Directors of the Company during 1997. During 1997, 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 1997. 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 1997 salary and bonus exceeded $100,000:
SUMMARY COMPENSATION TABLE Annual Compensation (a) (b) (c) (D) (G) (H) Fiscal SECURITIES Year UNDERLYING ALL OTHER Name and Ended OPTIONS/SARS(#) COMPENSATION Principal Position December 31st Salary($) BONUS ($) ($) Daniel E. Marvin, Jr., 1997 $170,338 $45,608 7,500 $27,093 President & 1996 170,338 59,848 --- 26,390 Chief Executive Officer 1995 164,000 48,163 --- 26,001 William S. Rowland, Executive 1997 $110,000 $21,450 4,000 $13,912 Vice President, Treasurer 1996 105,338 23,570 --- 13,517 and Chief Financial Officer 1995 101,000 21,651 --- 12,756 Stanley E. Gilliland, Vice 1997 $96,000 $15,264 2,000 $6,686 President 1996 91,338 15,435 --- 6,426 1995 86,000 15,738 --- 5,917 Jack R. Kuczynski, Vice 1997 $98,045 $16,569 1,000 $6,448 President 1996 51,625 9,419 --- --- 1995 --- --- --- --- Includes deferred amounts. Represents the Company's contributions to its retirement plan for 1997, 1996 and 1995 of $13,812, $13,109 and $12,720, 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 each year. Represents the Company's contributions to its retirement plan for 1997, 1996 and 1995 of $8,014, $7,619 and $6,876, 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 1997 and 1996 and $5,880 for 1995. Represents the Company's contributions to its retirement plan.
STOCK OPTION INFORMATION The following table sets forth certain information concerning the number and value of stock options granted in the last fiscal year to the individuals named in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR Individual Grants Potential realizable value at assumed annual rates of stock price appreciation for option term (a) (b) (c) (d) (e) (f) (g) % of Total OPTIONS Options Granted GRANTED to Employees in Exercise or Base Expiration NAME (#) Fiscal Year Price ($/Sh) Date 5%($) 10%($) Daniel E. Marvin, Jr. 7,500 38% $23.51 10/21/07 $110,888 $281,025 2,500 22% 33.73 12/10/07 53,025 134,400 William S. Rowland 4,000 21% $23.51 10/21/07 $59,140 $149,880 2,000 17% 33.73 12/10/07 42,420 107,520 Stanley E. Gilliland 2,000 10% $23.51 10/21/07 $29,570 $74,940 1,000 9% 33.73 12/10/07 21,210 53,760 Jack R. Kuczynski 1,000 5% $23.51 10/21/07 $14,785 $37,470 1,000 9% 33.73 12/10/07 21,210 53,760 Options become exercisable in four equal annual portions beginning one year from the date of grant. Options with an exercise price of $23.51 were granted on October 21, 1997 as part of the respective officer's compensation for service to the Company during the 1997 fiscal year. Options with an exercise price of $33.73 were granted on December 10, 1997 as part of the respective officer's 1998 compensation.
The following table sets forth certain information concerning the number and value of stock options at December 31, 1997 held by the named executive officers. No stock options were exercised during 1997 by such persons.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES Shares Number of Securities Acquired Underlying Unexercised VALUE OF UNEXERCISED on Value Options/SARs at FY-End IN- Name Exercise Realized (#)(d) THE-MONEY (a) (#)(b) ($)(c) EXERCISABLE UNEXERCISABLE OPTIONS/SARS AT FY-END ($)(E) EXERCISABLE UNEXERCISABLE Daniel E. Marvin, Jr. --- $--- --- 10,000 $--- $98,300 William S. Rowland --- $--- --- 6,000 $--- $53,900 Stanley E. Gilliland --- $--- --- 3,000 $--- $26,950 Jack R. Kuczynski --- $--- --- 2,000 $--- $14,580
EMPLOYMENT AGREEMENTS In December, 1997, the Company entered into employment agreements with Daniel E. Marvin, Jr. and William S. Rowland. The employment agreements provide for an initial base salary, which may be increased but not decreased, and a bonus of up to 35% of base salary for Mr. Marvin and 25% for Mr. Rowland. Each agreement has an initial term of three years, which may be extended upon mutual agreement. In the event of termination of the respective officer's employment by the Company without cause, the Company will be obligated to pay to such officer an amount equal to one year's salary. In the event such person's employment discontinues following a change in control of the Company, the successor to the Company is obligated to make a lump sum payment to such officer in amount equal to the greater of two years' base salary or the aggregate base salary the officer would have received for the balance of the three year term of the agreement. The employment agreements include a covenant which limits the ability of each officer to compete with the Bank for a period of two years following the termination of his employment. The Company has also entered into a similar agreement with John M. Remsen, Jr., who became the Bank's President in August, 1997. 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 1997, the Company's net income amounted to $4,726,000, a $560,000 (13.4%) improvement from 1996's 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, Gilliland, and Kuczynski were awarded incentive bonuses of $45,608, $21,450, $15,264 and $16,569, respectively. The relationships between the base salaries and incentive compensation of Messrs. Marvin, Rowland, Gilliland and Kuczynski for 1997, 1996 and 1995 were as follows: Incentive Compensation as a % of Base Salary 1997 1996 1995 Mr. Marvin 27% 35% 29% Mr. Rowland 20% 22% 21% Mr. Gilliland 16% 17% 18% Mr. Kuczynski 17% 18% - % The members of the Compensation Committee are: Charles A. Adams, Kenneth R. Diepholz, Richard A. Lumpkin, Gary W. Melvin, William G. Roley and 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 following line graph 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, 1992 through December 31, 1997. 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
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 First Mid-Illinois Bancshares, Inc. $100 $130 $134 $178 $217 $345 Nasdaq Bank Stocks $100 $114 $114 $169 $223 $377 S&P 500 $100 $110 $112 $153 $189 $252
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth certain information regarding the Company's Common Stock beneficially owned on February 28, 1998 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 OF CLASS 5% STOCKHOLDERS Margaret Lumpkin Keon 136,421 6.8% 16 Miller Avenue Suite 203 Mill Valley, California 94941 Mary Lumpkin Sparks 190,997 9.6% 2438 Campbell Road, N.W. Albuquerque, New Mexico 87104 DIRECTORS Charles A. Adams 131,635 6.4% Kenneth R. Diepholz 31,961 1.6% Richard Anthony Lumpkin 404,864 19.8% Daniel E. Marvin, Jr. 31,142 1.6% Gary W. Melvin 91,605 4.5% William G. Roley 40,889 2.1% William S. Rowland 9,942 * Ray Anthony Sparks 39,695 2.0% OTHER NAMED EXECUTIVE OFFICERS Stanley E. Gilliland 7,407 * Jack R. Kuczynski 3,034 * All directors and executive officers as a group (13 persons) 793,999 35.8% _____________ * Less than one percent. 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. Amounts include 1,000 shares obtainable by each of Messrs. Adams, Diepholz, Lumpkin, Melvin, Roley and Sparks through the exercise of options which are currently exercisable or which will become exercisable within 60 days of the date of the information provided. 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. The above amount includes 20,210 shares obtainable through the conversion of Preferred Stock held by Ms. Keon and 116,031 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. The above amount includes 20,210 shares obtainable through the conversion of Preferred Stock and 116,537 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 1,190 shares held directly by Mrs. Sparks and 53,060 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. The above amount includes 16,018 shares of Common Stock and 80,840 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 2,056 shares held by Mr. Adams' spouse, over which shares Mr. Adams has no voting and investment power. The above amount does not include 1,623 shares held by adult children of Mr. Adams. The above amount includes 14,147 shares obtainable through the conversion of Preferred Stock held by Mr. Diepholz. The above amount includes 40,420 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, 54,684 shares held directly by Mr. Lumpkin and 9,805 shares held by The Lumpkin Foundation, of which Mr. Lumpkin serves as a director. The above amount also includes 116,537 shares held under the Richard A. Lumpkin Trust, and further includes 20,210 shares obtainable through the conversion of Preferred Stock and 116,537 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 45,671 shares held by McCloud USA, of which Mr. Lumpkin is Vice Chairman of the Board, and of which shares beneficial ownership is disclaimed. The above amount does not include 68,080 shares held by adult children of Mr. Lumpkin and 53,060 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. The above amount includes 4,850 shares obtainable through the conversion of Preferred Stock held by Mr. Marvin. The above amount also includes 3,115 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, and 225 shares held by Mr. Marvin's grandchildren, over which Mr. Marvin has shared voting and investment power. The above amount includes 40,420 shares obtainable through the conversion of Preferred Stock held by Mr. Melvin. The above amount includes 4,042 shares obtainable through the conversion of Preferred Stock held by Mr. Roley. The above amount also includes 4,042 shares obtainable through the conversion of Preferred Stock held by Mr. Roley's spouse and 13,057 shares held by the Peggy A. Roley Trust, over which Mr. Roley has no voting or investment power and of which Mr. Roley disclaims beneficial ownership. The above amount includes 4,850 shares obtainable through the conversion of Preferred Stock held by Mr. Rowland. The above amount includes 7,189 shares held by Mr. Sparks' children, over which Mr. Sparks shares voting and investment power. The above amount includes 2,021 shares obtainable through the conversion of Preferred Stock held by Mr. Gilliland and 963 shares held by Mr. Gilliland and his spouse, over which Mr. Gilliland has shared voting and investment power. Includes an aggregate of 215,842 shares obtainable through conversion of Preferred Stock.
As of February 28, 1998, the Bank acted as sole or co-fiduciary with respect to trusts and other fiduciary accounts which own or hold 99,151 shares or 5.0% of the outstanding Common Stock of the Company, over which the Bank has sole voting and investment power with respect to 83,051 shares or 4.2% of the outstanding Common Stock and shared voting and investment power with respect to 16,100 shares or 0.8% 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, 1997 through December 31, 1997. PROPOSAL TO ADOPT STOCK INCENTIVE PLAN On October 21, 1997, the Board of Directors unanimously adopted resolutions approving the First Mid-Illinois Bancshares, Inc., 1997 Stock Incentive Plan (the "Incentive Plan"), to promote equity ownership of the Company by directors of the Company and selected officers and employees of the Bank, to increase their proprietary interest in the success of the Company, and to encourage them to remain in the employ of the Company and the Bank. While the Incentive Plan is not generally subject to stockholder approval, the Company is submitting the Incentive Plan to its stockholders for purposes of complying with certain provisions of the Internal Revenue Code of 1986, as amended (the "Code"), pertaining to incentive stock options, as described below. ADMINISTRATION The Incentive Plan is to be administered by the Stock Incentive Plan Administrative Committee, which will be comprised of at least two non-employee directors appointed by the Board of Directors (the "Stock Incentive Committee"). The Stock Incentive Committee will have the authority, subject to approval by the Board of Directors, to select the employees to whom awards may be granted, to determine the terms of each award, to interpret the provisions of the Incentive Plan and to make all other determinations for the administration of the Incentive Plan. The Incentive Plan provides for the grant of "incentive stock options," as defined under Section 422(b) of the Code, options that do not so qualify (referred to herein as "nonstatutory options"), restricted stock and stock appreciation rights ("SARs"), as determined in each individual case by the Stock Incentive Committee. The Board of Directors has reserved 100,000 shares of Common Stock for issuance under the Incentive Plan, subject to adjustment for stock splits, stock dividends or similar transactions. In general, if any award granted under the Incentive Plan expires, terminates, is forfeited or is cancelled for any reason, the shares of Common Stock allocable to such award may again be made subject to an award granted under the Incentive Plan. AWARDS Directors of the Company and key policy-making employees of the Bank are eligible to receive grants under the Incentive Plan. Director options will be granted at the fair market value of the Common Stock on the date of grant. Employee awards may be granted subject to a vesting requirement and in any event will become fully vested upon a merger or change of control of the Company. The exercise price of incentive stock options granted under the Incentive Plan must at least equal the fair market value of the Common Stock subject to the option (determined as provided in the plan) on the date the option is granted. The exercise price of nonstatutory options and SARs will be determined by the Stock Incentive Committee. An incentive stock option granted under the Incentive Plan to an employee owning more than 10% of the combined voting power of all classes of stock of the Company must have an exercise price of at least 110% of the then current fair market value of the shares of Common Stock issuable upon exercise of the option and may not have an exercise term of more than five years. Incentive stock options are also subject to the further restriction that the aggregate fair market value (determined as of the date of grant) of Common Stock as to which any such incentive stock option first becomes exercisable in any calendar year, is limited to $100,000. To the extent options covering more than $100,000 worth of Common Stock first become exercisable in any one calendar year, the excess will be nonstatutory options. For purposes of determining which, if any, options have been granted in excess of the $100,000 limit, options will be considered to become exercisable in the order granted. Each director and key employee eligible to participate in the Incentive Plan will be notified by the Stock Incentive Committee. The award agreement will specify the type of award to be granted, the number of shares of Common Stock (if any) to which the award relates, the terms and conditions of the award and the date granted. In the case of an award of options, the award agreement will also specify the price at which the shares of Common Stock subject to the option may be purchased, the date(s) on which the option becomes exercisable and whether the option is an incentive stock option or a nonstatutory option. The full exercise price for all shares of Common Stock purchased upon the exercise of options under the Incentive Plan may be paid by cash, personal check, personal note, award surrender or Common Stock owned at the time of exercise, as directed by the Stock Incentive Committee. Incentive stock options granted under the Incentive Plan will remain outstanding and exercisable for ten years from the date of grant or until the expiration of ninety days (or such lesser period as the Stock Incentive Committee may determine) from the employees date of termination of employment with the Company. Nonstatutory options and SARs granted under the Incentive Plan remain outstanding and exercisable for such period as the Stock Incentive Committee may determine. INCOME TAX With respect to incentive stock options, no taxable income is recognized by the option holder for income tax purposes at the time of the grant or exercise of an incentive stock option, although neither is there any income tax deduction available to the Company as a result of such a grant or exercise. Any gain or loss recognized by an option holder on the later disposition of shares of Common Stock acquired pursuant to the exercise of an incentive stock option generally will be treated as capital gain or loss if such disposition does not occur prior to one year after the date of exercise of the option, or two years after the date the option was granted. With respect to nonstatutory stock options, restricted stock or SARs, no taxable income will result to the recipient of the awards, nor will the Company be entitled to an income tax deduction. However, upon the exercise of nonstatutory stock options or SARs, or the lapse of restrictions on restricted stock, the award holder will generally recognize ordinary income equal to the difference between the exercise price and the fair market value of the shares of Common Stock acquired on the date of exercise, and the Company will be entitled to an income tax deduction in the amount of the ordinary income recognized by the option holder. In general, any gain or loss realized by the option holder on the subsequent disposition of such shares will be a capital gain or loss. AMENDMENT AND TERMINATION The Incentive Plan expires ten years after its adoption, unless sooner terminated by the Board of Directors. The Board has authority to amend the Incentive Plan in such manner as it deems advisable, except that the Board of Directors is not permitted, without stockholder approval, to amend the plan in a manner which would prevent the grant of incentive stock options or increase the number of shares of Common Stock available. NEW PLAN BENEFIT TABLE The following table sets forth certain information concerning the value and number of Incentive Plan grants which have made with respect to the 1997 and 1998 fiscal years.
NEW PLAN BENEFITS FIRST MID-ILLINOIS BANCSHARES, INC. 1997 STOCK INCENTIVE PLAN NAME AND POSITION DOLLAR VALUE ($) NUMBER OF UNITS Daniel E. Marvin, President and Chief Executive Officer $ --- 10,000 Other Named Executive Officers $ --- 11,000 Non-Executive Director Group $ --- 6,000 Non-Executive Officer and Employee Group $ --- 4,000 All options will be exercisable at a price equal to 100% of the fair market value of the underlying security on the date of the grant.
REQUIRED AFFIRMATIVE VOTE The affirmative vote of the holders of a majority of the shares of Common Stock present in person or by proxy at the annual meeting is required to ratify the Incentive Plan under the Code. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSED STOCK INCENTIVE PLAN. 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, 1998. 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 1999 ANNUAL MEETING For inclusion in the Company's Proxy Statement and form of proxy relating to the 1999 Annual Meeting of Stockholders, stockholder proposals must be received by the Company on or before December 16, 1998 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 15, 1998 ALL STOCKHOLDERS ARE URGED TO SIGN AND MAIL THEIR PROXIES PROMPTLY PROXY CARD FIRST MID-ILLINOIS BANCSHARES, INC. PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF STOCKHOLDERS -- MAY 20, 1998 The undersigned hereby appoints Stanley E. Gilliland, John M. Remsen, Jr. 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 20, 1998, 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. - ------ Check here if you plan to attend the meeting. New Address: (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 Election of Directors: Charles A. Adams, Daniel E. Marvin, Jr. and Ray Anthony Sparks To approve the adoption of the First Mid-Illinois, Inc. 1997 Stock Incentive Plan. 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 1998. THIS PROXY WILL BE VOTED IN ACCORDANCE WITH SPECIFICATION MADE. IF NO CHOICES ARE INDICATED, THIS PROXY WILL BE VOTED FOR ALL PROPOSALS. Dated:--------, 1998 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. Signature(s) EX-27 2 EXHIBIT 27 - 1997
9 1000 12-MOS DEC-31-1997 DEC-31-1997 20486 250 5925 0 116782 3020 3057 358223 2636 532978 457598 17780 3595 6200 0 3100 7891 34585 532978 30040 7460 305 37805 17147 19131 18674 700 (6000) 16039 7356 0 0 0 4726 2.30 2.17 3.96 1194 145 346 0 2684 802 54 2636 2636 0 500 Registrant had a 2-for-1 stock split in the form of a 100% stock dividend on Mat 22, 1997. Prior Financial Data Schedules have not been restated.
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